<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25812
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, VA 20170
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(703) 904-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
-
COMMON STOCK, $.01 PAR VALUE - 51,809,243 SHARES AS OF NOVEMBER 2, 1998
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
The Index of Exhibits appears on page 28
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<PAGE>
PSINET INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1998 and September 30, 1997................................................................. 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and September 30, 1997................................................................. 5
Notes to Consolidated Financial Statements................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................................... 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................................................. 25
Signatures............................................................................................................. 27
Exhibit Index.......................................................................................................... 28
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSINET INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED) (AUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 282,586 $ 33,322
Restricted cash and short-term investments 127,617 20,690
Short-term investments 52,842 -
Accounts receivable, net 36,932 11,022
Notes receivable 1,347 7,224
Prepaid expenses 5,052 1,478
Other current assets 16,906 5,162
------------------ --------------
Total current assets 523,282 78,898
Property and equipment, net 221,390 95,619
Goodwill and other intangibles, net 103,504 4,675
Other assets and deferred charges 30,454 6,969
------------------ --------------
Total assets $ 878,630 $ 186,181
================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Lines of credit $ - $ 5,648
Current portion of long-term debt 44,746 33,985
Trade accounts payable 34,727 25,031
Accrued payroll and related expenses 7,646 4,636
Other accounts payable and accrued liabilities 25,667 2,382
Deferred revenue 9,678 5,944
------------------ --------------
Total current liabilities 122,664 77,626
Long-term debt 772,998 33,820
Other liabilities 9,601 1,306
------------------ --------------
Total liabilities 905,263 112,752
------------------ --------------
Shareholders' equity (deficit):
Preferred stock - -
Convertible preferred stock 28,637 28,135
Common stock 519 406
Capital in excess of par value 400,949 210,162
Accumulated deficit (295,033) (162,649)
Treasury stock (2,005) (2,005)
Accumulated other comprehensive income (1,150) (620)
Bandwidth asset to be delivered under IRU agreement (158,550) -
------------------ --------------
Total shareholders' equity (deficit) (26,633) 73,429
------------------ --------------
Total liabilities and shareholders' equity (deficit) $ 878,630 $ 186,181
================== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
1998 1997 1998 1997
---------- ---------- ---------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue $ 67,550 $ 32,001 $ 165,732 $ 87,147
Operating costs and expenses:
Data communications and operations 51,908 23,765 130,517 66,847
Sales and marketing 14,701 6,210 37,919 18,070
General and administrative 11,566 5,354 29,439 16,976
Depreciation and amortization 14,658 6,557 37,011 20,648
Charge for acquired in-process
research and development 13,400 - 40,400 -
---------- ---------- ---------- --------
Total operating costs and expenses 106,233 41,886 275,286 122,541
---------- ---------- ---------- --------
Loss from operations (38,683) (9,885) (109,554) (35,394)
Interest expense (18,722) (1,516) (38,193) (4,162)
Interest income 4,747 550 11,391 1,995
Other income (expense) (301) 177 703 119
Gain on sale of investments 5,647 - 5,647 5,701
---------- ---------- ---------- --------
Loss before income taxes (47,312) (10,674) (130,006) (31,741)
Income tax benefit (expense) (36) - (65) 476
---------- ---------- ---------- --------
Net loss (47,348) (10,674) (130,071) (31,265)
Return to preferred shareholders (768) - (2,313) -
---------- ---------- ---------- --------
Net loss to common shareholders $(48,116) $(10,674) $(132,384) $(31,265)
========== ========== ========== ========
Basic and diluted loss per share $ (0.93) $(0.26) $(2.70) $(0.78)
========== ========== ========== ========
Shares used in computing basic and
diluted loss per share (thousands) 51,659 40,407 49,120 40,264
========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1998 1997
----------- ------------
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<S> <C> <C>
Net cash used in operating activities $ (76,931) $ (13,009)
------------ ------------
Cash flows from Investing activities:
Purchases of property and equipment, net (48,635) (9,120)
Purchases of short-term investments (247,223) (3,000)
Proceeds from sale of short-term investments 200,044 4,649
Investments in certain businesses, net of cash acquired (123,797) -
Change in restricted cash and short-term investments, net (106,212) -
Net proceeds from sale of subsidiary - 20,353
Other, net (205) 148
------------ ------------
Net cash (used in) provided by investing activities (326,028) 13,030
------------ ------------
Cash flows from financing activities:
Net (payments) proceeds on lines of credit (5,603) 1,000
Proceeds from issuance of notes payable, net 718,575 5,988
Repayments of notes payable (37,313) (5,290)
Principal payments under capital lease obligations (24,205) (14,313)
Dividends paid to preferred shareholders (2,140) -
Other, net 4,914 409
------------ ------------
Net cash provided by (used in) financing activities 654,228 (12,206)
------------ ------------
Effect of exchange rate changes on cash (2,005) -
------------ ------------
Net increase (decrease) in cash and cash equivalents 249,264 (12,185)
Cash and cash equivalents, beginning of period 33,322 52,695
------------ ------------
Cash and cash equivalents, end of period $ 282,586 $ 40,510
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
These consolidated financial statements for the three and nine month periods
ended September 30, 1998 and 1997 and the related footnote information are
unaudited and have been prepared on a basis substantially consistent with the
audited consolidated financial statements of PSINet Inc. and its subsidiaries
(collectively, "PSINet" or the "Company") as of and for the year ended December
31, 1997 included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission (the "Annual Report"). These financial
statements should be read in conjunction with the audited consolidated financial
statements and the related notes to consolidated financial statements of the
Company as of and for the year ended December 31, 1997 included in the Annual
Report and the unaudited quarterly consolidated financial statements and related
notes to unaudited consolidated financial statements of the Company for the
three month period ended March 31, 1998 and the three and six month periods
ended June 30, 1998 included in the Company's Form 10-Q for the quarters then
ended, as filed with the Securities and Exchange Commission. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) which management
considers necessary to present fairly the consolidated financial position of the
Company at September 30, 1998 and the results of its operations and cash flows
for the three and nine month periods ended September 30, 1998 and 1997. The
results of operations for the three and nine month periods ended September 30,
1998 may not be indicative of the results expected for any succeeding quarter or
for the entire year ending December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results may
differ from those estimates.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Comprehensive Income
- --------------------
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and displaying comprehensive income, as defined, and its
components. Accumulated other comprehensive income is reported in the
consolidated balance sheets and includes unrealized gain on investments and
cumulative foreign currency translation adjustment.
Comprehensive income for the three and nine months ended September 30, 1998 and
1997 was as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net loss $(47,348) $(10,674) $(130,071) $(31,265)
Other comprehensive income:
Change in unrealized holding gain
(loss) on investments (4,955) - - -
Foreign currency translation 343 (117) (530) (110)
adjustment -------- -------- --------- --------
(4,612) (117) (530) (110)
-------- -------- --------- --------
Comprehensive income $(51,960) $(10,791) $(130,601) $(31,375)
======== ======== ========= ========
</TABLE>
The Company classifies certain of its investment holdings in equity securities
as available-for-sale and reports such investments at fair value, with
unrealized gains and losses included in shareholders' equity as a component of
accumulated other comprehensive income. During the quarter ended June 30, 1998,
the Company purchased equity securities by exercising a warrant, and at June 30,
1998 reported an unrealized gain of $5.0 million on such investment. During the
quarter ended September 30, 1998, the Company sold these securities and realized
a gain of $5.6 million.
6
<PAGE>
Segment Reporting
- -----------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is effective for fiscal years beginning after December 15, 1997. The
Statement establishes standards for reporting information about operating
segments in annual and interim financial statements. Generally, the Statement
requires financial information to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company will adopt the Statement's disclosure
requirements in its financial statements as of and for the year ending December
31, 1998.
Derivative Financial Instruments
- --------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging securities.
To the extent the Company enters into such transactions in the future, the
Company will adopt the Statement's requirements in the financial statements for
the year ending December 31, 2000.
NOTE 3 - LONG-TERM DEBT
During the nine months ended September 30, 1998, the Company incurred capital
lease obligations of $54.9 million upon the execution of leases for new
equipment and other fixed assets.
At September 30, 1998, the aggregate unused portion under the Company's various
financing arrangements for purchases of equipment and other fixed assets was
$60.4 million. The aggregate unused portion of the Company's operating lines of
credit was $0.4 million.
On April 13, 1998, the Company completed an offering of $600.0 million aggregate
principal amount of 10% Senior Notes due 2005, Series A (the "10% Initial
Notes"). The 10% Initial Notes were issued and sold in accordance with Rule
144A and Regulation S under the Securities Act of 1933, as amended (the
"Securities Act").
On June 11, 1998, the Company completed an exchange offer of the 10% Initial
Notes for equivalent 10% Senior Notes due 2005, Series B (the "10% Exchange
Notes" and, together with the 10% Initial Notes, the "10% Senior Notes") which
have been registered under the Securities Act. The 10% Senior Notes are senior
unsecured obligations of the Company ranking equivalent in right of payment to
all existing and future unsecured and unsubordinated indebtedness of the Company
and senior in right of payment to all existing and future subordinated
indebtedness of the Company. The net proceeds of the offering, after deducting
discounts and commissions and expenses payable by the Company, were
approximately $581.0 million.
Concurrently with the closing of the offering, the Company deposited $138.7
million of such net proceeds into an escrow account, which, together with the
proceeds of the investment thereof, is expected to be sufficient to pay when due
the first five semi-annual interest payments on the 10% Senior Notes. At
September 30, 1998, the balance in the escrow account was $122.8 million. Of the
remaining net proceeds of the offering, $20.0 million was used to repay certain
indebtedness incurred primarily to finance the Company's acquisition of iSTAR
internet inc. ("iSTAR") and the balance is expected to be used to finance
capital expenditures (including facilities and equipment in connection with the
development and expansion of the Company's domestic and international network)
and working capital requirements (including debt service obligations) of the
Company.
On September 29, 1998, the Company entered into a three-year senior secured
revolving credit facility to replace the Company's then existing bank credit
arrangements in the United States (the "Credit Facility"). The Credit Facility
is a secured revolving credit facility with borrowing availability thereunder in
the maximum principal amount of $110.0 million, $108.5 million of which was
drawn upon at September 30, 1998 to finance a portion of the purchase price for
the acquisition of Tokyo Internet Corporation (Note 6).
7
<PAGE>
The 10% Senior Notes and the Credit Facility have certain financial covenants.
The Company was in compliance with all financial covenants at September 30,
1998. Prior to the completion of an offering of 11 1/2% Senior Notes, the
Company repaid, with other cash on hand, all borrowings outstanding under the
Credit Facility. Following the repayment, the Company continues to have
borrowing capacity of up to $110 million under the Credit Facility, subject to
its terms.
In November 1998, the Company completed offerings of $350.0 million aggregate
principal amount of 11 1/2% Senior Notes due 2008 (the "11 1/2% Senior Notes").
The 11 1/2% Senior Notes were issued and sold in accordance with Rule 144A and
Regulation S under the Securities Act. The Company has agreed (1) to file a
registration statement with the SEC to exchange the 11 1/2% Senior Notes for its
senior debt securities with terms identical to the 11 1/2% Senior Notes by
January 18, 1999; (2) to use its best efforts to cause such registration
statement to be declared effective under the Securities Act by April 2, 1999;
and (3) to keep that exchange offer open for not less than 20 business days and
cause that exchange offer to be consummated no later than the 30th business day
after such registration statement is declared effective. The 11 1/2% Senior
Notes are senior unsecured obligations ranking equivalent in right of payment to
all our existing and future unsecured and unsubordinated indebtedness and senior
in right of payment to all our existing and future subordinated indebtedness.
The net proceeds of the 11 1/2% Senior Notes offerings, after deducting
discounts and commissions and estimated expenses payable by the Company, were
approximately $342.8 million.
NOTE 4 - STRATEGIC ALLIANCES
Strategic Alliance with IXC Internet Services, Inc.
- ---------------------------------------------------
On February 25, 1998, the Company acquired from IXC Internet Services, Inc.
("IXC"), an indirect subsidiary of IXC Communications, Inc., 20-year
noncancellable indefeasible rights of use ("IRUs") in up to 10,000 equivalent
route miles of fiber-based OC-48 network bandwidth (the "PSINet IRUs") in
selected portions across the IXC fiber optic telecommunications network within
the United States. The PSINet IRUs were acquired in exchange for 10,229,789
shares of common stock of the Company (the "IXC Initial Shares") pursuant to an
IRU and Stock Purchase Agreement dated as of July 22, 1997 between the Company
and IXC, as amended (the "IRU Purchase Agreement"). The issuance of the IXC
Initial Shares was recorded at $7.6875 per share (the last reported quoted
market price of the Company's common stock on the date of the closing). Such
amount equaled $78.6 million. If the fair market value of the IXC Initial
Shares (based on a 20 trading day volume-weighted average share price) is less
than $240.0 million at the earlier of one year following delivery and acceptance
of the total amount of bandwidth corresponding to the PSINet IRUs or February
25, 2002 (the "Determination Date"), the Company will be obligated to provide
IXC with additional shares of its common stock, or at the sole option of the
Company, cash or a combination thereof equal to the shortfall (the "Contingent
Payment Obligation"). The Company has the right to accelerate the Contingent
Payment Obligation to any date (the "Acceleration Date") prior to the
Determination Date. In addition, the right of IXC to receive additional shares
of common stock and/or cash pursuant to the Contingent Payment Obligation will
terminate on such date as the fair market value of the IXC Initial Shares (based
on a 20 trading day volume-weighted average share price) is equal to or greater
than $240.0 million. At September 30, 1998, the IXC Initial Shares had an
aggregate market value of $142.6 million based on the closing market price per
share of the Company's common stock on such date of $13.938.
The Contingent Payment Obligation was recorded as capital in excess of par value
based on its fair value of $107.3 million. The fair value of the Contingent
Payment Obligation was determined utilizing a Black-Scholes valuation model
using an assumed term of four years, the closing market price per share of the
common stock on the date of the closing ($7.6875), an exercise price of $23.46
(which is the price per share required in order for the calculation of the IXC
Initial Shares to result in a value equal to $240.0 million), expected
volatility of 76% and an interest rate of 11%. The amount recorded for the fair
value
8
<PAGE>
of the Contingent Payment Obligation could be adjusted upward in a future period
under certain circumstances.
The amount representing the initial aggregate of the fair value of the IXC
Initial Shares and the Contingent Payment Obligation, $186.0 million, was
recorded as an offset to shareholders' equity similar to a stock subscription
receivable. Such amount will be reduced, and a long-term asset relating to the
PSINet IRUs will be recorded, as each bandwidth unit corresponding to the PSINet
IRUs is accepted by the Company. The Company expects to amortize the
capitalized amount of the asset relating to the PSINet IRUs ratably over the 20-
year period during which the Company has the right to utilize the bandwidth
corresponding to the PSINet IRUs.
The bandwidth corresponding to the PSINet IRUs is contemplated to be delivered
to the Company (to the extent then available) in specified minimum increments
every six months during the two year period following closing. As of September
30, 1998, the Company had accepted from IXC 1,475 equivalent route miles of OC-
48 bandwidth and had recorded $27.4 million as an increase to fixed assets and a
decrease to "Bandwidth asset to be delivered under IRU agreement" in
shareholders' equity (deficit).
The Company expects to incur on an annual basis approximately $1.15 million in
operations and maintenance fees with respect to the PSINet IRUs for each 1,000
equivalent route miles of OC-48 bandwidth accepted under the agreement.
NOTE 5 - INVESTMENTS IN AND ACQUISITIONS OF CERTAIN BUSINESSES
During the nine months ended September 30, 1998, the Company acquired 12
companies. The Company also acquired an equity interest in one company. The
following table summarizes certain information concerning these acquisitions or
investments:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Principal Ownership
Business Name Market Location Acquisition Date Interest
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Internet Prolink S.A. Switzerland January 1998 100%
- ---------------------------------------------------------------------------------------
iSTAR internet inc. Canada February and 100%
May 1998
- ---------------------------------------------------------------------------------------
Interactive Telephony Channel April 1998 100%
Limited Islands, Jersey
- ---------------------------------------------------------------------------------------
WorldPay Limited* Channel April 1998 12.5%
Islands, Jersey
- ---------------------------------------------------------------------------------------
Interactive Networx GmbH Germany May 1998 100%
- ---------------------------------------------------------------------------------------
LinkAge Online Limited Hong Kong June 1998 100%
- ---------------------------------------------------------------------------------------
ioNET Internetworking United States June 1998 100%
Services
- ---------------------------------------------------------------------------------------
SCII-CalvaPro Sub-Sahara June 1998 100%
Africa
- ---------------------------------------------------------------------------------------
INTERLOG Internet Service, Canada July 1998 100%
Inc.
- ---------------------------------------------------------------------------------------
Rimnet Corporation Japan August 1998 100%
- ---------------------------------------------------------------------------------------
TWICS Co., Ltd. Japan September 1998 100%
- ---------------------------------------------------------------------------------------
Hong Kong Internet & Hong Kong September 1998 100%
Gateway Services
- ---------------------------------------------------------------------------------------
Inet, Inc. Korea September 1998 100%
- ---------------------------------------------------------------------------------------
</TABLE>
*The investment in WorldPay is accounted for under the cost method.
9
<PAGE>
Certain portions of the purchase prices have been retained to secure performance
by certain sellers of indemnification or other contractual obligations.
Each of the acquisitions was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of the
acquired companies have been included in the Company's financial statements
since the acquisition dates. The purchase price of the acquisitions was
allocated to assets acquired, including intangible assets and liabilities
assumed, based on their respective fair values at the acquisition dates. The
excess of the purchase price over the fair value of the net tangible assets of
the acquisitions is being amortized over periods up to 15 years from the dates
of acquisition.
In connection with these acquisitions, the Company recorded a $40.4 million
charge in the nine months ended September 30, 1998 for acquired in-process
research and development. This represents the value of purchased in-process
technology on projects that have not yet reached technological feasibility and
have no alternative future use. The charge is comprised of $7.0 million in the
first quarter of 1998 relating to the acquisition of iSTAR, $20.0 million in the
second quarter relating to the acquisitions of INX, ioNet and LinkAge, and $13.4
million in the third quarter relating to the acquisitions of Interlog, Rimnet
and Inet.
The amount of purchase price allocated to in-process research and development
was determined using appropriate valuation techniques, including percentage-of-
completion which utilizes the key milestones to estimate the stage of
development of each in-process research and development project at the date of
acquisition, estimating cash flows resulting from the expected revenues
generated from such projects, and discounting the net cash flows back to their
present value. The discount rate includes a factor that takes into account the
uncertainty surrounding the successful development of the purchased in-process
technology.
The value assigned to purchased in-process technology was determined by
identifying research projects in areas including network applications such as
Internet Protocol telephony, access technologies such as asymmetric digital
subscriber line access and wireless local loop access, and other technologies
for which technological feasibility has not been established. The value of the
in-process projects was adjusted to reflect the relative value and contribution
of the acquired research and development. In doing so, consideration was given,
as appropriate, to the stage of completion, the complexity of the work completed
to date, the difficulty of completing the remaining development, costs already
incurred, and the projected cost to complete the projects. The value assigned
to purchased in-process technology was based on the following assumptions.
The estimated revenue associated with the respective business enterprise
valuations assumes five-year compound annual revenue growth rates of between 22%
to 45%. Revenue growth rates for each technology were developed considering,
among other things, the current and expected industry trends, acceptance of the
technologies and historical growth rates for similar industry products.
Estimated total revenue from the purchased in-process technology projects
generally peak in the year 2003 and decline through 2007 as other new products
are expected to be introduced. These revenue projections were based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions. The estimated net cash
flows were discounted back to their present value using a discount rate of
between 17.0% and 27.5%, which represents a premium to the Company's cost of
capital. The estimated percentage-of-completion of the various in-process
research and development projects ranged from 50% to 85% complete.
The resulting net cash flows from such projects were based on our estimates of
revenues, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes associated with such projects.
If none of these projects is successfully developed, the Company's sales and
profitability may be adversely affected in future periods. However, the failure
of any particular individual project in-process would not have a material impact
on the Company's financial condition or its results of operations.
Additionally, the failure of any particular individual project in-process could
impair the value of other intangible assets acquired. We expect to begin to
benefit from the purchased in-process technology in late 1998 or early 1999.
All of the companies acquired are Internet service providers ("ISPs"), or data
transmission companies, offering a wide range of Internet-protocol based
solutions for businesses, institutions and small-office/home-office users.
Depending on the particular business activities of the company acquired, revenue
may also be derived from service to consumer users, network integration, web
hosting, managed co-location, as well as vertical market Internet services,
including comprehensive banking, medical and telecommunications Internet
solutions.
The purchase price relating to one transaction may be increased by up to $8.0
million pursuant to an earnout provision in the event the acquired company
achieves certain levels of operating results in the period following the
acquisition. Such amount will be recorded as additional cost of the acquired
10
<PAGE>
company and reflected as additional purchased goodwill when it becomes probable
that the amount will be paid.
In connection with the acquisition of these companies, liabilities assumed were
as follows (in thousands of U.S. dollars):
Fair value of assets acquired $ 211,502
Cash paid for the capital stock (141,580)
---------
Liabilities assumed $ 69,922
=========
The following presents the unaudited pro forma results of operations of the
Company for the nine month periods ended September 30, 1998 and 1997 as if all
of the companies acquired since the beginning of 1998 in business combinations
accounted for under the purchase method had been consummated at the beginning of
the periods presented. The pro forma results of operations include certain pro
forma adjustments, including the amortization of intangible assets and the
write-off of intangible assets consisting of in-process research and development
costs relating to the acquisitions. The pro forma results of operations are
prepared for comparative purposes only and do not necessarily reflect the
results that would have occurred had the acquisitions occurred at the beginning
of the periods presented or the results which may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------------
September 30, 1998 September 30, 1997
---------------------------- ---------------------------
<S> <C> <C>
(in millions of U.S. dollars, except per share amounts)
Revenue $ 201.6 $ 154.6
Net loss $(150.8) $(120.1)
Basic and diluted loss per share $ (3.07) $ (2.98)
</TABLE>
NOTE 6 - SUBSEQUENT EVENTS
In October 1998, the Company acquired two Internet service providers: Tokyo
Internet Corporation in Japan, and Internet Exchange Europe, B.V./Unix Support
Netherland B.V. in the Netherlands. The aggregate amount of the purchase prices
and related payments for these acquisitions was approximately $147.7 million,
exclusive of indebtedness assumed in connection with such acquisitions. Of such
amount, the Company paid $120.7 million and retained the balance to secure
performance by certain sellers of indemnification or other contractual
obligations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with (1) our
accompanying unaudited consolidated financial statements and notes thereto, (2)
our audited consolidated financial statements, notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations as of
and for the year ended December 31, 1997 included in our Annual Report on Form
10-K for such period, (3) our unaudited quarterly consolidated financial
statements and related notes to unaudited consolidated financial statements for
the three month period ended March 31, 1998 and the three and six month periods
ended June 30, 1998 included in our Form 10-Q for the quarters then ended, as
filed with the Securities and Exchange Commission. This discussion includes
certain forward-looking statements. Actual results could differ materially from
the forward-looking statements as a result of a number of factors. For a
discussion of the risk factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors" set forth in
Exhibit 99.1 filed herewith and our other filings with the Securities and
Exchange Commission.
We wrote this Management's Discussion and Analysis using the Securities and
Exchange Commission's newly adopted "Plain English" guidelines to provide you
with more understandable and useful information. Unless the context otherwise
requires, "PSINet", the "Company", "we", "our" and "us" refer to PSINet Inc. and
its subsidiaries.
GENERAL
We are a leading global facilities-based provider of Internet access services
and related products and derive a majority of our revenues from providing
Internet access services to business customers and other Internet Service
Providers ("ISPs"). We provide dedicated and dial-up Internet connectivity in
90 of the 100 largest metropolitan statistical areas in the U.S. and in 12 of
the 20 largest international telecommunications markets. Business customers are
typically signed to contracts that range from one to three years. Revenues
generated from business customers are typically comprised of recurring monthly
fees, installation and start-up charges and sales of related equipment and
services. Revenues from other ISPs are generated pursuant to network access
agreements which typically require a minimum number of subscribers and obligate
the ISP customers to pay us specified monthly fees for each subscriber using the
PSINet network. In addition, we provide a variety of value-added services,
including, among others, corporate intranets, Web hosting, security services,
commerce solutions and other advanced Internet Protocol ("IP") -based
applications, including, among others, Voice-Over-Internet Protocol ("VOIP")
services and Internet fax. Revenues from value-added services are typically in
the form of monthly charges and are often bundled with Internet access services.
At September 30, 1998, we served 46,700 business accounts, including 141 ISPs,
and connected to more than 475 points of presence ("POPs") in 12 countries
throughout North America, Asia and Europe. The 141 ISPs provided Internet
services to over 665,000 customers using PSINet Internet solutions.
We own and operate a technologically advanced, high-speed data communications
network with over 245 POPs located in the U.S. and over 230 POPs located
internationally. To meet the growing data communications needs of our
customers, we seek to continually expand and enhance our network infrastructure
and are committed to a strategy of being a facilities-based ISP, rather than
relying solely on leased bandwidth for our network backbone. This strategy is
intended to lower operating costs, improve capacity and ensure sufficient
availability of bandwidth when needed. In connection with this program, we have
made significant investments in telecommunications circuits and equipment to
produce an IP-optimized, geographically dispersed, Asynchronous Transfer Mode
("ATM"), Integrated Service Digital Network ("ISDN") and Switched Multimegabit
Data Service ("SMDS") compatible frame relay network. These investments
generally are made in advance of anticipated customer growth and resulting
revenue.
As part of our ongoing efforts to further expand and enhance our network, we
have recently acquired or agreed to acquire significant amounts of global fiber-
based telecommunications bandwidth, including
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IRUs or other rights in up to 10,000 equivalent route miles of OC-48 capacity
across the United States, STM-1 transatlantic capacity connecting the United
States, the United Kingdom and continental Europe, dark fiber connecting the New
York City and Washington, D.C. metropolitan areas and major metropolitans areas
in between, and six DS-3s of transpacific capacity connecting the United States
and Japan. In addition, we have entered into an agreement with other leading
global telecommunications companies to build the Japan-U.S. Cable Network. The
acquisition of these bandwidth assets is expected to increase our network
capacity by at least 50 times and to reduce significantly our future data
communications and operations costs per equivalent mile. In addition, the
increased network capacity is expected to enable us to offer a wider variety of
higher-speed Internet and Internet-related services to a larger customer base.
As a result, we anticipate that our data communications and operations costs as
a percentage of revenue will decrease as we substitute the acquired bandwidth
for leased circuit arrangements with various telecommunications carriers. We
expect to further expand our network in North America, Europe and Asia, as well
as in other select international markets, and to acquire fiber-based IRUs and
dark fiber in these regions to support demand growth and reduce costs.
INTERNATIONAL OPERATIONS
We currently have operations in 12 of the 20 largest international
telecommunications markets including Belgium, Canada, France, Germany, Hong
Kong, Italy, Japan, the Netherlands, Republic of Korea, Switzerland, the United
Kingdom and the United States. We typically enter a new market through an
investment in a start-up company within the particular market or by acquiring a
local ISP. Revenue from international operations continues to increase as a
percentage of consolidated results, comprising 38% of revenue in the third
quarter of 1998. By comparison, it was 18% of revenue in the fourth quarter of
1997, 28% in the first quarter of 1998, and 31% in the second quarter of 1998.
The following table provides a brief overview of our domestic and international
operations (based upon the location from which service is provided):
<TABLE>
<CAPTION>
WHOLESALE
REVENUES AND
FOR NINE MONTHS BUSINESS CONSUMER PLANNED
ENDED 9/30/98 POPS ACCOUNTS ACCOUNTS BACKBONE COMMENCEMENT
(MILLIONS) (AT 10/1/98) (AT 10/1/98) (AT 10/1/98) BANDWIDTH OF OPERATIONS
---------------- ------------ ------------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
U.S. $110.7 245 22,800 483,700 2,400Mbps 1989
Canada 19.1 42 6,500 86,200 155 1996
Europe 25.4 151 9,600 23,700 155 1995
Asia 10.5 62 14,400 81,200 270+ 1994
------ --- ------ -------
$165.7 500 53,300 674,800
====== === ====== =======
</TABLE>
ACQUISITIONS AND INVESTMENTS
As part of our growth strategy, we have, over the last twelve months, completed
the acquisition of 15 ISPs in eight of the 20 largest global telecommunications
markets, resulting in the addition of approximately 21,200 new business and Web
services accounts, over 200,000 new consumer dial-up customers and over 150 new
POPs. The aggregate amount of the purchase prices and related payments for
these acquisitions was approximately $285.1 million, exclusive of indebtedness
assumed in connection with such acquisitions. Of such amount, we have paid
$247.1 million and retained the balance to secure performance by certain sellers
of indemnification or other contractual obligations. The following table
summarizes certain information concerning these acquisitions:
<TABLE>
<CAPTION>
ABBREVIATED RANKING
NAME OF AMONG 20
ACQUIRED DATE OF PRINCIPAL BUSINESS CONSUMER LARGEST GLOBAL
COMPANY ACQUISITION MARKET TERRITORY ACCOUNTS (1) ACCOUNTS (1) TELECOM MARKETS
---------------- ----------- ----------------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
CalvaCom 10/97 France 1,500 2,300 5
Iprolink 1/98 Switzerland 2,400 2,600 14
iSTAR 2/98 Canada 2,700 47,000 10
ITL 4/98 Jersey, Channel Islands -- -- N/A
INX 5/98 Germany 650 15,600 3
ioNET 6/98 U.S. 2,300 21,500 1
LinkAge 6/98 Hong Kong 1,100 -- 19
CalvaPro 6/98 Sub-Sahara Africa 425 30 N/A
</TABLE>
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Interlog 7/98 Canada 2,100 41,000 10
Rimnet 8/98 Japan 260 56,000 2
TWICS 9/98 Japan 70 1,700 2
HKIGS 9/98 Hong Kong 200 -- 19
Inet 9/98 Korea 1,100 13,000 12
Tokyo Internet 10/98 Japan 6,500 10,000 2
IXE/USN 10/98 Netherlands 85 -- 13
------ -------
Total 21,390 210,730
====== =======
_______________________
(1) As of the respective dates of acquisition.
ISSUANCE OF 10% SENIOR NOTES
In April 1998, we completed an offering of $600.0 million aggregate principal
amount of 10% Senior Notes due 2005 (the "10% Senior Notes"). The 10% Senior
Notes are senior unsecured obligations of the Company ranking equivalent in
right of payment to all existing and future unsecured and unsubordinated
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. They are rated B3 by Moody's
Investors Service and B- by Standard & Poor's.
The 10% Senior Notes will mature on February 15, 2005. Interest on the 10%
Senior Notes is payable semi-annually on August 15 and February 15 of each year,
commencing August 15, 1998. The 10% Senior Notes are redeemable at our option in
whole or in part, at any time on or after February 15 of 2002, 2003 and 2004 at
105%, 102.5% and 100% of the principal amount thereof, respectively, in each
case, plus accrued and unpaid interest to the date of redemption. In addition,
on or prior to February 15, 2001, we may redeem up to 35% of the original
aggregate principal amount of the 10% Senior Notes at a redemption price of 110%
of the principal amount thereof, plus accrued and unpaid interest to the date of
redemption, with the net cash proceeds of certain public equity offerings or the
sale of stock to one or more strategic investors, provided that at least 65% of
the original aggregate principal amount of the 10% Senior Notes remains
outstanding immediately after such redemption. Upon the occurrence of certain
change of control events, we will be required to make an offer to purchase the
10% Senior Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
The net proceeds of the offering of the 10% Initial Notes, after deducting
discounts and commissions and expenses payable by us, were approximately $581.0
million. Concurrently with the closing of the offering, we deposited $138.7
million of such net proceeds into an escrow account, which, together with the
proceeds of the investment thereof, is expected to be sufficient to pay when due
the first five semi-annual interest payments on the 10% Senior Notes.
ISSUANCE OF 11 1/2% SENIOR NOTES
In November 1998, we completed offerings of $350.0 million aggregate principal
amount of 11 1/2% Senior Notes due 2008 (the "11 1/2% Senior Notes"). The 11
1/2% Senior Notes were issued and sold in accordance with Rule 144A and
Regulation S under the Securities Act of 1933 as amended (the "Securities
Act"). They are rated B3 by Moody's Investors Service and B- by Standard &
Poor's.
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We have agreed (i) to file a registration statement with the Securities and
Exchange Commission ("SEC") to exchange the 11 1/2% Senior Notes for our senior
debt securities with terms identical to the 11 1/2% Senior Notes by January 18,
1999; (ii) to use our best efforts to cause such registration statement to be
declared effective under the Securities Act by April 2, 1999; and (iii) to keep
that exchange offer open for not less than 20 business days and cause that
exchange offer to be consummated no later than the 30th business day after such
registration statement is declared effective. The 11 1/2% Senior Notes are
senior unsecured obligations ranking equivalent in right of payment to all our
existing and future unsecured and unsubordinated indebtedness and senior in
right of payment to all our existing and future subordinated indebtedness.
The 11 1/2% Senior Notes will mature on November 1, 2008. Interest on the 11
1/2% Senior Notes is payable in cash semi-annually on May 1 and November 1 of
each year, commencing May 1, 1999. We will be able to redeem the 11 1/2% Senior
Notes, at our option, on or after November 1, 2003, 2004, 2005, and 2006 at
105.75%, 103.833% and 101.917% and 100.0% of the principal amount thereof,
respectively, and thereafter at 100.0% of the principal amount thereof, in each
case, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to November 1, 2001, we may redeem up to 35% of the
original aggregate principal amount of the 11 1/2% Senior Notes at a redemption
price of 111.5% of the principal amount thereof, plus accrued and unpaid
interest to the date of redemption, with the net cash proceeds of certain public
equity offerings or the sale of stock to a strategic investor in a single
transaction or a series of related transactions, provided that at least 65% of
the original aggregate principal amount of the 11 1/2% Senior Notes remains
outstanding immediately after such redemption. Upon the occurrence of certain
change of control events, we could be required to make an offer to purchase the
11 1/2% Senior Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
The aggregate net proceeds of the 11 1/2% Senior Notes offerings, after
deducting discounts and commissions and estimated expenses payable by us, were
approximately $342.8 million. We intend to use the net proceeds from these
offerings to finance capital expenditures, including the acquisition of
additional telecommunications bandwidth and related facilities and equipment,
and the construction of Internet data centers, and general corporate purposes.
In addition, we may also use a portion of the net proceeds to make investments
in or acquisitions of businesses or assets related to or complementary to our
business.
CREDIT FACILITY
On September 29, 1998, we entered into a new three-year senior secured revolving
credit facility, pursuant to which The Chase Manhattan Bank ("Chase") is acting
as administrative agent, to replace our existing bank credit arrangements in the
United States (the "Credit Facility"). The Credit Facility is a secured
revolving credit facility with borrowing availability thereunder in the maximum
principal amount of $110.0 million, $108.5 million of which was drawn upon to
finance a portion of the purchase price for the acquisition of Tokyo Internet.
Prior to the closing of the initial 11 1/2% Initial Notes offering, we repaid,
with other cash on hand, all borrowings outstanding under the Credit Facility.
Following the closings of those offerings, we continue to have borrowing
capacity of up to $110.0 million under the Credit Facility, subject to its
terms.
Borrowings under the Credit Facility bear interest, at our option, at (1) the
London interbank offered rate for deposits in U.S. Dollars for the relevant
period multiplied by the statutory reserve rate plus the Applicable Margin
("Eurodollar Rate") or (2) the higher of Chase's prime rate or the Federal
Funds effective rate plus 1/2 of 1%, plus the Applicable Margin ("ABR Rate").
The Applicable Margin varies based on the Leverage Ratio (as defined in the
Credit Facility) as of the most recent determination date. Currently, the
Applicable Margin is 1.75% for ABR Rate borrowings and 2.75% for Eurodollar Rate
borrowings.
Our obligations under the Credit Facility are guaranteed by each of our existing
and subsequently acquired or organized significant domestic subsidiaries (a
subsidiary which owns or maintains at least $1,000,000 in assets or generates at
least $1,000,000 in annual revenues) and are secured by a lien on substantially
all of our assets and each subsidiary guarantor and by a pledge by us and each
subsidiary guarantor of all capital stock and other equity interests it owns
(65% in the case of equity interests in foreign subsidiaries).
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The Credit Facility contains covenants and provisions that restrict, among other
things, our ability and our subsidiaries' ability to:
. make dividends and distributions on, and redemptions and repurchases of,
capital stock and other similar payments;
. make prepayments, redemptions and repurchases of indebtedness;
. incur liens and enter into sale-leaseback transactions;
. make certain loans and investments;
. incur additional indebtedness and certain contingent obligations;
. effect certain mergers, acquisitions and asset sales;
. engage in certain transactions with affiliates;
. effect certain changes in business conducted by us; and
. amend and waive certain debt and other agreements.
The Credit Facility also requires the satisfaction of certain financial
covenants, including a minimum annual consolidated revenue test, a minimum debt-
to-annualized adjusted revenue ratio, a minimum aggregate balance of
nonrestricted cash and available borrowings and a minimum EBITDA test. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Structure." In addition, the Credit Facility requires a
reduction in the maximum amount of availability and prepayments (if required as
a result of such reduction) equal to the net proceeds received from certain
asset sales aggregating more than $5 million and from certain casualty events.
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THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997
RESULTS OF OPERATIONS
Revenue. We generate revenue primarily from the sale of Internet access and
related services to businesses. Revenue was $67.6 million for the three months
ended September 30, 1998, an increase of $35.6 million, or 111%, from $32.0
million for the three months ended September 30, 1997. Revenue was $165.7
million for the nine months ended September 30, 1998, an increase of $78.6
million, or 90%, from $87.1 million for the nine months ended September 30,
1997. The 90% year-to-date revenue growth is broken down into 55% from those
operations that were in existence at September 30, 1997 and 35% from companies
acquired since that date. Our organic growth is attributable to a number of
factors, including an increase in the number of business customer and ISP
accounts, an increase in the average annual revenue realized per new customer
account, and an increase in the business account retention rate.
Our customer account base increased by 103% to 46,700 business accounts
including 141 ISPs at September 30, 1998, from 23,000 business accounts
including 41 ISPs at September 30, 1997. Average annual new contract value
increased to $5,900 from $5,800 in the second quarter of 1998, which we believe
reflects an increasing demand for value-added services and higher levels of
bandwidth.
Data Communications and Operations. Data communications and operations expenses
consist primarily of leased long distance and local circuit costs as well as
personnel and related operating expenses associated with network operations,
customer support and field service. Data communications and operations expenses
were $51.9 million (76.8% of revenue) for the three months ended September 30,
1998, an increase of $28.1 million from $23.8 million (74.3% of revenue) for the
three months ended September 30, 1997. Data communications and operations
expenses were $130.5 million (78.8% of revenue) for the nine months ended
September 30, 1998, an increase of $63.7 million from $66.8 million (76.7% of
revenue) for the nine months ended September 30, 1997. The increase in expenses
related principally to increases in (1) leased long distance, dedicated customer
and dial-up circuit costs, (2) expenditures for additional primary rate
interfaces ("PRIs") to support the growth of our Carrier and ISP Services
business, and (3) personnel costs resulting from the expansion of our network
operations, customer support and field service staff, including through
acquisitions. Circuit costs relating to our new and expanded POPs and PRIs
generally are incurred by us in advance of anticipated growth in our customer
base. Although we expect that data communications and operations expenses will
continue to increase as our customer base grows, we anticipate that such
expenses will decrease over time as a percentage of revenue due to decreases in
unit costs and continued increases in network utilization. In particular, we
anticipate that costs for data communications and operations as a percentage of
revenue will decrease as we substitute network bandwidth purchased or acquired
under capital lease agreements for bandwidth currently taken under operating
lease agreements. This will, in turn, result in increases in depreciation and
amortization expense.
Sales and Marketing. Sales and marketing expenses consist primarily of sales
and marketing personnel costs, advertising costs, distribution costs and related
occupancy costs. Sales and marketing expenses were $14.7 million (21.8% of
revenue) for the three months ended September 30, 1998, an increase of $8.5
million from $6.2 million (19.4% of revenue) for the three months ended
September 30, 1997. Sales and marketing expenses were $37.9 million (22.9% of
revenue) for the nine months ended September 30, 1998, an increase of $19.8
million from $18.1 million (20.7% of revenue) for the nine months ended
September 30, 1997. The increase resulted principally from costs related to a
branding and advertising campaign and from costs associated with the growth of
our sales force in conjunction with our growth and acquisition strategy. All
advertising and marketing costs are expensed in the period incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for executive, financial, legal and
administrative personnel and provision for uncollectible accounts receivable.
General and administrative expenses were $11.6 million (17.1% of revenue) for
the three months ended September 30, 1998, an increase of $6.2 million from $5.4
million (16.7% of revenue) for the three months ended September 30, 1997.
General and administrative expenses were $29.4 million (17.8% of revenue) for
the nine months ended September 30, 1998, an increase of $12.4 million from
$17.0 million (19.5% of revenue) for the nine months ended September
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30, 1997. The increase resulted from the addition of management staff and
related operating expenses across the organization, including in conjunction
with our growth and acquisition strategy, and increases in the provision for
doubtful accounts receivable associated with our growth in revenue.
Depreciation and Amortization. Depreciation and amortization costs were $14.7
million (21.7% of revenue) for the three months ended September 30, 1998, an
increase of $8.1 million from $6.6 million (20.5% of revenue) for the three
months ended September 30, 1997. Depreciation and amortization costs were $37.0
million (22.3% of revenue) for the nine months ended September 30, 1998, an
increase of $16.4 million from $20.6 million (23.7% of revenue) for the nine
months ended September 30, 1997. Depreciation and amortization costs have
increased as a result of capital expenditures associated with network
infrastructure enhancements and amortization of intangible assets related to
acquisitions. We anticipate that our depreciation and amortization expenses
will continue to increase significantly as a percentage of revenue as we
substitute network bandwidth purchased or acquired under capital lease
agreements for bandwidth currently taken under operating lease agreements, and
as we record depreciation and amortization on tangible and intangible assets
related to business combinations and expansion of our operations.
Acquired In-Process Research and Development. The results for the three months
ended September 30, 1998 include a $13.4 million charge (19.8% of revenue) for
acquired in-process research and development related to acquisitions completed
during the third quarter. The results for the nine months ended September 30,
1998 include a $40.4 million charge (24.4% of revenue) for acquired in-process
research and development. The charges were based on independent valuations and
reflect technologies acquired prior to technological feasibility and for which
there is no alternative future use. There were no comparable charges in 1997.
Interest Expense. Interest expense was $18.7 million for the three months
ended September 30, 1998, an increase of $17.2 million from $1.5 million for the
three months ended September 30, 1997. Interest expense was $38.2 million for
the nine months ended September 30, 1998, an increase of $34.0 million from $4.2
million for the nine months ended September 30, 1997. The increase was due to
interest on our issuance of $600.0 million aggregate principal amount of 10%
Senior Notes, as well as to increased borrowings and capital lease obligations
incurred to finance our network expansion and to fund our working capital
requirements. We expect interest expense to increase in future quarters as a
result of the issuance of the 11 1/2% Senior Notes.
Interest Income. Interest income was $4.7 million for the three months ended
September 30, 1998, an increase of $4.2 million from $0.5 million for the three
months ended September 30, 1997. Interest income was $11.4 million for the nine
months ended September 30, 1998, an increase of $9.4 million from $2.0 million
for the nine months ended September 30, 1997. The increases were due to
interest received on the net proceeds of our offering of the 10% Senior Notes,
which proceeds are invested in U.S. Government securities, A-1/P-1 rated
certificates of deposit or A-1/P-1 rated commercial paper until such time as
they are used for other purposes.
Gain on Sale of Investment. The gain on the sale of investments of $5.6
million for the three months and nine months ended September 30, 1998 relates to
the recognition of realized gains on equity securities that we sold during the
third quarter. The gain on the sale of investments of $5.7 million for the nine
months ended September 30, 1997 relates to the sale in the first quarter of 1997
of our software subsidiary.
Net Loss to Common Shareholders and Loss per Share. As a result of the factors
discussed above, our net loss to common shareholders for the three months ended
September 30, 1998 was $48.1 million, or $0.93 basic and diluted loss per share,
a $37.4 million increase from a net loss to common shareholders for the three
months ended September 30, 1997 of $10.7 million, or $0.26 basic and diluted
loss per share. Our net loss to common shareholders for the nine months ended
September 30, 1998 was $132.4 million, or $2.70 basic and diluted loss per
share, a $101.1 million increase from a net loss to common shareholders for the
nine months ended September 30, 1997 of $31.3 million, or $0.78 basic and
diluted loss per share. The return to preferred shareholders, which comprises
the dividends with respect to our Series B 8% Convertible Preferred Stock
("Series B Preferred Stock") and accretion of the related conversion premium
on the Series B Preferred Stock, is subtracted from net loss in determining the
net
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loss to common shareholders. Because inclusion of common stock equivalents
is antidilutive, basic and diluted loss per share are the same for each period
presented.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements through cash from
operations, through borrowings and capital lease financings from vendors,
financial institutions and other third parties, and through the issuance of debt
and equity securities.
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Cash flows used in operating activities were $76.9 million and $13.0 million for
the nine months ended September 30, 1998 and 1997, respectively. Cash flows
used in operating activities can vary significantly from period to period
depending upon our net income or loss in addition to the timing of operating
cash receipts and payments, especially accounts receivable, prepaid expenses and
other assets, and accounts payable and accrued liabilities.
Cash flows used in investing activities were $326.0 million and cash flows
provided by investing activities were $13.0 million for the nine months ended
September 30, 1998 and 1997, respectively. Purchases of short-term investments
related to the 10% Senior Notes offering during the nine months ended September
30, 1998 were $247.2 million, offset by proceeds from the sale of short-term
investments of $200.0 million. The change in restricted cash, including the
escrow for interest on the 10% Senior Notes, was $106.2 million. The expansion
of the Company's network resulted in capital expenditures of $103.3 million and
$29.1 million for the nine months ended September 30, 1998 and 1997,
respectively (which included capital expenditures financed under equipment
financing agreements aggregating $54.9 million and $20.0 million, respectively).
Acquisition activities resulted in the use of $123.8 million of cash for the
nine months ended September 30, 1998, net of cash acquired. Cash flows provided
by investing activities for the nine months ended September 30, 1997 benefited
from the sale in February 1997 of our software subsidiary for cash consideration
of $12.0 million and the receipt of $8.5 million as repayment of intercompany
debt owed by our software subsidiary.
Cash flows provided by financing activities were $654.2 million and cash flows
used in financing activities were $12.2 million for the nine months ended
September 30, 1998 and 1997, respectively. The financing cash flow in 1998
primarily relates to issuance of the 10% Senior Notes and borrowings under the
Credit Facility, offset by repayments on our financing facilities. During the
nine months ended September 30, 1998 and 1997, we made repayments aggregating
$61.5 million and $19.6 million, respectively, on such financing facilities.
As of September 30, 1998, we had $463.0 million of cash, cash equivalents,
restricted cash and short-term investments, and short-term investments and
marketable securities, including $122.8 million escrowed for the repayment of
interest on the 10% Senior Notes.
CAPITAL STRUCTURE
Our capital structure at September 30, 1998 consisted of lines of credit,
capital lease obligations and notes payable (including the 10% Senior Notes),
preferred stock and common stock.
Total borrowings at September 30, 1998 were $817.7 million, which included $44.7
million in current obligations and $773.0 million in long-term capital lease
obligations and notes payable. We also had $0.6 million of letters of credit
outstanding as of September 30, 1998. As of that date, the aggregate unused
portion under our various financing arrangements for purchases of equipment and
other fixed assets was $60.4 million. The aggregate unused portion of our
operating lines of credit (some of which are subject to a borrowing base
formula) was $0.4 million.
Prior to the closing of the 11 1/2% Senior Notes offerings, we repaid, with
other cash on hand, $108.5 million of borrowings outstanding under the Credit
Facility. Following the closing of these offerings, we continue to have
borrowing capacity of up to $110 million under the Credit Facility, subject to
its terms.
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Our bank financing arrangements in the United States, which are secured by
substantially all of our assets, require us to satisfy certain financial
covenants such as those relating to consolidated revenue, leverage, liquidity
and EBITDA (as defined therein), and prohibit us from paying cash dividends and
repurchasing our capital stock without the lender's consent. In particular, we
are required not to permit:
. consolidated revenue for any period of four consecutive fiscal quarters
to be less than $215.0 million on or after December 31, 1998 but prior to
June 30, 1999, $285.0 million on or after June 30, 1999 but prior to
December 31, 1999, $350.0 million on or after December 31, 1999 but prior
to June 30, 2000, $425.0 million on or after June 30, 2000 but prior to
December 31, 2000, and $500.0 million on December 31, 2000 and
thereafter;
. the ratio of consolidated debt minus cash (excluding cash escrowed with
respect to the payment of obligations) to annualized consolidated revenue
for the most recent fiscal quarter for which financial statements have
been delivered (as adjusted to give pro forma effect to any acquisitions
completed during or after such fiscal quarter) to exceed 2.5 to 1 at any
time;
. the sum of cash (excluding cash escrowed with respect to the payment of
obligations) and available borrowing capacity under the Credit Facility
at any time to be less than $100.0 million; and
. EBITDA (as defined therein), to be less than negative $45.0 million,
negative $40.0 million, negative $29.0 million, negative $15.0 million,
$0, $15.0 million, $25.0 million, $40.0 million and $50.0 million for any
period of four consecutive fiscal quarters ending on each of December 31,
1998, March 31, 1999, June 30, 1999, September 30, 1999, December 31,
1999, March 31, 2000, June 30, 2000, September 30, 2000 and December 31,
2000, respectively.
In April 1998, we completed an offering of $600.0 million aggregate principal
amount of 10% Senior Notes, and in November 1998, we completed offerings of
$350.0 million of 11 1/2% Senior Notes. The net proceeds of the offering, after
giving effect to discounts, commissions and estimated expenses and the
establishment of a $138.7 million escrow arrangement to fund when due the first
five interest payments on the 10% Senior Notes, were $785.1 million.
The Indenture for the 10% Senior Notes and the 11 1/2% Senior Notes contain
certain financial covenants with which we must comply relating to, among other
things, the following matters:
. limitation on our payment of cash dividends, repurchase of capital stock,
payment of principal on subordinated indebtedness and making of certain
investments, unless after giving effect to each such payment, repurchase
or investment, certain operating cash flow coverage tests are met,
excluding certain permitted payments and investments;
. limitation on our incurrence and our subsidiaries' incurrence of
additional indebtedness, unless at the time of such incurrence, our ratio
of debt to annualized operating cash flow would be less than or equal to
6.0 to 1.0 prior to April 1, 2001 and less than or equal to 5.5 to 1.0 on
or after April 1, 2001, excluding certain permitted incurrences of debt;
. limitation on our incurrence and our subsidiaries' incurrence of liens,
unless the 10% Senior Notes are secured equally and ratably with the
obligation or liability secured by such lien, excluding certain
permitted liens;
. limitation on the ability of any subsidiary of ours to create or
otherwise cause to exist any encumbrance or restriction on the payment
of dividends or other distributions on their capital stock, payment of
indebtedness owed to us or any other subsidiary, making of investments in
us or any other subsidiary, or transfer of any properties or assets to us
or any other subsidiary, excluding certain permitted encumbrances and
restrictions;
. limitation on certain mergers, consolidations and sales of assets by us
or our subsidiaries;
. limitation on certain transactions with affiliates of ours;
. limitation on the ability of any of our subsidiaries to guarantee or
otherwise become liable with respect to any indebtedness of us unless
such subsidiary provides for a guarantee of the 10% Senior Notes and the
11 1/2% Senior Notes on the same terms as the guarantee of such
indebtedness;
. limitation on certain sale and leaseback transactions by us or our
subsidiaries;
. limitation on certain issuances and sales of capital stock of
subsidiaries of ours; and
. limitation on the ability of us or our subsidiaries to engage in any
business not substantially related to a telecommunications business.
In November 1997, we completed a private placement of 600,000 shares of our
Series B 8% Convertible Preferred Stock (the "Series B Preferred Stock") for
gross proceeds of $30.0 million. Each share of Series B Preferred Stock has a
stated value of $50.00 per share. The Series B Preferred Stock accrues dividends
at an annual rate of 8%, payable quarterly in cash or, at our option, our Series
B Preferred Stock. The Series B Preferred Stock is convertible into a number of
shares of our common stock equal to the stated value of the Series B Preferred
Stock at a conversion price of $10 per share of common stock during the first
year. The conversion price may be reset at the end of the first and second
anniversary dates, under certain circumstances, to the stock's then current
market value. At the third anniversary date, the conversion price may be reset
under certain circumstances, to 95% of the stock's then current market value.
To reflect the nature of the conversion rights, preferred stock has been reduced
by $1.5 million with a corresponding increase to capital in excess of par value.
The Series B Preferred Stock may be redeemed, at our option, under certain
circumstances commencing on the third anniversary of original issuance. So long
as any Series B Preferred Stock remains outstanding, except for any payment that
may be made pursuant to the IRU Purchase Agreement, neither we nor any of our
subsidiaries will:
. redeem, purchase or otherwise acquire directly or indirectly any common
stock or other junior securities,
. directly or indirectly pay or declare any dividend or make any
distribution (other than certain dividends or distributions or a
distribution on securities issuable pursuant to any rights under our
shareholder rights plan) upon, nor will any distribution (other than
certain dividends or distributions or a distribution on securities
issuable pursuant to any rights pursuant to the rights plan) be made in
respect of, any common stock or other junior securities, or
. set aside any funds for or apply any funds to the purchase, redemption or
acquisition (through a sinking fund or otherwise) of any common stock or
other junior securities (other than pursuant to the rights plan).
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We may, however, redeem, purchase or otherwise acquire and set aside funds for
and apply funds to the purchase, redemption or acquisition of common stock or
other junior securities:
. for up to an aggregate amount not to exceed, at any point in time the sum
of: (1) $10.0 million plus (2) an amount equal to 100% of the aggregate
net cash proceeds received by us after November 10, 1997 from the issuance
of common stock or other junior securities or debt securities that have
been converted into common stock or other junior securities plus (3) an
amount equal to 50% of our cumulative consolidated positive earnings
before interest, taxes, depreciation and amortization as reported by us in
respect of each fiscal quarter commencing with the fiscal quarter ending
December 31, 1997, or
. pursuant to the right of first offer granted pursuant to the IRU Purchase
Agreement, provided that immediately after giving effect thereto, our
consolidated shareholders' equity will not be less than $20.0 million.
We have a credit facility with a Canadian bank ("Canadian Credit Facility")
which provides availability of loans to our Canadian subsidiary in three
components:
. a revolving credit facility of Cdn. $150,000;
. a term loan of Cdn. $1,000,000, having a balance outstanding of Cdn.
$281,000 as of September 30, 1998, repayable in February 1999; and
. an equipment leasing facility of Cdn. $1,000,000 having a balance
outstanding of Cdn. $773,000 as of September 30, 1998, and a final
maturity date of March 2001.
Borrowings under the revolving credit facility and the term loan bear interest
at the applicable prime rate of the bank plus 1.5%. Borrowings under the
equipment lease facility bear interest at an average rate of 8.7%.
COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS
As of September 30, 1998, we had commitments to certain telecommunications
vendors totaling $80.2 million. The commitments require minimum monthly usage
levels of data and voice communications over the next five years. Additionally,
we have various agreements to lease office space and facilities and, as of
September 30, 1998, were obligated to make future minimum lease payments of
$35.5 million on non-cancellable operating leases expiring in various years
through 2005. We are obligated, under the terms of one of our Carrier and ISP
Services agreements, to provide the ISP customer with a rental facility of up to
$5.0 million for telecommunications equipment owned or leased by us and deployed
in the customer's network. At September 30, 1998, we had provided $1.4 million
of equipment under this facility. In certain cases we also obtain local customer
circuits under multi-year agreements that permit us to redesignate the circuit
to a different customer but which obligate us for that circuit until expiration.
In order to take full advantage of the bandwidth acquired from IXC, in addition
to other planned capital expenditures, we expect to incur capital expenditures
through the end of the year 2000 of up to $95.0 million. We expect to incur
these capital expenditures in the deployment of high activity POPs throughout
the United States designed and located with the objective of optimizing the
efficient use of the bandwidth. These POPs are expected to contain switching,
routing and modem equipment, together with any computing equipment as may be
necessary to address the increase in customer demand anticipated as a result of
the enhanced capacity provided by the PSINet IRUs. In addition, we expect to
incur on an annual basis $1.2 million in operation and maintenance fees for each
1,000 equivalent route miles of OC-48 bandwidth accepted from IXC. Other
planned capital expenditures expected to be incurred by us over the next four
years include up to $35.0 million in connection with the anticipated build-out
of our pan-European Internet network, including in connection with our recent
acquisition of IRUs in transatlantic STM-1 bandwidth connecting the United
States, the United Kingdom and the Netherlands, and for construction of our
recently opened network operations center in Switzerland. In addition, we
expect to incur capital expenditures of (1) approximately $45.0 million over the
next several years in connection with our acquisition, lighting and utilization
of 18 dark fiber optic strands connecting the New York City to Washington, D.C.
metropolitan areas and major metropolitan areas in between, (2) approximately
$47.0 million in connection with our recent acquisition of IRUs in transpacific
DS-3 bandwidth connecting the United States and Japan, and (3) in excess of
$100.0 million of total costs over the 25
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year term of the agreement in connection with our agreement with a group of
leading global telecommunications companies to build the Japan-U.S. Cable
Network. We currently anticipate that these expenditures will be financed
through a combination of capital leases, a portion of the net proceeds from the
10% Senior Notes and 11 1/2% Senior Notes offerings, and with other sources
of financing. We expect to continue to seek opportunities to acquire bandwidth
to enhance our global network capabilities.
We presently believe, based on the flexibility we expect to have in the timing
of orders of bandwidth corresponding to the PSINet IRUs, in outfitting our POPs
with appropriate telecommunications and computer equipment, and in controlling
the pace and scope of our anticipated buildout of our international Internet
network, that we will have a reasonable degree of flexibility to adjust the
amount and timing of such capital expenditures in response to our then existing
financing capabilities, market conditions, competition and other factors.
Accordingly, we believe that working capital generated from the use of bandwidth
corresponding to the PSINet IRUs, together with other working capital from
operations, from existing credit facilities, from capital lease financings, from
the proceeds of the 10% Senior Notes and 11 1/2% Senior Notes offerings and from
future equity or debt financings (which we presently expect to be able to obtain
when needed), will be sufficient to meet the currently anticipated working
capital and capital expenditure requirements of our operations. There can be no
assurance, however, that we will have access to sufficient additional capital
and/or financing on satisfactory terms to enable us to meet our capital
expenditure and working capital requirements. See "Risk Factors--Need for
Additional Capital to Finance Growth and Capital Requirements."
As more fully described in "Notes to Consolidated Financial Statements (Note 4
- - Strategic Alliances - Strategic Alliance with IXC Internet Services, Inc.),"
we could be obligated in accordance with the Contingent Payment Obligation to
provide IXC with additional shares of our common stock and/or cash, at our sole
option, as of the Determination Date or the Acceleration Date (as defined), as
applicable. In the event the Contingent Payment Obligation to IXC becomes
payable, we presently believe that, because it may be satisfied by us, at our
sole option, by delivery of additional shares of Common Stock or cash or a
combination thereof, we will have sufficient flexibility to satisfy the
Contingent Payment Obligation. There can be no assurance, however, that
satisfaction of the Contingent Payment Obligation will not have a material
adverse effect on us. See "Risk Factors--Risks Associated with Acquisitions of
Bandwidth and Strategic Alliance with IXC."
We have certain payment obligations related to earnout and purchase price
retention arrangements pursuant to certain agreements between us and third
parties.
OTHER POSSIBLE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We anticipate that we will continue to seek to develop relationships with
strategic partners, both domestically and internationally, and to acquire assets
(including, without limitation, additional telecommunications bandwidth) and
businesses principally relating to or complementary to our existing business.
Certain of these strategic relationships may involve other telecommunications
companies that desire to enter into joint marketing and services arrangements
with us pursuant to which we would provide Internet and Internet-related
services to such companies. These transactions, if deemed appropriate by us,
may also be effected in conjunction with an equity and/or debt investment by
such companies in us. Such relationships and acquisitions may require
additional financing and may be subject to the consent of our lenders and other
third parties.
FOREIGN OPERATIONS - FINANCIAL INSTRUMENTS
We have not, in the past, used in any material respect financial instruments as
hedges against certain financial and currency risks or for trading. However, as
a result of the recent increase in our foreign operations, we may begin to use
various financial instruments, including derivative financial instruments, in
the ordinary course of business for purposes other than trading. These
instruments could include letters of credit, guarantees of debt, interest rate
swap agreements and foreign currency exchange contracts relating to intercompany
payables of foreign subsidiaries. We do not intend to use derivative financial
instruments for speculative purposes. Foreign currency exchange contracts would
be used to mitigate foreign currency exposure and with the intent of protecting
the U.S. dollar value of certain
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currency positions and future foreign currency transactions. Interest rate swap
agreements would be used to reduce our exposure to risks associated with
interest rate fluctuations. By their nature, all such instruments would involve
risk, including the risk of nonperformance by counterparties, and our maximum
potential loss may exceed the amount recognized in the balance sheet. We would
attempt to control our exposure to counterparty credit risk through monitoring
procedures and by entering into multiple contracts.
RISKS ASSOCIATED WITH YEAR 2000
The commonly referred to Year 2000 ("Y2K") problem results from the fact that
many existing computer programs and systems use only two digits to identify the
year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other processing
involving the Year 2000 or a later date. We have identified two main areas of
Y2K risk:
. Internal computer systems or embedded chips could be disrupted or fail,
causing an interruption or decrease in productivity in our operations; and
. Computer systems or embedded chips of third parties including (without
limitation) financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others ("Material Third Parties") could be disrupted or fail, causing an
interruption or decrease in our ability to continue our operations.
We have developed, or are in the process of developing, detailed plans for
implementation and testing of any necessary modifications to our key computer
systems and equipment with embedded chips to ensure that they are Y2K compliant.
We have engaged a third party consultant to perform an assessment of our
systems, domestically and internationally. We expect that the assessment, which
is being done in stages, will be complete by December 31, 1998. We anticipate
that our domestic internal systems will be Y2K ready by June 30, 1999, and our
international systems will be Y2K compliant by the end of the third quarter of
1999, which is consistent with prior plans. We believe that with these detailed
plans and completed modifications, the Y2K issue will not pose significant
operational problems for us. However, if the modifications and conversions are
not made, or not completed in a timely fashion, the Y2K issue could have a
material impact on our operations.
Our cost of addressing Y2K issues has been minor to date, less than five percent
(5%) of our information technology budget, but this amount will increase as
substantial consultants or personnel resources are required or if operationally-
important equipment must be remediated or replaced. The risk that Y2K issues
could present to us include, without limitation, disruption, delay or cessation
of operations, including operations that are subject to regulatory compliance.
In each case, the correction of the problem could result in substantial expense
and disruption or delay of our operations. The total cost of Y2K assessments
and remediation is funded through cash flows generated through operations and
available from other sources and, to date, we are expensing these costs. The
financial impact of making any required systems changes or other remediation
efforts cannot be known precisely at this time, but it is not expected to be
material to our financial position, results of operations, or cash flows. We
have not canceled any principal information technology projects as a result of
our Y2K effort, although we have rescheduled some tasks to accommodate this
effort.
In addition, we have identified and prioritized and are communicating with
Material Third Parties to determine their Y2K status and any probable impact on
us. We will continue to track and evaluate our long-term relationship with
Material Third Parties based on the responses we receive and on information
learned from other sources. If any of our Material Third Parties are not Y2K
ready and their non-compliance causes a material disruption to any of their
respective businesses, our business could be materially adversely affected.
Disruptions could include, among other things: the failure of a Material Third
Party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to our facilities; and other interruptions in
the normal course of our operations, the nature and extent of which we cannot
foresee. We will continue to evaluate the nature of these risks, but at this
time we are unable to determine the probability that any such risk will occur,
or if it does occur, what the nature, length or other effects, if
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any, it may have on us. If a significant number of Material Third Parties
experience failures in their computer systems or operations due to Y2K non-
compliance, it could affect our ability to process transactions or otherwise
engage in similar normal business activities. For example, while we expect our
internal systems, domestic and international, to be Y2K ready in stages during
1999, we and our customers who communicate internationally will be dependent
upon the Y2K-readiness of many foreign providers of telecommunication services
and their vendors and suppliers. If these providers and others are not Y2K
ready, we and our customers will not be able to send and receive data and other
electronic transmissions, which would have a material adverse effect on the
business and revenues of us and our customers. While many of these risks are
outside our control, we have instituted a program to identify Material Third
Parties and to address any non-compliance issues.
While we believe that we are adequately addressing the Y2K issue, there can be
no assurance that our Y2K analyses will be completed on a timely basis or that
the cost and liabilities associated with the Y2K issue will not materially
adversely impact our business, prospects, revenues or financial position. We
are uncertain as to our most reasonably likely worst case Y2K scenario and have
not yet developed a contingency plan to handle a worst case scenario. We expect
to have a contingency plan to handle this situation by September 30, 1999.
24
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PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On November 10, 1998, the Company solicited (the "Consent Solicitation")
consents (the "Consents") from each person in whose name the Company's 11 1/2%
Senior Notes were registered on the books of the registrar for the 11 1/2%
Senior Notes as of the close of business on November 9, 1998 and their proxies.
(c) The Consent Solicitation was conducted to receive approval of amendments
to (1) the Indenture dated as of November 3, 1998 between the Company and
Wilmington Trust Company, as trustee, pursuant to which the 11 1/2% Senior Notes
were issued (the "Indenture") and (2) the 11 1/2% Senior Notes. The Amendments
were to increase the principal amount of the 11 1/2% Senior Notes permitted to
be issued pursuant to the Indenture from an aggregate principal amount of $200.0
million to $350.0 million and to make related amendments to the Indenture and
the 11 1/2% Senior Notes in order to permit the Company to issue an additional
$150.0 million aggregate principal amount of the 11 1/2% Senior Notes. Consents
representing $152.385 million principal amount (76.2%) of the $200.0 million
aggregate principal amount of then outstanding 11 1/2% Senior Notes were
received approving the Amendments.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed or incorporated by reference herewith:
Exhibit 4.1 First Supplemental Indenture dated as of November 12,
1998, between the Company and Wilmington Trust
Company, as trustee
Exhibit 4.2 Form of 11 1/2% Senior Notes Due 2008, as amended
Exhibit 4.3 Registration Rights Agreement, dated as of November
13, 1998, among the Company and Donaldson Lufkin &
Jenrette Securities Corporation, Chase Securities Inc.
and Morgan Stanley & Co. Incorporated
Exhibit 10.1 Second Amendment dated as of November 9, 1998, to the
Credit Agreement, dated as of September 29, 1998,
among the Company, the Lenders party thereto, the
Chase Manhattan Bank, as Administrative Agent, Fleet
National Bank, as Syndication Agent, and The Bank of
New York, as Documentation Agent
Exhibit 10.2 Employment Agreement dated October 12, 1998 between
the Company and Geoffrey E. Axton
Exhibit 10.3 Employment Agreement dated September 30, 1998
between the Company and Sandra L. Blaisdell
Exhibit 10.4 Employment Agreement dated October 14, 1998
between the Company and Edward Arnold Davis
Exhibit 10.5 Employment Agreement dated September 8, 1998
between the Company and James Haid
Exhibit 10.6 Amendment to Employment Agreement dated October 1,
1998 between the Company and Harry Hobbs
Exhibit 10.7 Employment Agreement dated November 2, 1998
between the Company and David J. Kramer
Exhibit 10.8 Employment Agreement dated September 1, 1998
between the Company and Chi H. Kwan
Exhibit 10.9 Employment Agreement dated November 6, 1998
between the Company and John Walpuck
Exhibit 10.10 Employment Agreement dated November 12, 1998
between the Company and Lawrence Winkler
Exhibit 10.11 Master Lease Agreement Agreement between the
Company and Technology Credit Corporation No.
1788 dated June 20, 1998
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Exhibit 10.12 Master Lease Agreement Agreement between the
Company and Technology Credit Corporation No.
1789 dated June 20, 1998
Exhibit 10.13 Master Loan and Security Agreement No. 3963
between the Company and Charter Financial Inc.
dated September 28, 1998
Exhibit 11.1 Calculation of Basic and Diluted Loss per Share
and Weighted Average Shares Used in Calculation
for the Three Months Ended September 30, 1998
Exhibit 11.2 Calculation of Basic and Diluted Loss per Share
and Weighted Average Shares Used in Calculation
for the Nine Months Ended September 30, 1998
Exhibit 27 Financial Data Schedule*
Exhibit 99.1 Risk Factors
* Not deemed filed for purposes of Section 11 of the Securities
Act of 1933, Section 18 of the Securities Exchange Act of 1934
and Section 323 of the Trust Indenture Act of 1939 or otherwise
subject to the liabilities of such sections and not deemed part
of any registration statement of which such exhibit relates.
(b) Reports on Form 8-K
On September 15, 1998, the Company filed a Current Report on Form 8-K
which included certain financial statements and pro forma financial
information relating to certain businesses recently acquired by the
Company.
On October 16, 1998, the Company filed a Current Report on Form 8-K
relating to the closing of a new $110.0 million senior secured credit
facility to replace the Company's existing bank credit arrangements in the
United States and the acquisition by the Company of Tokyo Internet
Corporation.
On October 28, 1998, the Company filed a Current Report on Form 8-K which
included as an Exhibit a press release issued by the Company announcing
that it would be pursuing a placement of debt securities in accordance
with Securities and Exchange Commission Rule 144A.
On November 10, 1998, the Company filed a Current Report on Form 8-K
relating to the closing of $200,000,000 principal aggregate amount of the
11 1/2% Senior Notes offering.
26
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PSINET INC.
FORM 10-Q
SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSINET INC.
November 16, 1998 By: /s/ William L. Schrader
- ----------------- ------------------------
Date William L. Schrader
Chairman, Chief Executive Officer
and Director
November 16, 1998 By: /s/ Edward D. Postal
- ----------------- ---------------------
Date Edward D. Postal
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
27
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EXHIBIT INDEX
The following Exhibits are filed or incorporated by reference herewith:
Exhibit
Number Description of Exhibit Location
-------- ----------------------- ---------
4.1 First Supplemental Indenture Sequentially numbered pages
dated as of November 12, 1998,
between the Company and Wilmington
Trust Company, as trustee
4.2 Form of 11 1/2% Senior Notes Due Sequentially numbered pages
2008, as amended
4.3 Registration Rights Agreement, Sequentially numbered pages
dated as of November 13, 1998,
among the Company and Donaldson
Lufkin & Jenrette Securities
Corporation, Chase Securities Inc.
and Morgan Stanley & Co.
Incorporated
10.1 Second Amendment dated as of Sequentially numbered pages
November 9, 1998, to the Credit
Agreement, dated as of September
29, 1998, among the Company, the
Lenders party thereto, the Chase
Manhattan Bank, as Administrative
Agent, Fleet National Bank, as
Syndication Agent, and The Bank of
New York, as Documentation Agent
10.2 Employment Agreement dated October Sequentially numbered pages
12, 1998 between the Company and
Geoffrey E. Axton
10.3 Employment Agreement dated Sequentially numbered pages
September 30, 1998 between the
Company and Sandra L. Blaisdell
10.4 Employment Agreement dated October Sequentially numbered pages
14, 1998 between the Company and
Edward Arnold Davis
10.5 Employment Agreement dated Sequentially numbered pages
September 8, 1998 between the
Company and James Haid
10.6 Amendment to Employment Agreement Sequentially numbered pages
dated October 1, 1998 between the
Company and Harry Hobbs
10.7 Employment Agreement dated Sequentially numbered pages
November 2, 1998 between the
Company and David J. Kramer
10.8 Employment Agreement dated Sequentially numbered pages
September 1, 1998 between the
Company and Chi H. Kwan
10.9 Employment Agreement dated Sequentially numbered pages
November 6, 1998 between the
Company and John Walpuck
10.10 Employment Agreement dated Sequentially numbered pages
November 12, 1998 between the
Company and Lawrence Winkler
10.11 Master Lease Agreement Agreement Sequentially numbered pages
between the Company and Technology
Credit Corporation No. 1788 dated
June 20, 1998
10.12 Master Lease Agreement Agreement Sequentially numbered pages
between the Company and Technology
Credit Corporation No. 1789
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dated June 20, 1998
10.13 Master Loan and Security Agreement Sequentially numbered pages
No. 3963 between the Company and
Charter Financial Inc. dated
September 28, 1998
11.1 Calculation of Basic and Diluted Sequentially numbered pages
Loss per Share and Weighted
Average Shares Used in Calculation
for the Three Months Ended
September 30, 1998
11.2 Calculation of Basic and Diluted Sequentially numbered pages
Loss per Share and Weighted
Average Shares Used in Calculation
for the Nine Months Ended
September 30, 1998
27 Financial Data Schedule Sequentially numbered pages
99.1 Risk Factors Sequentially numbered pages
29
<PAGE>
EXHIBIT 4.1
PSINET INC., as Issuer,
and
WILMINGTON TRUST COMPANY, as Trustee
FIRST SUPPLEMENTAL INDENTURE
Dated as of November 12, 1998
to
INDENTURE
Dated as of November 3, 1998
11 1/2% SENIOR NOTES DUE 2008
<PAGE>
FIRST SUPPLEMENTAL INDENTURE, dated as of November 12, 1998, between
PSINET, INC., a New York corporation (the "Company"), as Issuer, and Wilmington
Trust Company, a Delaware banking corporation, as Trustee (the "Trustee").
WHEREAS, the Company and the Trustee executed an Indenture, dated as
of November 3, 1998, in respect of $200,000,000 aggregate principal amount of
the Company's 11 1/2% Senior Notes due 2008 (the "Notes");
WHEREAS, the Company desires to amend the Indenture to permit the
issuance of an additional $150,000,000 aggregate principal amount of Notes and
to treat all such Notes as a single issuance and series for all purposes
thereunder;
WHEREAS, Section 9.02 of the Indenture provides that the Indenture and
the Notes may be amended with the consent of the Holders of at least a majority
in aggregate principal amount of the then outstanding Notes;
WHEREAS, the Company undertook a consent solicitation (the
"Solicitation") seeking the written consent of Holders to implement the
amendments set forth in this First Supplemental Indenture;
WHEREAS, the Company has received in the Solicitation the valid
written consents of the Holders of more than a majority in aggregate principal
amount of the outstanding Notes consenting to the substance of the amendments
set forth in this First Supplemental Indenture;
WHEREAS, all conditions and requirements necessary to make this First
Supplemental Indenture a valid, binding and legal instrument in accordance with
the terms of the Indenture have been performed and fulfilled and the execution
and delivery hereof have been in all respects duly authorized; and
WHEREAS, in accordance with the terms of the Indenture, the Company
has requested that the Trustee execute and deliver this First Supplemental
Indenture and has delivered to the Trustee a copy of a Board Resolution
authorizing the execution of this First Supplemental Indenture.
NOW, THEREFORE, in consideration of the above premises, each party
agrees, for the benefit of the other and for the equal and ratable benefit of
the Holders of the Notes, as follows:
<PAGE>
I ARTICLE
AMENDMENTS
I.1. Section The Indenture is hereby amended as follows:
(a) In the first sentence of the Recitals of the Company, the amount of
"$200,000,000" is hereby deleted and replaced with the amount of "$350,000,000".
(a) The definition of "Registration Rights Agreement" contained in
Section 1.01 of the Indenture on page 21 thereof is hereby deleted in its
entirety and replaced with the following:
"`Registration Rights Agreement' means, collectively, (i) the
-----------------------------
Registration Rights Agreement, dated as of November 3, 1998, between
the Company and the Initial Purchasers and (ii) the Registration
Rights Agreement, dated as of November 13, 1998, between the Company
and the Initial Purchasers."
(a) In the definition of "Series A Notes" contained in Section 1.01 of
the Indenture on page 22 thereof, the word "offering" is hereby deleted and
replaced with the word "offerings".
(a) The first sentence of the second paragraph of the Form of the Face
of the Series A Note contained in Section 2.02(a) of the Indenture on page 38
thereof is hereby deleted in its entirety and replaced with the following
sentence:
"The Holder of this Series A Note is entitled to the benefits of
either the Registration Rights Agreement between the Company and the
Initial Purchasers, dated as of November 3, 1998, or the Registration
Rights Agreement between the Company and the Initial Purchasers, dated
as of November 13, 1998, pursuant to which, subject to the terms and
conditions thereof, the Company is obligated to consummate the
Exchange Offer pursuant to which the Holder of this Note shall have
the right to exchange this Note for 11 1/2% Senior Notes due
<PAGE>
2008, Series B (herein called the "Series B Notes") in like principal
amount as provided therein."
(a) In the first sentence of the first paragraph of the Form of Reverse
of the Series A Notes contained in Section 2.02(a) of the Indenture on page 46
thereof the following amendments are hereby made:
(i) the amount of "$200,000,000" therein is hereby deleted and replaced
with the amount of "$350,000,000"; and
(i) after the phrase "dated as of November 3, 1998" therein the phrase
", as amended" is hereby added thereto.
(a) In the first sentence of the first paragraph of the Form of Reverse
of the Series B Notes contained in Section 2.02(a) of the Indenture on page 50
thereof the following amendments are hereby made:
(i) the amount of "$200,000,000" therein is hereby deleted and replaced
with the amount of "$350,000,000"; and
(i) after the phrase "dated as of November 3, 1998" therein the phrase
", as amended" is hereby added thereto.
(a) In the first sentence of Section 3.01 of the Indenture on page 54
thereof the amount of "$200,000,000" therein is hereby deleted and replaced with
the amount of "$350,000,000".
(a) The first sentence of the first paragraph of Exhibit A to the
Indenture is hereby amended by adding the phrase ", as amended" after the phrase
"dated as of November 3, 1998" contained therein.
(a) The first sentence of the first paragraph of Exhibit B to the
Indenture is hereby amended by adding the phrase ", as amended" after the phrase
"dated as of November 3, 1998" contained therein.
(a) The first sentence of the first paragraph of Exhibit C to the
Indenture is hereby amended by adding the phrase ", as amended" after the phrase
"dated as of November 3, 1998" contained therein.
I.1. Section The Company hereby agrees to issue, execute and deliver, and
the Trustee hereby agrees to authenticate, a replacement certificate or
certificates representing any Notes outstanding on the date of this First
Supplemental
<PAGE>
Indenture, which certificate or certificates shall reflect the amendments to the
Notes effected pursuant to Section 1.1(d) and 1.1(e) hereof.
I ARTICLE
ACKNOWLEDGMENT
The $200,000,000 aggregate principal amount of Notes issued by the
Company on November 3, 1998 and the additional $150,000,000 aggregate principal
amount of Notes permitted to be issued by the Company upon the effectiveness of
this First Supplemental Indenture shall, for any and all purposes under the
Indenture, be deemed and treated as a single series of Notes both with an
original issuance date of November 3, 1998.
I ARTICLE
NOTIFICATION TO HOLDERS
The Company shall notify the Holders in accordance with Section 9.07
of the Indenture of the execution of this First Supplemental Indenture. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of this First Supplemental
Indenture.
I ARTICLE
MISCELLANEOUS PROVISIONS
I.1. Section Terms Defined. For all purposes of this First Supplemental
-------------
Indenture, except as otherwise defined herein, capitalized terms used in this
First Supplemental Indenture shall have the meanings ascribed to such terms in
the Indenture.
I.2. Section Indenture. Except as amended hereby, the Indenture and the
---------
Notes are in all respects ratified and confirmed and all their terms shall
remain in full force and effect. From and after the effectiveness of this First
Supplemental Indenture, any reference to the Indenture or the Notes shall mean
the Indenture or the Notes, as the case may be, as so amended by this First
Supplemental Indenture.
I.1. Section Governing Law. The internal laws of the State of New York
-------------
shall govern this First Supplemental Indenture, without regard to the principles
of the conflicts of law thereof.
<PAGE>
I.1. Section Successors. All agreements of the Company in this First
----------
Supplemental Indenture and the Notes shall bind its successors and assigns. This
First Supplemental Indenture shall be binding upon each Holder of Notes and
their respective successors and assigns.
I.1. Section Multiple Counterparts. The parties may sign multiple
---------------------
counterparts of this First Supplemental Indenture. Each signed counterpart shall
be deemed an original, but all of them together represent the same agreement.
I.1. Section Effectiveness. The provisions of this First Supplemental
-------------
Indenture shall become effective at the time that Holders of not less than a
majority in aggregate principal amount of the outstanding Notes have validly
consented to the substance of the amendments set forth herein and not validly
revoked their respective consents hereto. In accordance with Section 9.03 of the
Indenture, the Company has delivered an Officers' Certificate and Opinion of
Counsel to the Trustee as conclusive evidence that this First Supplemental
Indenture complies with the applicable requirements of the Indenture and that
all of the conditions precedent to the effectiveness of this First Supplemental
Indenture have been satisfied.
I.1. Section Trustee Disclaimer. The Trustee accepts the amendment of
------------------
the Indenture and the Notes effected by this First Supplemental Indenture and
agrees to execute the trust created by the Indenture as hereby amended, but only
upon the terms and conditions set forth in the Indenture, including the terms
and provisions defining and limiting the liabilities and responsibilities of the
Trustee, which terms and provisions shall in like manner define and limit its
liabilities and responsibilities in the performance of the trust created by the
Indenture as hereby amended. Without limiting the generality of the foregoing,
the Trustee shall not be responsible in any manner whatsoever for or with
respect to any of the recitals or statements contained herein, all of which
recitals or statements are made solely by the Company, or for or with respect to
(i) the validity, efficacy or sufficiency of this First Supplemental Indenture
or any of the terms or provisions hereof, (ii) the proper authorization hereof
by the Company by corporate action or otherwise, (iii) the due execution hereof
by the Company or (iv) the consequences (direct or indirect and whether
deliberate or inadvertent) of any amendment herein provided for, and the Trustee
makes no representation with respect to any such matters.
I.1. Section Separability Clause. In case any clause of this First
-------------------
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, all as of the date first written
above.
PSINET INC., as Issuer
By: /s/ Edward D. Postal
--------------------------------
Name: Edward D. Postal
Title: Senior Vice President and
Chief Financial Officer
WILMINGTON TRUST COMPANY, as Trustee
By: /s/ James J. McGinley
--------------------------------
Name: James J. McGinley
Title: Authorized Signer
<PAGE>
EXHIBIT 4.2
THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY
NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES
OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN
THE NEXT SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST
HEREIN, THE HOLDER:
(1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB") OR (B) IT HAS
ACQUIRED THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION
S UNDER THE SECURITIES ACT,
(2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE
EXCEPT (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM
THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE
144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903
OR 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE REQUIREMENTS
OF RULE 144 UNDER THE SECURITIES ACT, (E) IN ACCORDANCE WITH ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) OR (F) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR
ANY OTHER APPLICABLE JURISDICTION AND
(3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN
INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND.
AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES"
HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES
ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO
REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING.
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE
<PAGE>
NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN
PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 3.06
AND 3.07 OF THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
<PAGE>
PSINET INC.
___________________
11 1/2% SENIOR NOTE DUE 2008, SERIES A
CUSIP NO. ____________
No. __ $______________
PSINet Inc., a New York corporation (herein called the "Company",
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to _____________ or
registered assigns, the principal sum of ____________________________ United
States dollars on November 1, 2008, at the office or agency of the Company
referred to below, and to pay interest thereon from November 3, 1998, or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, semiannually on May 1 and November 1, in each year, commencing May
1, 1999 at the rate of 11 1/2% per annum, subject to adjustments as described in
the second following paragraph, in United States dollars, until the principal
hereof is paid or duly provided for. Interest shall be computed on the basis of
a 360-day year comprised of twelve 30-day months.
The Holder of this Series A Note is entitled to the benefits of either
the Registration Rights Agreement between the Company and the Initial
Purchasers, dated as of November 3, 1998, or the Registration Rights Agreement
between the Company and the Initial Purchasers, dated as of November 13, 1998,
pursuant to which, subject to the terms and conditions thereof, the Company is
obligated to consummate the Exchange Offer pursuant to which the Holder of this
Note shall have the right to exchange this Note for 11 1/2% Senior Notes due
2008, Series B (herein called the "Series B Notes") in like principal amount as
provided therein. The Series A Notes and the Series B Notes are together
referred to as the "Notes". The Series A Notes rank pari passu in right of
payment with the Series B Notes.
In the event that (a) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to the date specified in the Registration
Rights Agreement, (b) the Exchange Offer Registration Statement is not declared
effective on or prior to the date specified in the Registration Rights
Agreement, (c) the Exchange Offer is not consummated on or prior to the date
specified in the Registration Rights Agreement,
<PAGE>
(d) if obligated to file the Shelf Registration Statement, the Company fails to
file the Shelf Registration Statement with the Commission on or prior to the
date specified in the Registration Rights Agreement, (e) if obligated to file
the Shelf Registration Statement, the Shelf Registration Statement is not
declared effective on or prior to the date specified in the Registration Rights
Agreement, or (f) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of the Series A Notes during the
periods specified in the Registration Rights Agreement (each such event referred
to in clauses (a) through (f) above, a "Registration Default"), the Company
agrees to pay to each Holder of Series A Notes liquidated damages ("Liquidated
Damages") in an amount equal to $0.05 per week per $1,000 in principal amount of
Series A Notes held by such Holder for each week or portion thereof that the
Registration Default continues for the first 90 day period immediately following
the occurrence of such Registration Default. The amount of Liquidated Damages
shall increase by an additional $0.05 per week per $1,000 in principal amount of
Series A Notes with respect to each subsequent 90 day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $0.50 per week per $1,000 in principal amount of Series A Notes. The
Company shall not be required to pay Liquidated Damages for more than one
Registration Default at any given time. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages shall cease. All accrued Liquidated
Damages shall be paid by the Company to holders entitled thereto by wire
transfer to the accounts specified by them or by mailing checks to their
registered address if no such accounts have been specified.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture hereinafter
referred to, be paid to the Person in whose name this Note (or any Predecessor
Notes) is registered at the close of business on the Regular Record Date for
such interest, which shall be the April 15 or October 15 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid, or duly provided for, and interest on
such defaulted interest at the interest rate borne by the Series A Notes, to the
extent lawful, shall forthwith cease to be payable to the Holder on such Regular
Record Date, and may either be paid to the Person in whose name this Note (or
any Predecessor Notes) is registered at the close of business on a Special
Record Date for the payment of such defaulted interest to be fixed by the
Trustee, notice whereof shall be given to Holders of Notes not less than 10 days
prior to such Special Record Date, or be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by this
Indenture not inconsistent with the requirements of such exchange, all as more
fully provided in this Indenture.
<PAGE>
Payment of the principal of, premium, if any, and interest on, this
Note, and exchange or transfer of the Note, will be made at the office or agency
of the Company in the City of New York maintained for that purpose (which
initially will be the Trustee c/o Harris Trust Company of New York, 77 Water
Street, New York, NY 10005), or at such other office or agency as may be
maintained for such purpose, or, at the option of the Company, payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear on the Note Register, and provided, that
payment by wire transfer of immediately available funds will be required with
respect to principal of and interest on all Global Notes and all other Notes the
Holders of which shall have provided wire transfer instructions to the Company
or the Paying Agent. Such payment shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Note shall not be entitled to any benefit under the Indenture, or
be valid or obligatory for any purpose.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers and its
corporate seal to be affixed or reproduced hereon.
PSINET INC.
[Seal] By:___________________________
Title:________________________
Attest:
____________________________
Authorized Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11 1/2% Senior Notes due 2008, Series A referred to
in the within-mentioned Indenture.
WILMINGTON TRUST COMPANY,
as Trustee
By: _________________________________
Authorized Signer
Dated:
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.12 or Section 10.14, as applicable, of the Indenture, check the Box:
[_].
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.12 or Section 10.14 as applicable, of the Indenture,
state the amount (in original principal amount):
$ _______________.
Date: ___________________
Your Signature: _____________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: __________________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
<PAGE>
(Back of Note)
PSINET INC.
11 1/2% Senior Note due 2008, Series A
This Note is one of a duly authorized issue of Notes of the Company
designated as its 11 1/2% Senior Notes due 2008, Series A (herein called the
"Notes"), limited (except as otherwise provided in the Indenture referred to
below) in aggregate principal amount to $350,000,000, issued under, entitled to
the benefits of and subject to the terms of an indenture (herein called the
"Indenture") dated as of November 3, 1998, as amended, between the Company and
Wilmington Trust Company, as trustee (herein called the "Trustee," which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, any Guarantors, the Trustee and the Holders of the
Notes, and of the terms upon which the Notes are, and are to be, authenticated
and delivered.
The Indenture contains provisions for defeasance at any time of (a)
the entire Indebtedness on the Notes and (b) certain restrictive covenants and
related Defaults and Events of Default, in each case upon compliance with
certain conditions set forth therein.
The Notes are subject to redemption at any time on or after November
1, 2003, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice, in amounts of $1,000 or an integral
multiple thereof, at the following redemption prices (expressed as percentages
of the principal amount), if redeemed during the 12-month period beginning
November 1 of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003 105.750%
2004 103.833%
2005 101.917%
2006 100.000%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
<PAGE>
In addition, at any time on or prior to November 1, 2001, the Company
may, at its option, use the net proceeds of one or more Public Equity Offerings
or the sale of Capital Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or in a series of related
transactions, to redeem up to an aggregate of 35% of the aggregate principal
amount of Notes originally issued under the Indenture at a redemption price
equal to 111.5% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the Redemption Date; provided that at least
65% aggregate principal amount of Notes remains outstanding immediately after
the occurrence of such redemption. In order to effect the foregoing redemption,
the Company must mail a notice of redemption no later than 45 days after the
closing of the related Public Equity Offering or to a Strategic Investor and
must consummate such redemption within 60 days of the closing of the Public
Equity Offering or sale to a Strategic Investor.
If less than all of the Notes are to be redeemed, the Trustee shall
select the Notes or portions thereof to be redeemed pro rata, by lot or by any
other method the Trustee shall deem fair and reasonable.
Upon the occurrence of a Change of Control, subject to the terms of the
Indenture, each Holder may require the Company to purchase such Holder's Notes
in whole or in part in integral multiples of $1,000, at a purchase price in cash
in an amount equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase, pursuant to a Change of
Control Offer in accordance with the procedures set forth in the Indenture.
Under certain circumstances, subject to the terms of the Indenture, in
the event the Net Cash Proceeds received by the Company from any Asset Sale,
which proceeds are not used to repay any Pari Passu Indebtedness of the Company
or any Subsidiary (including the repurchase of Notes) or which will be invested
in Telecommunications Assets, exceeds a specified amount the Company will be
required to apply such proceeds by making an offer to purchase Notes and certain
Indebtedness ranking pari passu in right of payment to the Notes.
In the case of any redemption of Notes in accordance with the
Indenture, interest installments whose Stated Maturity is on or prior to the
Redemption Date will be payable to the Holders of such Notes of record as of the
close of business on the relevant Regular Record Date or Special Record Date
referred to on the face hereof. Notes (or portions thereof) for whose
redemption and payment provision is made in accordance with the Indenture shall
cease to bear interest from and after the Redemption Date.
<PAGE>
In the event of redemption of this Note in accordance with the
Indenture in part only, a new Note or Notes for the unredeemed portion hereof
shall be issued in the name of the Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal
amount of all the Notes may be declared due and payable in the manner and with
the effect provided in the Indenture.
The Indenture permits, with certain exceptions (including certain
amendments permitted without the consent of any Holders and certain amendments
which require the consent of all the Holders) as therein provided, the amendment
thereof and the modification of the rights and obligations of the Company and
any Guarantors and the rights of the Holders under the Indenture and the Notes
and any Guarantees at any time by the Company and the Trustee with the consent
of the Holders of at least a majority in aggregate principal amount of the Notes
at the time Outstanding. The Indenture also contains provisions permitting the
Holders of at least a majority in aggregate principal amount of the Notes (100%
of the Holders in certain circumstances) at the time Outstanding, on behalf of
the Holders of all the Notes, to waive compliance by the Company and any
Guarantors with certain provisions of the Indenture and the Notes and any
Guarantees and certain past Defaults under the Indenture and the Notes and any
Guarantees and their consequences. Any such consent or waiver by or on behalf
of the Holder of this Note shall be conclusive and binding upon such Holder and
upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Notes (in the event such Guarantor or such
other obligor is obligated to make payments in respect of the Notes), which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest on, this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Note is registrable in the Note Register, upon
surrender of this Note for registration of transfer at the office or agency of
the Company in the Borough of Manhattan, The City of New York, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Note Registrar duly executed by, the Holder hereof or its
attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
<PAGE>
Certificated securities shall be transferred to all beneficial holders
in exchange for their beneficial interests in the Rule 144A Global Notes or the
Regulation S Global Notes if (x) the Depositary notifies the Company that it is
unwilling or unable to continue as depository for such Global Note and a
successor depository is not appointed by the Company within 90 days or (y) there
shall have occurred and be continuing an Event of Default and the Note Registrar
has received a request from the Depositary. Upon any such issuance, the Trustee
is required to register such certificated Series A Notes in the name of, and
cause the same to be delivered to, such Person or Persons (or the nominee of any
thereof). All such certificated Series A Notes would be required to include the
Private Placement Legend.
Series A Notes in certificated form are issuable only in registered
form without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain limitations
therein set forth, the Series A Notes are exchangeable for a like aggregate
principal amount of Notes of a differing authorized denomination, as requested
by the Holder surrendering the same.
At any time when the Company is not subject to Sections 13 or 15(d) of
the Exchange Act, upon the written request of a Holder of a Series A Note, the
Company will promptly furnish or cause to be furnished such information as is
specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor
provision thereto) to such Holder or to a prospective purchaser of such Series A
Note who such Holder informs the Company is reasonably believed to be a
"Qualified Institutional Buyer" within the meaning of Rule 144A under the
Securities Act, as the case may be, in order to permit compliance by such Holder
with Rule 144A under the Securities Act.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor
or the Trustee may treat the Person in whose name this Note is registered as the
owner hereof for all purposes, whether or not this Note is overdue, and neither
the Company, any Guarantor, the Trustee nor any such agent shall be affected by
notice to the contrary.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES
THEREOF.
All terms used in this Note which are defined in the Indenture and not
otherwise defined herein shall have the meanings assigned to them in the
Indenture.
<PAGE>
FORM OF TRANSFER NOTICE
FOR VALUE RECEIVED, the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No. ______________________________________
__________________________________________________________________________
__________________________________________________________________________
(Please print or typewrite name and address including zip code of assignee)
__________________________________________________________________________ the
within Note and all rights thereunder, hereby irrevocably constituting and
appointing
__________________________________________________________________________
attorney to transfer such Note on the books of the Company with full power of
substitution in the premises. In connection with any transfer of this Note
occurring prior to the date which is the earlier of the date of an effective
Registration Statement or November 3, 1999, the undersigned confirms that
without utilizing any general solicitation or general advertising that:
[Check One]
[_] (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act of 1933, as amended,
provided by Rule 144A thereunder or
[_] (b) this Note is being transferred other than in accordance with
(a) above and documents are being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture. If none of the foregoing
boxes is checked, the Trustee or other Note Registrar shall not be obligated to
register this Note in the name of any Person other than the Holder hereof unless
and until the conditions to any such transfer of registration set forth herein
and in Section 3.07 of the Indenture shall have been satisfied.
Date: ________________________________________________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within-mentioned instrument in every particular,
without alteration or any change whatsoever.
<PAGE>
Signature Guarantee:
________________________
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15.]
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned
represents and warrants that it is purchasing this Note for its own account or
an account with respect to which it exercises sole investment discretion and
that it and any such account is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware
that the sale to it is being made in reliance on Rule 144A and acknowledges that
it has received such information regarding the Company as the undersigned has
requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated:________________________________________________________________
NOTICE: To be executed by an authorized signatory
<PAGE>
EXHIBIT 4.3
REGISTRATION RIGHTS AGREEMENT
Dated as of November 13, 1998
by and among
PSINet Inc.
and
Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities Inc. and
Morgan Stanley & Co. Incorporated
<PAGE>
This Registration Rights Agreement (this "AGREEMENT") is made and entered
---------
into as of November 13, 1998, by and among PSINet Inc., a New York corporation
(the "COMPANY"), and Donaldson, Lufkin & Jenrette Securities Corporation, Chase
-------
Securities Inc. and Morgan Stanley & Co. Incorporated (each an "INITIAL
-------
PURCHASER" and, collectively, the "INITIAL PURCHASERS"), each of whom has agreed
- --------- ------------------
to purchase the Company's 11 1/2% Senior Notes due 2008 (the "NOTES") pursuant
-----
to the Purchase Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated November
9, 1998 (the "PURCHASE AGREEMENT"), by and among the Company and the Initial
------------------
Purchasers. In order to induce the Initial Purchasers to purchase the Notes,
the Company has agreed to provide the registration rights set forth in this
Agreement. The execution and delivery of this Agreement is a condition to the
obligations of the Initial Purchasers set forth in Section 3 of the Purchase
Agreement. Capitalized terms used herein and not otherwise defined shall have
the meaning assigned to them the Indenture, dated as of November 3, 1998, as
amended, between the Company and Wilmington Trust Company, as Trustee, relating
to the Notes and the Exchange Notes (as defined below) (as amended, the
"INDENTURE").
---------
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
ACT: The Securities Act of 1933, as amended.
---
AFFILIATE: As defined in Rule 144 of the Commission under the Act.
---------
AFFILIATED MARKET MAKER: A Broker-Dealer who is deemed to be an Affiliate
-----------------------
of the Company.
BROKER-DEALER: Any broker or dealer registered under the Exchange Act.
-------------
BUSINESS DAY: A day other than Saturday, Sunday or a day on which banking
------------
institutions located in New York City or in the place in which the Company
maintains its principal office are authorized or obligated by law, regulation or
executive order to be closed.
CERTIFICATED SECURITIES: Physical Notes, as defined in the Indenture.
-----------------------
CLOSING DATE: The date hereof.
------------
COMMISSION: The Securities and Exchange Commission.
----------
CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes
----------
of this Agreement upon the occurrence of (a) the filing and effectiveness under
the Act of the Exchange Offer Registration Statement relating to the Exchange
Notes to be issued in the Exchange Offer, (b) the
<PAGE>
maintenance of such Exchange Offer Registration Statement continuously effective
and the keeping of the Exchange Offer open for a period not less than the period
required pursuant to Section 3(b) hereof and (c) the delivery by the Company to
the Registrar under the Indenture of Exchange Notes in the same aggregate
principal amount as the aggregate principal amount of Notes validly tendered by
Holders thereof pursuant to the Exchange Offer. The term "Consummation" shall
have a correlative meaning.
CONSUMMATION DEADLINE: As defined in Section 3(b) hereof.
---------------------
EFFECTIVENESS DEADLINE: As defined in Sections 3(a) and 4(a) hereof.
----------------------
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
------------
EXCHANGE NOTES: The Company's 11 1/2% Senior Notes due 2008 to be issued
--------------
pursuant to the Indenture: (i) in the Exchange Offer or (ii) as contemplated by
Section 4 hereof.
EXCHANGE OFFER: The exchange and issuance by the Company of an aggregate
--------------
principal amount of Exchange Notes (which shall be registered pursuant to the
Exchange Offer Registration Statement) equal to the outstanding aggregate
principal amount of Notes that are tendered by such Holders in connection with
such exchange and issuance.
EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement
-------------------------------------
relating to the Exchange Offer, including the related Prospectus.
EXEMPT RESALES: The transactions in which the Initial Purchasers propose
--------------
to resell the Notes to certain "qualified institutional buyers," as such term is
defined in Rule 144A under the Act and pursuant to Regulation S under the Act.
FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof.
---------------
HOLDERS: As defined in Section 2 hereof.
-------
PERSON: Any individual, corporation, limited liability company,
------
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
PROSPECTUS: The prospectus included in a Registration Statement at the
----------
time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Offering Memorandum.
RECOMMENCEMENT DATE: As defined in Section 6(d) hereof.
-------------------
REGISTRATION DEFAULT: As defined in Section 5 hereof.
--------------------
REGISTRATION STATEMENT: Any registration statement of the Company
----------------------
relating to (a) an offering of Exchange Notes pursuant to the Exchange Offer or
(b) the registration for resale of Transfer Restricted
<PAGE>
Securities pursuant to the Shelf Registration Statement, in each case, (i) that
is filed pursuant to the provisions of this Agreement and (ii) including the
Prospectus included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
REGULATION S: Regulation S promulgated under the Act.
------------
SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof.
----------------------------
SUSPENSION NOTICE: As defined in Section 6(d) hereof.
-----------------
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as
---
in effect on the date of the Indenture.
TRANSFER RESTRICTED SECURITIES: Each Note, until the earliest to occur of
------------------------------
(a) the date on which such Note is exchanged in the Exchange Offer for a
Exchange Note which is entitled to be resold to the public by the Holder thereof
without complying with the prospectus delivery requirements of the Act, (b) the
date on which such Note has been disposed of in accordance with a Shelf
Registration Statement (and the purchasers thereof have been issued Exchange
Notes), or (c) the date on which such Note is entitled to be distributed to the
public pursuant to Rule 144 under the Act (and purchasers thereof have been
issued Exchange Notes), and each Exchange Note until the date on which such
Exchange Note is disposed of by a Broker-Dealer pursuant to the "Plan of
Distribution" contemplated by the Exchange Offer Registration Statement
(including the delivery of the Prospectus contained therein).
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities (each,
a "HOLDER") whenever such Person owns Transfer Restricted Securities.
------
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by applicable federal
law (after the procedures set forth in Section 6(a)(i) below have been complied
with), the Company shall (i) cause the Exchange Offer Registration Statement to
be filed with the Commission as soon as practicable after the Closing Date, but
in no event later than 65 days after the Closing Date (such 65th day being the
"FILING DEADLINE"), (ii) use its best efforts to cause such Exchange Offer
---------------
Registration Statement to become effective at the earliest possible time
(consistent with existing contractual obligations of the Company), but in no
event later than 140 days after the Closing Date (such 140th day being the
"EFFECTIVENESS DEADLINE"), (iii) in connection with the foregoing, (A) file all
----------------------
pre-effective amendments to such Exchange Offer Registration Statement as may be
necessary in order to cause it to become effective, (B) file, if applicable, a
post-effective amendment to such Exchange Offer Registration Statement pursuant
to Rule 430A under the Act and (C) cause all necessary filings, if any, in
connection with the registration and qualification of the Exchange Notes to be
made under the Blue Sky laws of such jurisdictions as are necessary to permit
Consummation of the Exchange Offer, and (iv) upon the effectiveness of such
<PAGE>
Exchange Offer Registration Statement, commence and Consummate the Exchange
Offer. The Exchange Offer shall be on the appropriate form permitting (i)
registration of the Exchange Notes to be offered in exchange for the Notes that
are Transfer Restricted Securities and (ii) resales of Exchange Notes by Broker-
Dealers that tendered into the Exchange Offer the Notes that such Broker-Dealer
acquired for its own account as a result of market making activities or other
trading activities (other than Notes acquired directly from the Company or any
of its Affiliates) as contemplated by Section 3(c) below.
(b) The Company shall use its best efforts to cause the Exchange Offer
Registration Statement to be effective continuously and shall keep the Exchange
Offer open for a period of not less than the minimum period required under
applicable federal and state securities laws to Consummate the Exchange Offer;
provided, however, that in no event shall such period be less than 20 Business
Days. The Company shall cause the Exchange Offer to comply with all applicable
federal and state securities laws. No securities other than the Exchange Notes
shall be included in the Exchange Offer Registration Statement. The Company
shall use its best efforts to cause the Exchange Offer to be Consummated on the
earliest practicable date after the Exchange Offer Registration Statement has
become effective, but in no event later than 30 Business Days thereafter (such
30/th/ day being the "CONSUMMATION DEADLINE").
---------------------
(c) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any Broker-Dealer who holds Transfer Restricted Securities that
were acquired for the account of such Broker-Dealer as a result of market-making
activities or other trading activities (other than Notes acquired directly from
the Company or any Affiliate of the Company), may exchange such Transfer
Restricted Securities pursuant to the Exchange Offer; however, such Broker-
Dealer may be deemed to be an "underwriter" within the meaning of the Act and
must, therefore, deliver a prospectus meeting the requirements of the Act in
connection with any resales of the Exchange Notes received by such Broker-Dealer
in the Exchange Offer, which prospectus delivery requirement may be satisfied by
the delivery by such Broker-Dealer of the Prospectus contained in the Exchange
Offer Registration Statement. Such "Plan of Distribution" section shall also
contain all other information with respect to such sales by such Broker-Dealers
that the Commission may require in order to permit such sales pursuant thereto,
but such "Plan of Distribution" shall not name any such Broker-Dealer or
disclose the amount of Transfer Restricted Securities held by any such Broker-
Dealer, except to the extent required by the Commission as a result of a change
in policy, rules or regulations after the date of this Agreement. The letter of
transmittal or similar documentation to be executed by a Holder in order to
participate in the Exchange Offer will include, among other things, a provision
to the effect that, if the Holder is a Broker-Dealer holding Notes acquired for
its own account as a result of market-making activities or other trading
activities, such Holder acknowledges that it will deliver a prospectus meeting
the requirements of the Act in connection with any resale of Exchange Notes
received in respect of Notes pursuant to the Exchange Offer.
Because such Broker-Dealer may be deemed to be an "underwriter" within the
meaning of the Act and must, therefore, deliver a prospectus meeting the
requirements of the Act in connection with its initial sale of any Exchange
Notes received by such Broker-Dealer in the Exchange Offer, the Company shall
permit the use of the Prospectus contained in the Exchange Offer Registration
Statement by such Broker-Dealer to satisfy such prospectus delivery requirement.
To the extent necessary to ensure that the prospectus contained in the Exchange
Offer Registration Statement is available for sales of Exchange Notes by Broker-
Dealers, the Company agree to use its best efforts to keep the Exchange Offer
<PAGE>
Registration Statement continuously effective, supplemented, amended and current
as required by and subject to the provisions of Section 6(a) and (c) hereof and
in conformity with the requirements of this Agreement, the Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of one year from the Consummation Deadline or such shorter period as will
terminate when all Transfer Restricted Securities covered by such Registration
Statement have been sold pursuant thereto. The Company shall provide sufficient
copies of the latest version of such Prospectus to such Broker-Dealers, promptly
upon request, and in no event later than two Business Days after such request,
at any time during such period.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Exchange Offer is not permitted by
------------------
applicable law (after the Company has complied with the procedures set forth in
Section 6(a)(i) below) or (ii) if any Holder of Transfer Restricted Securities
shall notify the Company within 20 Business Days following the Consummation
Deadline that (A) such Holder was prohibited by law or Commission policy from
participating in the Exchange Offer or (B) such Holder may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
Holder or (C) such Holder is a Broker-Dealer and holds Notes acquired directly
from the Company or any of its Affiliates, then the Company shall:
(x) cause to be filed, on or prior to 30 days after the earlier of (i)
the date on which the Company determines that the Exchange Offer Registration
Statement cannot be filed as a result of clause (a)(i) above or (ii) the date
on which the Company receives the notice specified in clause (a)(ii) above
(such earlier date, the "FILING DEADLINE"), a shelf registration statement
---------------
pursuant to Rule 415 under the Act (which may be an amendment to the Exchange
Offer Registration statement (the "SHELF REGISTRATION STATEMENT")), relating
----------------------------
to all Transfer Restricted Securities, the Holders of which shall have
provided the information required pursuant to Section 4(b) hereof, and
(y) shall use its best efforts to cause such Shelf Registration
Statement to become effective on or prior to 60 days after the filing of the
Shelf Registration Statement (or such longer period, not to exceed 150 days
after the filing of the Shelf Registration Statement as may be necessary to
avoid conflicts with existing contractual obligations of the Company) (such
60th day or longer period the "EFFECTIVENESS DEADLINE").
----------------------
If, after the Company has filed an Exchange Offer Registration Statement
that satisfies the requirements of Section 3(a) above, the Company is required
to file and make effective a Shelf Registration Statement solely because the
Exchange Offer is not permitted under applicable federal law (i.e., clause
(a)(i) above), then the filing of the Exchange Offer Registration Statement
shall be deemed to satisfy the requirements of clause (x) above; provided that,
in such event, the Company shall remain obligated to meet the Effectiveness
Deadline set forth in clause (y) above.
To the extent necessary to ensure that the Shelf Registration Statement is
available for sales of Transfer Restricted Securities by the Holders thereof
entitled to the benefit of this Section 4(a) and the other securities required
to be registered therein pursuant to Section 6(b)(ii) hereof, the Company shall
<PAGE>
use its best efforts to keep any Shelf Registration Statement required by this
Section 4(a) continuously effective, supplemented, amended and current as
required by and subject to the provisions of Sections 6(b) and (c) hereof and in
conformity with the requirements of this Agreement, the Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of at least two years (as extended pursuant to Section 6(c)(i)) following
the Closing Date, or such shorter period as will terminate when all Transfer
Restricted Securities covered by such Shelf Registration Statement have been
sold pursuant thereto.
(b) Provision by Holders of Certain Information in Connection with the
------------------------------------------------------------------
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
- ----------------------------
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 10 Business days after receipt of a request
therefor, such information as the Company may reasonably request for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
prospectus included therein, including, without limitation, the information
specified in Item 507 or 508 of Regulation S-K, as applicable, under the Act for
use in connection with any Shelf Registration Statement or Prospectus or
preliminary Prospectus included therein. No Holder of Transfer Restricted
Securities shall be entitled to liquidated damages pursuant to Section 5 hereof
unless and until such Holder shall have provided all such information. Each
selling Holder as to which any Shelf Registration Statement is being effected
agrees to notify the Company as promptly as practicable of any inaccuracy or
change in information previously furnished by such Holder to the Company or the
happening of any event, in either case as a result of which the Shelf
Registration Statement contains any untrue statement of a material fact
regarding such Holder or the distribution of Transfer Restricted Securities or
omits to state any material fact regarding such Holder or the distribution of
such Transfer Restricted Securities required to be stated therein or necessary
to make the statement therein, in light of the circumstances under which they
are made, not misleading or any prospectus relating to such Shelf Registration
Statement contains any untrue statement of a material fact regarding such Holder
or the distribution of such Transfer Restricted Securities or omits to state any
material fact regarding such Holder or the distribution of such Transfer
Restricted Securities necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and to furnish
promptly to the Company any additional information (i) required to correct and
update any previously furnished information or (ii) required so that the Shelf
Registration Statement or any Prospectus shall not contain any such untrue
statement of a material fact or any such omission to state a material fact.
SECTION 5. LIQUIDATED DAMAGES
If (i) any Registration Statement required by this Agreement is not filed
with the Commission on or prior to the applicable Filing Deadline, (ii) any such
Registration Statement has not been declared effective by the Commission on or
prior to the applicable Effectiveness Deadline, (iii) the Exchange Offer has not
been Consummated on or prior to the Consummation Deadline, or (iv) any
Registration Statement required by this Agreement is filed and declared
effective but shall thereafter cease to be effective or fail to be usable for
its intended purpose without being succeeded immediately (subject to the terms
of this Agreement) by a post-effective amendment to such Registration Statement
that cures such failure and that is itself declared effective immediately (each
such event referred to in clauses (i) through (iv), a "REGISTRATION DEFAULT"),
--------------------
then the Company hereby agrees to pay to each Holder of
<PAGE>
Transfer Restricted Securities affected thereby liquidated damages in an amount
equal to $.05 per week per $1,000 in principal amount of Transfer Restricted
Securities held by such Holder for each week or portion thereof that the
Registration Default continues for the first 90-day period immediately following
the occurrence of such Registration Default. The amount of the liquidated
damages shall increase by an additional $.05 per week per $1,000 in principal
amount of Transfer Restricted Securities with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of liquidated damages of $.50 per week per $1,000 in principal amount of
Transfer Restricted Securities, provided that the Company shall in no event be
required to pay liquidated damages for more than one Registration Default at any
given time. Notwithstanding anything to the contrary set forth herein, (1) upon
filing of the Exchange Offer Registration Statement (and/or, if applicable, the
Shelf Registration Statement), in the case of (i) above, (2) upon the
effectiveness of the Exchange Offer Registration Statement (and/or, if
applicable, the Shelf Registration Statement), in the case of (ii) above, (3)
upon Consummation of the Exchange Offer, in the case of (iii) above, or (4) upon
the filing of a post-effective amendment to the Registration Statement or an
additional Registration Statement that causes the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement) to again be
declared effective or made usable in the case of (iv) above, the liquidated
damages payable with respect to the Transfer Restricted Securities as a result
of such clause (i), (ii), (iii) or (iv), as applicable, shall cease.
All accrued liquidated damages shall be paid to the Holders entitled
thereto, in the manner provided for the payment of interest in the Indenture, on
each Interest Payment Date, as more fully set forth in the Indenture and the
Notes. Notwithstanding the fact that any securities for which liquidated
damages are due cease to be Transfer Restricted Securities, all obligations of
the Company to pay liquidated damages with respect to such securities
outstanding prior to the time such securities ceased to be Transfer Restricted
Securities shall survive until such time as such obligations with respect to
such securities shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with the
-------------------------------------
Exchange Offer, the Company shall (x) comply with all applicable provisions of
Section 6(c) below, (y) use its best efforts to effect such exchange and to
permit the resale of Exchange Notes by Broker-Dealers that tendered in the
Exchange Offer Notes that such Broker-Dealer acquired for its own account as a
result of its market making activities or other trading activities (other than
Notes acquired directly from the Company or any of its Affiliates) being sold in
accordance with the intended method or methods of distribution thereof, and (z)
comply with all of the following provisions:
(i) If, following the date hereof there has been announced a change in
Commission policy with respect to exchange offers such as the Exchange Offer,
that in the reasonable opinion of counsel to the Company raises a substantial
question as to whether the Exchange Offer is permitted by applicable federal
law, the Company hereby agrees to seek a no-action letter or other favorable
decision from the Commission allowing the Company to Consummate an Exchange
Offer for such Transfer Restricted Securities. The Company hereby agrees to
pursue the issuance of such a decision to the Commission staff level. In
connection with and subject to the foregoing, the Company hereby agrees to
take all such other actions as may be reasonably requested by the
<PAGE>
Commission or otherwise required in connection with the issuance of such
decision, including, without limitation, (A) participating in telephonic
conferences with the Commission, (B) delivering to the Commission staff an
analysis prepared by counsel to the Company setting forth the legal bases, if
any, upon which such counsel has concluded that such an Exchange Offer should
be permitted and (C) diligently pursuing a resolution (which need not be
favorable) by the Commission staff.
(ii) As a condition to its participation in the Exchange Offer, each
Holder of Transfer Restricted Securities (including, without limitation, any
Holder who is a Broker Dealer) shall furnish, upon the request of the
Company, prior to the Consummation of the Exchange Offer, a written
representation to the Company (which may be contained in the letter of
transmittal contemplated by the Exchange Offer Registration Statement) to the
effect that (A) it is not an Affiliate of the Company, (B) it is not engaged
in, and does not intend to engage in, and has no arrangement or understanding
with any person to participate in, a distribution of the Exchange Notes to be
issued in the Exchange Offer and (C) it is acquiring the Exchange Notes in
its ordinary course of business. In addition, all such Holders of Transfer
Restricted Securities shall otherwise reasonably cooperate to the extent
necessary in the Company's preparations for the Exchange Offer. Each Holder
using the Exchange Offer to participate in a distribution of the Exchange
Notes hereby acknowledges and agrees that, if the resales are of Exchange
Notes obtained by such Holder in exchange Notes acquired directly from the
Company or an Affiliate thereof, it (1) could not, under Commission policy as
in effect on the date of this Agreement, rely on the position of the
Commission enunciated in Morgan Stanley and Co., Inc. (available June 5,
----------------------------
1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as
----------------------------------
interpreted in the Commission's letter to Shearman & Sterling dated July 2,
-------------------
1993, and similar no-action letters (including, if applicable, any no-action
letter obtained pursuant to clause (i) above), and (2) must comply with the
registration and prospectus delivery requirements of the Act in connection
with a secondary resale transaction and that such a secondary resale
transaction must be covered by an effective registration statement containing
the selling security holder information required by Item 507 or 508, as
applicable, of Regulation S-K.
(iii) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company shall provide a supplemental letter to the Commission
(A) stating that the Company is registering the Exchange Offer in reliance on
the position of the Commission enunciated in Exxon Capital Holdings
----------------------
Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available
----------- ----------------------------
June 5, 1991) as interpreted in the Commission's letter to Shearman &
----------
Sterling dated July 2, 1993, and, if applicable, any no-action letter
--------
obtained pursuant to clause (i) above, (B) including a representation that
the Company has not entered into any arrangement or understanding with any
Person to distribute the Exchange Notes to be received in the Exchange Offer,
and to the extent that the Company is capable of so representing, to the best
of the Company's information and belief, each Holder participating in the
Exchange Offer is acquiring the Exchange Notes in its ordinary course of
business and has no arrangement or understanding with any Person to
participate in the distribution of the Exchange Notes received in the
Exchange Offer and (C) any other undertaking or representation required by
the Commission as set forth in any no-action letter obtained pursuant to
clause (i) above, if applicable.
<PAGE>
(b) Shelf Registration Statement. In connection with the Shelf
----------------------------
Registration Statement, the Company shall (i) (x) comply with all the provisions
of Section 6(c) below and (y) use its best efforts to effect such registration
to permit the sale of the Transfer Restricted Securities being sold in
accordance with the intended method or methods of distribution thereof (as
indicated in the information furnished to the Company pursuant to Section 4(b)
hereof), and pursuant thereto the Company will prepare and file with the
Commission a Registration Statement relating to the registration on any
appropriate form under the Act, which form shall be available for the sale of
the Transfer Restricted Securities in accordance with the intended method or
methods of distribution thereof within the time periods and otherwise in
accordance with the provisions hereof; and (ii) issue, upon the request of any
Holder or purchaser of Notes covered by any Shelf Registration Statement
contemplated by this Agreement, Exchange Notes having an aggregate principal
amount equal to the aggregate principal amount of Notes sold pursuant to the
Shelf Registration Statement and surrendered to the Company for cancellation;
the Company shall register Exchange Notes on the Shelf Registration Statement
for this purpose and issue the Exchange Notes to the purchaser(s) of securities
subject to the Shelf Registration Statement in the names as such purchaser(s)
shall designate.
(c) General Provisions. In connection with any Registration Statement and
------------------
any related Prospectus required by this Agreement, the Company shall:
(i) use its best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements for the
period specified in Section 3 or 4 of this Agreement, as applicable. Upon
the occurrence of any event that would cause any such Registration Statement
or the Prospectus contained therein (A) to contain an untrue statement of
material fact or omit to state any material fact necessary to make the
statements therein not misleading or (B) not to be effective and usable for
resale of Transfer Restricted Securities during the period required by this
Agreement, the Company shall file promptly an appropriate amendment to such
Registration Statement curing such defect, and, if Commission review is
required, use its best efforts to cause such amendment to be declared
effective as soon as practicable.
(ii) prepare and file with the Commission such amendments and post-
effective amendments to the applicable Registration Statement as may be
necessary to keep such Registration Statement effective for the applicable
period set forth in Section 3 or 4 hereof, as the case may be; cause the
Prospectus to be supplemented by any required Prospectus supplement, and as
so supplemented to be filed pursuant to Rule 424 under the Act, and to comply
fully with the applicable provisions of Rules 424, 430A and 462, as
applicable, under the Act in a timely manner; and comply with the provisions
of the Act with respect to the disposition of all securities covered by such
Registration Statement during the applicable period in accordance with the
intended method or methods of distribution by the sellers thereof set forth
in such Registration Statement or supplement to the Prospectus;
(iii) advise each Holder and each Initial Purchaser who is required
to deliver a prospectus in connection with sales or market making activities
(an "AFFILIATED MARKET MAKER") promptly and, if requested by such Holder or
-----------------------
Person, confirm such advice in writing, (A) when the Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and, with
respect to any applicable Registration Statement or any post-effective
amendment thereto, when the same has become effective, (B) of any request by
the Commission for amendments to the Registration
<PAGE>
Statement or amendments or supplements to the Prospectus or for additional
information relating thereto, (C) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement under
the Act or of the suspension by any state securities commission of the
qualification of the Transfer Restricted Securities for offering or sale in
any jurisdiction, or the initiation of any proceeding for any of the
preceding purposes, (D) of the existence of any fact or the happening of any
event that makes any statement of a material fact made in the Registration
Statement, the Prospectus, any amendment or supplement thereto or any
document incorporated by reference therein untrue, or that requires the
making of any additions to or changes in the Registration Statement in order
to make the statements therein not misleading, or that requires the making of
any additions to or changes in the Prospectus in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the Transfer
Restricted Securities under state securities or Blue Sky laws, the Company
shall use its best efforts to obtain the withdrawal or lifting of such order
at the earliest practical time;
(iv) subject to Section 6(c)(i), if any fact or event contemplated
by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a
supplement or post-effective amendment to the Registration Statement or
related Prospectus or any document incorporated therein by reference or file
any other required document so that, as thereafter delivered to the
purchasers of Transfer Restricted Securities, the Prospectus will not contain
an untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(v) furnish to each Holder and each Affiliated Market Maker in
connection with such exchange or sale, if any, before filing with the
Commission, copies of any Registration Statement or any Prospectus included
therein or any amendments or supplements to any such Registration Statement
or Prospectus (including all documents incorporated by reference after the
initial filing of such Registration Statement), which documents will be
subject to the review and comment of such Holders in connection with such
sale, if any, for a period of at least five Business Days, and the Company
will not file any such Registration Statement or Prospectus or any amendment
or supplement to any such Registration Statement or Prospectus (including all
such documents incorporated by reference) to which such Holders shall
reasonably object within five Business Days after the receipt thereof. A
Holder shall be deemed to have reasonably objected to such filing if such
Registration Statement, amendment, Prospectus or supplement, as applicable,
as proposed to be filed, contains an untrue statement of a material fact or
omits to state any material fact necessary to make the statements therein not
misleading or fails to comply with the applicable requirements of the Act
which has been specifically identified by such Holder or Affiliated Market
Maker;
(vi) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
provide copies of such document to each Holder and each Affiliated Market
Maker in connection with such exchange or sale, if any, make the Company's
representatives available at reasonable times for discussion of such document
and other customary due diligence matters, and include such information in
such document prior to the filing thereof as such Holders may reasonably
request;
<PAGE>
(vii) make available, at reasonable times, for inspection by each
Holder and each Affiliated Market Maker and any attorney or accountant
retained by such Holders all financial and other records, pertinent corporate
documents of the Company and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Holder
or attorney or accountant in connection with such Registration Statement or
any post-effective amendment thereto subsequent to the filing thereof and
prior to its effectiveness; provided, however, that such Persons shall first
agree in writing with the Company that any information that is reasonably and
in good faith designated by the Company in writing as confidential at the
time of delivery of such information shall be kept confidential by such
Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities, (ii) disclosure of such information is required by law
(including any disclosure requirements pursuant to federal securities laws in
connection with the filing of such Registration Statement or the use of any
Prospectus), (iii) such information becomes generally available to the public
other than as a result of a disclosure or failure to safeguard such
information by such Person or (iv) such information becomes available to such
Person from a source other than the Company and its subsidiaries and such
source is not known, after due inquiry, by such Person to be bound by a
confidentiality agreement; provided further, that the foregoing investigation
shall be coordinated on behalf of such Persons by one representative
designated by and on behalf of such Persons and any such confidential
information shall be available from such representative to such Persons so
long as any Person agrees to be bound by such confidentiality agreement;
(viii) if requested by any Holders in connection with such exchange or
sale or any Affiliated Market Maker, promptly include in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective amendment
if necessary, such information as such Holders may reasonably request to have
included therein, including, without limitation, information relating to the
"Plan of Distribution" of the Transfer Restricted Securities and the use of
the Registration Statement or Prospectus for market making activities, except
to the extent that the Company, upon receipt of an opinion of counsel,
reasonably believes that the inclusion of such information could result in a
violation of federal or state securities laws; and make all required filings
of such Prospectus supplement or post-effective amendment as soon as
practicable after the Company is notified of the matters to be included in
such Prospectus supplement or post-effective amendment;
(ix) furnish to each Holder in connection with such exchange or sale
and each Affiliated Market Maker, without charge, at least one copy of the
Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference therein
and all exhibits (including exhibits incorporated therein by reference);
(x) deliver to each Holder and each Affiliated Market Maker,
without charge, as many copies of the Prospectus (including each preliminary
prospectus) and any amendment or supplement thereto as such Persons
reasonably may request; the Company hereby consents to the use (in accordance
with law) of the Prospectus and any amendment or supplement thereto by each
selling Holder in connection with the offering and the sale of the Transfer
Restricted Securities covered by the Prospectus or any amendment or
supplement thereto and all market making activities of such Affiliated Market
Maker, as the case may be;
<PAGE>
(xi) upon the request of any Holder, enter into such agreements
(including underwriting agreements) and make such representations and
warranties as are customarily made by issuers to underwriters in primary
underwritten offerings and take all such other actions in connection
therewith in order to expedite or facilitate the disposition of the Transfer
Restricted Securities pursuant to any applicable Registration Statement
contemplated by this Agreement as may be reasonably requested by any Holder
in connection with any sale or resale pursuant to any applicable Registration
Statement. In such connection, and also in connection with market making
activities by any Affiliated Market Maker, the Company shall:
(A) upon request of any Holder furnish (or in the case of
paragraphs (2) and (3) below, use its best efforts to cause to be
furnished) to each Holder upon Consummation of the Exchange Offer or upon
the effectiveness of the Shelf Registration Statement, in such substance
and scope and as are customarily made by issuers to underwriters in primary
underwritten offerings, as the case may be:
(1) a certificate, dated such date, signed on behalf of the
Company by (x) the President or any Vice President and (y) a principal
financial or accounting officer of the Company, confirming, as of the
date thereof, the matters set forth in Sections 6(y), 9(a) and 9(b) of
the Purchase Agreement and such other similar matters as such Holders
may reasonably request;
(2) an opinion, dated the date of Consummation of the Exchange
Offer or the date of effectiveness of the Shelf Registration Statement,
as the case may be, of counsel for the Company covering matters similar
to those set forth in paragraph (e) of Section 9 of the Purchase
Agreement and such other matters as such Holder may reasonably request,
and in any event including a statement to the effect that such counsel
has participated in conferences with officers and other representatives
of the Company, representatives of the independent public accountants
for the Company, the underwriters' representatives and the underwriters'
counsel in connection with the preparation of such Registration
Statement and the related Prospectus, and have considered the matters
required to be stated therein and the statements contained therein,
although such counsel has not independently verified the accuracy,
completeness or fairness of such statements; and that such counsel
advises that, on the basis of the foregoing (relying as to materiality
to the extent such counsel deems appropriate upon the statements of
officers and other representatives of the Company and without
independent check or verification), no facts came to such counsel's
attention that caused such counsel to believe that the applicable
Registration Statement, at the time such Registration Statement or any
post-effective amendment thereto became effective and, in the case of
the Exchange Offer Registration Statement, as of the date of
Consummation of the Exchange Offer, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
that the Prospectus contained in such Registration Statement as of its
date and, in the case of the opinion dated the date of Consummation of
the Exchange Offer, as of the date of Consummation, contained an untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Without
limiting the foregoing, such counsel may
<PAGE>
state further that such counsel assumes no direct or indirect
responsibility, explicitly or implicitly, for, and has not independently
verified, the accuracy, completeness or fairness of the financial
statements (including, without limitation, pro forma financial
statements), notes and schedules and other financial, numerical,
statistical and accounting information and data included in any
Registration Statement contemplated by this Agreement or the related
Prospectus; and
(3) a customary comfort letter, dated the date of Consummation
of the Exchange Offer, or as of the date of effectiveness of the Shelf
Registration Statement, as the case may be, from the Company's
independent accountants, in the customary form and covering matters of
the type customarily covered in comfort letters to underwriters in
connection with underwritten offerings, and affirming the matters set
forth in the comfort letters delivered pursuant to Section 9(g) of the
Purchase Agreement; and
(B) deliver such other documents and certificates as may be
reasonably requested by the selling Holders or such Persons to evidence
compliance with the matters covered in clause (A) above and with any
customary conditions contained in the underwriting or other agreement
entered into by the Company pursuant to this clause (xi);
(xii) prior to any public offering of Transfer Restricted Securities,
cooperate with the selling Holders and their counsel in connection with the
registration and qualification of the Transfer Restricted Securities under
the securities or Blue Sky laws of such jurisdictions as the selling Holders
may request and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Transfer Restricted
Securities covered by the applicable Registration Statement; provided,
however, that the Company shall not be required to register or qualify as a
foreign corporation where it is not now so qualified or to take any action
that would subject it to the service of process in suits or to taxation,
other than as to matters and transactions relating to the Registration
Statement, in any jurisdiction where it is not now so subject;
(xiii) in connection with any sale of Transfer Restricted Securities
that will result in such securities no longer being Transfer Restricted
Securities, cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Transfer Restricted Securities to
be sold and not bearing any restrictive legends; and to register such
Transfer Restricted Securities in such denominations and such names as the
selling Holders may request at least two Business Days prior to such sale of
Transfer Restricted Securities;
(xiv) use its best efforts to cause the disposition of the Transfer
Restricted Securities covered by the Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof to consummate the
disposition of such Transfer Restricted Securities, subject to the proviso
contained in clause (xii) above;
(xv) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of a Registration Statement covering such
Transfer Restricted Securities and provide the Trustee under the Indenture
with printed certificates for the Transfer Restricted Securities which are in
a form eligible for deposit with the Depository Trust Company;
<PAGE>
(xvi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to its
security holders with regard to any applicable Registration Statement, as
soon as practicable, a consolidated earnings statement meeting the
requirements of Rule 158 (which need not be audited) covering a twelve-month
period beginning after the effective date of the Registration Statement (as
such term is defined in paragraph (c) of Rule 158 under the Act);
(xvii) use its best efforts to cause the Indenture to be qualified
under the TIA not later than the effective date of the first Registration
Statement required by this Agreement and, in connection therewith, cooperate
with the Trustee and the Holders to effect such changes to the Indenture as
may be required for such Indenture to be so qualified in accordance with the
terms of the TIA; and execute and use its best efforts to cause the Trustee
to execute, all documents that may be required to effect such changes and all
other forms and documents required to be filed with the Commission to enable
such Indenture to be so qualified in a timely manner; and
(xviii) provide promptly to each Holder and Affiliated Market Maker,
upon request, each document filed with the Commission pursuant to the
requirements of Section 13 or Section 15(d) of the Exchange Act.
(d) Restrictions on Holders. Each Holder agrees by acquisition of a
-----------------------
Transfer Restricted Security and each Affiliated Market Maker agrees that, upon
receipt of the notice referred to in Section 6(c)(iii)(C) or any notice from the
Company of the existence of any fact of the kind described in Section
6(c)(iii)(D) hereof (in each case, a "SUSPENSION NOTICE"), such Holder or Person
-----------------
will forthwith discontinue disposition of Transfer Restricted Securities
pursuant to the applicable Registration Statement until (i) such Holder or
Person has received copies of the supplemented or amended Prospectus
contemplated by Section 6(c)(iv) hereof, or (ii) such Holder or Person is
advised in writing by the Company that the use of the Prospectus may be resumed,
and has received copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT
--------------
DATE"). Each Holder or Person receiving a Suspension Notice hereby agrees that
- ----
it will either (i) destroy any Prospectuses, other than permanent file copies,
then in such Holder's or Person's possession which have been replaced by the
Company with more recently dated Prospectuses or (ii) deliver to the Company (at
the Company's expense) all copies, other than permanent file copies, then in
such Holder's Person's possession of the Prospectus covering such Transfer
Restricted Securities that was current at the time of receipt of the Suspension
Notice. The time period regarding the effectiveness of such Registration
Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended
by a number of days equal to the number of days in the period from and including
the date of delivery of the Suspension Notice to the date of delivery of the
Recommencement Date.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or compliance
with this Agreement will be borne by the Company, regardless of whether a
Registration Statement becomes effective, including without limitation: (i) all
registration and filing fees and expenses; (ii) all fees and expenses of
compliance with federal securities and state Blue Sky or securities laws; (iii)
all expenses of
<PAGE>
printing (including printing certificates for the Exchange Notes to be issued in
the Exchange Offer and printing of Prospectuses whether for exchanges, sales,
market making or otherwise), messenger and delivery services and telephone; (iv)
all fees and disbursements of counsel for the Company and one counsel for the
Holders of Transfer Restricted Securities as provided in Section 7(b) below; (v)
all application and filing fees in connection with listing the Exchange Notes on
a national securities exchange or automated quotation system pursuant to the
requirements hereof; and (vi) all fees and disbursements of independent
certified public accountants of the Company (including the expenses of any
special audit and comfort letters required by or incident to such performance).
The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Company.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
Initial Purchasers and the Holders of Transfer Restricted Securities who are
tendering Notes in the Exchange Offer and/or selling or reselling Notes or
Exchange Notes pursuant to the "Plan of Distribution" contained in the Exchange
Offer Registration Statement or the Shelf Registration Statement, as applicable,
for the reasonable fees and disbursements of not more than one counsel, who
shall be Paul, Hastings, Janofsky & Walker LLP, unless another firm shall be
chosen by the Holders of a majority in principal amount of the Transfer
Restricted Securities for whose benefit such Registration Statement is being
prepared.
SECTION 8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each Holder, its
directors, officers and each Person, if any, who controls such Holder (within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act), from
and against any and all losses, claims, damages, liabilities or judgments
(including without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action that
could give rise to any such losses, claims, damages, liabilities or judgments)
caused by any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement, preliminary prospectus or Prospectus
(or any amendment or supplement thereto) provided by the Company to any Holder
or any prospective purchaser of Exchange Notes or registered Notes, or caused by
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or judgments are
caused by (i) an untrue statement or omission or alleged untrue statement or
omission that is based upon information relating to any of the Holders furnished
in writing to the Company by any of the Holders or (ii) an untrue statement or
alleged untrue statement or omission or alleged omission in any preliminary
prospectus that was corrected by the Prospectus and such Holder failed to comply
with such Prospectus delivery requirements as are applicable to it and such
loss, claim, damage, liability or judgment would not have arisen if such
Prospectus had been so delivered.
<PAGE>
(b) Each Holder of Transfer Restricted agrees, severally and not jointly,
to indemnify and hold harmless the Company and its directors and officers, and
each Person, if any, who controls (within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act) the Company, to the same extent as the
foregoing indemnity from the Company set forth in section (a) above, but only
(i) with reference to information relating to such Holder furnished in writing
to the Company by such Holder expressly for use in any Registration Statement or
(ii) if an untrue statement or alleged untrue statement or omission or alleged
omission in any preliminary prospectus was corrected by the Prospectus and such
Holder failed to comply with such Prospectus delivery requirements as are
applicable to it and such loss, claim, damage, liability or judgment would not
have arisen if such Prospectus had been so delivered. In no event shall any
Holder, its directors, officers or any Person who controls such Holder be liable
or responsible for any amount in excess of the amount by which the total amount
received by such Holder with respect to its sale of Transfer Restricted
Securities pursuant to a Registration Statement exceeds (i) the amount paid by
such Holder for such Transfer Restricted Securities and (ii) the amount of any
damages that such Holder, its directors, officers or any Person who controls
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission or failure to comply
with such Prospectus delivery requirements as are applicable to it.
(c) In case any action shall be commenced involving any Person in respect
of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
- ------------------
against whom such indemnity may be sought (the "INDEMNIFYING PERSON") in writing
-------------------
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), a Holder shall not be required to assume the
defense of such action pursuant to this Section 8(c), but may employ separate
counsel and participate in the defense thereof, but the fees and expenses of
such counsel, except as provided below, shall be at the expense of the Holder).
Any indemnified party shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of the indemnified party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the indemnifying party, (ii) the indemnifying party shall have failed to assume
the defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party, and the indemnified party shall have been advised by such counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by a majority of
the Holders, in the case of the parties indemnified pursuant to Section 8(a),
and by the Company in the case of parties indemnified pursuant to Section 8(b).
The indemnifying party shall indemnify and hold harmless the indemnified party
from and against any and all losses, claims, damages, liabilities and judgments
by reason of any settlement of any action (i) effected with its written consent
or (ii) effected without its written consent if the settlement is entered into
more than 20 Business Days after the indemnifying party shall have received a
request from
<PAGE>
the indemnified party for reimbursement for the fees and expenses of counsel (in
any case where such fees and expenses are at the expense of the indemnifying
party) and, prior to the date of such settlement, the indemnifying party shall
have failed to comply with such reimbursement request. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement or compromise of, or consent to the entry of judgment with respect
to, any pending or threatened action in respect of which the indemnified party
is or could have been a party and indemnity or contribution may be or could have
been sought hereunder by the indemnified party, unless such settlement,
compromise or judgment (i) includes an unconditional release of the indemnified
party from all liability on claims that are or could have been the subject
matter of such action and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of the
indemnified party.
(d) To the extent that the indemnification provided for in this Section 8
is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, on the one
hand, and the Holders, on the other hand, from their sale of Transfer Restricted
Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 8(d)(i) above but also the relative
fault of the Company, on the one hand, and of the Holder, on the other hand, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative fault of the Company, on the one hand,
and of the Holder, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to (A)
information supplied by the Company on the one hand, or by the Holder, on the
other hand, or (B) an untrue statement or alleged untrue statement or omission
or alleged omission therein that was corrected by the Prospectus and any Holder
failed to comply with such Prospectus delivery requirements as are applicable to
it and such loss, claim, damage, liability or judgment would not have arisen if
such Prospectus had been so delivered, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and judgments referred to above shall be
deemed to include, subject to the limitations set forth in the second paragraph
of Section 8(a), any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
The Company and each Holder agree that it would not be just and equitable
if contribution pursuant to this Section 8(d) were determined by pro rata
allocation (even if the Holders were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or judgments referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any matter. Notwithstanding the
provisions of this Section 8, no Holder, its directors, its officers or any
Person, if any, who controls such Holder shall be required to contribute, in the
aggregate, any amount in excess of the amount by which the total amount received
by such Holder with respect to the sale of Transfer Restricted Securities
pursuant to a Registration Statement exceeds (i)
<PAGE>
the amount paid by such Holder for such Transfer Restricted Securities and (ii)
the amount of any damages which such Holder has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission or failure to comply with such Prospectus delivery requirements as are
applicable to it. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 8(c) are several in
proportion to the respective principal amount of Transfer Restricted Securities
held by each Holder hereunder and not joint.
(e) The Company agrees that the indemnity and contribution provisions of
this Section 8 shall apply to Affiliated Market Makers to the same extent, on
the same conditions, as it applies to Holders.
SECTION 9. RULE 144A AND RULE 144
The Company agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding and during any period in which the
Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make
available, upon request of any Holder, to such Holder or beneficial owner of
Transfer Restricted Securities in connection with any sale thereof and any
prospective purchaser of such Transfer Restricted Securities designated by such
Holder or beneficial owner, the information required by Rule 144A(d)(4) under
the Act in order to permit resales of such Transfer Restricted Securities
pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of the
Exchange Act, to make all filings required thereby in a timely manner in order
to permit resales of such Transfer Restricted Securities pursuant to Rule 144.
SECTION 10. MISCELLANEOUS
(a) Remedies. The Company acknowledges and agrees that any failure by it
--------
to comply with its obligations under Sections 3 and 4 hereof may result in
material irreparable injury to the Initial Purchasers or the Holders or
Affiliated Market Makers for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuries precisely and that, in
the event of any such failure, the Initial Purchasers or any Holder or
Affiliated Market Makers may obtain such relief as may be required to
specifically enforce the Company's obligations under Sections 3 and 4 hereof.
The Company further agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not, on or after the
--------------------------
date of this Agreement, enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as set forth on Schedule
A attached hereto, there are no agreements between the Company and any Person
granting such Person any registration rights with respect to its securities.
Except as set forth on Schedule A attached hereto, the rights granted to the
Holders hereunder do not conflict with the rights granted to the holders of the
Company's securities under any agreement in effect on the date hereof.
<PAGE>
(c) Amendments and Waivers. The provisions of this Agreement may not be
----------------------
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless (i) in the case of Section 5
hereof and this Section 10(c)(i), the Company has obtained the written consent
of Holders of all outstanding Transfer Restricted Securities and (ii) in the
case of all other provisions hereof, the Company has obtained the written
consent of Holders of a majority of the outstanding principal amount of Transfer
Restricted Securities (excluding Transfer Restricted Securities held by the
Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent
to departure from the provisions hereof that relates exclusively to the rights
of Holders whose Transfer Restricted Securities are being tendered pursuant to
the Exchange Offer, and that does not affect directly or indirectly the rights
of other Holders whose Transfer Restricted Securities are not being tendered
pursuant to such Exchange Offer, may be given by the Holders of a majority of
the outstanding principal amount of Transfer Restricted Securities subject to
such Exchange Offer.
(d) Third Party Beneficiary. The Holders and Affiliated Market Makers
-----------------------
shall be third party beneficiaries to the agreements made hereunder between the
Company, on the one hand, and the Initial Purchasers, on the other hand, and
shall have the right to enforce such agreements directly to the extent they may
deem such enforcement necessary or advisable to protect its rights or the rights
of Holders and Affiliated Market Makers hereunder.
(e) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Company:
PSINet Inc.
510 Huntmar Park Drive
Herndon, VA 20170-5100
Telecopier No.: (703) 904-9527
Attention: David N. Kunkel
Executive Vice President and General Counsel
With a copy to:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue
New York, NY 10022
Telecopier No.: (212) 940-3111
Attention: Richard F. Langan, Jr.
<PAGE>
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when receipt
acknowledged, if telecopied; and on the next business day, if timely delivered
to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
Upon the date of filing of the Exchange Offer or a Shelf Registration
Statement, as the case may be, notice shall be delivered to Donaldson, Lufkin &
Jenrette Securities Corporation, on behalf of the Initial Purchasers (in the
form attached hereto as Exhibit A) and shall be addressed to: Attention: Louise
Guarneri (Compliance Department), 277 Park Avenue, New York, New York 10172.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties,
including, without limitation and without the need for an express assignment,
subsequent Holders; provided, that nothing herein shall be deemed to permit any
assignment, transfer or other disposition of Transfer Restricted Securities in
violation of the terms hereof or of the Purchase Agreement or the Indenture. If
any transferee of any Holder shall acquire Transfer Restricted Securities in any
manner permitted by this Agreement, the Purchase Agreement and the Indenture,
whether by operation of law or otherwise, such Transfer Restricted Securities
shall be held subject to all of the terms of this Agreement, the Purchase
Agreement and the Indenture, and by taking and holding such Transfer Restricted
Securities, such Person shall be conclusively deemed to have agreed to be bound
by and to perform all of the terms and provisions of this Agreement, the
Purchase Agreement and the Indenture, including the restrictions on resale set
forth in this Agreement, the Purchase Agreement and the Indenture, and such
Person shall be entitled to receive the benefits hereof.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
THE CONFLICTS OF LAW RULES THEREOF.
(j) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Entire Agreement. This Agreement is intended by the parties as a
----------------
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration
<PAGE>
rights granted with respect to the Transfer Restricted Securities. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to such subject matter.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PSINET INC.
By: /s/ Edward D. Postal
-----------------------------
Name: Edward D. Postal
Title: Senior Vice President and
Chief Financial Officer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Colin Knudsen
-----------------------------
Name: Colin Knudsen
Title: Managing Director
CHASE SECURITIES INC.
By: /s/ Stephanie Cuskley
-----------------------------
Name: Stephanie Cuskley
Title: Managing Director
MORGAN STANLEY & CO. INCORPORATED
By: /s/ James D. Allen
-----------------------------
Name: James D. Allen
Title: Vice President
<PAGE>
EXHIBIT A
NOTICE OF FILING OF
EXCHANGE OFFER REGISTRATION STATEMENT
To: Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Attention: Louise Guarneri (Compliance Department)
Fax: (212) 892-7272
From: PSINet Inc.
11 1/2% Senior Notes due 2008
Date: ___, 199_
For your information only (NO ACTION REQUIRED):
Today, ______, 199_, we filed [an Exchange Registration Statement/a Shelf
Registration Statement] with the Securities and Exchange Commission. We
currently expect this registration statement to be declared effective within __
business days of the date hereof.
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT dated as of November 9, 1998 (this
"Amendment"), to the Credit Agreement, dated as of September 29, 1998 (as
---------
amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among PSINET, INC., a corporation organized under
-----------------
the laws of the State of New York (the "Borrower"), the several banks and
--------
other financial institutions and entities from time to time parties
thereto (the "Lenders"), THE CHASE MANHATTAN BANK, as administrative
-------
agent (the "Administrative Agent") for the Lenders, Fleet National Bank,
--------------------
as syndication agent for the Lenders, and The Bank of New York as
documentation agent for the Lenders.
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make certain loans to the Borrower; and
WHEREAS the Borrower has requested that certain provisions of the
Credit Agreement be modified in the manner provided for in this Amendment, and
the Lenders are willing to agree to such modifications as provided for in this
Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used and not defined herein
--------------
shall have the meanings given to them in the Credit Agreement, as amended
hereby.
2. Amendments to the Credit Agreement.
-----------------------------------
(a) Section 1.01 of the Credit Agreement is hereby amended by
deleting the definition of "1998 High Yield Notes" in its entirety and
substituting therefor the following definition:
"'1998 High Yield Notes' means the high yield notes (which notes
---------------------
may be issued under one or more indentures and on one or more dates)
issued by the Borrower in November 1998 on substantially the terms
described in the Preliminary Offering Memorandum dated October 27,
1998, which do not
<PAGE>
mature in whole or part, and in respect of which no regularly
scheduled amortization of principal is required, earlier than the date
which is six months subsequent to the Maturity Date, including the
Indebtedness represented thereby and refinancings of such
Indebtedness; provided that (i) any such refinancing Indebtedness
shall not have a greater outstanding principal amount, an earlier
maturity date, or a decreased weighted average life than the 1998 High
Yield Notes refinanced and (ii) the proceeds of such refinancing
Indebtedness shall be used solely to repay the 1998 High Yield Notes
refinanced thereby and fees and expenses in connection therewith.".
(b) Section 6.01 of the Credit Agreement is hereby amended by
deleting the number "$300,000,000" from subsection 6.01(xii) thereof and
substituting "$350,000,000" therefor.
(c) Section 6.05 of the Credit Agreement is hereby amended by:
(i) deleting subsection (c) thereof in its entirety and substituting
therefor the following:
"(c) Investments by the Borrower or its Subsidiaries in the
capital stock or Indebtedness of the Subsidiaries or in the capital
stock or equity interests or Indebtedness of any joint venture or
other Person entered into by the Borrower or its Subsidiaries;
provided that (i) certificates or promissory notes, if any,
representing equity or partnership interests or Indebtedness of such
Subsidiary, joint venture or other Person held by a Loan Party as a
result thereof shall be delivered pursuant to the Pledge Agreement
(subject to the limitations applicable to common stock of a Foreign
Subsidiary referred to in Section 5.13 and provided that if the
-------- ----
aggregate principal amount of Indebtedness of such Subsidiary, joint
venture or other Person to the Borrower or its Subsidiaries is less
than $1,000,000, the promissory note or notes evidencing such
Indebtedness need not be pledged)
<PAGE>
and (ii) such Investments (other than Investments in Loan Parties) may
not exceed $50,000,000 in the aggregate, except that Investments, in
addition to such $50,000,000, in Foreign Subsidiaries may be made by
the Borrower or its Subsidiaries in an amount not to exceed
$50,000,000 in the aggregate;"; and
(ii) deleting subsection (e) thereof in its entirety and substituting
therefor:
"(e) Loans, advances, Guarantees or other Indebtedness made by
the Borrower to any Subsidiary and made by any Subsidiary to the
Borrower or any other Subsidiary; provided that any such loans and
advances made by a Loan Party after the Effective Date shall (within
30 days thereafter) be evidenced by a promissory note pledged pursuant
to the Pledge Agreement; and provided further, that the Borrower shall
not, and shall cause the Subsidiaries not to, make loans, advances,
Guarantees or other Indebtedness to any Subsidiary (except as
permitted by clause (ii) of the proviso in subsection 6.05(c)) to the
extent the Borrower has not delivered, or caused to be delivered (to
the extent permitted by applicable law in the case of pledges by
Foreign Subsidiaries), to the Collateral Agent the certificates
representing 100% of the equity or partnership interests of such
Subsidiary (or, in the case of any Foreign Subsidiary, certificates
representing 65% of the equity or partnership interests of such
Foreign Subsidiary excluding directors' qualifying shares);".
(d) Section 6.08 of the Credit Agreement is hereby amended by
inserting after the word "indenture" in the first parenthetical thereof the
words "or indentures".
3. No Other Amendments; Confirmation. Except as expressly amended,
----------------------------------
waived, modified and supplemented hereby, the provisions of the Credit Agreement
are and shall remain in full force and effect.
<PAGE>
4. Representations and Warranties. The Borrower hereby represents
-------------------------------
and warrants to the Administrative Agent and the Lenders as of the date hereof
as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any person (including any governmental agency) in order
to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligation of the Borrower,
enforceable against it in accordance with its terms, subject only to the
operation of the Bankruptcy Code and other similar statutes for the benefit of
debtors generally and to the application of general equitable principles.
(c) All representations and warranties of the Borrower contained in
the Credit Agreement (other than representations or warranties expressly made
only on and as of the Effective Date) are true and correct as of the date
hereof.
5. Effectiveness. This Amendment shall become effective only upon
--------------
the satisfaction in full of the following conditions precedent:
(a) The Administrative Agent shall have received counterparts hereof,
duly executed and delivered by the Borrower and the Required Lenders; and
(b) Prior to or contemporaneously with each closing of the issuance
and sale by the Borrower of the 1998 High Yield Notes, all outstanding Revolving
Loans shall have been Prepaid in full.
6. Expenses. The Borrower agrees to reimburse the Administrative
---------
Agent for its out-of-pocket expenses in connection with this Amendment,
including the reasonable fees, charges and disbursements of Cravath, Swaine &
Moore, counsel for the Administrative Agent.
<PAGE>
7. Governing Law; Counterparts. (a) This Amendment and the rights
----------------------------
and obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
(b) This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
PSINET INC.
by
/s/ Edward D. Postal
--------------------
Name: Edward D. Postal
Title: Senior Vice President
and Chief Financial Oficer
THE CHASE MANHATTAN BANK, individually
and as Administrative Agent,
by
/s/ Mitchell J. Gervis
----------------------
Name: Mitchell J. Gervis
Title: Vice President
FLEET NATIONAL BANK,
individually and as Syndication Agent,
by
/s/ Daniel G. Head, Jr.
-----------------------
Name: Daniel G. Head, Jr.
Title: Senior Vice President
THE BANK OF NEW YORK,
individually and as Documentation
Agent,
by
/s/ Gerry Granovsky
-------------------
Name: Gerry Granovsky
Title: Vice President
<PAGE>
EXHIBIT 10.2
October 9, 1998
Mr. Geoffrey E. Axton
903 Winstead Street
Great Falls, NY 22066
Dear Geoff:
This letter confirms our offer to you of employment by PSINet Inc. (the
"Company"), and sets forth the terms and conditions which shall govern such
employment as outlined below. This offer is subject to satisfactory completion
of reference checks and ratification by the Company's Board of Directors, but
otherwise shall remain open until noon on Monday, October 12, 1998.
1. EMPLOYMENT.
A) The Company agrees to employ you as Senior Vice President - Business &
Corporate Development, reporting to the Chief Operating Officer (COO) of the
Company or his designee. This is a corporate officer position and as an officer
of the Company you must stand for election by the Board of Directors each year.
You accept the employment and agree to begin work on or before Monday, October
12, 1998, and remain in the employ of the Company, and, except during vacation
periods and sickness, to provide during standard business hours a minimum of
forty (40) hours per week of management services to the Company, as determined
by and under the direction of the COO.
B) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2. COMPENSATION.
A) BASE SALARY, COMPANY CAR OR CAR ALLOWANCE. The Company shall pay you a base
salary at the rate of $200,000 per annum. Your base salary shall be subject to
additional increases at the discretion of the Company's Board of Directors.
Your base salary shall be payable in such installments as the Company regularly
pays its other salaried employees, subject to such deductions and withholdings
as may be required by law or by further agreement with you. The Company plans to
implement a company car policy for which you would be eligible. Until such a
policy is implemented, the Company will cover the rental or short term leasing
cost (through normal expense reimbursement) of a suitable executive vehicle up
to the value of Seven Hundred Fifty Dollars ($750.00) per month.
B) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
<PAGE>
measured on or about January 15, 1999. The performance criteria will be issued
separately by the COO, and may be changed, with mutual fairness, from time to
time as situations develop. The target bonus for the period ending December 31,
1998 (start date through December 31, 1998) will be a total of up to $18,500
(i.e., prorata assessment equivalent to twelve (12) weeks of the full year).
This will vary on a prorata basis should your start date not be October 12.
Separate criteria will be established for your entitlement for the year starting
January 1, 1999. The on-target bonus will be forty percent (40%) of your base
salary.
C) INCENTIVE STOCK OPTIONS. Effective upon your start date, the Company shall
grant you options, subject to Board approval, to purchase 98,000 shares of
PSINet Inc.'s common stock (the "Options") pursuant to its Executive Stock
Incentive Plan (the "Plan"). Such Options shall be evidenced by an option
agreement in such form as required by the Plan. Among other terms and
provisions prescribed by the Plan, the option agreement shall provide that (a)
the exercise price of the Options shall be the price per share of the Company's
common stock as reported by the NASDAQ Stock Market at the close of business on
your start date, (b) the Options shall not be exercisable after the expiration
of ten (10) years from the date such Options are granted, and (c) the stock
shall vest ratably, monthly, over forty-eight (48) months, provided that for
each month's vesting purposes you continue to be employed full time by the
Company or one of its subsidiaries during such month, and provided that the
Company's Board of Directors ratifies, no less often than annually, that you
have met the performance standards and criteria set for you for the preceding
period.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four (4) weeks' paid vacation (beginning January 1,
1999, with two (2) weeks' paid vacation provided for the remainder of 1998), and
life, health, accident and disability insurance under the Company's plans,
policies and programs available to employees in accordance with the provisions
of such plans, policies, and programs.
4. TERMINATION.
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 4(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 5(a) hereof. Your employment may
also be terminated by the Company at any time without Cause provided the Company
shall have given you thirty (30) days' prior written notice of such termination.
That written notice must state whether the Company has elected to use the non-
Competition restriction (which decision may not be rescinded). If you are
terminated by the Company without cause within the initial one (1) year term of
your employment, you will be paid ninety (90) days' severance pay. In addition,
your employment may be terminated by you at any time for any reason, provided
you shall have given the Company at least thirty (30) days' prior written notice
of such termination. By the thirtieth day the Company must notify you in
writing whether it has elected to use the non-Competition restriction. Such
decision may not be rescinded. Failure of the Company to so notify you shall
result in the non-Competition restriction not being in place.
2
<PAGE>
B) Subject to your compliance with your obligations under Section 5 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 3; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such twelve (12) month period. The Company shall
make up the difference in cash payments directly to you to the extent that
applicable law would not permit it to make such contributions.
C) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 5
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
5. AGREEMENT NOT TO COMPETE.
A) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twelve
(12) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communication services
offered to customers by the Company as of the date of termination or within six
(6) months thereafter. The foregoing shall in no event restrict you from: (i)
writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (ii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iii) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 6(a). The Company
shall respond to such request within thirty (30) days after receipt. The
Company will notify you in writing if it becomes aware of any breach or
threatened breach of any of the
3
<PAGE>
provisions in Section 7(a), and you shall have thirty (30) days after receipt of
such notice in which to cure or prevent the breach, to the extent that you are
able to do so. You and the Company acknowledge that any breach or threatened
breach by you of any of the provisions in Section 6(a) above cannot be remedied
by the recovery of damages, and agree that in the event of any such breach or
threatened breach which is not cured with such thirty (30) day period, the
Company may pursue injunctive relief for any such breach or threatened breach.
If a court of competent jurisdiction determines that you breached any of such
provisions, you shall not be entitled to any Termination Payments from and after
date of the breach. In such event, you shall promptly repay any Termination
Payments previously made plus interest thereon from the date of such payment(s)
at twelve percent (12%) per annum. If, however, the Company has suspended making
such Termination Payments and a court of competent jurisdiction finally
determines that you did not breach such provision or determines such provision
to be unenforceable as applied to your conduct, you shall be entitled to receive
any suspended Termination Payment, plus interest thereon from the date when due
at twelve percent (12%) per annum. The Company may elect (once) to continue
paying the Termination Payments before a final decision has been made by the
court.
6. INTELLECTUAL PROPERTY; OWNERSHIP OF WORK PRODUCT. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
7. NONDISCLOSURE AGREEMENT. You agree to sign the Company's Nondisclosure
Agreement before commencing employment with PSINet Inc.
8. TRANSFERABILITY.
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
4
<PAGE>
9. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 6 shall be restricted, a proportional
reduction shall be made in the payments under Section 5.
10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of
any provision of this Agreement shall be effective unless in writing and signed
by both parties.
11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO ITS PRINCIPLES OF CONFLICTS OF LAW.
13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning one
copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/ William L. Schrader
-----------------------------------
William L. Schrader
Chairman and Chief Executive Officer
Accepted and Agreed to as of 12/th/ of October, 1998
By: /s/ Geoffrey E. Axton
-----------------------------------
Geoffrey E. Axton
5
<PAGE>
EXHIBIT 10.3
September 30, 1998
Ms. Sandy Blaisdell
12877 Fair Valley Court
Fairfax, VA 22030
Dear Sandy:
This letter confirms our offer to you of employment by PSINet Inc. (the
"Company"), and sets forth the terms and conditions which shall govern such
employment as outlined below. This offer is subject to satisfactory completion
of reference checks and ratification by the Company's Board of Directors, but
otherwise shall remain open until midnight on Wednesday, September 30, 1998.
1. EMPLOYMENT.
A) The Company agrees to employ you as a Vice President of Field Service,
reporting to the President of PSINetworks Company (the "President") or his
designee. This is a corporate officer position and as an officer of the Company
you must stand for election by the Board of Directors each year. You accept the
employment and agree to begin work on or before October 1, 1998, and remain in
the employ of the Company, and, except during vacation periods and sickness, to
provide during standard business hours a minimum of forty (40) hours per week of
management services to the Company, as determined by and under the direction of
the President.
B) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2. COMPENSATION.
A) BASE SALARY. The Company shall pay you a base salary at the rate of
$135,000 per annum. Your base salary shall be subject to additional increases
at the discretion of the Company's Board of Directors. Your base salary shall
be payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
B) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured on or about January 15, 1999. The performance criteria will be issued
separately by the President, and may be changed, with mutual fairness, from time
to time as situations develop. The target bonus for the period ending December
31, 1998 (start
<PAGE>
date through December 31, 1998) will be a total of up to $6,250. Separate
criteria will be established for your entitlement for the year starting January
1, 1999.
C) INCENTIVE STOCK OPTIONS. Effective upon your start date, the Company shall
grant you options, subject to Board approval, to purchase forty-eight thousand
(48,000) shares of PSINet Inc.'s common stock (the "Options") pursuant to its
Executive Stock Incentive Plan (the "Plan"). Such Options shall be evidenced by
an option agreement in such form as required by the Plan. Among other terms and
provisions prescribed by the Plan, the option agreement shall provide that (a)
the exercise price of the Options shall be the price per share of the Company's
common stock as reported by the NASDAQ Stock Market at the close of business on
your start date, (b) the Options shall not be exercisable after the expiration
of ten (10) years from the date such Options are granted, and (c) the stock
shall vest ratably, monthly, over forty-eight (48) months, provided that for
each month's vesting purposes you continue to be employed full time by the
Company or one of its subsidiaries during such month, and provided that the
Company's Board of Directors ratifies, no less often than annually, that you
have met the performance standards and criteria set for you for the preceding
period.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four (4) weeks' paid vacation, and life, health,
accident and disability insurance under the Company's plans, policies and
programs available to employees in accordance with the provisions of such plans,
policies, and programs.
4. TERMINATION.
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 4(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 5(a) hereof. Your employment may
also be terminated by the Company at any time without Cause provided the Company
shall have given you thirty (30) days' prior written notice of such termination.
That written notice must state whether the Company has elected to use the non-
Competition restriction (which decision may not be rescinded). If you are
terminated by the Company without cause within the initial one (1) year term of
your employment, you will be paid ninety (90) days' severance pay. In addition,
your employment may be terminated by you at any time for any reason, provided
you shall have given the Company at least thirty (30) days' prior written notice
of such termination. By the thirtieth day the Company must notify you in
writing whether it has elected to use the non-Competition restriction. Such
decision may not be rescinded. Failure of the Company to so notify you shall
result in the non-Competition restriction not being in place.
B) Subject to your compliance with your obligations under Section 5 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 2; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided
2
<PAGE>
to you; and (iii) Company contributions, to the extent permitted by applicable
law, to a SEP-IRA, Keogh or other retirement mechanism selected by you
sufficient to provide the same level of retirement benefits you would have
received if you had remained employed by the Company during such twelve (12)
month period. The Company shall make up the difference in cash payments directly
to you to the extent that applicable law would not permit it to make such
contributions.
C) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 5
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
5. AGREEMENT NOT TO COMPETE.
A) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twelve
(12) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communication services
offered to customers by the Company as of the date of termination or within six
(6) months thereafter. The foregoing shall in no event restrict you from: (i)
writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (ii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iii) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 5(a). The Company
shall respond to such request within thirty (30) days after receipt. The
Company will notify you in writing if it becomes aware of any breach or
threatened breach of any of the provisions in Section 6(a), and you shall have
thirty (30) days after receipt of such notice in which to cure or prevent the
breach, to the extent that you are able to do so. You and the Company
acknowledge that any breach or threatened breach by you of any of the provisions
in Section 6(a) above cannot be remedied by the recovery of damages, and agree
that in the event of any such breach or threatened breach which is not cured
with such thirty (30) day period, the Company may pursue injunctive relief for
any such breach or threatened breach. If a court of competent jurisdiction
determines that you breached any of such provisions, you shall not be entitled
to any Termination Payments
3
<PAGE>
from and after date of the breach. In such event, you shall promptly repay any
Termination Payments previously made plus interest thereon from the date of such
payment(s) at twelve percent (12%) per annum. If, however, the Company has
suspended making such Termination Payments and a court of competent jurisdiction
finally determines that you did not breach such provision or determines such
provision to be unenforceable as applied to your conduct, you shall be entitled
to receive any suspended Termination Payment, plus interest thereon from the
date when due at twelve percent (12%) per annum. The Company may elect (once) to
continue paying the Termination Payments before a final decision has been made
by the court.
6. INTELLECTUAL PROPERTY; OWNERSHIP OF WORK PRODUCT. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
7. TRANSFERABILITY.
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
8. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 6 shall be restricted, a proportional
reduction shall be made in the payments under Section 5.
9. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
4
<PAGE>
communications of the parties, oral or written. No waiver or modification of
any provision of this Agreement shall be effective unless in writing and signed
by both parties.
10. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
11. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO ITS PRINCIPLES OF CONFLICTS OF LAW.
12. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning one
copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/ Harold S. Wills
-------------------------------------------
Harold S. Wills, President and COO
Accepted and Agreed to as of September 30, 1998:
By: /s/ Sandra L. Blaisdell
-------------------------------------------
SANDY BLAISDELL
5
<PAGE>
EXHIBIT 10.4
October 13, 1998
Mr. E. A "Ted" Davis
21 Pheasant Run Drive
Basking Ridge, NJ 07920
Dear Mr. Davis:
This letter confirms our offer to you of employment by PSINet Inc. (the
"Company"), and sets forth the terms and conditions which shall govern such
employment as outlined below. This offer is subject to satisfactory completion
of reference checks and ratification by the Company's Board of Directors, but
otherwise shall remain open until noon on Wednesday, October 14, 1998.
1. EMPLOYMENT.
A) The Company agrees to employ you as President - PSINetworking, reporting to
the Chief Operating Officer (COO) of the Company or his designee. This is a
corporate officer position and as an officer of the Company you must stand for
election by the Board of Directors each year. You accept the employment and
agree to begin work on or before Wednesday, October 14, 1998, and remain in the
employ of the Company, and, except during vacation periods and sickness, to
provide during standard business hours a minimum of forty (40) hours per week of
management services to the Company, as determined by and under the direction of
the COO.
B) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2. COMPENSATION.
A) BASE SALARY. The Company shall pay you a base salary at the rate of
$225,000 per annum. Your base salary shall be subject to additional increases
at the discretion of the Company's Board of Directors. Your base salary shall
be payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
B) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured on or about January 15, 1999. The performance criteria will be issued
separately by the COO, and may be changed, with mutual fairness, from time to
time as situations develop. The target bonus for the period ending December 31,
1998 will be the pro-rated sum proportional to the fraction of the calendar year
you worked from your
<PAGE>
start date through December 31, 1998 (on the basis of an annualized bonus of up
to $125,000). Separate criteria will be established for your entitlement for the
year starting January 1, 1999.
C) INCENTIVE STOCK OPTIONS. Effective upon your start date, the Company shall
grant you options, subject to Board approval, to purchase 96,000 shares of
PSINet Inc.'s common stock (the "Options") pursuant to its Executive Stock
Incentive Plan (the "Plan"). Such Options shall be evidenced by an option
agreement in such form as required by the Plan. Among other terms and
provisions prescribed by the Plan, the option agreement shall provide that (a)
the exercise price of the Options shall be the price per share of the Company's
common stock as reported by the NASDAQ Stock Market at the close of business on
your start date, (b) the Options shall not be exercisable after the expiration
of ten (10) years from the date such Options are granted, and (c) the stock
shall vest ratably, monthly, over forty-eight (48) months, provided that for
each month's vesting purposes you continue to be employed full time by the
Company or one of its subsidiaries during such month, and provided that the
Company's Board of Directors ratifies, no less often than annually, that you
have met the performance standards and criteria set for you for the preceding
period.
D) CAR ALLOWANCE OR CAR POLICY. The Company plans to implement a Company car
policy for which you would be eligible. Until such a policy is implemented, the
Company will cover the rental or short term leasing cost (through normal expense
reimbursement) of a suitable executive vehicle up to the value of $600.00 per
month.
E) RELOCATION ALLOWANCE. The Company will provide you with a relocation
allowance of up to $70,000 to assist you in relocating your residence from
Basking Ridge, NJ to a comparable home in Northern Virginia. The relocation
allowance will include reasonable expenses of sale, moving, interim living and
resettlement in the new home. Income taxes will be withheld from this sum. You
may be eligible for a refund of some portion of the taxes withheld upon filing
your current year's US tax return. Should you voluntarily terminate your
employment with the Company within one (1) year from the date you commence
employment at our Virginia offices, you agree to reimburse the Company for the
entire sum of this allowance within ninety (90) days of your date of
termination.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four (4) weeks' paid vacation, and life, health,
accident and disability insurance under the Company's plans, policies and
programs available to employees in accordance with the provisions of such plans,
policies, and programs.
4. TERMINATION.
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 4(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 5(a) hereof. Your employment may
also be terminated by the Company at any time without Cause provided the Company
shall have given you thirty
2
<PAGE>
(30) days' prior written notice of such termination. That written notice
must state whether the Company has elected to use the non-Competition
restriction (which decision may not be rescinded). If you are terminated by the
Company without cause within the initial one (1) year term of your employment,
you will be paid one hundred eighty (180) days' severance pay. In addition, your
employment may be terminated by you at any time for any reason, provided you
shall have given the Company at least thirty (30) days' prior written notice of
such termination. By the thirtieth day the Company must notify you in writing
whether it has elected to use the non-Competition restriction. Such decision may
not be rescinded. Failure of the Company to so notify you shall result in the
non-Competition restriction not being in place.
B) Subject to your compliance with your obligations under Section 5 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 2; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such twelve (12) month period. The Company shall
make up the difference in cash payments directly to you to the extent that
applicable law would not permit it to make such contributions.
C) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 5
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
5. AGREEMENT NOT TO COMPETE.
A) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twelve
(12) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communication services
offered to customers by the Company as of the date of termination or within six
(6) months thereafter. The foregoing shall in no event restrict you from: (i)
writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (ii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iii) after termination
3
<PAGE>
of employment, becoming employed by a hardware, software or other vendor to the
Company, provided that such vendor does not offer network or communication
services that are competitive with the Internet-related network or
communications services offered by the Company as of the date of termination of
employment or within six (6) months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 5(a). The Company
shall respond to such request within thirty (30) days after receipt. The
Company will notify you in writing if it becomes aware of any breach or
threatened breach of any of the provisions in Section 5(a), and you shall have
thirty (30) days after receipt of such notice in which to cure or prevent the
breach, to the extent that you are able to do so. You and the Company
acknowledge that any breach or threatened breach by you of any of the provisions
in Section 6(a) above cannot be remedied by the recovery of damages, and agree
that in the event of any such breach or threatened breach which is not cured
with such thirty (30) day period, the Company may pursue injunctive relief for
any such breach or threatened breach. If a court of competent jurisdiction
determines that you breached any of such provisions, you shall not be entitled
to any Termination Payments from and after date of the breach. In such event,
you shall promptly repay any Termination Payments previously made plus interest
thereon from the date of such payment(s) at twelve percent (12%) per annum. If,
however, the Company has suspended making such Termination Payments and a court
of competent jurisdiction finally determines that you did not breach such
provision or determines such provision to be unenforceable as applied to your
conduct, you shall be entitled to receive any suspended Termination Payment,
plus interest thereon from the date when due at twelve percent (12%) per annum.
The Company may elect (once) to continue paying the Termination Payments before
a final decision has been made by the court.
6. INTELLECTUAL PROPERTY; OWNERSHIP OF WORK PRODUCT. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
7. NONDISCLOSURE AGREEMENT. You agree to sign the Company's Nondisclosure
Agreement before commencing employment with PSINet Inc.
8. TRANSFERABILITY.
4
<PAGE>
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
9. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 6 shall be restricted, a proportional
reduction shall be made in the payments under Section 5.
10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of
any provision of this Agreement shall be effective unless in writing and signed
by both parties.
11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS TO BE PERFORMED WHOLLY WITHIN THAT STATE.
13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning one
copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
5
<PAGE>
PSINet Inc.
By: /s/ Harold S. Wills
-------------------
Harold S. Wills
President and Chief Operating Officer
Accepted and Agreed to as of October 14, 1998:
By: /s/ Edward A. Davis
-------------------
E.A. "Ted" Davis
6
<PAGE>
EXHIBIT 10.5
September 8, 1998
Mr. James A. Haid
10309 Hickory Creek Court
Great Falls, Virginia 22066
Dear Jim:
This letter confirms our offer to you of employment by PSINet Inc. (the
"Company"), and sets forth the terms and conditions which shall govern such
employment as outlined below. This offer is subject to satisfactory completion
of reference checks and ratification by the Company's Board of Directors, but
otherwise shall remain open until noon on September 10, 1998.
1. EMPLOYMENT:
A) The Company agrees to employ you as Vice President of Network Operations,
reporting to the Chief Operating Officer (COO) of the Company or his designee.
This is a corporate officer position and as an officer of the Company you must
stand for election by the Board of Directors each year. You accept the
employment and agree to begin work on or before October 1, 1998, and remain in
the employ of the Company, and, except during vacation periods and sickness, to
provide during standard business hours a minimum of forty (40) hours per week of
management services to the Company, as determined by and under the direction of
the COO.
B) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2. COMPENSATION:
A) BASE SALARY. The Company shall pay you a base salary at the rate of
$175,000 per annum. Your base salary shall be subject to additional increases at
the discretion of the Company's Board of Directors. Your base salary shall be
payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
B) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured on or about January 25, 1999. The performance criteria will be issued
separately by the COO, and may be changed, with mutual fairness, from time to
time as situations develop. The target bonus for the period ending December 31,
1998 (start date
1
<PAGE>
through December 31, 1998) will be a total of up to $12,500. Separate criteria
will be established for your entitlement for the year starting January 1, 1999,
but the value will be up to $50,000.
C) INCENTIVE STOCK OPTIONS. Effective upon your start date, PSINet Inc. shall
grant you options, subject to Board approval, to purchase Ninety-Six Thousand
(96,000) shares of PSINet Inc.'s common stock (the "Options") pursuant to its
Executive Stock Incentive Plan (the "Plan"). Such Options shall be evidenced by
an option agreement in such form as required by the Plan. Among other terms and
provisions prescribed by the Plan, the option agreement shall provide that (a)
the exercise price of the Options shall be the price per share of the Company's
common stock as reported by the NASDAQ Stock Market at the close of business on
your start date, (b) the Options shall not be exercisable after the expiration
of ten years from the date such Options are granted, and (c) the stock shall
vest ratably, monthly, over forty-eight (48) months, provided that for each
month's vesting purposes you continue to be employed full time by the Company or
one of its subsidiaries during such month, and provided that the Company's Board
of Directors ratifies, no less often than annually, that you have met the
performance standards and criteria set for you for the preceding period.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four weeks' paid vacation, and life, health,
accident and disability insurance under the Company's plans, policies and
programs available to employees in accordance with the provisions of such plans,
policies, and programs.
4. TERMINATION:
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 4(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 5(a) hereof. Your employment may
also be terminated by the Company at any time without Cause provided the Company
shall have given you thirty (30) days' prior written notice of such termination.
That written notice must state whether the Company has elected to use the non-
Competition restriction (which decision may not be rescinded). If you are
terminated by the Company without case within the initial one-year term of your
employment, you will be paid ninety (90) days' severance pay. In addition, your
employment may be terminated by you at any time for any reason, provided you
shall have given the Company at least thirty (30) days' prior written notice of
such termination. By the 30th day the Company must notify you in writing whether
it has elected to use the non-Competition restriction. Such decision may not be
rescinded. Failure of the Company to so notify you shall result in the non-
Competition restriction not being in place.
B) Subject to your compliance with your obligations under Section 5 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 2; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided
2
<PAGE>
to you; and (iii) Company contributions, to the extent permitted by applicable
law, to a SEP-IRA, Keogh or other retirement mechanism selected by you
sufficient to provide the same level of retirement benefits you would have
received if you had remained employed by the Company during such 12-month
period. The Company shall make up the difference in cash payments directly to
you to the extent that applicable law would not permit it to make such
contributions.
C) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 5
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
5. AGREEMENT NOT TO COMPETE.
A) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twelve
(12) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communication services
offered to customers by the Company as of the date of termination or within six
(6) months thereafter. The foregoing shall in no event restrict you from: (i)
writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (ii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iii) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 5(a). The Company
shall respond to such request within thirty (30) days after receipt. The Company
will notify you in writing if it becomes aware of any breach or threatened
breach of any of the provisions in Section 6(a), and you shall have thirty (30)
days after receipt of such notice in which to cure or prevent the breach, to the
extent that you are able to do so. You and the Company acknowledge that any
breach or threatened breach by you of any of the provisions in Section 5(a)
above cannot be remedied by the recovery of damages, and agree that in the event
of any such breach or threatened breach which is not cured with such 30-day
period, the Company may pursue injunctive relief for any such breach or
threatened breach. If a court of competent jurisdiction determines that you
breached any of such provisions, you shall not be entitled to any Termination
Payments from and after
3
<PAGE>
date of the breach. In such event, you shall promptly repay any Termination
Payments previously made plus interest thereon from the date of such payment(s)
at 12% per annum. If, however, the Company has suspended making such Termination
Payments and a court of competent jurisdiction finally determines that you did
not breach such provision or determines such provision to be unenforceable as
applied to your conduct, you shall be entitled to receive any suspended
Termination Payment, plus interest thereon from the date when due at 12% per
annum. The Company may elect (once) to continue paying the Termination Payments
before a final decision has been made by the court.
6. INTELLECTUAL PROPERTY. Ownership of Work Product. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
7. TRANSFERABILITY.
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 7, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
8. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 5 shall be restricted, a proportional
reduction shall be made in the payments under Section 4.
9. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of any
4
<PAGE>
provision of this Agreement shall be effective unless in writing and signed by
both parties.
10. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
11. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO ITS PRINCIPLES OF CONFLICTS OF LAW.
12. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning
one copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/ Harold S. Wills
-------------------------------------
HAROLD S. WILLS
Executive Vice President and Chief Operating Officer
Accepted and Agreed to as of September 8, 1998:
By: /s/ James A. Haid
-------------------------------------
JAMES A. HAID
5
<PAGE>
EXHIBIT 10.6
AMENDMENT TO EMPLOYMENT AGREEMENT
This agreement is dated as of the 1st day of October, 1998, and is an amendment
to the employment agreement between PSINet Inc. (the "Company") and Harry Hobbs
("Hobbs"), dated August 4, 1997. Except as modified or otherwise provided
herein, all terms and provisions of that employment agreement remain in effect.
This amendment is to provide certain changes in the employment of Hobbs related
to a new assignment in Switzerland as President, Europe for the Company, as well
as a new designation as Senior Vice President of the Company.
1. Reporting, Responsibility and Term. Hobbs shall continue to report to the
----------------------------------
Chief Operating Officer of the Company. In his role as President, Europe,
he shall have operating authority over the Company's European operations
and responsibility for the results of those operations. His terms as
President, Europe shall commence as of the date hereof, and extend through
December 31, 2000, unless earlier terminated or modified by the Company or
Hobbs in accordance with the other provisions of Hobbs' employment
agreement.
2. Base and Bonus Compensation. Hobbs shall be paid base salary at a rate of
---------------------------
$225,000 per year, on the same terms as otherwise provided in the
employment agreement. In addition, Hobbs shall be eligible for up to
$112,500 in additional bonus compensation, payable annually, upon
achievement of stated goals to be mutually agreed with the Chief Operating
Officer.
3. Adjustment of Differential Tax Rates. If necessary, the Company shall
------------------------------------
"gross up" Hobbs' base, bonus and personal travel compensation so that
Hobbs' after-tax compensation during his tour in Switzerland shall not be
less than he would have had if stationed in the United States for such
period and earning the identical compensation. In other words, if the
combined relative personal tax rate on such compensation is increased by
reason of Hobbs' location in Switzerland, the Company shall increase the
compensation such that the after-tax results to Hobbs shall eliminate any
loss in compensation otherwise caused by the increased tax rate.
4. Travel to the U.S. The Company shall reimburse Hobbs up to $20,000 (per
------------------
year) for personal travel expenses between Switzerland and the U.S. This
reimbursement shall pertain to travel for Hobbs or any member of his
immediate family (i.e., wife and children).
5. Automobile. The Company shall provide Hobbs with a suitable automobile in
----------
Switzerland, with the Company bearing all related costs (insurance,
registration, leasing, fuel, maintenance, etc.).
6. Accommodations and Related Expenses. The Company shall pay for a suitable
-----------------------------------
rental unit for Hobbs in or near Geneva, Switzerland, including all
utilities, parking and related costs. The Company shall also pay for a one-
time relocation allowance of one-month's salary in lieu of expenses for
setting up Hobbs' new household, and a similar allowance upon Hobbs' return
to the U.S. If Hobbs should need to engage the services of a destination
services company or real estate agent for the purpose of finding suitable
housing in Switzerland, the Company shall pay for the charges and fees
related to such company or agent.
In Switzerland, the Company shall provide Hobbs with home telephone lines
to support his business requirements, as well as mobile telephone service.
In addition, the Company shall
<PAGE>
reimburse Hobbs for grounds maintenance and utilities costs incurred by
Hobbs with respect to his permanent residence in the United States.
7. Freight. The Company shall pay for the shipment of necessary household
-------
goods to Switzerland (and back) for Hobbs, as well as for associated
packing and in-transit insurance in an amount not to exceed $100,000. The
Company shall also provide, if necessary, the services of a professional
organizer to facilitate Hobbs' move to and from Switzerland.
8. Work Permit. The Company shall secure a work permit for Hobbs (as well as a
-----------
permit for Hobbs' wife, if she does not have the services of her employer
for such purpose).
9. COLA. The Company shall pay to Hobbs, if indicated by a Runzheimer or
----
similar analysis of the differential cost of living between Metropolitan
Washington, D.C. and Geneva, Switzerland, a Cost of Living Adjustment (in
the form of monthly additions to his base salary), not to exceed 15% of
such salary.
AGREED as of this 1/st/ day of October, 1998.
/s/ Harold S. Wills
---------------------
For PSINet Inc.
/s/ Harry Hobbs
---------------------
Harry Hobbs
<PAGE>
EXHIBIT 10.7
November 2, 1998
Mr. David J. Kramer
630 Blossom Drive
Rockville, MD 20850
Dear David:
This letter sets forth the terms and conditions which shall govern your
employment by PSINet Inc. (the "Company") as outlined below.
1. EMPLOYMENT.
A) The Company agrees to employ you as Vice President and Associate General
Counsel, reporting to the Vice President and Deputy General Counsel of the
Company or her designee. This is a corporate officer position and as an officer
of the Company you must stand for election by the Board of Directors each year.
You accept the employment and agree to remain in the employ of the Company, and,
except during vacation periods and sickness, to provide during standard business
hours a minimum of forty (40) hours per week of management services to the
Company, as determined by and under the direction of the Vice President and
Deputy General Counsel.
B) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2. TERM OF EMPLOYMENT. The term of the employment shall commence on November
2, 1998, and shall continue for a period of three (3) years.
3. COMPENSATION.
A) BASE SALARY. The Company shall pay you a base salary at the rate of
$175,000.00 per annum. On January 1/st/ of each succeeding year during the term
of this Agreement, your base salary shall be increased at a minimum by an amount
equal to five percent (5%) of your then current base salary. Your base salary
shall be subject to additional increases at the discretion of the Company's
Board of Directors. Your base salary shall be payable in such installments as
the Company regularly pays its other salaried employees, subject to such
deductions and withholdings as may be required by law or by further agreement
with you.
B) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured on or about January of each year during the term of your employment
with the Company. The performance criteria will be issued separately by the
Vice President and
<PAGE>
Deputy General Counsel, and may be changed, with mutual fairness, from time to
time as situations develop. The target bonus for the period ending December 31,
1998 (start date through December 31, 1998) will be a total of up to $40,000.00.
Separate criteria will be established for your entitlement for the year starting
January 1, 1999. The performance bonus for subsequent years will be $50,000.00
or greater.
C) INCENTIVE STOCK OPTIONS. In the event that your employment is terminated
or continued under conditions not substantially the same as those called for in
this Agreement, the Company shall provide a loan sufficient to exercise all
vested stock options and pay any required taxes to which you may be subjected to
as a result, with the terms of the loan to be no less favorable than installment
free for the duration, interest charged at the IRS minimum rate, with a five (5)
year balloon payment for interest and principal.
4. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four (4) weeks' paid vacation, and life, health,
accident and disability insurance under the Company's plans, policies and
programs available to employees in accordance with the provisions of such plans,
policies, and programs.
5. TERMINATION.
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 5(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 6(a) hereof. Your employment may
also be terminated by the Company at any time without Cause provided the Company
shall have given you thirty (30) days' prior written notice of such termination.
That written notice must state whether the Company has elected to use the non-
Competition restriction (which decision may not be rescinded). If you are
terminated by the Company without cause, you will be paid twenty-six (26) weeks
severance pay. In addition, your employment may be terminated by you at any
time for any reason, provided you shall have given the Company at least thirty
(30) days' prior written notice of such termination. By the 30th day the
Company must notify you in writing whether it has elected to use the non-
Competition restriction. Such decision may not be rescinded. Failure of the
Company to so notify you shall result in the non-Competition restriction not
being in place.
B) Subject to your compliance with your obligations under Section 6 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 3; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such 12-month period. The Company shall make up
the
2
<PAGE>
difference in cash payments directly to you to the extent that applicable law
would not permit it to make such contributions.
C) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 6
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
6. AGREEMENT NOT TO COMPETE.
A) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twelve
(12) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communication services
offered to customers by the Company as of the date of termination or within six
(6) months thereafter. The foregoing shall in no event restrict you from: (i)
the general practice of law, either individually or in a private firm practice,
(ii) writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (iii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iv) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 6(a). The Company
shall respond to such request within thirty (30) days after receipt. The
Company will notify you in writing if it becomes aware of any breach or
threatened breach of any of the provisions in Section 6(a), and you shall have
thirty (30) days after receipt of such notice in which to cure or prevent the
breach, to the extent that you are able to do so. You and the Company
acknowledge that any breach or threatened breach by you of any of the provisions
in Section 6(a) above cannot be remedied by the recovery of damages, and agree
that in the event of any such breach or threatened breach which is not cured
with such thirty (30) day period, the Company may pursue injunctive relief for
any such breach or threatened breach. If a court of competent jurisdiction
determines that you breached any of such provisions, you shall not be entitled
to any Termination Payments from and after date of the breach. In such event,
you shall promptly repay any Termination Payments previously made plus interest
thereon from the date of such payment(s) at twelve percent (12%) per annum. If,
however, the Company has suspended making such Termination Payments and a court
of competent jurisdiction
3
<PAGE>
finally determines that you did not breach such provision or determines such
provision to be unenforceable as applied to your conduct, you shall be entitled
to receive any suspended Termination Payment, plus interest thereon from the
date when due at twelve percent (12%) per annum. The Company may elect (once) to
continue paying the Termination Payments before a final decision has been made
by the court.
7. INTELLECTUAL PROPERTY; OWNERSHIP OF WORK PRODUCT. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
8. TRANSFERABILITY.
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company, who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
9. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 6 shall be restricted, a proportional
reduction shall be made in the payments under Section 5.
10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of
any provision of this Agreement shall be effective unless in writing and signed
by both parties.
4
<PAGE>
11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE
TO ITS PRINCIPLES OF CONFLICTS OF LAW.
13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning one
copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/ William L. Schrader
------------------------------
WILLIAM L. SCHRADER
CHAIRMAN & CEO
Accepted and Agreed to as of November 2, 1998:
By: /s/ David J. Kramer
-----------------------------
DAVID J. KRAMER
5
<PAGE>
EXHIBIT 10.8
August 28, 1998
Mr. Chi H. Kwan
4-1-8 M304 Hiroo, Shibuya-ku
Tokyo 105 Japan
This letter confirms our offer to you of employment by PSINet K.K. or a related
Japanese company (the "Company"), and sets forth the terms and conditions which
shall govern such employment as outlined below. This offer shall remain open
until noon on September 1, 1998.
1. EMPLOYMENT:
A) The Company agrees to employ you as President of PSINet Asia/Pacific
Division reporting to the C.O.O. of PSINet Inc. You will also be appointed a
Senior Vice President of PSINet Inc. This is a corporate officer position and as
an officer of the Company you must stand for election by the PSINet Inc. Board
of Directors each year. You accept the employment and agree to begin work on or
before October 6, 1998, and remain in the employ of the Company, and, except
during vacation periods and sickness, to provide during standard business hours
a minimum of forty hours per week of management services to the Company, as
determined by and under the direction of the C.O.O.
B) In connection with your employment by the Company, your principal place of
employment shall be the Tokyo, Japan area and you shall not be required
permanently to relocate to a principal place of business outside such area
during the term of your employment hereunder.
C) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2. TERM OF EMPLOYMENT. The term of the employment shall commence on the date
hereof and shall continue for a period of three (3) years.
3. COMPENSATION:
A) BASE SALARY. The Company shall pay you a base salary at the rate of
(Yen)40,000,000 per annum. Beginning on January 2, 2000, and on January 2/nd/
of each year during the term of this Agreement, your base salary shall be
increased at a minimum by an amount equal to five percent (5%) of your then
current base salary. Your base salary shall be subject to additional increases
at the discretion of the Company's Board of Directors. Your base salary shall
be payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
B) SIGNING BONUS. The Company will pay you a signing bonus of (Yen)3,000,000
at the completion of your first full month of employment with the Company. This
bonus shall be subject to all normal withholding taxes.
<PAGE>
C) PERFORMANCE BONUS. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance for the applicable
year. The performance criteria will be issued separately by the C.O.O. of
PSINet Inc., at the beginning of each year, and may be changed, with mutual
fairness, from time to time as situations develop. Your performance bonus will
be an amount equal to up to (Yen)16,500,000 and shall be payable in two tiers,
each of which shall consist of one-half of your total performance bonus amount
for the applicable year. Separate criteria will be established for your
entitlement to each tier's bonus money. For the period ending March 1999, your
performance bonus shall not be less than (Yen)8,250,000, provided all
obligations under this agreement are met by you for this period.
D) INCENTIVE STOCK OPTIONS. Effective upon your start date, PSINet Inc. shall
grant you options to purchase One Hundred Thousand (100,000) shares of PSINet
Inc.'s common stock (the "Options") pursuant to its Executive Stock Incentive
Plan. Such Options shall be evidenced by an option agreement in such form as
required by the Plan. Among other terms and provisions prescribed by the Plan,
the option agreement shall provide that (a) the exercise price of the Options
shall be the price per share of the Company's common stock as reported by the
NASDAQ Stock Market at the close of business on your start dare, (b) the Options
shall not be exercisable after the expiration of ten (10) years from the date
such Options are granted, and (c) the stock shall vest ratably, monthly, over
forty-eight (48) months, provided that for each month's vesting purposes you
continue to be employed full time by the Company, PSINet Inc. or one of its
subsidiaries during such month, and provided that the Company's Board of
Directors ratifies, no less often than annually, that you have met the
performance standards and criteria set for you for the preceding period. The
Compensation Committee of the Company's Board of Directors, in its sole
discretion, may determine to grant you additional options in the future.
In the event of a Change of Control, as defined in Section 9 below, or upon
the occasion of your death during the term of this Agreement while you are in
compliance with the requirements hereof, the Company shall vest all of the above
noted unvested stock options immediately.
4. EMPLOYEE BENEFITS. You shall be provided employee benefits commensurate
with your position as Vice President, including (without limitation) 401(k)
retirement plan, four weeks' paid vacation, reasonable expenses associated with
an annual physical examination paid for by the Company, reimbursement of up
seventy-five percent (75%) of your annually incurred dental expenses, and life,
health, accident and disability insurance under the Company's plans, policies
and programs available to employees in accordance with the provisions of such
plans, policies, and programs.
5. TERMINATION:
A) Your employment with the Company may be terminated by the Company at any
time for "Cause" as defined in Section 6(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the non-
competition restrictions set forth in Section 7(a) hereof. Your employment may
also be terminated by the Company at any time without Cause provided the Company
shall have given you thirty (30) days' prior written notice of such termination.
That written notice must state whether the Company has elected to use the non-
Competition restriction (which decision may not be rescinded). If you are
terminated by the Company without cause within the initial two years of your
employment, you will be paid severance pay for a total of twelve (12) months.
If you are terminated without cause within the third year of your employment,
you will be paid severance pay for a total of twenty-six (26) weeks. In
addition, your employment may be
-2-
<PAGE>
terminated by you at any time for any reason, provided you shall have given the
Company at least thirty (30) days' prior written notice of such termination. By
the 30th day the Company must notify you in writing whether it has elected to
use the non-Competition restriction. Such decision may not be rescinded. Failure
of the Company to so notify you shall result in the non-Competition restriction
not being in place.
B) Subject to your compliance with your obligations under Section 7 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twenty-four (24)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 3; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such 24-month period. The Company shall make up
the difference in cash payments directly to you to the extent that applicable
law would not permit it to make such contributions.
C) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 6
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony or an
equivalent under Japanese law, or any material breach by you of this Agreement.
6. AGREEMENT NOT TO COMPETE.
A) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twenty-
four (24) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communication services
offered to customers by the Company as of the date of termination or within six
(6) months thereafter. The foregoing shall in no event restrict you from: (i)
writing or teaching, whether on behalf of for-profit, or not-for-profit
institution(s); (ii) investing (without participating in management or
operation) in the securities of any private or publicly traded corporation or
entity; or (iii) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
B) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 7(a). The Company
shall respond to such request within thirty (30) days after receipt. The
Company will notify you in writing if it becomes aware of any breach or
threatened breach of any of the provisions in Section 7(a), and you shall have
thirty (30) days after receipt of such notice in which to cure or prevent the
breach, to the extent that you are able to do so. You and the Company
acknowledge that any breach or threatened breach by you of
-3-
<PAGE>
any of the provisions in Section 7(a) above cannot be remedied by the recovery
of damages, and agree that in the event of any such breach or threatened breach
which is not cured with such 30-day period, the Company may pursue injunctive
relief for any such breach or threatened breach. If a court of competent
jurisdiction determines that you breached any of such provisions, you shall not
be entitled to any Termination Payments from and after date of the breach. In
such event, you shall promptly repay any Termination Payments previously made
plus interest thereon from the date of such payment(s) at twelve percent (12%)
per annum. If, however, the Company has suspended making such Termination
Payments and a court of competent jurisdiction finally determines that you did
not breach such provision or determines such provision to be unenforceable as
applied to your conduct, you shall be entitled to receive any suspended
Termination Payment, plus interest thereon from the date when due at 12% per
annum. The Company may elect (once) to continue paying the Termination Payments
before a final decision has been made by the court.
7. INTELLECTUAL PROPERTY. Ownership of Work Product. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
8. TRANSFERABILITY.
A) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and
your personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
B) Except as provided under paragraph (a) of this Section 9, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
C) As used in this Agreement, "Change in Control" shall mean: (i) the
shareholders of the Company approve an agreement for the sale of all or
substantially all of the assets of the Company; or (ii) the shareholders of the
Company approve a merger or consolidation of the Company with any other
corporation (and the Company implements it), other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent more than eighty
percent (80%) of the combined voting power of the voting securities of the
Company, or such surviving entity, outstanding immediately after such merger or
consolidation, or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no "person"
(as defined below) acquires more than thirty percent (30%) of the combined
voting power of the Company's then-outstanding securities' or (iii) any
"person," as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") (other than (A) of the
Company, (B) any corporation owned, directly or indirectly, by the Company or
the shareholders of the Company in substantially
-4-
<PAGE>
the same proportions as their ownership of stock of the Company is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities.
9. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the provision so as to be enforceable.
However, if the provisions of Section 7 shall be restricted, a proportional
reduction shall be made in the payments under Section 6b.
10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of
any provision of this Agreement shall be effective unless in writing and signed
by both parties.
11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set for at the head of this agreement or such other address as such
party may designate in writing to the other.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF JAPAN. THIS AGREEMENT SHALL BE
RENDERED IN JAPANESE, IF REQUIRED BY LAW, BUT THE ENGLISH LANGUAGE VERSION
HEREOF SHALL BE DEEMED TO BE THE OFFICIAL VERSION BETWEEN THE PARTIES.
13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
-5-
<PAGE>
KWAN EMPLOYMENT AGREEMENT SIGNATURE PAGE
Please confirm your agreement with the foregoing by signing and returning
one copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet K.K.
By: /s/William L. Schrader
--------------------------------
William L. Schrader, Chairman
Accepted and Agreed to as of September 1, 1998:
-----------
By: /s/Chi H. Kwan
--------------------------------
Chi H. Kwan
-6-
<PAGE>
EXHIBIT 10.9
November 6, 1998
Mr. John Walpuck
4513 Highland Avenue
Bethesda, MD 20814
Dear John:
This letter confirms our offer to you of employment by PSINet Inc. (the
"Company"), and sets forth the terms and conditions which shall govern such
employment as outlined below. This offer is subject to ratification by the
Company's Board of Directors.
1 EMPLOYMENT:
a) The Company employed you as Director, Mergers and Acquisistions, Finance,
since December 1, 1997, and hereby promotes you to Vice President, Mergers and
Acquisitions, reporting to the Senior Vice President, Corporate Business
Development. This is a corporate officer position and as an officer of the
Company you must stand for election by the Board of Directors each year. You
accept the employment and agree to remain in the employ of the Company, and,
except during vacation periods and sickness, to provide during standard business
hours a minimum of forty (40) hours per week of management services to the
Company, as determined by and under the direction of the Senior Vice President,
Corporate Business Development.
b) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
2 COMPENSATION:
a) BASE SALARY. The Company shall pay you a base salary at the rate of $175,000
per annum. Your base salary shall be subject to additional increases at the
discretion of the Company's Board of Directors. Your base salary shall be
payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
b) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured on or about December 31, 1998. The performance criteria will be issued
separately by the Senior Vice President, Corporate business Development and may
be changed with mutual fairness, from time to time as situations develop. Your
1998 bonus for the period ending December 31, 1998 will be 30% of the prorated
portion of your annual salary from the date of your promotion, which was October
12, 1998.
c) INCENTIVE STOCK OPTIONS. PSINet Inc as granted you additional 50,000
options, subject to Board Approval, to purchase shares of PSINet Inc.'s common
stock (the "Options") pursuant to its Executive Stock Incentive Plan (the
"Plan"). Such Options shall be evidenced by an option agreement in such form as
required by the Plan. Among other terms and provisions prescribed by the Plan,
the option agreement shall provide that (a) the exercise price of the Options
shall be the price per share of the Company's common stock as reported by the
NASDAQ Stock Market at the close of business on your start date, (b) the Options
shall not be exercisable after the expiration of ten (10) years from the date
such Options are granted, and (c) the stock shall vest ratably, monthly, over
forty-eight (48) months, provided that for each month's vesting purposes you
continue to be employed full time by the Company or one of its subsidiaries
during such month, and provided that the Company's Board of Directors ratifies,
no less often
<PAGE>
than annually, that you have met the performance standards and criteria set for
you for the preceeding period.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four weeks' paid vacation, and life, health,
accident and disability insurance under the Company's plans, policies and
programs available to employees in accordance with the provisions of such plans,
policies and programs.
3 TERMINATION:
a) The Company may terminate your employment at any time for "Cause" as defined
in section 4(C) hereof. Upon such termination, the Company will provide written
notice whether it has elected to use the non-competition restrictions set forth
in section 5(a) hereof. Your employment may also be terminated by the Company at
any time without Cause provided the Company shall have given you thirty (30)
days' prior written notice of such termination. That written notice must state
whether the Company has elected to use the non-Competition restriction (which
decision may not be rescinded). If you are terminated by the Company without
Cause within the initial one-year term of your employment, you will be paid
ninety (90) days' severance pay. In addition, your employment may be terminated
by you at any time for any reason, provided you shall have given the Company at
least thirty (30) days' prior written notice of such termination. By the
thirtieth day the Company must notify you in writing whether it has elected to
use the non-Competition restriction not being in place.
b) Subject to your compliance with your obligations under Section 5 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (I) your then current rate of base salary as provided
in Section 2; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such 12-month period. The Company shall make up
the difference in cash payments directly to you to the extent that applicable
law would not permit it to make such contributions.
c) The Company shall have "Cause" for termination of your employment by reason
of any breach of your agreement not to compete pursuant to Section 5 hereof,
your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
4. AGREEMENT NOT TO COMPETE.
a) In consideration of your employment pursuant to this Agreement and for other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, you covenant to and agree with the Company that, so long as you
are employed by the Company under this Agreement and for a period of twelve (12)
months following the termination of such employment (but only if the Company has
elected to enforce the restriction), you shall not, without the prior written
consent of the Company, either for yourself or for any other person, firm or
corporation, manage, operate, control, participate in the management, operation
or control of or be employed by any other person or entity which is engaged in
providing Internet-related network or communications services competitive with
the Internet-related network or communications services offered to customers by
the Company as of the date of termination or within six (6) months thereafter.
The foregoing shall in no event restrict you from: (I) writing or teaching,
whether
<PAGE>
on behalf of for-profit, or not for profit institution(s); (ii) investing
(without participating in management or operation) in the securities of any
private or publicly traded corporation or entity; or (iii) after termination of
employment, becoming employed by a hardware, software or other vendor to the
Company, provided that such vendor does not offer network or communication
services that are competitive with the Internet-related network or
communications services offered by the Company as of the date of termination of
employment or within six (6) months thereafter.
b) You may request permission from the Company's Board of Directors to engage
in activities, which would otherwise be prohibited by Section 5(a). The Company
shall respond to such request within thirty (30) days after receipt. The Company
shall notify you in writing if it becomes aware of any breach or threatened
breach of any of the provisions in Section 5(a), and you shall have thirty (30)
days after receipt of such notice in which to cure or prevent the breach, to the
extent that you are able to do so. You and the Company acknowledge that any
breach or threatened breach by you of any of the provisions in Section 5(a)
above cannot by remedied by the recovery of damages, and agree that in the event
of any such breach or threatened breach which is not cured with such 30-day
period, the Company may pursue injunctive relief for any such breach or
threatened breach. If a court of competent jurisdiction determines that you
breached any of such provisions, you shall not be entitled to any Termination
Payments from and after date of the breach. In such event, you shall promptly
repay any Termination Payments previously made plus interest thereon from the
date of such payment(s) at 12% per annum. If, however, the Company has suspended
making such Termination Payments and a court of competent jurisdiction finally
determines that you did not breach such provision or determines such provision
to be unenforceable as applied to your conduct, you shall be entitled to receive
any suspended Termination Payment, plus interest thereon from the date when due
at 12% per annum. The Company may elect (once) to continue paying the
Termination Payments before a final decision has been made by the court.
6) INTELLECTUAL PROPERTY. Ownership of Work Product. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
7. TRANSFERABILITY.
a) As used in this Agreement, the term "Company" shall include any successor to
all or part of the business or assets of the Company who shall assume and agree
to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal and legal representatives, executors, administrators,
heirs,distributees, devisees and legatees.
b) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
8. SEVERABILITY. The invalidity or unenforceability of any particular provision
of this Agreement shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provision were omitted. If a court of competent jurisdiction determines
<PAGE>
that any particular provision of this Agreement is invalid or unenforceable, the
court shall restrict the provision so as to be enforceable. However, if the
provisions of Section 5 shall be restricted, a proportional reduction shall be
made in the payments under Section 4.
10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entir
agreement of the parties concerning the subject matter hereof and supercedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of any
provision of this Agreement shall be effective unless in writing and signed by
both parties.
11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set forth at the head of this agreement or such other address as such
party may designate in writing to the other.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS TO BE PERFORMED WHOLLY WITHIN THAT STATE.
13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning one
copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/ Harold S. Wills
-----------------------------
Harold S. Wills
President and Chief Operating Officer
Accepted and Agreed to as of November 6, 1998:
By: /s/ John Walpuck
-----------------------------
John Walpuck
<PAGE>
EXHIBIT 10.10
November 12, 1998
Mr. Lawrence Winkler
1230 Eton Court
Washington, DC 20007
Dear Larry:
This letter confirms our offer to you of further employment by PSINet Inc. (the
"Company"), and sets forth the terms and conditions which shall govern such
employment as outlined below. This offer is subject to ratification by the
Company's Board of Directors.
1. EMPLOYMENT:
a) The Company employed you as Director, Treasury, Capital Markets and
Investor Relations since December 1, 1997, and hereby promotes you to Vice
President and Treasurer reporting to Senior Vice President Chief Financial
Officer. This is a corporate officer position and as an officer of the Company
you must stand for election by the Board of Directors each year. You accept the
employment and agree to remain in the employ of the Company, and, except during
vacation periods and sickness, to provide during standard business hours a
minimum of forty (40) hours per week of management services to the Company, as
determined by and under the direction of the Senior Vice President and Chief
Financial Officer.
b) During your employment you will, except during vacations, periods of
illness, and other absences beyond your reasonable control, devote your best
efforts, skill and attention to the performance of your duties on behalf of the
Company.
1. COMPENSATION:
a) BASE SALARY. The Company shall pay you a base salary at the rate of
$175,000 per annum. Your base salary shall be subject to additional increases at
the discretion of the Company's Board of Directors. Your base salary shall be
payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
b) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance, which will be
measured on or about December 31, 1998. The performance criteria will be issued
separately by the Senior Vice President an Chief Financial Officer, and may be
changed with mutual fairness, from time to time as situations develop. Your 1998
bonus for the period ending December 31, 1998 will be total of up to $50,000.
Separate criteria will be established for your bonus for the year starting
January 1, 1999. Additional compensation may be paid based upon achievement of
company financing plans..
c) INCENTIVE STOCK OPTIONS. PSINet Inc. has granted you an additional 50,000
options, subject to Board Approval, to purchase shares of PSINet Inc.'s common
stock (the "Options") pursuant to its Executive Stock Incentive Plan (the
"Plan"). Such Options shall be evidenced by an option agreement in such form as
required by the Plan. Among other terms and provisions prescribed by the Plan,
the option agreement shall provide that (a) the exercise price of the Options
shall be the price per share of the Company's common stock as reported by the
NASDAQ Stock Market at the close of business on your start date, (b) the Options
shall not be exercisable after the expiration of ten (10) years from the date
such Options are granted, and (c) the stock shall vest ratably, monthly, over
forty-eight (48) months, provided that for each month's vesting purposes you
continue to be employed full time by the Company or one of its subsidiaries
during such month, and provided that the Company's Board of Directors ratifies,
no less often
<PAGE>
than annually, that you have met the performance standards and criteria set for
you for the preceding period.
3. EMPLOYEE BENEFITS. You shall be provided employee benefits, including
(without limitation) 401(k), four weeks' paid vacation, and life, health,
accident and disability insurance under the Company's plans, policies and
programs available to employees in accordance with the provisions of such plans,
policies and programs.
4. TERMINATION:
a) The Company may terminate your employment at any time for "Cause" as
defined in section 4(c) hereof. Upon such termination, the Company will provide
written notice whether it has elected to use the non-competition restrictions
set forth in section 5(a) hereof. Your employment may also be terminated by the
Company at any time without Cause provided the Company shall have given you
thirty (30) days' prior written notice of such termination. That written notice
must state whether the Company has elected to use the non-Competition
restriction (which decision may not be rescinded). If you are terminated by the
Company without Cause within the initial one-year term of your employment, you
will be paid ninety (90) days' severance pay. If you are terminated by the
Company without cause thereafter, you will be paid one hundred eighty day
severance pay. In addition, your employment may be terminated by you at any time
for any reason, provided you shall have given the Company at least thirty (30)
days' prior written notice of such termination. By the thirtieth day the Company
must notify you in writing whether it has elected to use the non-Competition
restriction not being in place.
b) Subject to your compliance with your obligations under Section 5 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the non-
Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (I) your then current rate of base salary as provided
in Section 2; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such 12-month period. The Company shall make up
the difference in cash payments directly to you to the extent that applicable
law would not permit it to make such contributions.
c) The Company shall have "Cause" for termination of your employment by reason
of any breach of your agreement not to compete pursuant to Section 5 hereof,
your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
5. AGREEMENT NOT TO COMPETE.
a) In consideration of your employment pursuant to this Agreement and for
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, you covenant to and agree with the Company that, so long as
you are employed by the Company under this Agreement and for a period of twelve
(12) months following the termination of such employment (but only if the
Company has elected to enforce the restriction), you shall not, without the
prior written consent of the Company, either for yourself or for any other
person, firm or corporation, manage, operate, control, participate in the
management, operation or control of or be employed by any other person or entity
which is engaged in providing Internet-related network or communications
services competitive with the Internet-related network or communications
services offered to customers by the Company as of the date of termination or
within six (6) months thereafter. The foregoing shall in no event restrict you
from: (I) writing or teaching, whether on behalf of for-profit, or not for
profit institution(s); (ii) investing (without participating in management
<PAGE>
or operation) in the securities of any private or publicly traded corporation or
entity; or (iii) after termination of employment, becoming employed by a
hardware, software or other vendor to the Company, provided that such vendor
does not offer network or communication services that are competitive with the
Internet-related network or communications services offered by the Company as of
the date of termination of employment or within six (6) months thereafter.
b) You may request permission from the Company's Board of Directors to engage
in activities, which would otherwise be prohibited by Section 5(a). The Company
shall respond to such request within thirty (30) days after receipt. The Company
shall notify you in writing if it becomes aware of any breach or threatened
breach of any of the provisions in Section 5(a), and you shall have thirty (30)
days after receipt of such notice in which to cure or prevent the breach, to the
extent that you are able to do so. You and the Company acknowledge that any
breach or threatened breach by you of any of the provisions in Section 5(a)
above cannot by remedied by the recovery of damages, and agree that in the event
of any such breach or threatened breach which is not cured with such 30-day
period, the Company may pursue injunctive relief for any such breach or
threatened breach. If a court of competent jurisdiction determines that you
breached any of such provisions, you shall not be entitled to any Termination
Payments from and after date of the breach. In such event, you shall promptly
repay any Termination Payments previously made plus interest thereon from the
date of such payment(s) at 12% per annum. If, however, the Company has suspended
making such Termination Payments and a court of competent jurisdiction finally
determines that you did not breach such provision or determines such provision
to be unenforceable as applied to your conduct, you shall be entitled to receive
any suspended Termination Payment, plus interest thereon from the date when due
at 12% per annum. The Company may elect (once) to continue paying the
Termination Payments before a final decision has been made by the court.
6. INTELLECTUAL PROPERTY. Ownership of Work Product. All copyrights,
patents, trade secrets, or other intellectual property rights associated with
any ideas, concepts, techniques, inventions, processes, or works of authorship
developed or created by you during the course of performing the Company's work
(collectively the "Work Product") shall belong exclusively to the Company and
shall, to the extent possible, be considered a work made for hire for the
Company within the meaning of Title 17 of the United States Code. You
automatically assign, and shall assign at the time of creation of the Work
Product, without any requirement of further consideration, any right, title, or
interest you may have in such Work Product, including any copyrights or other
intellectual property rights pertaining thereto. Upon request of the Company,
you shall take such further actions, including execution and delivery of
instruments of conveyance, as may be appropriate to give full and proper effect
to such assignment.
7. TRANSFERABILITY.
a) As used in this Agreement, the term "Company" shall include any successor
to all or part of the business or assets of the Company, who shall assume and
agree to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal and legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
b) Except as provided under paragraph (a) of this Section 8, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
8. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted. If a court of competent jurisdiction
determines that any particular provision of this Agreement is invalid or
unenforceable, the court shall restrict the
<PAGE>
provision so as to be enforceable. However, if the provisions of Section 5 shall
be restricted, a proportional reduction shall be made in the payments under
Section 4.
10. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supercedes and
cancels all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written. No waiver or modification of any
provision of this Agreement shall be effective unless in writing and signed by
both parties.
11. NOTICES. Any notices, requests, instruction or other document to be given
hereunder shall be in writing and shall be sent certified mail, return receipt
requested, addressed to the party intended to be notified at the address of such
party as set forth at the head of this agreement or such other address as such
party may designate in writing to the other.
12. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS TO BE PERFORMED WHOLLY WITHIN THAT STATE.
13. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which shall
be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning one
copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/Edward D. Postal
--------------------
Edward D. Postal
Senior Vice President and Chief Financial Officer
Accepted and Agreed to as of November 13, 1998:
By: /s/Lawrence Winkler
--------------------
Lawrence Winkler
<PAGE>
EXHIBIT 10.11
- --------------------------------------------------------------------------------
MASTER LEASE AGREEMENT
- --------------------------------------------------------------------------------
No. 1788
-----
This Master Lease Agreement (the "MLA") is entered into by and between
TECHNOLOGY Credit Corporation ("Lessor"), having its principal place of business
at 1650 Zanker Road, Suite 236, San Jose, California 95112, and PSINet, Inc.
----------------
("Lessee"), having its principal place of business at 510 Huntmar Park Drive,
--------------------------
Herndon, VA 22070
- --------------------------------------------------------------------------------
1. LEASE AGREEMENT. Lessor agrees to lease to Lessee, and Lessee agrees
to lease from Lessor, the equipment (the "Equipment") referenced in each of the
schedules (the "Schedule" or "Schedules") which incorporate the MLA therein (the
"Lease").
2. TERM. Each lease shall be effective upon the execution of the MLA and
the related Schedule by the Lessor and the lessee. The lease term (the "Lease
Term") of the Equipment referenced in each of the Schedules shall commence on
the rent commencement date specified in each Schedule (the "Rent Commencement
Date"). The Rent Commencement Date shall be the date upon which the Equipment is
delivered and determined to be ready for use at the Lessee's location as
referenced in a certificate pursuant to which Lessee unconditionally accepts the
Equipment subject to such Lease (the "Certificate of Installation"). Lessor
shall not be obligated, or bound by, any Lease until Lessee has provided to
Lessor a "Certificate of Installation" and has received the advance Rent
payment(s) required by such Lease.
3. RENT. The rent (the "Rent") for the Equipment referenced in any
Schedule shall be as stated in such Schedule and shall be payable according to
the provisions of such Schedule. If any amount payable under a Schedule is not
received by Lessor within 10 days of the due date, Lessee agrees to pay an
Overdue Charge, as defined herein, with respect to such amount.
4. SELECTION AN ASSIGNMENT. Lessee will select the type, quantity and
Supplier of each item of Equipment designated in a Schedule, and Lessee hereby
assigns to Lessor all of its right, title and interest in and to the related
equipment purchase agreement, a copy of which has been provided to Lessor by
Lessee (the "Agreement"). The Agreement may be amended with the consent of
Lessor. Any such assignment with respect to Equipment shall become binding upon
Lessor when Lessor and Lessee have entered into a Lease with respect to such
Equipment and Lessor has received a related Certificate of Installation. Upon
such an assignment becoming effective, Lessor shall be obligated to purchase the
Equipment from the Supplier in accordance with the provisions of the Agreement.
It is expressly agreed that Lessee shall at all times remain liable to Supplier
under the Agreement to perform all the duties and obligations of Lessee
thereunder, except for the obligation to purchase the Equipment to the extent
expressly assumed by the Lessor hereunder, and that the Lessee shall be entitled
to the same rights of the purchaser of the Equipment under the Agreement, except
such rights of the purchaser of the Equipment under the Agreement except such
right, title and interest in the Equipment retained exclusively by the Lessor as
owner of the Equipment. Lessor shall have no liability for a Supplier's failure
to meet the terms and conditions of the Agreement.
5. DELIVERY AND INSTALLATION. Lessee shall be responsible for payment of
all transportation, packing, installation, testing and other charges associated
with the delivery, installation or use of any Equipment which are not included
in the Agreement with respect to such Equipment.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT, ITS MERCHANTABILITY OR
ITS FITNESS FOR A PARTICULAR PURPOSE. LESSOR SHALL NOT BE LIABLE TO LESSEE OR
ANY OTHER PERSON FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES ARISING FORM LESSEE'S USE OF THE EQUIPMENT, OR FOR DAMAGES BASED ON
STRICT OR ABSOLUTE TORT LIABILITY OR LESSOR'S PASSIVE NEGLIGENCE. LESSEE HEREBY
ACKNOWLEDGES THAT ANY MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO
THE EQUIPMENT ARE FOR THE BENEFIT OF BOTH LESSOR AND LESSEE. NOTWITHSTANDING THE
FOREGOING, LESSEE'S OBLIGATIONS TO PAY EACH RENT PAYMENT DUE, OR OTHERWISE
PERFORM ITS OBLIGATIONS, UNDER THIS LEASE ARE ABSOLUTE AND UNCONDITIONAL.
7. TITLE TO AND LOCATION OF EQUIPMENT. Lessor shall retain title to each
item of Equipment. Lessee, at its expense, shall protect Lessor's title and keep
the Equipment free from all claims, liens, encumbrances and legal processes. The
Equipment is personal property and is not to be regarded as part of the real
estate on which it may be situated. If requested by Lessor, Lessee will, at
Lessee's expense, furnish a landlord or mortgagee waiver with respect to the
Equipment. The Equipment shall not be removed from the location specified in the
Schedule without the written consent of Lessor. Lessee shall, upon Lessor's
request, affix and maintain plates, tags or other identifying labels, showing
Lessor's ownership of the Equipment in a prominent position on the Equipment.
8. USE OF EQUIPMENT, INSPECTION AND REPORTS. The use of the Equipment by
Lessee shall conform with all applicable laws, insurance policies, and
warranties of the manufacturer or Supplier of the Equipment. Lessor shall have
the right to inspect the Equipment at the premises where the Equipment is
located. Lessee shall notify the Lessor promptly of any claims, items,
encumbrances or legal processes with respect to the Equipment.
9. FURTHER ASSURANCES. Lessee shall execute and deliver to Lessor such
instruments as Lessor deems necessary for the confirmation of this Lease and
Lessor's rights hereunder. Lessor is authorized to file financing statements
signed only by the Lessor in accordance with the Uniform Commercial Code, or
financing statements signed by Lessor as Lessee's attorney-in-fact. Any such
filing with respect to the Equipment leased pursuant to a true lease shall not
be deemed evidence of any intent to create a security interest under the Uniform
Commercial Code.
10. MAINTENANCE AND REPAIRS. Lessee shall, at its expense, maintain each
item of Equipment in good condition, normal wear and tear excepted. Lessee shall
not make any addition, alteration, or attachment to the Equipment without
Lessor's prior written consent. Lessee shall make no repair, addition,
alteration or attachment to the Equipment which interferes with the normal
operation or maintenance thereof, creates a safety hazard, or might result in
the creation of a mechanic's or materialman's lien.
11. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to
perform any of its obligations under a Lease, Lessor may perform any act or make
any payment which Lessor deems necessary for the maintenance and preservation of
the Equipment subject thereto and Lessor's title thereto. All sums so paid by
Lessor (together with all related Overdue Charges), and reasonable attorneys'
fees incurred by Lessor in connection therewith, shall be additional rent
payable to Lessor on demand. The performance of any such act or the making of
any such payment by Lessor shall not be deemed a waiver or release of any
obligation or default on the part of Lessee.
12. INDEMNIFICATION. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, and its agents, employees,
officers, directors, partners and successors and assigns, from and against, all
liabilities, obligations, losses, damages, injuries, claims, demands, penalties,
actions, costs and expenses, including, without limitation, reasonable
attorneys' fees, of whatever kind and nature, in contract or in tort, arising
out of the use, condition, operation, ownership, selection, delivery, leasing or
return of any item of Equipment, regardless of when, how and by whom operated,
or any failure on the part of Lessee to perform or comply with any of its
obligations under a Lease, excluding, however, any of the foregoing which result
from the gross negligence or willful misconduct of Lessor. Such indemnities and
assumptions of liabilities and obligations shall continue in full force and
effect, notwithstanding the expiration or other termination of such Lease.
Nothing contained in any Lease shall authorize Lessee to operate the Equipment
subject thereto so as to incur or impose any liability on, or obligation for or
on behalf of, Lessor.
13. NO OFF-SET. All Rent shall be paid by Lessee irrespective of any
off-set, counterclaim, recoupment, defense or other right which Lessee may have
against Lessor, the manufacturer or Supplier of the Equipment or any other
party.
14. ASSIGNMENT BY LESSEE. Lessee shall not, without Lessor's prior
written consent, (a) sell, assign, transfer, pledge, hypothecate, or otherwise
dispose of, encumber or suffer to exist a lien upon or against, any of the
Equipment or any Lease or any interest therein, by operation of law or
otherwise, or (b) sublease or lend any of the Equipment or permit any of the
Equipment to be used by anyone other than Lessee.
15. ASSIGNMENT BY LESSOR. Lessor may assign, sell or encumber its
interest in any of the Equipment and any Lease. Upon Lessor's written request,
Lessee shall pay directly to the assignee of any such interest all Rent and
other sums due under an assigned Lease. THE RIGHTS OF ANY SUCH ASSIGNEE SHALL
NOT BE SUBJECT TO ANY ABATEMENT, DEDUCTION, OFF-SET, COUNTERCLAIM, RECOUPMENT,
DEFENSE OR OTHER RIGHT WHICH LESSEE MAY HAVE AGAINST LESSOR OR ANY OTHER
PERSON OR ENTITY. Notwithstanding the foregoing, any such assignment (a) shall
be subject to Lessee's right to possess and use the Equipment subject to a Lease
so long as Lessee is not in default thereunder, and (b) shall not release any of
Lessor's obligations hereunder.
16. RETURN OF EQUIPMENT. Unless Lessee has exercised its option, if any,
to renew a lease or purchase the Equipment subject thereto, upon expiration of
the then current Lease Term of such Lease, Lessee shall, at its expense, cause
such Equipment to be removed, disassembled, and placed in the same condition as
when delivered to Lessee (reasonable wear and tear excepted) and properly crate
such Equipment for shipment and deliver it to a common carrier designated by
Lessor. Lessee will ship such Equipment, F.O.B. destination, to any address
specified in writing by Lessor within the continental United States. All
additions, attachments, alterations and repairs made or placed upon any of the
Equipment shall become part of such Equipment and shall be the property of
Lessor.
<PAGE>
17. EVENTS OF DEFAULT. The occurrence of any of the following shall be
deemed to constitute an Event of Default hereunder: (a) Lessee fails to pay
Rent, any other amount it is obligated to pay under a Lease or any other amount
it is obligated to pay to Lessor and does not cure such failure within 10 days
of such amount becoming due; (b) Lessee fails to perform or observe any
obligation or covenant to be performed or observed by Lessee hereunder or under
any Schedule, including, without limitation, supplying all requested
documentation, and does not cure such failure within 10 days of receiving
written notice thereof from Lessor; (c) any warranty, representation or
statement made or furnished to Lessor by or on behalf of Lessee is proven to
have been false in any material respect when made or furnished; (d) the
attempted sale or encumbrance by Lessee of the Equipment, or the making of any
levy, seizure or attachment thereof or thereon; or (e) the dissolution,
termination of existence, discontinuance of business, insolvency, or appointment
of a receiver of any part of the property of Lessee, assignment by Lessee for
the benefit of its creditors, the commencement of proceedings under any
bankruptcy, reorganization or arrangement laws by or against Lessee, or any
other act of bankruptcy on the part of Lessee.
18. REMEDIES OF LESSOR. At any time after occurrence of any Event of
Default, Lessor may exercise one or more of the following remedies: (a) Lessor
may terminate any or all of the Leases with respect to any or all items of
Equipment subject thereto: (b) Lessor may recover from Lessee all Rent and other
amounts then due and to become due under any or all of the Leases; (c) Lessor
may take possession of any or all items of Equipment, wherever the same may be
located, without demand or notice, without any court order or other-process of
law and without liability to Lessee for any damages occasioned by such taking of
possession, and any such taking of possession shall not constitute a termination
of any Lease; (d) Lessor may demand that Lessee return any or all items of
Equipment to Lessor in accordance with Paragraph 16; and (e) Lessor may pursue
any other remedy available at law or in equity, including, without limitation,
seeking damages, specific performance or an injunction.
Upon repossession or return of any item of the Equipment, Lessor shall
sell, lease or otherwise dispose of such item in a commercially reasonable
manner, with or without notice and on public or private bid, and apply the net
proceeds thereof (after deducting the estimated fair market value of such item
at the expiration of the term of the applicable Lease, in the case of sale, or
the rents due for any period beyond the scheduled expiration of such Lease, in
the case of any subsequent lease of such item, and all expenses, including
without limitation, reasonable attorneys' fees, incurred in connection
therewith) towards the Rent and other amounts due under such Lease, with any
excess net proceeds to be retained by Lessor.
Each of the remedies under this Lease shall be cumulative, and not
exclusive, and in addition to any other remedy referred to herein or otherwise
available to Lessor in law or in equity. Any repossession or subsequent sale or
lease by Lessor of any item of Equipment shall not bar an action for a
deficiency as herein provided, and the bringing of an action or the entry of
judgement against Lessee shall not bar Lessor's right to repossess any or all
items of Equipment.
19. CREDIT AND FINANCIAL INFORMATION. Within 90 days of the close of
each of Lessee's fiscal years, Lessee shall deliver to Lessor a copy of Lessee's
annual report, if any, and an audited balance sheet and profit and loss
statement with respect to such year. If audited financial statements of Lessee
for such year are not prepared, Lessee may provide financial statements
certified by an officer of Lessee. At Lessor's request, Lessee shall deliver to
Lessor a balance sheet and profit and loss statement for any of its fiscal
quarters, certified by an officer of Lessee.
20. INSURANCE. Lessee shall obtain and maintain for the entire Lease
Term of each Lease (and any renewal or extension thereof), at its own expense,
property damage and personal liability insurance and insurance against loss or
damage to the Equipment, including, without limitation, loss by fire (with
extended coverage), theft and such other risks of loss as are customarily
insured against with respect to the types of Equipment leased hereunder and by
the types of businesses in which such Equipment will be used by Lessee. Such
insurance shall be in such amounts, with such deductibles, in such form and with
such insurers as shall be satisfactory to Lessor; provided, however, that the
amount of the insurance against loss or damage to the Equipment shall not be
less than the greater of the replacement value of the Equipment, from time to
time, or the original purchase price of the Equipment. Each insurance policy
shall name Lessee as an insured and Lessor as an additional insured or loss
payee, and shall contain a clause requiring the insurer to give Lessor at least
30 days prior written notice of any alteration in the terms of such policy or of
the cancellation thereof. Lessee shall furnish to Lessor a certificate of
insurance or other evidence satisfactory to Lessor that such insurance coverage
is in effect; provided, however, that Lessor shall be under no duty either to
ascertain the existence of or to examine such insurance policy or to advise
Lessee in the event such insurance coverage shall not comply with the
requirements hereof. Lessee shall give Lessor prompt notice of any damage to, or
loss of, any of the Equipment, or any part thereof, or any personal injury or
property damage occasioned by the use of any of the Equipment.
21. TAXES. Lessee hereby assumes liability for, and shall pay when due,
and, on a net after-tax basis, shall indemnify, protect and hold harmless Lessor
against all fees, taxes and governmental charges (including, without limitation,
interest and penalties) of any nature imposed on or in any way relating to
Lessor, Lessee, any item of Equipment or any Lease, except state and local taxes
on or measured by Lessor's net income (other than any such tax which is in
substitution for or relieves Lessee from the payment of taxes it would otherwise
be obligated to pay or reimburse to Lessor as herein provided) and federal taxes
on Lessor's net income. Lessee shall, at its expense, file when due with the
appropriate authorities any and all tax and similar returns, and reports
required to be filed with respect thereto, for which it has indemnified Lessor
hereunder or, if requested by Lessor, notify Lessor of all such requirements and
furnish Lessor with all information required for Lessor to effect such filings.
Any fees, taxes or other charges paid by Lessor upon failure of Lessee to make
such payments shall, at Lessor's option, become immediately due from Lessee and
shall be subject to the Overdue Charge from the date paid by Lessor until the
date reimbursed by Lessee.
22. SEVERABILITY. If any provision of any Lease is held to be invalid by
a court of competent jurisdiction, such invalidity shall not affect the other
provisions of such Lease or any provision of any other Lease.
23. NOTICES. All notices hereunder shall be in writing and shall be
deemed given when sent by certified mail, postage prepaid, return receipt
requested, addressed to the party to which it is being sent at its address set
forth herein or to such other address as such party may designate in writing to
the other party.
24. AMENDMENTS, WAIVERS AND EXTENSIONS. This MLA and each Schedule
constitute the entire agreement between Lessor and Lessee with respect to the
lease of the Equipment subject to such Schedule, and supersede all previous
communications, understandings, and agreements, whether oral or written, between
the parties with respect to such subject matter. No provision of any Lease may
be changed, waived, amended or terminated except by a written agreement,
specifying such change, waiver, amendment or termination, signed by both Lessee
and Lessor, except that Lessor may insert, on the appropriate schedule, the
serial number of Equipment, after delivery of such Equipment, and the
Installation Date for the Equipment, after receiving a Certificate of
Installation with respect thereto. No waiver by Lessor of any Event of Default
shall be construed as a waiver of any future Event of Default or any other Event
of Default. At the expiration of the Lease Term with respect to a Lease, upon
notice given by Lessee at lest ninety (90) days prior thereto, (a) such Lease
shall be renewed or the Equipment subject thereto shall be purchased under the
terms and conditions set forth herein for a term and rent amount or purchase
price, as the case may be, to be agreed upon, or (b) if no such agreement is
reached prior to the expiration of such Lease Term or such notice specifies that
Lessee intends to return the Equipment, then Lessee shall return the Equipment
to Lessor in the manner prescribed in Paragraph 16 of this MLA. In the absence
of Lessor's timely receipt of the notice contemplated by the preceding sentence,
the Lease shall be automatically extended, on a month-to-month basis, until
terminated (upon notice by either party given at least ninety (90) days prior to
the end of the month on which the termination is to be effective) or until
renewed or the Equipment subject thereto is purchased by agreement of the
parties. Unless otherwise agreed, Lessee shall continue to pay the Rent for each
month following such Lease Term until the Equipment subject to such Lease is
returned pursuant to Paragraph 16 of this MLA.
25. CONSTRUCTION. This MLA shall be governed by and construed in
accordance with the internal laws, but not the choice of laws provisions, of the
State of California. The titles of the sections of this MLA are convenience only
and shall not define or limit any of the terms or provisions hereof. Time is of
the essence in each of the provisions hereof.
26. PARTIES. This MLA shall be binding upon, and inure to the benefit
of, the permitted assigns, representatives and successors of the Lessor and
Lessee. If there is more than one Lessee named in this MLA, the liability of
each shall be joint and several.
27. COUNTERPARTS. Each Lease may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
28. OVERDUE CHARGE. Overdue Charge shall mean an amount equal to 2% per
month of any payment under a Lease which is past due, including, without
limitation, any amounts not included in any payment of Rent hereunder, or the
highest charge permitted by law, whichever is lower.
The person executing this MLA on behalf of Lessee hereby certifies that he or
she has read, and is duly authorized to execute, this MLA.
Accepted By:
TECHNOLOGY Credit Corporation LESSEE: PSINet, Inc.
<PAGE>
EXHIBIT 10.12
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MASTER LEASE AGREEMENT
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No. 1789
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This Master Lease Agreement (the "MLA") is entered into by and between
TECHNOLOGY Credit Corporation ("Lessor"), having its principal place of business
at 1650 Zanker Road, Suite 236, San Jose, California 95112, and PSINet, Inc.
----------------
("Lessee"), having its principal place of business at 510 Huntmar Park Drive,
--------------------------
Herndon, VA 22070
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1. LEASE AGREEMENT. Lessor agrees to lease to Lessee, and Lessee agrees
to lease from Lessor, the equipment (the "Equipment") referenced in each of the
schedules (the "Schedule" or "Schedules") which incorporate the MLA therein (the
"Lease").
2. TERM. Each lease shall be effective upon the execution of the MLA and
the related Schedule by the Lessor and the lessee. The lease term (the "Lease
Term") of the Equipment referenced in each of the Schedules shall commence on
the rent commencement date specified in each Schedule (the "Rent Commencement
Date"). The Rent Commencement Date shall be the date upon which the Equipment is
delivered and determined to be ready for use at the Lessee's location as
referenced in a certificate pursuant to which Lessee unconditionally accepts the
Equipment subject to such Lease (the "Certificate of Installation"). Lessor
shall not be obligated, or bound by, any Lease until Lessee has provided to
Lessor a "Certificate of Installation" and has received the advance Rent
payment(s) required by such Lease.
3. RENT. The rent (the "Rent") for the Equipment referenced in any
Schedule shall be as stated in such Schedule and shall be payable according to
the provisions of such Schedule. If any amount payable under a Schedule is not
received by Lessor within 10 days of the due date, Lessee agrees to pay an
Overdue Charge, as defined herein, with respect to such amount.
4. SELECTION AN ASSIGNMENT. Lessee will select the type, quantity and
Supplier of each item of Equipment designated in a Schedule, and Lessee hereby
assigns to Lessor all of its right, title and interest in and to the related
equipment purchase agreement, a copy of which has been provided to Lessor by
Lessee (the "Agreement"). The Agreement may be amended with the consent of
Lessor. Any such assignment with respect to Equipment shall become binding upon
Lessor when Lessor and Lessee have entered into a Lease with respect to such
Equipment and Lessor has received a related Certificate of Installation. Upon
such an assignment becoming effective, Lessor shall be obligated to purchase the
Equipment from the Supplier in accordance with the provisions of the Agreement.
It is expressly agreed that Lessee shall at all times remain liable to Supplier
under the Agreement to perform all the duties and obligations of Lessee
thereunder, except for the obligation to purchase the Equipment to the extent
expressly assumed by the Lessor hereunder, and that the Lessee shall be entitled
to the same rights of the purchaser of the Equipment under the Agreement, except
such rights of the purchaser of the Equipment under the Agreement except such
right, title and interest in the Equipment retained exclusively by the Lessor as
owner of the Equipment. Lessor shall have no liability for a Supplier's failure
to meet the terms and conditions of the Agreement.
5. DELIVERY AND INSTALLATION. Lessee shall be responsible for payment of
all transportation, packing, installation, testing and other charges associated
with the delivery, installation or use of any Equipment which are not included
in the Agreement with respect to such Equipment.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT, ITS MERCHANTABILITY OR
ITS FITNESS FOR A PARTICULAR PURPOSE. LESSOR SHALL NOT BE LIABLE TO LESSEE OR
ANY OTHER PERSON FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES ARISING FORM LESSEE'S USE OF THE EQUIPMENT, OR FOR DAMAGES BASED ON
STRICT OR ABSOLUTE TORT LIABILITY OR LESSOR'S PASSIVE NEGLIGENCE. LESSEE HEREBY
ACKNOWLEDGES THAT ANY MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO
THE EQUIPMENT ARE FOR THE BENEFIT OF BOTH LESSOR AND LESSEE. NOTWITHSTANDING THE
FOREGOING, LESSEE'S OBLIGATIONS TO PAY EACH RENT PAYMENT DUE, OR OTHERWISE
PERFORM ITS OBLIGATIONS, UNDER THIS LEASE ARE ABSOLUTE AND UNCONDITIONAL.
7. TITLE TO AND LOCATION OF EQUIPMENT. Lessor shall retain title to each
item of Equipment. Lessee, at its expense, shall protect Lessor's title and keep
the Equipment free from all claims, liens, encumbrances and legal processes. The
Equipment is personal property and is not to be regarded as part of the real
estate on which it may be situated. If requested by Lessor, Lessee will, at
Lessee's expense, furnish a landlord or mortgagee waiver with respect to the
Equipment. The Equipment shall not be removed from the location specified in the
Schedule without the written consent of Lessor. Lessee shall, upon Lessor's
request, affix and maintain plates, tags or other identifying labels, showing
Lessor's ownership of the Equipment in a prominent position on the Equipment.
8. USE OF EQUIPMENT, INSPECTION AND REPORTS. The use of the Equipment by
Lessee shall conform with all applicable laws, insurance policies, and
warranties of the manufacturer or Supplier of the Equipment. Lessor shall have
the right to inspect the Equipment at the premises where the Equipment is
located. Lessee shall notify the Lessor promptly of any claims, items,
encumbrances or legal processes with respect to the Equipment.
9. FURTHER ASSURANCES. Lessee shall execute and deliver to Lessor such
instruments as Lessor deems necessary for the confirmation of this Lease and
Lessor's rights hereunder. Lessor is authorized to file financing statements
signed only by the Lessor in accordance with the Uniform Commercial Code, or
financing statements signed by Lessor as Lessee's attorney-in-fact. Any such
filing with respect to the Equipment leased pursuant to a true lease shall not
be deemed evidence of any intent to create a security interest under the Uniform
Commercial Code.
10. MAINTENANCE AND REPAIRS. Lessee shall, at its expense, maintain each
item of Equipment in good condition, normal wear and tear excepted. Lessee shall
not make any addition, alteration, or attachment to the Equipment without
Lessor's prior written consent. Lessee shall make no repair, addition,
alteration or attachment to the Equipment which interferes with the normal
operation or maintenance thereof, creates a safety hazard, or might result in
the creation of a mechanic's or materialman's lien.
11. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to
perform any of its obligations under a Lease, Lessor may perform any act or make
any payment which Lessor deems necessary for the maintenance and preservation of
the Equipment subject thereto and Lessor's title thereto. All sums so paid by
Lessor (together with all related Overdue Charges), and reasonable attorneys'
fees incurred by Lessor in connection therewith, shall be additional rent
payable to Lessor on demand. The performance of any such act or the making of
any such payment by Lessor shall not be deemed a waiver or release of any
obligation or default on the part of Lessee.
12. INDEMNIFICATION. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, and its agents, employees,
officers, directors, partners and successors and assigns, from and against, all
liabilities, obligations, losses, damages, injuries, claims, demands, penalties,
actions, costs and expenses, including, without limitation, reasonable
attorneys' fees, of whatever kind and nature, in contract or in tort, arising
out of the use, condition, operation, ownership, selection, delivery, leasing or
return of any item of Equipment, regardless of when, how and by whom operated,
or any failure on the part of Lessee to perform or comply with any of its
obligations under a Lease, excluding, however, any of the foregoing which result
from the gross negligence or willful misconduct of Lessor. Such indemnities and
assumptions of liabilities and obligations shall continue in full force and
effect, notwithstanding the expiration or other termination of such Lease.
Nothing contained in any Lease shall authorize Lessee to operate the Equipment
subject thereto so as to incur or impose any liability on, or obligation for or
on behalf of, Lessor.
13. NO OFF-SET. All Rent shall be paid by Lessee irrespective of any
off-set, counterclaim, recoupment, defense or other right which Lessee may have
against Lessor, the manufacturer or Supplier of the Equipment or any other
party.
14. ASSIGNMENT BY LESSEE. Lessee shall not, without Lessor's prior
written consent, (a) sell, assign, transfer, pledge, hypothecate, or otherwise
dispose of, encumber or suffer to exist a lien upon or against, any of the
Equipment or any Lease or any interest therein, by operation of law or
otherwise, or (b) sublease or lend any of the Equipment or permit any of the
Equipment to be used by anyone other than Lessee.
15. ASSIGNMENT BY LESSOR. Lessor may assign, sell or encumber its
interest in any of the Equipment and any Lease. Upon Lessor's written request,
Lessee shall pay directly to the assignee of any such interest all Rent and
other sums due under an assigned Lease. THE RIGHTS OF ANY SUCH ASSIGNEE SHALL
NOT BE SUBJECT TO ANY ABATEMENT, DEDUCTION, OFF-SET, COUNTERCLAIM, RECOUPMENT,
DEFENSE OR OTHER RIGHT WHICH LESSEE MAY HAVE AGAINST LESSOR OR ANY OTHER
PERSON OR ENTITY. Notwithstanding the foregoing, any such assignment (a) shall
be subject to Lessee's right to possess and use the Equipment subject to a Lease
so long as Lessee is not in default thereunder, and (b) shall not release any of
Lessor's obligations hereunder.
16. RETURN OF EQUIPMENT. Unless Lessee has exercised its option, if any,
to renew a lease or purchase the Equipment subject thereto, upon expiration of
the then current Lease Term of such Lease, Lessee shall, at its expense, cause
such Equipment to be removed, disassembled, and placed in the same condition as
when delivered to Lessee (reasonable wear and tear excepted) and properly crate
such Equipment for shipment and deliver it to a common carrier designated by
Lessor. Lessee will ship such Equipment, F.O.B. destination, to any address
specified in writing by Lessor within the continental United States. All
additions, attachments, alterations and repairs made or placed upon any of the
Equipment shall become part of such Equipment and shall be the property of
Lessor.
<PAGE>
17. EVENTS OF DEFAULT. The occurrence of any of the following shall be
deemed to constitute an Event of Default hereunder: (a) Lessee fails to pay
Rent, any other amount it is obligated to pay under a Lease or any other amount
it is obligated to pay to Lessor and does not cure such failure within 10 days
of such amount becoming due; (b) Lessee fails to perform or observe any
obligation or covenant to be performed or observed by Lessee hereunder or under
any Schedule, including, without limitation, supplying all requested
documentation, and does not cure such failure within 10 days of receiving
written notice thereof from Lessor; (c) any warranty, representation or
statement made or furnished to Lessor by or on behalf of Lessee is proven to
have been false in any material respect when made or furnished; (d) the
attempted sale or encumbrance by Lessee of the Equipment, or the making of any
levy, seizure or attachment thereof or thereon; or (e) the dissolution,
termination of existence, discontinuance of business, insolvency, or appointment
of a receiver of any part of the property of Lessee, assignment by Lessee for
the benefit of its creditors, the commencement of proceedings under any
bankruptcy, reorganization or arrangement laws by or against Lessee, or any
other act of bankruptcy on the part of Lessee.
18. REMEDIES OF LESSOR. At any time after occurrence of any Event of
Default, Lessor may exercise one or more of the following remedies: (a) Lessor
may terminate any or all of the Leases with respect to any or all items of
Equipment subject thereto: (b) Lessor may recover from Lessee all Rent and other
amounts then due and to become due under any or all of the Leases; (c) Lessor
may take possession of any or all items of Equipment, wherever the same may be
located, without demand or notice, without any court order or other-process of
law and without liability to Lessee for any damages occasioned by such taking of
possession, and any such taking of possession shall not constitute a termination
of any Lease; (d) Lessor may demand that Lessee return any or all items of
Equipment to Lessor in accordance with Paragraph 16; and (e) Lessor may pursue
any other remedy available at law or in equity, including, without limitation,
seeking damages, specific performance or an injunction.
Upon repossession or return of any item of the Equipment, Lessor shall
sell, lease or otherwise dispose of such item in a commercially reasonable
manner, with or without notice and on public or private bid, and apply the net
proceeds thereof (after deducting the estimated fair market value of such item
at the expiration of the term of the applicable Lease, in the case of sale, or
the rents due for any period beyond the scheduled expiration of such Lease, in
the case of any subsequent lease of such item, and all expenses, including
without limitation, reasonable attorneys' fees, incurred in connection
therewith) towards the Rent and other amounts due under such Lease, with any
excess net proceeds to be retained by Lessor.
Each of the remedies under this Lease shall be cumulative, and not
exclusive, and in addition to any other remedy referred to herein or otherwise
available to Lessor in law or in equity. Any repossession or subsequent sale or
lease by Lessor of any item of Equipment shall not bar an action for a
deficiency as herein provided, and the bringing of an action or the entry of
judgement against Lessee shall not bar Lessor's right to repossess any or all
items of Equipment.
19. CREDIT AND FINANCIAL INFORMATION. Within 90 days of the close of
each of Lessee's fiscal years, Lessee shall deliver to Lessor a copy of Lessee's
annual report, if any, and an audited balance sheet and profit and loss
statement with respect to such year. If audited financial statements of Lessee
for such year are not prepared, Lessee may provide financial statements
certified by an officer of Lessee. At Lessor's request, Lessee shall deliver to
Lessor a balance sheet and profit and loss statement for any of its fiscal
quarters, certified by an officer of Lessee.
20. INSURANCE. Lessee shall obtain and maintain for the entire Lease
Term of each Lease (and any renewal or extension thereof), at its own expense,
property damage and personal liability insurance and insurance against loss or
damage to the Equipment, including, without limitation, loss by fire (with
extended coverage), theft and such other risks of loss as are customarily
insured against with respect to the types of Equipment leased hereunder and by
the types of businesses in which such Equipment will be used by Lessee. Such
insurance shall be in such amounts, with such deductibles, in such form and with
such insurers as shall be satisfactory to Lessor; provided, however, that the
amount of the insurance against loss or damage to the Equipment shall not be
less than the greater of the replacement value of the Equipment, from time to
time, or the original purchase price of the Equipment. Each insurance policy
shall name Lessee as an insured and Lessor as an additional insured or loss
payee, and shall contain a clause requiring the insurer to give Lessor at least
30 days prior written notice of any alteration in the terms of such policy or of
the cancellation thereof. Lessee shall furnish to Lessor a certificate of
insurance or other evidence satisfactory to Lessor that such insurance coverage
is in effect; provided, however, that Lessor shall be under no duty either to
ascertain the existence of or to examine such insurance policy or to advise
Lessee in the event such insurance coverage shall not comply with the
requirements hereof. Lessee shall give Lessor prompt notice of any damage to, or
loss of, any of the Equipment, or any part thereof, or any personal injury or
property damage occasioned by the use of any of the Equipment.
21. TAXES. Lessee hereby assumes liability for, and shall pay when due,
and, on a net after-tax basis, shall indemnify, protect and hold harmless Lessor
against all fees, taxes and governmental charges (including, without limitation,
interest and penalties) of any nature imposed on or in any way relating to
Lessor, Lessee, any item of Equipment or any Lease, except state and local taxes
on or measured by Lessor's net income (other than any such tax which is in
substitution for or relieves Lessee from the payment of taxes it would otherwise
be obligated to pay or reimburse to Lessor as herein provided) and federal taxes
on Lessor's net income. Lessee shall, at its expense, file when due with the
appropriate authorities any and all tax and similar returns, and reports
required to be filed with respect thereto, for which it has indemnified Lessor
hereunder or, if requested by Lessor, notify Lessor of all such requirements and
furnish Lessor with all information required for Lessor to effect such filings.
Any fees, taxes or other charges paid by Lessor upon failure of Lessee to make
such payments shall, at Lessor's option, become immediately due from Lessee and
shall be subject to the Overdue Charge from the date paid by Lessor until the
date reimbursed by Lessee.
22. SEVERABILITY. If any provision of any Lease is held to be invalid by
a court of competent jurisdiction, such invalidity shall not affect the other
provisions of such Lease or any provision of any other Lease.
23. NOTICES. All notices hereunder shall be in writing and shall be
deemed given when sent by certified mail, postage prepaid, return receipt
requested, addressed to the party to which it is being sent at its address set
forth herein or to such other address as such party may designate in writing to
the other party.
24. AMENDMENTS, WAIVERS AND EXTENSIONS. This MLA and each Schedule
constitute the entire agreement between Lessor and Lessee with respect to the
lease of the Equipment subject to such Schedule, and supersede all previous
communications, understandings, and agreements, whether oral or written, between
the parties with respect to such subject matter. No provision of any Lease may
be changed, waived, amended or terminated except by a written agreement,
specifying such change, waiver, amendment or termination, signed by both Lessee
and Lessor, except that Lessor may insert, on the appropriate schedule, the
serial number of Equipment, after delivery of such Equipment, and the
Installation Date for the Equipment, after receiving a Certificate of
Installation with respect thereto. No waiver by Lessor of any Event of Default
shall be construed as a waiver of any future Event of Default or any other Event
of Default. At the expiration of the Lease Term with respect to a Lease, upon
notice given by Lessee at lest ninety (90) days prior thereto, (a) such Lease
shall be renewed or the Equipment subject thereto shall be purchased under the
terms and conditions set forth herein for a term and rent amount or purchase
price, as the case may be, to be agreed upon, or (b) if no such agreement is
reached prior to the expiration of such Lease Term or such notice specifies that
Lessee intends to return the Equipment, then Lessee shall return the Equipment
to Lessor in the manner prescribed in Paragraph 16 of this MLA. In the absence
of Lessor's timely receipt of the notice contemplated by the preceding sentence,
the Lease shall be automatically extended, on a month-to-month basis, until
terminated (upon notice by either party given at least ninety (90) days prior to
the end of the month on which the termination is to be effective) or until
renewed or the Equipment subject thereto is purchased by agreement of the
parties. Unless otherwise agreed, Lessee shall continue to pay the Rent for each
month following such Lease Term until the Equipment subject to such Lease is
returned pursuant to Paragraph 16 of this MLA.
25. CONSTRUCTION. This MLA shall be governed by and construed in
accordance with the internal laws, but not the choice of laws provisions, of the
State of California. The titles of the sections of this MLA are convenience only
and shall not define or limit any of the terms or provisions hereof. Time is of
the essence in each of the provisions hereof.
26. PARTIES. This MLA shall be binding upon, and inure to the benefit
of, the permitted assigns, representatives and successors of the Lessor and
Lessee. If there is more than one Lessee named in this MLA, the liability of
each shall be joint and several.
27. COUNTERPARTS. Each Lease may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
28. OVERDUE CHARGE. Overdue Charge shall mean an amount equal to 2% per
month of any payment under a Lease which is past due, including, without
limitation, any amounts not included in any payment of Rent hereunder, or the
highest charge permitted by law, whichever is lower.
The person executing this MLA on behalf of Lessee hereby certifies that he or
she has read, and is duly authorized to execute, this MLA.
Accepted By:
TECHNOLOGY Credit Corporation LESSEE: PSINet, Inc.
<PAGE>
EXHIBIT 10.13
MASTER LOAN AND SECURITY AGREEMENT NO. 3963
DEBTOR: PSINet Inc. SECURED PARTY: Charter Financial, Inc.
510 Huntmar Park Drive 153 East 53/rd/ Street
Herndon, VA 20170 New York, NY 10022
In consideration of the mutual covenants set forth herein, the above named
Debtor and the above named Secured Party hereby enter into this Master Loan and
Security Agreement and agree to the terms and conditions set forth herein. Each
Loan Schedule which may be executed by Debtor and Secured Party from time to
time pursuant to this Master Loan and Security Agreement shall be deemed to be a
separate loan transaction incorporating all of the terms and conditions of this
Master Loan and Security Agreement. References in this Master Loan and Security
Agreement to "Agreement", "hereunder" and "herein" shall mean a Loan Schedule
which incorporates this Master Loan and Security Agreement.
1. LOAN SCHEDULES. Debtor shall evidence its agreement to enter into each
Agreement incorporating the terms hereof by executing and delivering to Secured
Party a Loan Schedule in the form annexed hereto as Exhibit 1. Debtor's
execution of a Loan Schedule shall obligate Debtor to make all of the payments
set forth in the Schedule of Obligations as set forth in the Loan Schedule.
The Loan Schedule shall set forth the amount of the Loan, the Term of the Loan,
the number of payments to be made and the amount and dates upon which such
payments are due. The Loan Schedule shall also set forth the Time Balance which
means the aggregate amount of all payments which are payable under the Agreement
evidenced by such Loan Schedule. Secured Party shall have no obligation to
enter into or accept any Loan Schedule and no Loan Schedule shall be binding
upon Secured Party until accepted by Secured Party which acceptance shall be
evidenced only by the execution of such Loan Schedule by Secured Party.
2. GRANT OF SECURITY INTEREST. Debtor hereby grants to Secured Party a
security interest in the personal property referred to and/or described in each
Loan Schedule (hereinafter with all renewals, substitutions and replacements and
all parts, repairs, improvements, additions and accessories incorporated therein
or affixed thereto referred to as the "Equipment"), together with any and all
proceeds thereof and any and all insurance policies and proceeds with respect
thereto.
3. OBLIGATIONS SECURED. The aforesaid security interest is granted by
Debtor as security for (a) the payment of the Time Balance (as set forth in the
Loan Schedule) and the payment and performance of all other indebtedness and
obligations now or hereafter owing by Debtor to Secured Party, of any and every
kind and description under the Agreement evidenced by such Loan Schedule, and
any and all renewals and extensions of the foregoing, and all interest, fees,
charges, expenses and attorneys' fees accruing or incurred in connection with
any of the foregoing (all of which Time Balance, indebtedness and obligations
are hereinafter referred to as the "Liabilities") and (b) the payment and
performance of all other indebtedness and obligations now or hereafter owing by
Debtor to Secured Party, of any and every kind and description, howsoever
arising or evidenced including without limitation those arising under other Loan
Schedules, (all of which indebtedness and obligations are hereinafter referred
to as the "Other Liabilities"). Subject to Paragraph 16, any nonpayment of any
installment or other amounts within ten days of when due hereunder shall result
in the obligation on the part of Debtor promptly to pay also an amount equal to
five percent (5%), (or the maximum rate permitted by law, whichever is less) of
the installment or other amounts overdue.
4. DISCLAIMER OF WARRANTIES. DEBTOR ACKNOWLEDGES THAT SECURED PARTY MAKES
NO WARRANTIES, EXPRESS OR IMPLIED, IN RESPECT OF THE EQUIPMENT, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR ANY
PARTICULAR PURPOSE. Secured Party shall not be liable to Debtor for any loss,
damage or expense of any kind or nature caused, directly or indirectly, by any
Equipment secured hereunder or the use or maintenance thereof or the failure of
operation thereof, or the repair, service or adjustment thereof, or by any delay
or failure to provide any such maintenance, repairs, service or adjustment, or
by any interruption of service or loss of use thereof or for any loss of
business howsoever caused. The Equipment shall be shipped directly to Debtor by
the supplier thereof and Debtor agrees to accept such delivery. No defect or
unfitness of the Equipment, nor any failure or
<PAGE>
delay on the part of the manufacturer or the shipper of the Equipment to deliver
the Equipment or any part thereof to Debtor, shall relieve Debtor of the
obligation to pay the Time Balance or any other obligation under this Agreement.
Secured Party shall have no obligation under this Agreement in respect of the
Equipment and shall have no obligation to install, erect, test, adjust or
service the Equipment. Secured Party agrees, so long as there shall not have
occurred and be continuing any Event of Default hereunder or event which with
lapse of time or notice, or both, might become an Event of Default hereunder,
that Secured Party will permit Debtor to enforce in Debtor's own name at
Debtor's sole expense any supplier's or manufacturer's warranty or agreement in
respect of the Equipment to the extent that such warranty or agreement is
assignable.
5. ASSIGNMENT. Any transaction evidenced by a Loan Schedule shall be
assignable by Secured Party, and by its assigns, without the consent of Debtor,
but Debtor shall not be obligated to any assignee except upon written notice of
such assignment from Secured Party or such assignee. Subject to Section 19
hereof, the obligation of Debtor to pay and perform the Liabilities to such
assignee shall be absolute and unconditional and shall not be affected by any
circumstance whatsoever, and such payments shall be made without interruption or
abatement notwithstanding any event or circumstance whatsoever, including,
without limitation, the late delivery, non-delivery, destruction or damage of or
to the Equipment, the deprivation or limitation of the use of the Equipment, the
bankruptcy or insolvency of Secured Party or Debtor or any disaffirmance of this
Agreement by or on behalf of Debtor and notwithstanding any defense, set-off,
recoupment or counterclaim or any other right whatsoever, whether by reason of
breach of this Agreement or of any warranty in respect of the Equipment or
otherwise which Debtor may now or hereafter have against Secured Party, and
whether any such event shall be by reason of any act or omission of Secured
Party (including, without limitation, any negligence of Secured Party) or
otherwise; provided, however, that nothing herein contained shall affect any
right of Debtor to enforce against Secured Party any claim which Debtor may have
against Secured Party in any manner other than by abatement, attachment or
recoupment of, interference with, or set-off, counterclaim or defense against,
the aforementioned payments to be made to such assignee. Debtor's undertaking
herein to pay and perform the Liabilities to an assignee of Secured Party shall
constitute a direct, independent and unconditional obligation of Debtor to said
assignee. Said assignee shall have no obligations under this Agreement or in
respect of the Equipment and shall have no obligation to install, erect, test,
adjust or service the Equipment. Debtor also acknowledges and agrees that any
assignee of Secured Party's interest in this Agreement shall have the right to
exercise all rights, privileges and remedies (either in its own name or in the
name of Secured Party) which by the terms of this Agreement are permitted to be
exercised by Secured Party.
6. DAMAGE TO OR LOSS OF THE EQUIPMENT; REQUISITION. Debtor assumes and
shall bear the entire risk of loss or damage to the Equipment from any and every
cause, whatsoever. No loss or damage to the Equipment or any part thereof shall
affect any obligation of Debtor with respect to the Liabilities and this
Agreement, which shall continue in full force and effect. Debtor shall advise
Secured Party in writing prompt ly of any item of Equipment lost or damaged and
of the circumstances and extent of such damage. If the Equipment is totally
destroyed, irreparably damaged, lost, stolen or title thereto shall be
requisitioned or taken by any governmental authority under the power of eminent
domain or otherwise, Debtor shall, at the option of Secured Party, replace the
same with like equipment in good repair, condition and working order, or pay to
Secured Party all Liabilities due and to become due (with all future Rentals to
be paid over the term of the Agreement discounted at a rate equal to five
percent (5%)), less the net amount of the recovery, if any, actually received by
Secured Party from insurance or otherwise for such destruction, damage, loss,
theft, requisition or taking. Whenever the Equipment is destroyed or damaged
and, in the sole discretion of Secured Party, such destruction or damage can be
repaired, Debtor shall, at its expense, promptly effect such repairs as Secured
Party shall deem necessary for compliance with clause (a) of paragraph 8 below.
Any proceeds of insurance received by Secured Party with respect to such
reparable damage to the Equipment shall, at the election of Secured Party, be
applied either to the repair of the Equipment by payment by Secured Party
directly to the party completing the repairs, or to the reimbursement of Debtor
for the cost of such repairs; provided, however, that Secured Party shall have
no obligation to make such payment or any part thereof until receipt of such
evidence as Secured Party shall deem satisfactory that such repairs have been
completed and further provided that Secured Party may apply such proceeds to the
payment of any of the Liabilities or the Other Liabilities due if at the time
such proceeds are received by Secured Party there shall have occurred and be
continuing any Event of Default hereunder or any event which with lapse of time
or notice, or both, would
<PAGE>
become an Event of Default. Debtor shall, when and as requested by Secured
Party, undertake, by litigation or otherwise, in Debtor's name, the collection
of any claim against any person for such destruction, damage, loss, theft,
requisition or taking, but Secured Party shall not be obligated to undertake, by
litigation or otherwise, the collection of any claim against any person for such
destruction, damage, loss, theft, requisition or taking.
7. REPRESENTATIONS AND WARRANTIES OF DEBTOR. Debtor represents and
warrants that: it has the right, power and authority to enter into and carry out
the terms and provisions of this Agreement; this Agreement constitutes a valid
obligation of the Debtor and is enforceable in accordance with its terms; and
entering into this Agreement and carrying out its terms and provisions will not
violate the terms or constitute a breach of any other agreement to which Debtor
is a party.
8. AFFIRMATIVE COVENANTS OF DEBTOR. Debtor shall (a) cause the Equipment
to be kept in good condition and use the Equipment only in the manner for which
it was designed and intended so as to subject it only to ordinary wear and tear
and cause to be made all needed and proper repairs, renewals and replacements
thereto; (b) maintain at all times property damage, fire, theft and
comprehensive insurance for the full replacement value of the Equipment, with
additional loss payable provisions in favor of Secured Party and any assignee of
Secured Party as their interests may appear, and maintain public liability
insurance in amounts satisfactory to Secured Party, naming Secured Party and any
assignee of Secured Party as insureds with all of said insurance and loss
payable provisions to be in form, substance and amount and written by companies
reasonably approved by Secured Party, and deliver certificate of insurance
policies therefor, or duplicates thereof, to Secured Party; (c) pay or reimburse
Secured Party for any and all taxes, assessments and other governmental charges
of whatever kind or character, however designated (together with any penalties,
fines or interest thereon) levied or based upon or with respect to the
Equipment, the Liabilities or this Agreement or upon the manufacture, purchase,
ownership, delivery, possession, use, storage, operation, maintenance, repair,
return or other disposition of the Equipment, or upon any receipts or earnings
arising therefrom, or for titling or registering the Equipment, or upon the
income or other proceeds received with respect to the Equipment or this
Agreement provided, however, that Debtor shall pay taxes on or measured by the
net income of Secured Party and franchise taxes of Secured Party only to the
extent that such net income taxes or franchise taxes are levied or assessed in
lieu of any other taxes, assessments or other governmental charges hereinabove
described; (d) pay all shipping and delivery charges and other expenses incurred
in connection with the Equipment and pay all lawful claims, whether for labor,
materials, supplies, rents or services, which might or could if unpaid become a
lien on the Equipment; (e) comply in all material respects with all governmental
laws, regulations, requirements and rules, all instructions and warranty
requirements of Secured Party or the manufacturer of the Equipment, and with the
conditions and requirements of all policies of insurance with respect to the
Equipment and this Agreement; (f) mark and identify the Equipment with all
information and in such manner as Secured Party may request from time to time
and replace promptly any such marking or identification which are removed,
defaced or destroyed; (g) at any and all times during business hours upon prior
request by facsimile, grant to Secured Party free access to enter upon the
premises wherein the Equipment shall be located and permit Secured Party to
inspect the Equipment; (h) reimburse Secured Party for all charges, costs and
expenses (including reasonable attorneys' fees) incurred by Secured Party in
defending or protecting its interests in the Equipment, in the attempted
enforcement or enforcement of the provisions of this Agreement or in the
attempted collection or collection of any of the Liabilities; (i) indemnify and
hold any assignee of Secured Party, and Secured Party, harmless from and against
all claims, losses, liabilities, damages, judgments, suits, and all legal
proceedings, and any and all costs and expenses in connection therewith
(including reasonable attorneys' fees) arising out of or in any manner connected
with the manufacture, purchase, ownership, delivery, possession, use, storage,
operation, maintenance, repair, return or other disposition of the Equipment or
with this Agreement, including, without limitation, claims for injury to or
death of persons and for damage to property but excluding any claims resulting
from Secured Party's gross negligence or wilful misconduct, and give Secured
Party prompt notice of any such claim or liability; and (j) maintain a system of
accounts established and administered in accordance with generally accepted
accounting principles and practices consistently applied, and, within sixty (60)
days after the end of each fiscal quarter, deliver to Secured Party a balance
sheet as at the end of such quarter and statement of operations for such
quarter, and, within one hundred and twenty (120) days after the end of each
fiscal year, deliver to Secured
<PAGE>
Party a balance sheet as at the end of such year and statement of operations for
such year, in each case prepared in accordance with generally accepted
accounting principles and practices consistently applied and certified by
Debtor's chief financial officer as fairly presenting the financial position and
results of operation of Debtor in accordance with generally accepted accounting
principles, and, in the case of year end financial statements, certified by an
independent accounting firm reasonably acceptable to Secured Party.
9. NEGATIVE COVENANTS OF DEBTOR. Debtor shall not (a) create, incur,
assume or suffer to exist any mortgage, lien, pledge or other encumbrance or
attachment of any kind whatsoever upon, affecting or with respect to the
Equipment or this Agreement or any of Debtor's interests hereunder except for
those arising from or imposed by persons claiming by or through Secured Party or
Secured Party's assignees; (b) make any changes or alterations in or to the
Equipment except as necessary for compliance with clause (a) of para graph 8
above; (c) permit the name of any person, association or corporation other than
Secured Party to be placed on the Equipment as a designation that might be
interpreted as a claim of interest in the Equipment (provided, however, that
Debtor may place its name on the Equipment so long as such marking indicates
that the Equipment is subject to Secured Party's rights and interests as Secured
Party hereunder); (d) part with possession or control of or suffer or allow to
pass out of its possession or control any of the Equipment or change the
location of the Equipment or any part thereof except upon thirty (30) days
written notice to Secured Party from the location shown above, or on Schedule A
hereto; (e) assign or in any way dispose of all or any part of its rights or
obligations under this Agreement or enter into any lease of all or any part of
the Equipment except to (i) a wholly-owned subsidiary of Debtor or in connection
with the merger or consolidation of Debtor into a wholly-owned subsidiary of
Debtor, or (ii) an entity which acquires substantially all of Debtor's assets
and the successor entity agrees in writing to assume this Agreement; (f) change
its name or address from that set forth above unless it shall have given Secured
Party no less than thirty (30) days prior written notice thereof.
10. EQUIPMENT PERSONALTY. The Equipment is, and shall at all times be and
remain, personal property notwithstanding that the Equipment or any part thereof
may now be, or hereafter become, in any manner affixed or attached to, or
imbedded in, or permanently resting upon, real property or attached in any
manner to real property by cement, plaster, nails, bolts, screws or otherwise.
If requested by Secured Party with respect to any item of Equipment, Debtor will
use good faith efforts to obtain and deliver to Secured Party waivers of
interest or liens in recordable form, reasonably satisfactory to Secured Party,
from all persons claiming any interest in the real property on which such item
of Equipment is installed or located.
11. EVENTS OF DEFAULT AND REMEDIES. If any one or more of the following
events ("Events of Default") shall occur:
(a) Debtor shall fail to make any payment in respect of the Liabilities
within ten (10) days of the date when due; or
(b) any certification, statement, representation, warranty or financial
report or statement heretofore or hereafter furnished by or on behalf of Debtor
or any guarantor of any or all of the Liabilities proves to have been false in
any material respect at the time as of which the facts therein set forth were
stated or certified or has omitted any material contingent or unliquidated
liability or claim against Debtor or any such guarantor; or
(c) Debtor or any guarantor of any or all of the Liabilities shall fail
to perform or observe in any material respect any covenant, condition or
agreement to be performed or observed by it hereunder or under any guaranty
agreement which failure continues unremedied for more than thirty (30) days from
the date of notice of such failure from Secured Party; or
(d) Debtor or any guarantor of any or all of the Liabilities shall be
in breach of or in default, which breach or default is not waived or cured
within any applicable grace or notice period in the payment and performance of
any obligation relating to any of the Other Liabilities; or
(e) Debtor shall fail to comply, which failure is not waived, with the
financial covenants (as amended from time to time) set forth in its credit
agreement (as amended, restated or replaced, from time to time) with
<PAGE>
Fleet National Bank, and its successors and assigns (collectively "Fleet Bank")
or in a credit agreement with any other financial institution which provides a
working capital facility secured by substantially all the assets of Debtor which
replaces the credit facility with Fleet Bank, in whole or in part (a "New
Lender"), and as a result of such failure Fleet Bank or such New Lender shall
declare an event of default under its credit facility with Debtor and shall
exercise its rights and remedies which are available upon such event of default;
or
(f) Debtor or any guarantor of any or all of the Liabilities shall cease
doing business as a going concern, make an assignment for the benefit of
creditors, admit in writing its inability to pay its debts as they become due,
file a petition commencing a voluntary case under any chapter of Title 11 of the
United States Code entitled "Bankruptcy" (the "Bankruptcy Code"), be adjudicated
an insolvent, file a petition seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
arrangement under any present or future statute, law, rule or regulation or file
an answer admitting the material allegations of a petition filed against it in
any such proceeding, consent to the filing of such a petition or acquiescence in
the appointment of a trustee, receiver or liquidator of it or of all or any part
of its assets or properties, or take any action looking to its dissolution or
liquidation; or
(g) an order for relief against Debtor or any guarantor of any or all
of the Liabilities shall have been entered under any chapter of the Bankruptcy
Code or a decree or order by a court having jurisdiction in the premises shall
have been entered approving as properly filed a petition seeking reorganization,
arrangement, readjustment, liquidation, dissolution or similar relief against
Debtor or any guarantor of any or all of the Liabilities under any present or
future statute, law, rule or regulation, or within sixty (60) days after the
appointment without Debtor's or such guarantor's consent or acquiescence of any
trustee, receiver or liquidator of it or such guarantor or of all or any part of
its or such guarantor's assets and properties, such appointment shall not be
vacated, or an order, judgment or decree shall be entered against Debtor or such
guarantor by a court of competent jurisdiction and shall continue in effect for
any period of twenty (20) consecutive days without a stay of execution, or any
execution or writ or process shall be issued under any action or proceeding
against Debtor whereby the Equipment or its use may be taken or restrained; or
(h) Debtor or any guarantor of any or all of the Liabilities shall suffer
an adverse material change in its financial condition as compared to such
condition as at the date hereof, and as a result of such change in condition
Secured Party reasonably deems itself or any of the Equipment to be insecure;
then and in any such event, Secured Party may, at the sole discretion of Secured
Party, without notice or demand and without limitation of any rights and
remedies of Secured Party under the Uniform Commercial Code, take any one or
more of the following steps:
(1) Declare all of the Time Balance to be due and payable, whereupon the
same shall forthwith mature and become due and payable as provided for in
paragraph 16 below, provided, however, upon the occurrence of any of the events
specified in subparagraphs (f) and (g) above, all sums as specified in this
clause (1) shall immediately be due and payable without notice to Debtor (the
date on which Secured Party declares all of the Time Balance to be due and
payable is hereinafter referred to as the "Declaration Date");
(2) proceed to protect and enforce its rights by suit in equity, action
at law or other appropriate proceedings, whether for the specific performance of
any agreement contained herein, or for an injunction against a violation of any
of the terms hereof, or in aid of the exercise of any other right, power or
remedy granted hereby or by law, equity or otherwise; and
(3) at any time and from time to time, with or without judicial process
and the aid or assistance of others, enter upon any premises wherein any of the
Equipment may be located and, without resistance or interference by Debtor, take
possession of the Equipment on any such premises, and require Debtor to assemble
and make available to Secured Party at the expense of Debtor any part or all of
the Equipment at any place or time designated by Secured Party; and remove any
part or all of the Equipment from any premises wherein the same may be located
for the purpose of effecting the sale or other disposition thereof; and sell,
resell, lease, assign and deliver, grant options for or otherwise dispose of any
or all of the Equipment
<PAGE>
in its then condition or following any commercially reasonable preparation or
processing, at public or private sale or proceedings, by one or more contracts,
in one or more parcels, at the same or different times, with or without having
the Equipment at the place of sale or other disposition, for cash and/or credit,
and upon any terms, at such place(s) and time(s) and to such persons, firms or
corporations as Secured Party shall deem best, all without demand for
performance or any notice or advertisement whatsoever, except that Debtor shall
be given five (5) business days' written notice of the place and time of any
public sale or of the time after which any private sale or other intended
disposition is to be made, which notice Debtor hereby agrees shall be deemed
reasonable notice thereof. If any of the Equipment is sold by Secured Party upon
credit or for future delivery, Secured Party shall not be liable for the failure
of the purchaser to pay for same and in such event Secured Party may resell such
Equipment. Secured Party may buy any part or all of the Equipment at any public
sale and if any part or all of the Equipment is of a type customarily sold in a
recognized market or which is the subject of widely distributed standard price
quotations Secured Party may buy at private sale and may make payment therefor
by application of all or a part of the Liabilities and of all or a part of any
Other Liabilities. Any personalty in or attached to the Equipment when
repossessed may be held by Secured Party without any liability arising with
respect thereto, and any and all claims in connection with such personalty shall
be deemed to have been waived unless notice of such claim is made by certified
or registered mail upon Secured Party within five (5) business days after
repossession.
Secured Party shall apply the cash proceeds from any sale or other disposition
of the Equipment first, to the reasonable expenses of re-taking, holding,
preparing for sale, selling, leasing and the like, and to reasonable attorneys'
fees and other expenses which are to be paid or reimbursed to Secured Party
pursuant hereto, and second, to all outstanding portions of the Liabilities and
to any Other Liabilities in such order as Secured Party may elect, and third,
any surplus to Debtor, subject to any duty of Secured Party imposed by law to
the holder of any subordinate security interest in the Equipment known to
Secured Party; provided however, that Debtor shall remain liable with respect to
unpaid portions of the Liabilities owing by it and will pay Secured Party on
demand any deficiency remaining with interest as provided for in paragraph 16
below.
12. SECURED PARTY'S RIGHT TO PERFORM FOR DEBTOR. If Debtor fails to perform
or comply with any of its agreements contained herein Secured Party may perform
or comply with such agreement and the amount of any commercially reasonable
payments and expenses incurred by Secured Party in connection with such
performance or compliance, together with interest thereon at the rate provided
for in paragraph 16 below, shall be deemed a part of the Liabilities and shall
be payable by Debtor upon demand.
13. FURTHER ASSURANCES. Debtor will cooperate with Secured Party for the
purpose of protecting the interests of Secured Party in the Equipment,
including, without limitation, the execution of all Uniform Commercial Code
financing statements reasonably requested by Secured Party. Secured Party and
any assignee of Secured Party are each authorized to the extent permitted by
applicable law to file one or more Uniform Commercial Code financing statements
disclosing any security interest in the Equipment without the signature of
Debtor or signed by Secured Party or any assignee of Secured Party as attorney-
in-fact for Debtor. Debtor will pay all costs of filing any financing,
continuation or termination statements with respect to this Agreement,
including, without limitation, any documentary stamp taxes relating thereto.
Debtor will do whatever may be reasonably necessary to have a statement of the
interest of Secured Party and of any assignee of Secured Party in the Equipment
noted on any certificate of title relating to the Equipment and will deposit
said certificate with Secured Party or such assignee. Debtor shall execute and
deliver to Secured Party, upon request, such other instruments and assurances as
Secured Party deems reasonably necessary or advisable for the implementation,
effectuation, confirmation or perfection of this Agreement and any rights of
Secured Party hereunder.
14. NON-WAIVER; ETC. No course of dealing by Secured Party or Debtor or any
delay or omission on the part of Secured Party in exercising any rights
hereunder shall operate as a waiver of any rights of Secured Party. No waiver or
consent shall be binding upon Secured Party unless it is in writing and signed
by Secured Party. A waiver on any one occasion shall not be construed as a bar
to or a waiver of any right and/or remedy on any future occasion. To the extent
permitted by applicable law, Debtor hereby waives the benefit and advantage of,
and covenants not to assert against Secured Party, any valuation, inquisition,
stay,
<PAGE>
appraisement, extension or redemption laws now existing or which may hereafter
exist which, but for this provision, might be applicable to any sale or other
disposition made under the judgment, order or decree of any court or under the
powers of sale and other disposition conferred by this Agreement or otherwise.
Debtor hereby waives any right to a jury trial with respect to any matter
arising under or in connection with this Agreement.
15. ENTIRE AGREEMENT; SEVERABILITY; ETC. This Agreement and the Schedules
and Riders hereto constitute the entire agreement between Secured Party and
Debtor relating to the Equipment and supersede all prior and contemporaneous
conversations, agreements and representations relating to this Agreement or to
the Equipment. If any provision hereof or any remedy herein provided for shall
be invalid under any applicable law, such provision or remedy shall be
inapplicable and deemed omitted, but the remaining provisions and remedies
hereunder shall be given effect in accordance with the intent hereof. Neither
this Agreement nor any term hereof may be changed, discharged, terminated or
waived except in an instrument in writing signed by the party against which
enforcement of the change, discharge, termination or waiver is sought. This
Agreement shall in all respects be governed by and construed in accordance with
the internal laws of the State of New York, including all matters of
construction, validity and performance, and shall be deemed a purchase money
security agreement within the meaning of the Uniform Commercial Code. The
captions in this Agreement are for convenience of reference only and shall not
define or limit any of the terms or provisions hereof. This Agreement shall
inure to the benefit of and be binding upon Secured Party and Debtor and their
respective successors and assigns, subject, however, to the limitations set
forth in this Agreement with respect to Debtor's assignment hereof. No right or
remedy referred to in this Agreement is intended to be exclusive but each shall
be cumulative and in addition to any other right or remedy referred to in this
Agreement or otherwise available to Secured Party at law or in equity, and shall
be in addition to the provisions contained in any instrument referred to herein
and any instrument supplemental hereto. Debtor shall be liable for all costs and
expenses, including attorneys' fees and disbursements, incurred by reason of the
occurrence of any Event of Default or the exercise of Secured Party's remedies
with respect thereto. Time is of the essence with respect to this Agreement and
all of its provision.
16. REPAYMENT; REBATE; INTEREST. Except for the installment payments of the
Time Balance as set forth in the Schedule of Obligations, the Debtor may not
prepay the Time Balance, in whole or in part, at any time. In the event Secured
Party declares all of the Time Balance to be due and payable pursuant to clause
(1) of paragraph 11 above, Debtor shall pay to Secured Party an amount equal to
the sum of (a) all accrued and unpaid amounts as of the Declaration Date plus
interest thereon, and (b) the present value of all future installments set forth
in this Agreement over the remaining unexpired term of this Agreement discounted
to present value using a discount rate of five percent (5%), provided that the
amount of interest earned by Secured Party computed as aforesaid shall not
exceed the highest amount permitted by applicable law. The Time Balance as
reduced to present value in accordance with the preceding sentence shall bear
interest from and after the Declaration Date, and all other Liabilities due and
payable under this Agreement (including past due installments) shall bear
interest from and after their respective due dates, at the lesser of 14% per
annum or the highest rate permitted by applicable law, provided, however, that
Debtor shall have no obligation to pay any interest on interest except to the
extent permitted by applicable law.
17. CONSENT TO JURISDICTION. Debtor hereby irrevocably consents to the
jurisdiction of the courts of the State of New York and of any federal court
located in such state in connection with any action or proceeding arising out of
or relating to this Agreement with an additional copy sent in the same manner to
the same address, marked to the attention of Debtor's general counsel and
service so made shall be complete five (5) business days after the same shall
have been posted as aforesaid or the transactions contemplated hereby. Any such
action or proceeding will be maintained in the United States District Court for
the Southern District of New York or in any court of the State of New York
located in the County of New York and Debtor waives any objections based upon
venue or forum non conveniens in connection with any such action or proceeding.
Debtor consents that process in any such action or proceeding may be served upon
it by registered mail directed to Debtor at its address set forth at the head of
this Agreement or in any other manner permitted by applicable law or rules of
court. Debtor hereby irrevocably appoints Secretary of State of the State of
New York as its agent to receive service of process in any such action or
proceeding. Debtor and Secured Party
<PAGE>
hereby waive any right to a jury trial with respect to any matter arising under
or in connection with this Agreement or the Equipment.
18. NOTICES. Notice hereunder shall be deemed given if served personally
or by certified or registered mail, return receipt requested, to Secured Party
and Debtor at their respective addresses set forth at the head of this
Agreement. Any party hereto may from to time by written notice to the other
change the address to which notices are to be sent to such party. A copy of any
notice sent by Debtor to Secured Party shall be concurrently sent by Debtor to
any assignee of Secured Party of which Debtor has notice.
19. QUIET ENJOYMENT. So long as no Event of Default has occurred and is
continuing under this Agreement, Debtor shall be entitled to peaceful and quiet
use and enjoyment of the Equipment during the Term and such peaceful and quiet
use and enjoyment shall not be disturbed by Secured Party, Secured Party's
assignees or any person claiming by or through Secured Party.
20. EARLY TERMINATION. Provided that no Event of Default has occurred and
is continuing under this Agreement, Debtor shall be entitled, at its option,
upon at least thirty (30) days prior to written notice to Secured Party
specifying the termination date, to terminate any Agreement prior to the
expiration of the Term thereof by paying to Secured Party an amount equal to the
present value of the remaining rent payments as of the termination date
discounted at the rate of five percent (5%) for all of the Equipment subject to
such Agreement together with any accrued and unpaid installment payments as f
the termination date.
The Debtor agrees to all the provisions set forth above. This Agreement is
executed pursuant to due authorization. DEBTOR ACKNOWLEDGES RECEIPT OF A SIGNED
TRUE COPY OF THIS AGREEMENT.
Date:September 28, 1998
PSINET INC. CHARTER FINANCIAL INC.
<PAGE>
EXHIBIT 11.1
PSINET INC.
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE AND WEIGHTED AVERAGE SHARES USED
IN CALCULATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period................ 51,252,158
Weighted average shares issued during the three months
ended September 30, 1998 (538,182 shares)................ 407,170
-------------
51,659,328
=============
Net loss to common shareholders............................... $ (48,116,000)
=============
Basic and diluted loss per share.............................. $ (0.93)
=============
=================================================================================
</TABLE>
<PAGE>
EXHIBIT 11.2
PSINET INC.
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE AND WEIGHTED AVERAGE SHARES USED
IN CALCULATION (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------
<S> <C>
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period................. 40,477,786
Weighted average shares issued during the nine months
ended September 30, 1998 (11,312,554 shares).............. 8,642,483
-------------
49,120,269
=============
Net loss to common shareholders................................ $(132,384,000)
=============
Basic and diluted loss per share............................... $ (2.70)
=============
====================================================================================
</TABLE>
<PAGE>
EXHIBIT 99.1
RISK FACTORS
From time to time, in both written reports and in oral statements by our senior
management, we express expectations and other statements regarding our future
performance. These forward-looking statements are inherently uncertain and you
must recognize that events could turn out to be different than such expectations
and statements. We discuss key factors impacting current and future performance
in the Company's Annual Report on Form 10-K and other filings with the
Securities and Exchange Commission. In addition, you should consider the
following Risk Factors as well as the other information in this Quarterly Report
in evaluating us and our business. Capitalized terms used in this Exhibit 99.1
but not otherwise defined herein should have the respective meanings described
thereto in the periodic report with which this Exhibit 99.1 is filed. Unless
the context otherwise requires, "PSINet", the "Company", "we", "our" and "us"
refer to PSINet Inc. and its subsidiaries.
RISK ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS AND OUR ABILITY TO SERVICE DEBT
We are highly leveraged and have significant debt service requirements. As of
September 30, 1998, our total indebtedness was $817.7 million, representing 103%
of total capitalization, and our interest expense for the nine months ended
September 30, 1998 was $38.2 million.
Our high level of indebtedness could have several important effects on our
future operations, which, in turn, could have important consequences for the
holders of our securities, including the following:
. a substantial portion of our cash flow from operations must be used to pay
interest on our indebtedness and, therefore, will not be available for
other business purposes;
. covenants contained in the agreements evidencing our debt obligations
require us to meet certain financial tests, and other restrictions limit
our ability to borrow additional funds or to dispose of assets and may
affect our flexibility in planning for, and reacting to, changes in our
business, including possible acquisition activities and capital
expenditures; and
. our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or
other purposes may be impaired.
Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors. Based
on our current level of operations, management believes that working capital
from operations, existing credit facilities, capital lease financings and
proceeds of future equity or debt financings, will be adequate to meet our
presently anticipated future requirements for working capital, capital
expenditures and scheduled payments of interest on our debt. We cannot assure,
however, that our business will generate sufficient cash flow from operations or
that future working capital borrowings will be available in an amount sufficient
to enable us to service our debt or to make necessary capital expenditures. In
addition, we cannot assure that we will be able to raise additional capital for
any such refinancing in the future.
<PAGE>
RISK ASSOCIATED WITH OUR OPERATING DEFICIT AND CONTINUING LOSSES; POTENTIAL
FLUCTUATIONS IN OPERATING RESULTS; AND OPERATING LOSSES OF CERTAIN ACQUIRED
COMPANIES
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, we must, among other things, respond to
competitive developments, continue to attract and retain qualified persons, and
continue to upgrade our technologies and commercialize our network services
incorporating such technologies. We cannot assure that we will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on our business, financial condition, results of operations and ability
to pay when due principal, interest and other amounts in respect of our debt.
Although we have experienced revenue growth on an annual basis with revenue
increasing from $38.7 million in 1995 to $84.4 million in 1996 to $121.9 million
in 1997 and $165.7 million for the first nine months of 1998, we have incurred
losses and experienced negative earnings before depreciation and amortization,
interest income and expense, other income (loss), income tax expense (benefit),
gain on sale of investments, equity in loss of affiliate and intangible asset
write-down and charge for acquired in-process research and development
("EBITDA") during each of such periods. Management expects to continue to
operate at a net loss and experience negative EBITDA in the near term as we
continue our acquisition program and the expansion of our global network
operations. We have incurred net losses available to common shareholders of
$53.2 million, $55.1 million and $46.0 million and have incurred negative EBITDA
of $27.9 million, $28.0 million and $21.2 million for each of the years ended
December 31, 1995, 1996 and 1997, respectively. Additionally, we incurred net
losses available to common shareholders of $129.0 million and negative EBITDA of
$32.1 million, respectively, for the nine months ended September 30, 1998. At
September 30, 1998, we had an accumulated deficit of $295.0 million. We cannot
assure that we will be able to achieve or sustain profitability or positive
EBITDA. Principal among factors that adversely affected our operating
performance in 1997 and the first nine months of 1998 were:
. delivery delays for Primary Rate Interface ("PRI") telecommunications
facilities required to meet customer demand;
. accelerated investment by us in our overseas operations in order to respond
to rapidly developing markets; and
. lower than expected growth during the third quarter of 1997 in the demand
for our domestic Internet services.
We expect to focus in the near term on continuing to increase our corporate
customer base and geographic presence, and on expanding our Carrier and ISP
Services business unit strategy. This will require us to continue to incur
expenses for marketing, network infrastructure, personnel and the development of
new products and services. We also plan to continue to enhance our network and
the administrative and operational infrastructure necessary to support our
Internet access service domestically and internationally. We will accomplish
this through ownership interests or capital leases wherever possible. This
includes the acquisition of bandwidth, which must often be obtained in
anticipation of future revenue. Such expenses may adversely impact cash flow
and operating performance.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future as a result of a variety of factors some of which
are outside our control. These factors, include, among others:
. general economic conditions and specific economic conditions in the
Internet access industry;
. user demand for Internet services;
. capital expenditures and other costs relating to the expansion of
operations our network;
. the ability to identify, acquire and integrate successfully suitable
acquisition candidates;
. changes related to acquisitions;
. the introduction of new services by us or our competitors;
. the mix of services sold and the mix of channels through which those
services are sold;
. pricing changes and new product introductions by us and our competitors;
. delays in obtaining sufficient supplies of sole or limited source equipment
and telecom facilities (i.e., PRIs); and
. potential adverse regulatory developments.
<PAGE>
As a strategic response to a changing competitive environment, we may elect from
time to time to make certain pricing, service or marketing decisions that could
have a material adverse effect on our business, results of operations and cash
flow.
We have recently acquired a number of Internet-related companies. Certain of
these companies incurred net losses and had negative EBITDA prior to their
acquisition. We believe that after eliminating redundant network architecture
and administrative functions and taking other actions to integrate the
operations of these companies we will be able to realize significant cost
savings on our consolidated operations. However, we cannot assure that our
integration of the operations of these companies will be accomplished
successfully. Our inability to improve the operating performance of these
businesses or to successfully integrate their operations could have a material
adverse effect on our business, financial condition and results of operations.
RISK ASSOCIATED WITH COMPANY STRUCTURE AND DEPENDENCE ON SUBSIDIARIES FOR
REPAYMENT OF DEBT
We are an operating entity which also conducts a significant portion of our
business through our subsidiaries. Our cash flow from operations and
consequently our ability to service our debt (including the 10% Senior Notes and
the 11 1/2% Senior Notes) is therefore partially dependent upon our
subsidiaries' earnings and their distributions of those earnings to us. It may
also be dependent upon loans, advances or other payments of funds to us by those
subsidiaries. Our subsidiaries have no obligation, contingent or otherwise, to
make any funds available to us for payment of the principal of or interest on
certain of our debt obligations (including the 10% Senior Notes and the 11 1/2%
Senior Notes). Our subsidiaries' ability to make payments may be subject to the
availability of sufficient surplus funds, the terms of such subsidiaries'
indebtedness, applicable laws and other factors.
Our subsidiaries' creditors and holders of preferred stock, if any, of such
subsidiaries will have priority to the assets of such subsidiaries over the
claims of the Company and the holders of our indebtedness. One exception is
that if such subsidiaries have provided guarantees of our indebtedness and if
loans made by us to our subsidiaries are recognized as indebtedness, they will
not have such priorities. In any event, the 10% Senior Notes and the 11 1/2%
Senior Notes are effectively subordinated in right of payment to all existing
and future indebtedness and other liabilities of our subsidiaries, including
trade payables. As of September 30, 1998, after giving pro forma effect to the
Initial Notes Offering (and the application of the net proceeds therefrom as
described in "Use of Proceeds"), the acquisitions of the Acquired Companies
and borrowings under the Credit Facility, our subsidiaries would have had
approximately $133.2 million of total liabilities (including trade payables and
accrued liabilities). Under the terms of certain agreements evidencing our debt
obligations, certain subsidiaries of the Company are restricted in their ability
to incur debt in the future. We had approximately $108.5 million of
indebtedness outstanding under the Credit Facility on September 30, 1998.
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
In order to maintain our competitive position and continue to meet the
increasing demands for service quality, availability and competitive pricing, we
expect to make significant capital expenditures. Our expected expenditures
include the following:
. up to $95.0 million through the end of the year 2000 to take full advantage
of the bandwidth acquired from IXC;
. approximately $1.2 million per year in operation and maintenance fees per
each 1,000 equivalent route miles of OC-48 bandwidth accepted under the IRU
Purchase Agreement (as defined);
. up to $35.0 million over the next three years in connection with the
anticipated buildout of our pan-European Internet network, including in
connection with our recent acquisition of IRUs in transatlantic STM-1
bandwidth connecting the United States and Europe, and for construction of
a network operations center in Switzerland;
. approximately $45.0 million in connection with our acquisition of dark
fiber optic capacity connecting and encircling the New York City and
Washington, D.C. metropolitan areas;
. approximately $47.0 million in connection with our recent acquisition of
IRUs in and long-term capital leases of transpacific DS-3 bandwidth
connecting the United States and Japan; and
<PAGE>
. in excess of $100.0 million over 25 years in connection with our recent
agreement with a group of leading global telecommunications companies to
build the Japan-U.S. Cable Network.
In addition, we are also obligated, under one of our Carrier and ISP Services
agreements, to provide the ISP customer with a rental facility of up to $5.0
million for telecommunications equipment owned or leased by us and deployed in
the customer's network. On September 30, 1998, $1.4 million of this was drawn.
Furthermore, we may be obligated under the IRU Purchase Agreement to provide IXC
with additional shares of common stock and/or cash. For the specific terms of
this obligation, see "Note 4--Strategic Alliances--Strategic Alliance with IXC
Internet Services, Inc.". We also expect that we will require substantial
capital for acquisitions of Internet assets and businesses.
We believe that we will have a reasonable degree of flexibility to adjust the
amount and timing of these capital expenditures in response to market
conditions, competition, our then-existing financing capabilities and other
factors. We also believe that working capital generated from the use of
bandwidth, together with other working capital from operations, existing credit
facilities, capital lease financings, proceeds of this and prior offerings and
proceeds of future equity or debt financings will be sufficient to meet the
presently anticipated working capital and capital expenditure requirements of
our operations.
However, we may need to raise additional funds in order to take advantage of
unanticipated opportunities, more rapid international expansion or acquisitions
of complementary businesses. In addition, we may need to raise additional funds
to develop new products or otherwise respond to changing business conditions or
unanticipated competitive pressures. We cannot assure that we will be able to
raise such funds on favorable terms. In the event that we are unable to obtain
such additional funds on acceptable terms, we may determine not to enter into
various expansion opportunities.
RISK ASSOCIATED WITH COMPETITION AND PRICING FLUCTUATIONS
The market for Internet connectivity and related services is extremely
competitive. We anticipate that competition will continue to intensify as the
use of the Internet grows. The tremendous growth and potential market size of
the Internet access market has attracted many new start-ups as well as existing
businesses from different industries.
We believe that the primary competitive factors in our targeted market are a
reliable international network, knowledgeable salespeople and high quality
technical support. Price is usually secondary to these factors.
Our current and prospective competitors include: other national, regional and
local ISPs, long distance and local exchange telecommunications companies, cable
television, direct broadcast satellite, wireless communications providers and
on-line service providers. We believe that our network, products and customer
service distinguish us from these competitors. However, some of these
competitors have a significantly greater market presence, brand recognition and
financial, technical and personnel resources than the Company.
We compete with all of the major long distance companies (also known as
interexchange carriers or IXCs), including AT&T, MCIWorldCom, Sprint and Cable &
Wireless/IMCI, which also offer Internet access services. The recent sweeping
reforms in the federal regulation of the telecommunications industry have
created greater opportunities for local exchange carriers ("LECs"), including
the Regional Bell Operating Companies ("RBOCs"), to enter the Internet
connectivity market. We believe that there is a move toward horizontal
integration through acquisitions of, joint ventures with, and the wholesale
purchase of connectivity from ISPs to address the Internet connectivity
requirements of the current business customers of long distance and local
carriers. The WorldCom/MFS/UUNet consolidation, the WorldCom/MCI merger, the
ICG/NETCOM merger, Cable & Wireless' purchase of the internetMCI assets, the
Intermedia/DIGEX merger, GTE's acquisition of BBN and Frontier's acquisition of
Global Center are indicative of this trend. Accordingly, we expect to
experience increased competition from the traditional telecommunications
carriers. Many of these telecommunications carriers may have the ability to
bundle Internet access with basic local and long distance telecommunications
services. Such bundling of services may have an adverse effect on our ability
to compete effectively with the telecommunications
<PAGE>
providers and may result in pricing pressure on us that would have an adverse
effect on our business, financial condition and results of operations.
Many of the major cable companies have announced that they are exploring the
possibility of offering Internet connectivity, relying on the viability of cable
modems and economical upgrades to their networks. Several announcements also
have recently been made by other alternative service companies approaching the
Internet connectivity market with various wireless terrestrial and satellite-
based service technologies.
The predominant on-line service providers, including America Online, CompuServe,
Microsoft Network and Prodigy, have all entered the Internet access business by
engineering their current proprietary networks to include Internet access
capabilities. We compete to a lesser extent with these on-line service
providers.
Recently, there have been several announcements regarding the planned deployment
of broadband services for high speed Internet access by cable and telephone
companies. These services would include new technologies such as cable modems
and xDSL. These providers have initially targeted the residential consumer.
However, it is likely that their target markets will expand to encompass
business customers, which is our target market. This expansion could affect the
pricing of our service offerings.
As a result of the increase in the number of competitors and the vertical and
horizontal integration in the industry, we currently encounter and expect to
continue to encounter significant pricing pressure and other competition in the
future. Advances in technology as well as changes in the marketplace and the
regulatory environment are constantly occurring, and we cannot predict the
effect that ongoing or future developments may have on us or on the pricing of
our products and services. Increased price or other competition could result in
erosion of our market share and could have a material adverse effect on our
business, financial condition and results of operations. We cannot assure that
we will have the financial resources, technical expertise or marketing and
support capabilities to continue to compete successfully.
As we continue to expand our operations outside the United States, we will
encounter new competitors and competitive environments. In some cases, we will
be forced to compete with and buy services from government-owned or subsidized
telecommunications providers. Some of these providers may enjoy a monopoly on
telecommunications services essential to our business. We cannot assure that we
will be able to purchase such services at a reasonable price or at all. In
addition to the risks associated with our previously described competitors,
foreign competitors may pose an even greater risk, as they may possess a better
understanding of their local markets and better working relationships with local
infrastructure providers and others. We cannot assure that the Company can
obtain similar levels of local knowledge. Failure to obtain that knowledge
could place us at a significant competitive disadvantage.
RISKS ASSOCIATED WITH ACQUISITIONS AND STRATEGIC ALLIANCES
As part of our business strategy, we expect to continue to acquire assets and
businesses principally relating to or complementary to our current operations.
We may also seek to develop strategic alliances both domestically and
internationally. Any such future acquisitions or strategic alliances would be
accompanied by the risks commonly encountered in strategic alliances with or
acquisitions of companies. Such risks include, among other things:
. the difficulty of integrating the operations and personnel of the
companies;
. the potential disruption of our ongoing business;
. the inability of management to maximize our financial and strategic
position by the successful incorporation of licensed or acquired technology
and rights into our service offerings; and
. the inability to maintain uniform standards, controls, procedures and
policies and the impairment of relationships with employees and customers
as a result of changes in management.
We cannot assure that we will be successful in overcoming these risks or any
other problems encountered in connection with such acquisitions or strategic
alliances. We believe that after eliminating redundant network architecture and
administrative functions and taking other actions to integrate the operations of
acquired companies we will be able to realize cost savings. However, we cannot
assure that our
<PAGE>
integration of acquired companies' operations will be successfully accomplished.
Our inability to improve the operating performance of acquired companies'
businesses or to integrate successfully the operations of acquired companies
could have a material adverse effect on our business, financial condition and
results of operations. In addition, as we proceed with acquisitions in which the
consideration consists of cash, a substantial portion of our available cash will
be used to consummate such acquisitions.
Many of the businesses that might become attractive acquisition candidates for
us may have or generate significant goodwill and intangible assets, and
acquisition of these businesses, if accounted for as a purchase, would typically
result in increases in our amortization expenses and the length of time over
which they are reported. In connection with acquisitions, we could incur
substantial expenses, including the expenses of integrating the business of the
acquired company or the strategic alliance with our business. In this regard,
an intangible asset that frequently arises in connection with the acquisition of
a technology company is "acquired in-process research and development," which
under U.S. accounting standards, as presently in effect, must be expensed
immediately upon acquisition. Such expenses, in addition to the financial
impact of such acquisitions, could have a material adverse effect on our
business, financial condition and results of operations and could cause
substantial fluctuations in our quarterly and yearly operating results.
We expect that competition for appropriate acquisition candidates may be
significant. We may compete with other telecommunications companies with
similar acquisition strategies, many of which may be larger and have greater
financial and other resources than we have. Competition for Internet companies
is based on a number of factors including price, terms and conditions, size and
access to capital, ability to offer cash, stock or other forms of consideration
and other matters. We cannot assure that we will be able to successfully
identify and acquire suitable companies on acceptable terms and conditions.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND EXPANSION
We have over 500 POPs and we plan to continue to expand the capacity of existing
POPs as customer-driven demand dictates. In addition, we have completed a
number of acquisitions of companies and telecommunications bandwidth during 1998
and plan to continue to do so. We anticipate that our Carrier and ISP Services
business unit, as well as other business growth, may require continued
enhancements to and expansion of our network. However, our rapid growth has
placed a strain on our administrative, operational and financial resources and
has increased demands on our systems and controls. The process of consolidating
the businesses and implementing the strategic integration of these acquired
businesses with the Company may take a significant amount of time. It may also
place additional strain on our resources and could subject us to additional
expenses. We cannot assure that we will be able to integrate these companies
successfully or in a timely manner. In addition, we cannot assure that our
existing operating and financial control systems and infrastructure will be
adequate to maintain and effectively monitor future growth.
Our continued growth may also increase our need for qualified personnel. We
cannot assure that we will be successful in attracting, integrating and
retaining such personnel. The following risks, associated with the growth of
our Company, could have a material adverse effect on our business, results of
operations and financial condition:
. our inability to continue to upgrade our networking systems or our
operating and financial control systems;
. our inability to recruit and hire necessary personnel or to successfully
integrate new personnel into our operations;
. our inability to successfully integrate the operations of acquired
companies or to manage our growth effectively; or
. our inability to adequately respond to the emergence of unexpected
expansion difficulties.
RISKS ASSOCIATED WITH ACQUISITIONS OF BANDWIDTH AND STRATEGIC ALLIANCE WITH IXC
<PAGE>
We are subject to a variety of risks relating to our recent acquisitions of
fiber-based telecommunications bandwidth from IXC and various other global
network suppliers and the delivery, operation and maintenance of such bandwidth.
Such risks include, among other things, the following:
. the risk that financial, legal, technical and/or other matters may
adversely affect such suppliers' ability to perform their respective
operation, maintenance and other services relating to such bandwidth, which
may adversely affect our use of such bandwidth;
. the risk that we will not have access to sufficient additional capital
and/or financing on satisfactory terms to enable us to make the necessary
capital expenditures to take full advantage of such bandwidth;
. the risk that such suppliers may not continue to have the necessary
financial resources to enable them to complete, or may otherwise elect not
to complete, their contemplated buildout of their respective fiber optic
telecommunications systems; and
. the risk that such buildout may be delayed or otherwise adversely affected
by presently unforeseeable legal, technical and/or other factors.
In addition, we are subject to additional risks relating specifically to our
strategic alliance with IXC. Such risks include:
. the risk that, if the fair market value of the IXC Initial Shares (as
defined) is less than $240 million on the applicable date, our payment of
the shortfall, whether in cash, stock or a combination thereof, could
result in significant dilution to our shareholders and in IXC's owning a
significant, or even a controlling, portion of our outstanding common
stock, and/or could necessitate a significant cash outlay by the Company,
which in any such event could have a material adverse effect on us, our
shareholders and holders of our other securities;
. the risk that, in the event of a material default by IXC under the IRU
Purchase Agreement at such time as IXC is in bankruptcy, our use of the
bandwidth acquired from IXC may be materially adversely affected or
curtailed;
. the risk that, in the event of a change of control or change in management
of IXC, IXC's successor or new management, as the case may be, may not
share IXC's commitment to the buildout of its fiber optic
telecommunications system or may not otherwise allocate the necessary
human, financial, technical and other resources to satisfactorily meet its
obligations to us under the IRU Purchase Agreement that would adversely
affect our use of the bandwidth acquired from IXC;
. the risk that IXC, as our largest shareholder and through its ex-chairman's
seat on our Board of Directors, could subject us to certain conflicts of
interest or could influence our management in a manner that could adversely
affect our business or control of the Company; and
. the risk that future sales by IXC of substantial numbers of shares of our
common stock could adversely affect the market price of our common stock
and make it more difficult for us to raise funds through equity offerings
and to effect acquisitions of businesses or assets in consideration for
issuances of our common stock.
We cannot assure that we will be successful in overcoming these risks or any
other problems encountered in connection with our acquisitions of bandwidth or
our strategic alliance with IXC.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A component of our strategy is our planned expansion into international markets.
We may need to enter into joint ventures or other strategic relationships with
one or more third parties in order to conduct our foreign operations
successfully. However, we cannot assure that we will be able to obtain the
permits and operating licenses required for us to operate, to hire and train
employees or to market, sell and deliver high quality services in these markets.
In addition to the uncertainty as to our ability to expand our international
presence, there are certain risks inherent in doing business on an international
level. Such risks include:
. unexpected changes in or delays resulting from regulatory requirements,
tariffs, customs, duties and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer payment cycles and problems in collecting accounts receivable;
<PAGE>
. political instability, expropriation, nationalization, war, insurrection
and other political risks;
. fluctuations in currency exchange rates and foreign exchange controls which
restrict or prohibit repatriation of funds;
. technology export and import restrictions or prohibitions;
. delays from customs brokers or government agencies;
. seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world; and
. potentially adverse tax consequences, which could adversely impact the
success of our international operations.
We cannot assure that such factors will not have an adverse effect on our future
international operations and, consequently, on our business, financial condition
and results of operations. In addition, we cannot assure that laws or
administrative practice relating to taxation, foreign exchange or other matters
of countries within which we operate will not change. Any such change could
have a material adverse effect on our business, financial condition and results
of operations.
In particular, we have also recently made significant investments in Japan,
which is currently experiencing a severe economic recession. Other Asian-
Pacific countries in which we operate are also experiencing economic
difficulties and uncertainties. These economic difficulties and uncertainties
could have a material adverse effect on our business, financial condition and
results of operations.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
Our products and services are targeted toward users of the Internet, which has
experienced rapid growth. The market for Internet access and related services
is characterized by rapidly changing technology, evolving industry standards,
changes in customer needs and frequent new product and service introductions.
Our future success will depend, in part, on our ability to effectively use and
develop leading technologies. In particular, we will strive to:
. continue to develop our technical expertise;
. enhance our current services;
. develop new products and services that meet changing customer needs;
. influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis;
. integrate technological advances into our current network; and
. address the compatibility and interoperability issues raised by
technological changes or new industry standards.
We cannot assure that we will be successful in responding to changing technology
or market trends. In addition, services or technologies developed by others may
render our services or technologies uncompetitive or obsolete. Furthermore,
changes to our services in response to market demand may require the adoption of
new technologies that could likewise render certain of our assets
technologically uncompetitive or obsolete. As we accept bandwidth from IXC and
our other existing global network suppliers or acquire bandwidth or equipment
from other suppliers that may better meet our needs than existing bandwidth or
equipment, certain of our assets could be determined to be obsolete or excess.
The disposition of obsolete or excess assets could have a material adverse
effect on our business, financial condition and results of operations.
Even if we do successfully respond to technological advances, the integration of
new technology may require substantial time and expense, and we cannot assure
that we will succeed in adapting our network infrastructure.
DEPENDENCE ON KEY PERSONNEL
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of persons with knowledge of
and experience in the Internet service industry. The process of locating such
personnel with the combination of skills and attributes required to carry out
our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and
<PAGE>
retain qualified management, technical, marketing and sales personnel and upon
the continued contributions of such management and personnel. Our employees may
voluntarily terminate their employment with us at any time. We cannot assure
that we will be successful in attracting and retaining qualified executives and
personnel. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could have a material adverse effect on
our business, financial condition or results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to liability of ISPs for information carried on or disseminated
through their networks is not completely settled. A number of lawsuits have
sought to impose such liability for defamatory speech and infringement of
copyrighted materials. The U.S. Supreme Court has let stand a lower court ruling
which held that an Internet Service Provider was protected from liability for
material posted on its system by a provision of the Communications Decency Act.
However, the findings in that case may not be applicable in other circumstances.
Other courts have held that online service providers and ISPs may, under certain
circumstances, be subject to damages for copying or distributing copyrighted
materials. Certain provisions of the Communications Decency Act, which imposed
criminal penalties for using an interactive computer service for transmitting
obscene or indecent communications, have been found unconstitutional by the U.S.
Supreme Court. However, on October 21, 1998, new federal legislation was enacted
that requires limitations on access to pornography and other material deemed
"harmful to minors." This legislation has been attacked in court as a
violation of the First Amendment. We are unable to predict the outcome of this
case. The imposition upon ISPs or web server hosts of potential liability for
materials carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to such liability. Such measures may
require that we spend substantial resources or discontinue certain product or
service offerings. Any of these actions could have a material adverse effect on
our business, operating results and financial condition.
We carry errors and omissions insurance with a policy limit of $5.0 million,
subject to deductibles and exclusions. Such coverage may not be adequate or
available to compensate us for all liability that may be imposed. The imposition
of liability in excess of, or the unavailability of, such coverage could have a
material adverse effect on our business, financial condition and results of
operations.
The law relating to the regulation and liability of Internet access providers in
relation to information carried or disseminated also is undergoing a process of
development in other countries. Decisions, laws, regulations and other
activities regarding regulation and content liability may significantly affect
the development and profitability of companies offering on-line and Internet
access services, including the Company.
REGULATORY MATTERS
Consistent with our growth and acquisition strategy, we are now engaged in, or
will soon be engaged in, activities that subject us to varying degrees of
federal, state and local regulation. The Federal Communications Commission
("FCC") exercises jurisdiction over all facilities of, and services offered by,
telecommunications carriers to the extent that they involve the provision,
origination or termination of jurisdictionally interstate or international
communications. The state regulatory commissions retain jurisdiction over the
same facilities and services to the extent they involve origination or
termination of jurisdictionally intrastate communications. In addition, as a
result of the passage of the Telecommunications Act of 1996 (the "1996 Act"),
state and federal regulators share responsibility for implementing and enforcing
the domestic pro-competitive policies of the 1996 Act. In particular, state
regulatory commissions have substantial oversight over the provision of
interconnection and non-discriminatory network access by incumbent local
exchange carriers ("ILECs"). Municipal authorities generally have some
jurisdiction over access to rights of way, franchises, zoning and other matters
of local concern.
Our Internet operations are not currently subject to direct regulation by the
FCC or any other governmental agency (other than regulations applicable to
businesses generally). However, due to the increasingly widespread use of the
Internet, it is possible that additional laws and regulations may be adopted.
Such additional laws could cover issues such as content, user pricing, privacy,
libel, intellectual
<PAGE>
property protection and infringement, and technology export and other controls.
We may be subject to similar or other laws and regulations in non-U.S
jurisdictions.
Moreover, the FCC continues to review its regulatory position on the usage of
the basic network and communications facilities by ISPs. Although in an April
1998 Report the FCC determined that ISPs should not be treated as
telecommunications carriers and therefore not regulated, it is expected that
future ISP regulatory status will continue to be uncertain. Indeed, in that
report, the FCC concluded that certain services offered over the Internet, such
as phone-to-phone IP telephony, may be functionally indistinguishable from
traditional telecommunications service offerings and their non-regulated status
may have to be re-examined.
We are unable to predict what regulations may be adopted in the future, or to
what extent existing laws and regulations may be found applicable, or the impact
such new or existing laws may have on our business. We can give no assurance
that new laws or regulations relating to Internet services, or existing laws
found to apply to them, will not have a material adverse effect on us.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from Regional
Bell Operating Companies ("RBOCs") or other telecommunications companies, could
have an adverse effect on our business. Although the FCC has decided not to
allow local telephone companies to impose per-minute access charges on ISPs, and
that decision has been upheld by the reviewing court, further regulatory and
legislative consideration of this issue is likely. In addition, some telephone
companies are seeking relief through state regulatory agencies. Such rules, if
adopted, are likely to have a greater impact on consumer-oriented Internet
access providers than on business-oriented ISPs such as the Company.
Nonetheless, the imposition of access charges would affect our costs of serving
dial-up customers and could have a material adverse effect on our business,
financial condition and results of operations.
In addition to our Internet activities, we have focused attention on acquiring
telecommunications assets and facilities, which is a regulated activity. Our
wholly-owned subsidiary, PSINetworks Company, has received an international
Section 214 license from the FCC to provide global facilities-based
telecommunications services, subjecting it to regulation as a non-dominant
international common carrier. In addition, our wholly-owned subsidiary, PSINet
Telecom UK Limited, has received an international facilities license from DTI
and OFTEL, the responsible telecommunications regulatory bodies in the United
Kingdom. Generally, the FCC and OFTEL have chosen not to closely regulate the
charges or practices of non-dominant carriers, such as our subsidiaries.
Nevertheless, these regulatory agencies act upon complaints against such
carriers for failure to comply with statutory obligations or with the rules,
regulations and policies of such regulatory agencies. These regulatory agencies
also have the power to impose more stringent regulatory requirements on us and
to change our regulatory classification. We believe that, in the current
regulatory environment, such regulatory agencies are unlikely to do so. As we
enter new markets, we anticipate obtaining similar licenses as required by
applicable telecommunications rules and regulations in order to acquire and
maintain telecommunications assets and facilities in such countries.
The laws relating to the provision of telecommunications services in other
countries, and in multinational organizations such as the International
Telecommunications Union, are also undergoing a process of development. As we
continue our program of acquisition and expansion into international markets,
these laws will have an increasing impact on our operations. We can give no
assurance that new or existing laws or regulations will not have a material
adverse effect on us.
PSINetworks Company has also received competitive local exchange carrier
("CLEC") certification in Colorado and Texas, has applied for CLEC
certification in Virginia, California and New York, and is considering the
financial, regulatory and operational implications of becoming a CLEC in certain
other states. As a provider of domestic basic telecommunications services,
particularly competitive local exchange services, we could become subject to
further regulation by the FCC and/or another regulatory agency, including state
and local entities.
<PAGE>
The 1996 Act has caused fundamental changes in the markets for local exchange
services. In particular, the 1996 Act and the FCC rules issued pursuant to it
mandate competition in local markets and require that ILECs interconnect with
CLECs. Under the provisions of the 1996 Act, the FCC and state public utility
commissions share jurisdiction over the implementation of local competition: the
FCC was required to promulgate general rules and the state commissions were
required to arbitrate and approve individual agreements. However, the FCC
interconnection rules implementing the 1996 Act were appealed and, in the case
of the "national pricing" rules, vacated. The Supreme Court has agreed to review
this lower court decision and heard oral arguments on this matter on October 13,
1998. Pending the Supreme Court's decision, state public utility commissions are
free to develop independent pricing policies for interconnection, unbundled
access, resale, and transport and termination of local telecommunications
traffic.
A critical issue for CLECs is the right to receive reciprocal compensation for
the transport and termination of Internet traffic. We believe that, under the
1996 Act and current FCC rules, CLECs are entitled to receive reciprocal
compensation from ILECs for the transport and termination of Internet traffic.
However, some ILECs have disputed payment of reciprocal compensation for
Internet traffic, arguing that ISP traffic is not local traffic. Most states
have required ILECs to pay ISPs reciprocal compensation. However, federal
regulators and some state regulators are currently considering the proper
jurisdictional classification of local calls placed to an ISP and whether ISP
calling triggers an obligation to pay reciprocal compensation. On October 30,
1998, the FCC determined that dedicated Digital Subscriber Line service is an
interstate service and properly tariffed at the interstate level. However, the
FCC specifically did not apply this decision to the question of whether local
exchange carriers are entitled to receive reciprocal compensation when they
deliver circuit-switched dial-up traffic to ISPs. It is expected that the FCC
will address this question in the near future. There can be no assurance that
any FCC decision on this matter will favor our position. An unfavorable result
may have an adverse effect on our potential future revenues as a CLEC as well as
increasing our costs for PRIs in general.
The 1996 Act was intended to increase opportunities for companies to compete in
the local exchange market. However, we cannot give assurance that changes in
current or future regulations by the FCC and state regulatory commissions, or
other legislative or jurisdictional initiatives relating to the
telecommunications industry would not have a material adverse effect on us.
As we become a competitor in local exchange markets, we will become subject to
state requirements regarding provision of intrastate services. This may include
the filing of tarriffs containing rates and conditions. As a new entrant,
without market power, we expect to face a relatively flexible regulatory
environment. Nevertheless, it is possible that some states could require the
approval of the public utilities commission for the issuance of debt or equity
or other transactions which would result in a lien on our property used to
provide intrastate services.
DEPENDENCE ON SUPPLIERS
We have few long-term contracts with our suppliers. We are dependent on third
party suppliers for our leased-line connections or bandwidth. Certain of these
suppliers are or may become competitors of ours, and such suppliers are not
subject to any contractual restrictions upon their ability to compete with us.
If these suppliers change their pricing structures, we may be adversely
affected. Due to the consummation of our transaction with IXC and our recent
acquisitions of telecommunications bandwidth from other global network
providers, we anticipate that our dependence upon certain of these suppliers
will be decreased as we accept delivery of OC-48 bandwidth from IXC and
bandwidth from our other global network providers. Nevertheless, until the
fiber optic telecommunications systems of IXC and our other global network
providers are completed (and in the case of IXC, it is not obligated under the
IRU Purchase Agreement to extend its buildout of the IXC system beyond
approximately 6,640 unique route miles of OC-48 bandwidth) and, in certain
geographic areas, even after such completion, we will continue to be dependent
upon such suppliers. Moreover, any failure or delay of IXC or such other
network providers to deliver bandwidth to us or to provide operations,
maintenance and other services with respect to such bandwidth in a timely or
adequate fashion could adversely affect us.
<PAGE>
We are also dependent on certain third party suppliers of hardware components.
Although we attempt to maintain a minimum of two vendors for each required
product, certain components used by us in providing our networking services are
currently acquired or available from only one source. We have from time to time
experienced delays in the receipt of certain hardware components and
telecommunications facilities, including delays in delivery of PRI
telecommunications facilities (which connect dial-up customers to our network).
A failure by a supplier to deliver quality products on a timely basis, or the
inability to develop alternative sources if and as required, could result in
delays which could have a material adverse effect on us. Our remedies against
suppliers who fail to deliver products on a timely basis are limited by
contractual liability limitations contained in supply agreements and purchase
orders and, in many cases, by practical considerations relating to our desire to
maintain good relationships with the suppliers. As our suppliers revise and
upgrade their equipment technology, we may encounter difficulties in integrating
the new technology into our network.
Certain of the vendors from whom we purchase telecommunications bandwidth,
including the RBOCs, CLECs and other local exchange carriers ("LECs"),
currently are subject to tariff controls and other price constraints which in
the future may be changed. In addition, newly enacted legislation will produce
changes in the market for telecommunications services. These changes may affect
the prices which we are charged by the RBOCs and other carriers, which could
have a material adverse effect on our business, financial condition and results
of operations. Moreover, we are subject to the effects of other potential
regulatory actions which, if taken, could increase the cost of our
telecommunications bandwidth through, for example, the imposition of access
charges.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
Certain of our financing arrangements are secured by substantially all of our
assets and stock of certain of our subsidiaries. These financing arrangements
require that we satisfy certain financial covenants. They also currently
prohibit us from paying dividends and repurchasing our capital stock without the
lender's consent. In the event that the Company is liquidated, our secured
lenders would be entitled to foreclose upon those assets in the event of a
default under the financing arrangements. They would also be entitled to be
repaid from the proceeds of the liquidation of those assets before the assets
would be available for distribution to the holders of our securities. In
addition, the collateral security arrangements under our existing financing
arrangements may adversely affect our ability to obtain additional borrowings.
RISK OF SYSTEM FAILURE OR SHUTDOWN
Our success depends upon our ability to deliver reliable, high-speed access to
the Internet and upon the ability and willingness of our telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. Our network, and other networks providing services to us, are
vulnerable to damage or cessation of operations from fire, earthquakes, severe
storms, power loss, telecommunications failures and similar events, particularly
if such events occur within a high traffic location of the network. We have
designed our network to minimize the risk of such system failure, for instance,
with redundant circuits among POPs to allow traffic rerouting. In addition, we
perform lab and field testing before integrating new and emerging technology
into the network, and we engage in capacity planning. Nonetheless, we cannot
assure that we will not experience failures or shutdowns relating to individual
POPs or even catastrophic failure of the entire network.
We carry business personal property insurance at both scheduled locations and
unscheduled locations, with a blanket property limit of $168.0 million and
business interruption insurance with a blanket limit of $10.0 million. Such
coverage, however, may not be adequate or available to compensate us for all
losses that may occur. In addition, we generally attempt to limit our liability
to customers arising out of network failures by contractually disclaiming all
such liability. In respect of certain services, we have also contractually
limited liability to a usage credit based upon the amount of time that the
system was not operational. We cannot assure, however, that such limitations
will be enforceable. In any event, significant or prolonged system failures or
shutdowns could damage our reputation and result in the loss of customers.
NETWORK SECURITY RISKS; RISKS ASSOCIATED WITH PROVIDING SECURITY SERVICES
<PAGE>
We have implemented certain network security measures, such as limiting physical
and network access to its routers. Nonetheless, the network's infrastructure is
potentially vulnerable to computer viruses, break-ins and similar disruptive
problems caused by its customers or other Internet users. Computer viruses,
break-ins or other problems caused by third parties could lead to interruptions,
delays or cessation in service to our customers. Furthermore, such
inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers. This could, in turn, deter potential customers and
adversely affect existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center at
Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on us.
The security services that we offer in connection with our customers' networks
cannot assure complete protection from computer viruses, break-ins and other
disruptive problems. Although we attempt to limit contractually our liability
in such instances, the occurrence of such problems may result in claims against
or liability on the part of the Company. Such claims, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on our business or reputation or on our ability to attract and
retain customers for our products. Moreover, until more consumer reliance is
placed on security technologies available, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet service
industry and our customer base and revenues.
RISK ASSOCIATED WITH DEPENDENCE ON TECHNOLOGY AND WITH PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon our technology and
technical expertise and, to a lesser degree, on our proprietary rights as well.
In order to establish and protect our technology, we rely on a combination of
copyright, trademark and trade secret laws and contractual restrictions.
Nevertheless, we cannot assure that such measures are adequate to protect our
proprietary technology. It may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization or to
develop similar technology independently. In addition, our products may be
licensed or otherwise utilized in foreign countries where laws may not protect
our proprietary rights to the same extent as do laws in the United States. It
is our policy to require employees and consultants and, when obtainable,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with us. Nonetheless, we cannot assure that these precautions
will be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
In addition, we are also subject to the risk of adverse claims and litigation
alleging infringement by us of the intellectual property rights of others. From
time to time we have received claims that we have infringed other parties'
proprietary rights. While we do not believe that we have infringed the
proprietary rights of other parties, we cannot assure that third parties will
not assert infringement claims in the future with respect to our current or
future products. Such claims may require that we enter into license
arrangements or may result in protracted and costly litigation, regardless of
the merits of such claims. We cannot assure that any necessary licenses will be
available or that, if available, such licenses can be obtained on commercially
reasonable terms.
We have recently introduced new enterprise service offerings, including value-
added, IP-based enterprise communication services and xDSL-based Internet access
services in limited areas. The failure of these services to gain market
acceptance in a timely manner or at all, or the failure of xDSL-based services,
in particular, to achieve significant market coverage could have a material
adverse effect on our business, financial condition and results of operations.
Introduction by the Company of new or enhanced services with reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such services, which could adversely affect our ability to attract
new customers and subscribers. Our services may contain undetected errors or
defects when first introduced or as enhancements are introduced. Despite testing
by the Company or its customers, we cannot assure that errors will not be found
in new services after commencement of commercial deployment. Such errors could
result in
<PAGE>
additional development costs, loss of or delays in market acceptance, diversion
of technical and other resources from our other development efforts and the loss
of credibility with our customers and subscribers. Any such event could have a
material adverse effect on our business, financial condition and results of
operations.
Additionally, if we are unable to match our network capacity to customer demand
for our services, our network could become congested during periods of peak
customer demand. Such congestion could adversely affect the quality of service
we are able to provide. Conversely, due to the high fixed cost nature of our
infrastructure, if our network is under-utilized, it could adversely affect our
ability to provide cost-efficient services. The failure of the Company to match
network capacity to demand could have a material adverse effect on our business,
financial condition or results of operations.
RISKS ASSOCIATED WITH YEAR 2000
The commonly referred to Year 2000 ("Y2K") problem results from the fact that
many existing computer programs and systems use only two digits to identify the
year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other processing
involving the Year 2000 or a later date. We have identified two main areas of
Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or fail,
causing an interruption or decrease in productivity in our operations; and
2. Computer systems or embedded chips of third parties including (without
limitation) financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others ("Material Third Parties") could be disrupted or fail, causing an
interruption or decrease in our ability to continue our operations.
We have developed, or are in the process of developing, detailed plans for
implementation and testing of any necessary modifications to our key computer
systems and equipment with embedded chips to ensure that they are Y2K compliant.
We have engaged a third party consultant to perform an assessment of our
systems, domestically and internationally. We expect that the assessment, which
is being done in stages, will be complete by December 31, 1998. We anticipate
that our domestic internal systems will be Y2K ready by June 30, 1999, and our
international systems will be Y2K compliant by the end of the third quarter of
1999, which is consistent with prior plans. We believe that with these detailed
plans and completed modifications, the Y2K issue will not pose significant
operational problems for us. However, if the modifications and conversions are
not made, or not completed in a timely fashion, the Y2K issue could have a
material impact on our operations.
Our cost of addressing Y2K issues has been minor to date, less than five percent
(5%) of our information technology budget, but this amount will increase as
substantial consultants or personnel resources are required or if operationally-
important equipment must be remediated or replaced. The risk that Y2K issues
could present to us include, without limitation, disruption, delay or cessation
of operations, including operations that are subject to regulatory compliance.
In each case, the correction of the problem could result in substantial expense
and disruption or delay of our operations. The total cost of Y2K assessments
and remediation is funded through cash flows generated through operations and
available from other sources and, to date, we are expensing these costs. The
financial impact of making any required systems changes or other remediation
efforts cannot be known precisely at this time, but it is not expected to be
material to our financial position, results of operations, or cash flows. We
have not canceled any principal information technology projects as a result of
our Y2K effort, although we have rescheduled some tasks to accommodate this
effort.
In addition, we have identified and prioritized and are communicating with
Material Third Parties to determine their Y2K status and any probable impact on
us. We will continue to track and evaluate our long-term relationship with
Material Third Parties based on the responses we receive and on information
learned from other sources. If any of our Material Third Parties are not Y2K
ready and their non-compliance causes a material disruption to any of their
respective businesses, our business could be materially adversely affected.
Disruptions could include, among other things: the failure of a Material
<PAGE>
Third Party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to our facilities; and other interruptions in
the normal course of our operations, the nature and extent of which we cannot
foresee. We will continue to evaluate the nature of these risks, but at this
time we are unable to determine the probability that any such risk will occur,
or if it does occur, what the nature, length or other effects, if any, it may
have on us. If a significant number of Material Third Parties experience
failures in their computer systems or operations due to Y2K non-compliance, it
could affect our ability to process transactions or otherwise engage in similar
normal business activities. For example, while we expect our internal systems,
domestic and international, to be Y2K ready in stages during 1999, we and our
customers who communicate internationally will be dependent upon the Y2K-
readiness of many foreign providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, we and
our customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on the business and
revenues of us and our customers. While many of these risks are outside our
control, we have instituted a program to identify Material Third Parties and to
address any non-compliance issues.
While we believe that we are adequately addressing the Y2K issue, there can be
no assurance that our Y2K analyses will be completed on a timely basis or that
the cost and liabilities associated with the Y2K issue will not materially
adversely impact our business, prospects, revenues or financial position. We
are uncertain as to our most reasonably likely worst case Y2K scenario and have
not yet developed a contingency plan to handle a worst case scenario. We expect
to have a contingency plan to handle this situation by September 30, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price and trading volume of our common stock has been and may
continue to be highly volatile. Factors such as variations in our revenue,
earnings and cash flow and announcements of new service offerings, technological
innovations, strategic alliances and/or acquisitions involving our competitors
or price reductions by us, our competitors or providers of alternative services
could cause the market price of our common stock to fluctuate substantially. In
addition, the stock markets recently have experienced significant price and
volume fluctuations that particularly have affected technology-based companies
and resulted in changes in the market prices of the stocks of many companies
that have not been directly related to the operating performance of those
companies. Such broad market fluctuations have adversely affected and may
continue to adversely affect the market price of our common stock.
INVESTMENT COMPANY ACT
We do not propose to engage in investment activities in a manner or to an extent
which would require us to register as an investment company under the Investment
Company Act of 1940 (the "Investment Company Act"). The Investment Company
Act places restrictions on the capital structure and business activities of
companies registered thereunder. Accordingly, we will seek to limit our holding
of "investment securities" (as defined in the Investment Company Act) to an
amount which is less than 40% of the value of our total assets as calculated
pursuant to the Investment Company Act. The Investment Company Act permits a
company to avoid becoming subject to such Act for a period of up to one year
despite the holding of investment securities in excess of such amount if, among
other things, its Board of Directors has adopted a resolution which states that
it is not the company's intention to become an investment company. Our Board of
Directors may adopt such a resolution with respect to the proceeds of the 11
1/2% Senior Notes offering. Application of the provisions of the Investment
Company Act would have a material adverse effect on us. See "Use of
Proceeds."
UNCERTAINTY OF ARBITRATION RESULTS
On November 25, 1997, Chatterjee Management Company ("Chatterjee") initiated
arbitration proceedings against us before the International Chamber of
Commerce, Court of Arbitration, in London, England, with respect to a joint
venture agreement dated as of September 19, 1996 previously entered into by
Chatterjee and us. As previously disclosed by us in various filings with the
<PAGE>
Commission, on September 19, 1996, we signed an agreement with Chatterjee
pursuant to which we and an investment group led by Chatterjee would establish a
joint venture for the purpose of building an Internet network across Europe and
providing Internet-related services in Europe. Such investment group was to
invest up to $41.0 million in the joint venture. No monies were invested by
Chatterjee or the investment group pursuant to the joint venture agreement nor
were any other actions undertaken to implement it. Following the signing of the
agreement, the parties acknowledged structural difficulties associated with the
joint venture as originally contemplated, which prevented implementation of it.
Instead, they sought, for several months, to negotiate a direct investment in us
by Chatterjee in lieu of the prior agreement. Those negotiations were not
successful.
In the arbitration proceeding, Chatterjee has now alleged that we breached the
joint venture agreement by repudiating our obligations under the agreement and
by breaching a covenant not to compete. In the arbitration, Chatterjee requests
an award declaring that the agreement is still valid and binding upon the
parties and that we stand in breach of the agreement, directing us to
specifically perform our obligations under the agreement or, in the alternative,
awarding Chatterjee compensatory damages in an amount not less than $25.0
million, awarding Chatterjee profits that we have earned or stand to earn in
Europe, and awarding Chatterjee the costs of arbitration, including attorneys'
fees, and interest on the award of damages. We believe that Chatterjee's claims
are without merit and intend vigorously to defend ourself in the arbitration.
The arbitration commenced on October 19, 1998 in London, England. While the
ultimate outcome of the arbitration is uncertain, we believe that we have
meritorious defenses to Chatterjee's claim and intend to continue to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on our business, financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
Some of the information contained in this Report may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or similar words, or by discussions of strategy that involve
risks and uncertainties. These statements may discuss future expectations or
contain projections of results of operations or financial condition or expected
benefits to us resulting from certain acquisitions or transactions. We cannot
assure that the future results indicated, whether expressed or implied, will be
achieved. The Risk Factors noted herein, and other risks and uncertainties,
could cause our actual results to differ materially from those contained in any
forward-looking statement.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND THE CONSOLIDATED BALANCE SHEET AS SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 282,586
<SECURITIES> 52,842
<RECEIVABLES> 41,352
<ALLOWANCES> 4,420
<INVENTORY> 0
<CURRENT-ASSETS> 523,282
<PP&E> 306,120
<DEPRECIATION> 84,730
<TOTAL-ASSETS> 878,630
<CURRENT-LIABILITIES> 122,664
<BONDS> 772,998
0
28,637
<COMMON> 519
<OTHER-SE> (55,789)
<TOTAL-LIABILITY-AND-EQUITY> 878,630
<SALES> 165,732
<TOTAL-REVENUES> 165,732
<CGS> 130,517
<TOTAL-COSTS> 130,517
<OTHER-EXPENSES> 144,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,193
<INCOME-PRETAX> (130,006)
<INCOME-TAX> 65
<INCOME-CONTINUING> (130,071)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (130,071)
<EPS-PRIMARY> 2.70
<EPS-DILUTED> 2.70
</TABLE>
