SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 23, 1997
-----------------
PSINet Inc.
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(Exact name of registrant as specified in its charter)
New York 0-25812 16-1353600
--------------------------- ------------ ---------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
510 Huntmar Park Drive, Herndon, Virginia 20170
- -------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703)904-4100
----------------
_________________________________________________________________
(Former name or former address, if changed since last report)
Page 1 of 27
<PAGE>
Item 5. Other Events.
--------------
On December 23, 1997, PSINet Inc. (the "Company") and iSTAR
internet inc. ("iSTAR"), a Canadian Internet solutions company providing
advanced Internet services for businesses, institutions and individuals,
entered into a Pre-Acquisition Agreement (the "Agreement") for the
acquisition of all of the outstanding common stock of iSTAR.
Under the terms of the Agreement, the Company has made an offer
to purchase all of the outstanding common stock of iSTAR (currently
estimated to be 31,579,220 shares, of which 2,220,869 shares are held by a
wholly-owned subsidiary of iSTAR)for cash consideration of
US$0.52(Cdn.$0.75) per share, subject to the terms and conditions set forth
therein. Total cash consideration, assuming all shares are tendered
pursuant to the offer, is estimated to amount to US$16.6 million (Cdn.
$23.7 million), inclusive of the US$1.2 million (Cdn.$1.7 million) related
to the shares held by the subsidiary. Amounts stated herein in U.S.
dollars are computed at an exchange rate of Cdn.$1.43 : US$1.00 as of
January 6, 1998. In addition, pursuant to the Agreement, the Company and
iSTAR have agreed to terminate their prior agreement, dated November 9,
1997, as amended on November 12, 1997, which, as previously disclosed, had
provided for the Company to acquire all of the outstanding common stock of
iSTAR for US$0.84 (Cdn.$1.206) per share, or approximately US$26.6 million
payable in convertible preferred shares of the Company, pursuant to a plan
of arrangement which would have provided for, among other things, an
amalgamation under Canadian law of iSTAR and PSINet Limited, the Company's
wholly-owned Canadian subsidiary. In connection with the proposed
acquisition of iSTAR, the Company also expects to incur transaction
expenses currently estimated to be approximately US$1.5 million.
Pursuant to the Agreement, the Company has made an offer to
holders of all iSTAR shares by a circular bid prepared in accordance with
Ontario securities laws, other applicable provincial securities law, and
the Multi-Jurisdictional Disclosure System and will keep such offer open
until January 28, 1998. The offer is not subject to any conditions other
than that: (i) there shall have been validly deposited under the offer and
not withdrawn a number of shares constituting at least 51% of the
outstanding iSTAR shares as of the expiry date; (ii) at the time the
Company proposes to take up and pay for deposited shares, there does not
exist any prohibition at law against the Company making the offer or taking
up and paying for all of the shares registered in the names of the holders
resident in Canada under the offer; and (iii) all outstanding warrants or
options to acquire shares shall have been exercised, cancelled or otherwise
terminated. If the Company takes up and pays for the iSTAR shares validly
deposited under the offer, it will exercise its statutory right, if
available, to acquire all of the iSTAR shares not deposited under the offer
or will seek to cause a special
Page 2 of 27
<PAGE>
meeting of shareholders to be called to consider a subsequent transaction
for the purpose of enabling it to acquire all of the iSTAR shares not
deposited under the offer for consideration at least equal to that of the
offer.
Pursuant to the Agreement, the Company has delivered an
irrevocable letter of credit in the amount of Cdn.$22,018,763 of a Canadian
chartered bank in favor of iSTAR and a depositary under the offer. The
purpose of the letter of credit is to secure payment for the iSTAR shares.
iSTAR or the depositary shall be entitled to draw upon the letter of credit
by presenting a written demand for payment to such bank and such draws
shall be used to make payments to all shareholders of iSTAR in exchange for
their shares in accordance with a court-ordered judgment for specific
performance of the Company's obligation to make and complete the offer in
accordance with the Agreement. The depositary shall be entitled to draw
upon the letter of credit by presenting a written demand for payment to
such bank if the Company does not make other arrangements for payment and
such draws shall be used to pay for the shares deposited under the offer on
the expiry date of the offer, and if all the conditions to the offer set
forth in the Agreement have been satisfied or waived.
The change in the consideration to be paid by the Company for the
acquisition of the iSTAR common shares pursuant to the Agreement was
determined through negotiations between the Company and iSTAR conducted on
an arms' length basis.
Concurrently with its execution of the Agreement, the Company and
iSTAR entered into a management agreement pursuant to which the Company
will manage iSTAR's normal business activities prior to completion of the
acquisition. The management agreement became effective when the Company
delivered the letter of credit under the Agreement. Pursuant to the
management agreement, the Company is obligated to finance certain of
iSTAR's liabilities and indebtedness in excess of available cash. The
management agreement permits the Company to consolidate certain costs and
operational activities in anticipation of completion of the acquisition of
iSTAR.
Although there can be no assurance that the transaction will be
completed, this transaction is expected to be completed by January 30,
1998, subject to extension in accordance with the terms of the Agreement.
The acquisition of iSTAR will be accounted for as a purchase business
combination and, accordingly, the purchase price will be allocated to
tangible assets and liabilities acquired with the excess allocated to
intangible assets, which will be amortized over the estimated economic life
of the intangible assets from the date of acquisition. The Company
expects, subject to completion of a final valuation study, to record a
charge for in-process research and development of approximately US$7.0
million related to the iSTAR acquisition in the first quarter of 1998.
Page 3 of 27
<PAGE>
Pro forma financial information giving effect to each of (i) the
current terms of the Company's proposed acquisition of iSTAR pursuant to
the Agreement and (ii) the transactions contemplated by the IRU and Stock
Purchase Agreement, dated as July 22, 1997, between the Company and IXC
Internet Services, Inc., as amended on October 1, 1997 and December 4, 1997
("IXC Purchase Agreement") is included in this Form 8-K.
[Intentionally left blank]
Page 4 of 27
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet as
of September 30, 1997 presents, on a pro forma basis, the Company's
consolidated financial position assuming the acquisition of iSTAR had been
consummated on September 30, 1997. The following Unaudited Pro Forma
Consolidated Statements of Operations for the year ended December 31, 1996
and the nine months ended September 30, 1997 (collectively with the
Unaudited Pro Forma Consolidated Balance Sheet, the "Pro Forma Statements")
present, on a pro forma basis, the Company's consolidated results of
operations assuming the acquisition of iSTAR had been consummated on
January 1, 1996.
The Unaudited Pro Forma Consolidated Balance Sheet at September
30, 1997 combines the unaudited Consolidated Balance Sheet of the Company
as of September 30, 1997 and the unaudited Consolidated Balance Sheet of
iSTAR as of August 31, 1997. The Unaudited Pro Forma Consolidated
Statement of Operations for the year ended December 31, 1996 combines the
audited historical Consolidated Statement of Operations of the Company for
the year ended December 31, 1996 and the unaudited historical Consolidated
Statement of Operations of iSTAR for the twelve month period from December
1, 1995 through November 30, 1996. The Unaudited Pro Forma Consolidated
Statement of Operations for the nine months ended September 30, 1997
combines the unaudited historical Consolidated Statement of Operations of
the Company for the nine months ended September 30, 1997 and the unaudited
historical Consolidated Statement of Operations of iSTAR for the nine month
period from December 1, 1996 through August 31, 1997.
The Pro Forma Statements are not intended to be indicative of the
results which would actually have been obtained had the acquisition of
iSTAR occurred on the dates indicated or which may be obtained in the
future. The pro forma adjustments are based upon available information and
assumptions that the Company believes are reasonable in the circumstances.
The Pro Forma Statements should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto for the year ended
December 31, 1996 and the three and nine months ended September 30, 1997
and the iSTAR Consolidated Financial Statements for the fiscal year ended
May 31, 1997 and the three months ended August 31, 1997, both as previously
filed with the Commission.
The acquisition of iSTAR will be accounted for as a purchase
business combination and, accordingly, the purchase price will be allocated
to net tangible assets acquired and liabilities assumed, based upon their
respective fair values, with the excess allocated to intangible assets
which will be amortized over the estimated economic life of the intangible
assets from the date of acquisition. The Unaudited Pro Forma Consolidated
Balance Sheet reflects the write-off of intangible assets consisting of in-
process research and development costs of $7.2 million related to the
acquisition of iSTAR. The effect of this charge has not been reflected in
the accompanying Unaudited Pro Forma Consolidated Statements of Operations
as it is a non-recurring charge. The allocation of the purchase price
included in the Pro Forma Statements is preliminary and the Company intends
to retain an independent third party to fully evaluate the acquired assets
and liabilities of iSTAR. While the final allocation may differ from this
preliminary allocation, the Registrant does not believe that any purchase
adjustments would differ significantly from the pro forma adjustments
appearing herein.
The pro forma financial information has been further adjusted to
give effect to the Company's acquisition of the PSINet indefeasible rights
of use ("IRUs") pursuant to the IXC Purchase Agreement.
Page 5 of 27
<PAGE>
PSINet Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1996
(Thousands of U.S. Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
PSINet Inc. ISTAR Adjustments (3) Pro
Consolidated (1) Internet Inc.(2) Forma(4)
---------------- ----------------- --------------- ----------
<S> <C> <C> <C> <C>
Revenue $84,351 $20,838 $ $105,189
Other income, net 5,417 - 5,417
-------- -------- ---------- ---------
89,768 20,838 110,606
-------- -------- ---------- ---------
Operating cost and expenses:
Data communications and operations 70,102 30,991 101,093
Sales and marketing 27,064 7,029 34,093
General and administrative 20,648 8,280 28,928
Depreciation and amortization 28,035 3,982 4,196 2a 36,213
-------- -------- ----------- ---------
Total operating costs and expenses 145,849 50,282 4,196 200,327
-------- -------- ----------- ---------
Loss from operations (56,081) (29,444) (4,196) (89,721)
Interest expense (5,025) (173) (1,393)2b (6,591)
Interest income 3,794 553 4,347
Other income 2,863 - 2,863
Equity in loss of affiliate (807) - (807)
------- -------- ------------ ----------
Loss before taxes (55,256) (29,064) (5,589) (89,909)
Income tax benefit 159 - 159
------- -------- ------------ ----------
Net loss $(55,097) $(29,064) $(5,589) $(89,750)
========== ========== ============ ==========
Loss per share $(1.40)
==========
Pro forma loss per share $(2.28)
==========
Shares used in computing loss per share 39,378 39,378
and pro forma loss per share ========== ==========
Pro forma loss per share, as adjusted(5) $(1.81)
==========
Shares used in computing pro forma
loss per share, as adjusted (5) 49,544
=========
</TABLE>
____________________
(1) Reflects the audited consolidated results of operations of the Company
for the year ended December 31, 1996.
(2) Amounts have been derived from the unaudited consolidated results of
operations of iSTAR for the twelve months ended November 30, 1996
prepared in accordance with U.S. generally accepted accounting
principles. Certain amounts have been reclassified to conform with the
Company's presentation.
(3) See Notes to Unaudited Pro Forma Consolidated Statements of Operations
(Note 2 - Pro Forma Adjustments).
(4) Reflects the results of operations of the Company, on a pro forma
basis, assuming the acquisition of iSTAR had been consummated as of
January 1, 1996 (using an average exchange rate of Cdn$1.37 : US$1.00
for the year ended December 31, 1996).
(5) See Notes to Unaudited Pro Forma Consolidated Statements of Operations
(Note 4 - Pro Forma Loss Per Share, as Adjusted).
Page 6 of 27
<PAGE>
PSINet Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 1997
(Thousands of U.S. Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
PSINet,Inc. ISTAR Adjustments (3) Pro
Consolidated (1) Internet Inc.(2) Forma(4)
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Revenue $87,147 $21,691 $ $108,838
Operating cost and expenses:
Data communications and operations 66,847 24,941 91,788
Sales and marketing 18,070 5,352 23,422
General and administrative 16,976 5,650 22,626
Intangible asset write-down - 12,570 12,570
Depreciation and amortization 20,648 4,170 2,044 2a 26,862
--------- --------- ------------- ----------
Total operating costs and expenses 122,541 52,683 2,044 177,268
--------- --------- ------------- ----------
Loss from operations (35,394) (30,992) (2,044) (68,430)
Interest expense (4,162) (378) (712) 2b (5,252)
Interest income 1,995 8 2,003
Other income 119 - 119
Gain on sale of subsidiary 5,701 - 5,701
--------- --------- -------------- ----------
Loss before taxes (31,741) (31,362) (2,756) (65,859)
Income tax benefit 476 0 476
--------- ---------- -------------- ----------
Net loss $(31,265) $(31,362) $(2,756) $(65,383)
========== =========== ============== ==========
Loss per share $(0.78)
==========
Pro forma loss per share $(1.62)
==========
Shares used in computing loss per share
and pro forma loss per share 40,264 40,264
========== ==========
Pro forma loss per share, as adjusted(5) $(1.30)
==========
Shares used in computing pro forma
loss per share, as adjusted (5) 50,430
==========
</TABLE>
____________________
(1) Reflects the unaudited consolidated results of operations of the Company
for the nine months ended September 30, 1997.
(2) Amounts have been derived from the unaudited consolidated results of
operations of iSTAR for the nine months ended August 31, 1997 prepared in
accordance with U.S. generally accepted accounting principles. Certain
amounts have been reclassified to conform with the Company's presentation.
(3) See Notes to Unaudited Pro Forma Consolidated Statements of Operations
(Note 2 - Pro Forma Adjustments).
(4) Reflects the results of operations of the Company, on a pro forma basis,
assuming the acquisition of iSTAR had been consummated as of January 1,
1996 (using an average exchange rate of Cdn$1.37 : US$1.00 for the nine
months ended September 30, 1997).
(5) See Notes to Unaudited Pro Forma Consolidated Statements of Operations
(Note 4 - Pro Forma Loss Per Share, as Adjusted).
Page 7 of 27
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Twelve Months Ended December 31, 1996
and the Nine Months Ended September 30, 1997
Note l - Basis of Presentation
The Unaudited Pro Forma Consolidated Statements of Operations for the
twelve months ended December 31, 1996 and the nine months ended September 30,
1997, reflect the results of operations of the Company for the twelve months
ended December 31, 1996 and the nine months ended September 30, 1997, on a pro
forma basis, assuming the acquisition of iSTAR had been consummated on January
1, 1996. The Unaudited Pro Forma Consolidated Statements of Operations do not
give effect to any potential cost savings and synergies that could result from
the acquisition of iSTAR.
Management believes that the assumptions used in preparing the
Unaudited Pro Forma Consolidated Statements of Operations provide a reasonable
basis for presenting all of the significant effects of the iSTAR acquisition,
that the pro forma adjustments give appropriate effect to those assumptions and
that the pro forma adjustments are properly applied in the Unaudited Pro Forma
Consolidated Statements of Operations.
The pro forma financial information has been further adjusted to give
effect to the Company's acquisition of the PSINet IRUs in conjunction with the
IXC Purchase Agreement.
There were no intercompany transactions between the Company and iSTAR
during the twelve months ended December 31, 1996 and the nine months ended
September 30, 1997.
Note 2 - Pro Forma Adjustments
(a) Reflects the increase in depreciation and amortization resulting from
the allocation of the purchase price to the acquired net tangible
(increase in the basis of fixed assets with estimated lives of three
years) and intangible assets (principally tradename, customer
relationships, assembled workforce and goodwill intangible assets)
relating to iSTAR. The assigned lives of the acquired intangible
assets range over periods from one to 10 years.
(b) Reflects the increase in interest expense on the financing assumed to
be obtained ($15.9 million, 10% per annum, payable over 36 months) in
connection with the acquisition of iSTAR. The Company believes it will
be able to obtain such financing on terms consistent with its current
financing arrangements. However, there can be no assurance that the
Company will be able to raise such funds on favorable terms. Debt
acquisition costs and amortization thereof are expected to be
immaterial and have not been reflected in these pro formas.
Note 3 - Loss per Share and Pro Forma Loss per Share
Loss per share and pro forma loss per share are computed using net loss divided
by the weighted average number of shares of Common Stock that were outstanding
during the periods presented, adjusted for the dilutive effect of common stock
equivalent shares of common stock options and warrants, if any. Common stock
equivalent shares are calculated using the treasury stock method. Pro forma
loss per share on a fully diluted basis is not presented as the fully diluted
effect is antidilutive, as computed.
Page 8 of 27
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Twelve Months Ended December 31, 1996
and the Nine Months Ended September 30, 1997
Note 4 - Pro Forma Loss per Share, as Adjusted
Pro forma loss per share, as adjusted, is computed using the same method as pro
forma loss per share as described in Note 3 above, and assumes the Company's
acquisition of the PSINet IRUs in exchange for such number of shares of the
Company's Common Stock equal to 19.99999% of the issued and outstanding Common
Stock of the Company as of the closing of the transactions contemplated by the
IXC Purchase Agreement (the "Closing"), after giving effect to the shares to be
issued to IXC and to shares issuable upon exercise of existing warrants (the
"Initial Shares"), assuming 10,165,779 shares (which number is equal to
19.99999% of the issued and outstanding Common Stock of the Company as of
December 1, 1997 after giving effect to such issuance and to 224,274 shares of
Common Stock issuable upon exercise of outstanding warrants) of the Company's
Common Stock are issued, and the Contingent Obligation (as defined below) had
been consummated as of the beginning of the period presented. The Contingent
Obligation shall mean the obligation by the Company to deliver (1) additional
shares of the Company's Common Stock (the "Additional Shares"), or, at the
Company's sole option, (2) cash, or (3) a combination thereof, equal to the
shortfall in the fair market value of the Initial Shares below $240 million as
of the earlier of (i) the first anniversary of the date on which 100% of the
bandwidth corresponding to the PSINet IRUs is accepted by PSINet or (ii) the
fourth anniversary of the Closing (the "Determination Date"). Because the
Company does not anticipate that any significant portion of the bandwidth
corresponding to the PSINet IRUs will be accepted and utilized by the Company
until after the Closing, the pro forma loss per share, as adjusted, does not
include any incremental amortization expense relating to such bandwidth or any
potential reductions in operating costs associated with the termination of
existing leased bandwidth. In accordance with rules of the Commission, pro
forma loss per share, as adjusted, does not include any adjustments such as
incremental revenue relating to the acquisition of the PSINet IRUs.
Note 5- Intangible Asset Write-down
During the nine months ended September 30, 1997, iSTAR wrote-off $12.7 million
related to the permanent impairment of certain intangible assets, mainly
customer lists and goodwill, which resulted from iSTAR's acquisitions of
consumer-oriented Internet service providers ("ISPs") and Internet-oriented
professional service companies during iSTAR's fiscal year ended May 31, 1996.
In accordance with guidelines of the Commission, this non-recurring write-off
has not been eliminated from the Unaudited Pro Forma Consolidated Statement of
Operations for the nine months ended September 30, 1997.
On an ongoing basis, iSTAR management reviewed the valuation of customer lists
and goodwill, taking into consideration any events and circumstances which
might have impaired value. As a result of a number of factors involving
changes in the Internet industry in Canada and the evolution of iSTAR from a
provider of access products to a provider of Internet business solutions, iSTAR
management determined that the value of its customer lists and goodwill was
permanently impaired. The value of the customer lists and goodwill included
both the management expertise and the value of the acquired consumer-oriented
customer lists. Since the dial subscriber market in Canada has become a
commodity business, most of the customers acquired from the predecessor ISPs
left iSTAR for other ISPs and iSTAR management determined that the value
associated with the customer lists was permanently impaired and could not be
supported by future expected revenue streams from customers acquired in the
acquisitions. Additionally, most of the former owners and other key management
personnel, whose expertise was used in creating the acquired companies, were no
longer employed by iSTAR. All of these management departures resulted from the
reorganization by iSTAR as it shifted its focus away from the consumer-oriented
dial market in Canada to the corporate-oriented dedicated access market. On an
overall basis, the continuing net cash usage, net losses, loss of management
and increased competition in the Canadian marketplace for consumer-oriented
dial subscribers did not support the existence of the value of the customer
lists and goodwill from the purchased companies.
Page 9 of 27
<PAGE>
PSINet Inc.
Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 1997
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
PSINet Inc. iSTAR Pro Pro Forma, as
Consolidated (1) Internet Inc.(2) Adjustments(3) Forma(4) Adjustments(5) Adjusted(6)
---------------- ---------------- -------------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $40,510 $427 $ $40,937 $ $40,937
Short-term investments and 3,000 569 3,569 3,569
and marketable securities
Accounts receivable, net 13,004 7,250 20,254 20,254
Notes receivable 5,098 340 5,438 5,438
Prepaid expenses 2,597 1,025 3,622 3,622
Other current assets 2,408 - 2,408 2,408
---------- --------- --------- ---------- --------- -----------
Total current assets 66,617 9,611 - 76,228 - 76,228
Property and equipment, net 82,145 10,471 2,493 2b 95,109 95,109
Goodwill and other intangibles, 2,066 - 16,490 2c 18,556 18,556
net
Other assets and deferred charges 3,207 - 3,207 3,207
---------- ---------- ---------- ----------- ---------- ----------
Total assets $154,035 $20,082 $18,983 $193,100 $ - $193,100
========== ========== ========== =========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $3,000 $1,440 $4,440 $4,440
Current portion of long-term debt 32,860 2,453 4,770 2a 40,083 40,083
Trade accounts payable 21,723 6,881 28,604 28,604
Accrued payroll and related 3,323 154 3,477 3,477
expenses
Other accounts payable and accrued 2,341 2,582 12,864 2d 17,787 17,787
liabilities
Deferred revenue 5,398 1,080 6,478 6,478
-------- -------- --------- --------- ---------- ---------
Total current liabilities 68,645 14,590 17,634 100,869 100,869
Long-term debt 25,335 2,451 11,090 2a 38,876 38,876
Other liabilities 1,238 500 1,738 1,738
-------- -------- ---------- --------- ---------- ---------
Total liabilities 95,218 17,541 28,724 141,483 - 141,483
-------- -------- ---------- --------- ---------- ---------
Shareholders' equity:
Common stock 405 69,177 (69,177) 2a 405 102 3a 507
Capital in excess of par value 208,406 2,068 (2,068) 2a 208,406 69,788 3a
113,118 3b 391,312
Treasury stock (2,005) - (2,005) (2,005)
Retained deficit (147,901) (68,704) 61,504 2a (155,101) (155,101)
Cumulative foreign currency (88) (88) (88)
transalation adjustment
Bandwidth asset to be delivered (69,890) 3c
under IRU agreement 0 (113,118) 3c (183,008)
-------- -------- ----------- --------- --------- ----------
Total shareholders' equity 58,817 2,541 (9,741) 51,617 - 51,617
-------- -------- ----------- --------- --------- ----------
Total liabilities and
shareholders' equity $154,035 $20,082 $18,983 $193,100 $ $193,100
========= ========= =========== ========== ========== ==========
</TABLE>
___________________
(1) Reflects the unaudited consolidated financial position of the Company as of
September 30, 1997.
(2) Reflects the unaudited consolidated financial position of iSTAR as of
August 31, 1997.
(3) Reflects the adjustments necessary to give effect to the Company's
acquisition of iSTAR. See Notes to Unaudited Pro Forma Consolidated
Balance Sheet as of September 30, 1997 (Note 2 - Pro Forma Adjustments
Relating to the iSTAR Acquisition).
(4) Reflects the consolidated financial position of the Company, on a pro forma
basis, assuming the acquisition of iSTAR had been consummated on
September 30, 1997 (using an average exchange rate of Cdn$1.39 : US$1.00 as
of September 30, 1997).
(5) Reflects the adjustments necessary to give effect to the Company's
acquisition of the PSINet IRUs in exchange for the Initial Shares and the
Contingent Obligation. See Notes to Unaudited Pro Forma Consolidated
Balance Sheet as of September 30, 1997 (Note 3 - Pro Forma Adjustments
Relating to the IXC Purchase Agreement.
(6) Reflects the consolidated financial position of the Company, on a pro forma
basis, as adjusted, assuming the acquisition of the PSINet IRUs in exchange
for the Initial Shares and the Contingent Obligation and the acquisition of
iSTAR had been consummated as of September 30, 1997.
Page 10 of 27
<PAGE>
PSINet Inc.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
BALANCE SHEET
As of September 30, 1997
Note l - Basis of Presentation
The Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 1997 reflects the consolidated financial position
of the Company as of September 30, 1997, on a pro forma basis,
assuming the acquisition of iSTAR had been consummated on
September 30, 1997.
Management believes that the assumptions used in preparing
the Unaudited Pro Forma Consolidated Balance Sheet provide a
reasonable basis for presenting all of the significant effects
of the acquisition of iSTAR, that the pro forma adjustments give
appropriate effect to those assumptions and that the pro forma
adjustments are properly applied in the Unaudited Pro Forma
Consolidated Balance Sheet.
The pro forma financial information has been further
adjusted to give effect to the Company's acquisition of the
PSINet IRUs in exchange for the Initial Shares and the
Contingent Obligation pursuant to the IXC Purchase Agreement.
Note 2 - Pro Forma Adjustments Relating to the iSTAR Acquisition
(a) Reflects the elimination of the iSTAR common stock, contributed surplus
(capital in excess of par), and retained deficit (includes write-off of
$7.2 million of in-process research and development costs) and the debt
financing assumed to be obtained ($15.9 million, 10% per annum, payable
over 36 months) in connection with the acquisition of iSTAR. The Company
believes it will be able to obtain such financing on terms consistent
with its current financing arrangements. However, there can be no
assurance that the Company will be able to raise such funds on favorable
terms.
(b) Reflects the increase in the basis of fixed assets of iSTAR as the fixed
assets acquired in conjunction with the acquisition of iSTAR will be
recorded at fair value.
(c) Reflects the excess of cost over net tangible assets acquired. For
allocation purposes, the Company has allocated the purchase price of
iSTAR to tangible and intangible assets based on the estimated fair value
of such assets and to identified liabilities. The Company considered the
carrying value of the acquired assets, with the exception of fixed
assets, to approximate their fair value, with all of the excess of such
acquisition costs being attributed to the iSTAR tradename, customer
relationships, goodwill, in-process research and development, assembled
workforce and other intangible assets. The allocation of the purchase
price included in the Pro Forma Statements is preliminary. While the
final allocation may differ from this preliminary allocation, the Company
does not believe that any purchase adjustments would differ significantly
from these pro forma adjustments. The following is a summary of the
adjustment for goodwill and other intangible assets:
(In Thousands
of U.S. Dollars)
----------------
Tradename.......................................$ 1,440
Customer relationships.......................... 12,240
Goodwill........................................ 650
In-process research and development ............ 7,200
Write-off of in-process research and development (7,200)
Assembled workforce ............................ 1,080
Other intangible assets ........................ 1,080
----------
Total intangible assets $ 16,490
==========
Page 11 of 27
<PAGE>
PSINet Inc.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
BALANCE SHEET
As of September 30, 1997
Note 2 - Pro Forma Adjustments Relating to the iSTAR Acquisition (continued)
(d) Reflects the liabilities incurred in conjunction with the acquisition of
iSTAR including investment advisory fees, legal fees, accounting and
consulting fees, contractual employment obligations and costs directly
related to the acquisition.
Note 3 - Pro Forma Adjustments Relating to the IXC Purchase Agreement
(a) Reflects the recording of the issuance of the Initial Shares, assuming
10,165,779 shares (which number is equal to 19.99999% of the issued and
outstanding Common Stock of the Company as of December 1, 1997 after
giving effect to such issuance and to 224,274 shares of Common Stock
issuable upon exercise of outstanding warrants) of the Company's Common
Stock are issued at a price of $6 7/8 per share (based on the last
reported sale price of the Company's Common Stock on The Nasdaq Stock
Market on December 1, 1997) in exchange for the PSINet IRUs at the
Closing. The number of Initial Shares to be issued to IXC and the
amounts to be recorded with respect thereto will be based on the actual
number of shares of the Company's Common Stock issued and outstanding as
of the date of the Closing (after giving effect to such issuance and to
shares issuable upon exercise of then outstanding warrants) and the last
reported sale price of the Company's Common Stock on The Nasdaq Stock
Market as of the date of the Closing.
(b) Reflects the recording of the Company's Contingent Obligation pursuant to
the IXC Purchase Agreement to deliver Additional Shares or, at the
Company's sole option, cash, or a combination thereof to IXC on the
Determination Date, or, at the Company's sole option, on any date after
the Closing (the "Acceleration Date"), as applicable. The Contingent
Obligation is measured at fair value as of the date of the Closing
utilizing the fair value derived under the Black-Scholes valuation model
using an assumed term of four years. This term results in the lowest
fair value for a range of potential terms for the Contingent Obligation
of three to four years. The amount previously recorded for the fair
value of the Contingent Obligation could be adjusted upward in a future
period under certain circumstances.
(c) This amount represents the aggregate fair value of the Initial Shares and
the Contingent Obligation and has been 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 amount of the asset recorded will equal
(i) the ratio of the number of equivalent route miles of OC-48 bandwidth
accepted by the Company to the 10,000 equivalent route miles of OC-48
bandwidth obligated to be delivered by IXC pursuant to the IXC Purchase
Agreement, multiplied by (ii) the aggregate of the fair value of the
Initial Shares determined as of the date of issuance and the amount
recorded for the Contingent Obligation. 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. If the recorded amount
of the asset relating to the PSINet IRUs is adjusted due to a subsequent
increase to the fair value of the Contingent Obligation, the Company will
record adjustments to amortization expense to reflect the amount of
amortization that would have been cumulatively recorded to date based
on the recorded amount of the asset relating to the PSINet IRUs.
Page 12 of 27
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
(c) Exhibits
Exhibit 10-1: Pre-Acquisition Agreement between PSINet Inc. and iSTAR
internet inc., dated December 23, 1997.
[Intentionally left blank]
Page 13 of 27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: January 7, 1998 PSINET INC.
By: /S/ DAVID N. KUNKEL
--------------------------
David N. Kunkel
Senior Vice President,
Secretary and General
Counsel
Page 14 of 27
<PAGE>
Exhibit 10-1
THE PRE-ACQUISITION AGREEMENT entered into this 23rd day of December, 1997.
B E T W E E N:
PSINET INC., a corporation existing under the laws of New York (hereinafter
called the "Offeror")
- - and -
iSTAR internet inc., a corporation existing under the laws of Canada
(hereinafter called the "Company")
RECITALS
WHEREAS:
1. by letter agreement dated November 9, 1997 (the "Original Agreement"),
PSINet and ISTAR agreed, among other things and subject to certain
conditions, that PSINet would purchase all of the shares of ISTAR for
Cdn$1.206 per share payable through the issuance of convertible preferred
shares of PSINet to shareholders of ISTAR;
2. by letter agreement dated November 12, 1997 (the "First Amending
Agreement"), the parties hereto amended the Original Agreement, among other
things, to confirm that the Transaction would be completed by way of plan of
arrangement (the "Arrangement");
3. the Company and the Offeror have agreed to terminate the Original Agreement
and the First Amending Agreement in consideration for the Offeror offering to
purchase all of the outstanding shares of the Company for cash consideration
of Cdn$0.75 per share of the Company by way of take-over bid circular;
4. the board of directors of the Company has determined that it would be in
the best interests of the Company and its shareholders to recommend
acceptance of the Offeror's offer to the shareholders of the Company, to
cooperate with the Offeror and take all reasonable action to support the
Offeror's offer;
5. the board of directors of the Company has determined that it would be in
the best interests of the Company and its shareholders to enter into this
Agreement; and
Page 15 of 27
<PAGE>
6.the Offeror will make an offer subject to the terms and conditions of this
Agreement.
NOW THEREFORE IN CONSIDERATION of the mutual covenants hereinafter
set out, the parties hereto hereby agree as follows:
ARTICLE 1
THE OFFER
1.1 THE OFFER. Subject to the terms and conditions of this Agreement,
the Offeror agrees to mail on or before January 7, 1998 to all
holders of shares of the Company an offer to purchase all of the
shares of the Company ((the "Shares"), and the holders of Shares
are hereinafter called the "Shareholders") for a consideration of
Cdn$0.75 per Share, subject to the terms and conditions set out in
Schedule "A" to this Agreement (the "Offer") as the same may be
amended pursuant to the terms hereof. The Offeror further agrees
that it will not, except with the prior consent of the Company,
amend the terms of the Offer other than to increase the
consideration or to waive any conditions or to extend the expiry
thereof, provided in such case that all Shares deposited under the
Offer are taken up and paid for on or before January 30, 1998.
1.2 COMPANY APPROVAL OF THE OFFER.
(a) The Company represents that its board of directors, upon
consultation with its advisors, has determined that:
(i) the Offer is fair to the Shareholders and is in the best
interests of the Company and the Shareholders;
(ii) the board of directors will recommend that Shareholders
accept the Offer;
(iii) this Agreement is in the best interests of the
Company and the Shareholders; and
(iv) the individual members of the board of directors who
beneficially hold Shares have agreed to deposit their
Shares under the Offer.
(b) The Company represents that the board of directors has
received an opinion from the Company's
financial advisors to the effect that the Offer is fair from a
financial point of view to the Shareholders.
1.3 MUTUAL COOPERATION. The Offeror covenants to cooperate with the
Company to take all reasonable action to provide the Company, on a
confidential basis, with a draft copy of the take-over bid circular
or any amendment thereto to be issued, prior to the mailing
thereof, and to provide the Company with a reasonable opportunity
to review and provide comments thereon. The Company covenants to
cooperate
Page 16 of 27
<PAGE>
with the Offeror to take all reasonable action to support
the Offer and to provide the Offeror, on a confidential basis, with
a draft copy of the Directors' Circular or any amendment thereto to
be issued, prior to the mailing thereof, and to provide the Offeror
with a reasonable opportunity to review and provide comments
thereon. The Company further covenants to use reasonable
commercial efforts to mail the Directors' Circular to be issued in
connection with the mailing of the Offer on the same date that the
Offeror mails the Offer to the Shareholders. If required by the
Offeror, the Company shall cause its wholly-owned subsidiary which
owns Shares to deposit such Shares under the Offer.
1.4 JOINT PRESS RELEASE AND PUBLIC DISCLOSURE. The parties agree to
jointly issue a press release as soon as practicable in a mutually
agreeable form and the Company agrees to file a copy of this
Agreement as soon as possible with the securities regulatory
authorities having jurisdiction over the Company.
1.5 POST OFFER COVENANTS. The Company agrees and represents that its
board of directors has determined to use its and their respective
reasonable efforts to enable the Offeror to elect or appoint all of
the directors of the Company as soon as possible after the Offeror
takes up and pays for at least 50% of the outstanding Shares
pursuant to the Offer.
1.6 MANAGEMENT AGREEMENT. Contemporaneously with the signing of this
Agreement, the parties hereto shall enter into a management
agreement in form satisfactory to the parties (the "Management
Agreement").
1.7 MUTUAL RELEASES. The Company and the Offeror agree that the
Original Agreement and the First Amending Agreement are each hereby
terminated. The Company and the Offeror each shall execute a form
of release to release the other from all of its respective
obligations under such agreements in form satisfactory to each
party hereto, which forms of releases shall be held in escrow until
the date on which the letter of credit described in section 3.3
hereof is presented to the Company. In the
event that such letter of credit is not presented to the Company on
or before December 31, 1997, the releases shall be deemed to be
null and void and the parties hereto shall be considered to have
preserved their rights under the Original Agreement and the First
Amending Agreement.
ARTICLE II
COVENANTS OF THE COMPANY
2.1 ORDINARY COURSE OF BUSINESS. The Company covenants and agrees
that, prior to the time (the "Effective Time") of the appointment
or election to the board of directors of the Company of persons
designated by the Offeror pursuant to section 1.5, unless the
Offeror shall otherwise agree in writing or as otherwise expressly
contemplated or permitted by this Agreement, the Company covenants
and agrees:
Page 17 of 27
<PAGE>
(a) not to declare or pay any dividend or make any distribution of
its properties or assets to its shareholders or, other than as
provided for herein, purchase, redeem or retire any shares of
its capital stock or other securities of the Company;
(b) not to allot or issue, or enter into any agreement for the
allotment or issuance of, or grant any other rights to
acquire, shares of its capital stock or the capital stock of
any of its subsidiaries or securities convertible into,
exchangeable for or which carry a right to acquire, directly
or indirectly, shares of its capital stock or the capital
stock of any of its subsidiaries;
(c) not to, and not to permit any subsidiary to, merge,
amalgamate, or consolidate into or with any person or enter
into any other corporate reorganization, or, sell all or any
substantial part of its assets to any person, or, perform any
act or enter into any transaction or negotiation which can
reasonably be expected to interfere or be inconsistent with
the consummation of the transactions contemplated hereby;
(d) not to, and not permit any subsidiary to, alter or amend its
articles or bylaws, as they exist at the date of this
agreement;
(e) to use all reasonable efforts to make all filings and obtain
all consents, approvals and waivers necessary or desirable in
connection with the Offer and the transactions contemplated
hereby and to take such other measures as may be appropriate
to fulfil its obligations under and to carry out the
transactions contemplated by this agreement; and
(f) not to borrow any amounts greater than $5,000 other than in
accordance with the Management Agreement.
ARTICLE III
COVENANTS OF THE OFFEROR
3.1 EMPLOYMENT AGREEMENTS. The Offeror covenants and agrees, and after
the Effective Time will cause the Company and any successor to the
Company to agree, to honour and comply with the terms of those
existing employment and severance agreements of the Company and its
Subsidiaries which the Company has disclosed to the Offeror in
writing prior to the date hereof.
3.2 OFFICERS' AND DIRECTORS' INSURANCE. The Offeror agrees to use
reasonable efforts after the Effective Time to secure directors'
and officers' insurance coverage for the Company's current and
former directors and officers on a seven year "trailing" (or "run-
off") basis. If a trailing policy is not available at a reasonable
cost (a "reasonable cost" being an aggregate cost not greater than
$200,000), then the Offeror agrees that for the entire period from
the Effective Time until seven years
Page 18 of 27
<PAGE>
after the Effective Time, the Offeror will cause the Company or
any successor to the Company to maintain the Company's current
directors' and officers' insurance policy or an equivalent policy,
subject in either case to terms and conditions no less advantageous
to the directors and officers of the Company than those contained
in the policy in effect on the date hereof, for all present and
former directors and officers of the Company, covering claims made
prior to or within seven years after the Effective Time.
3.3 LETTER OF CREDIT. (1) The Offeror agrees to deliver on or before
December 31, 1997 an irrevocable letter of credit in the amount of
Cdn$22,018,763 drawn on a Canadian chartered bank in favour of the
Company and the Depositary under the Offer.
(2) The Company or the Depositary shall be entitled to draw upon
the letter of credit by presenting a written demand for payment to
such bank if the Offeror does not mail the take-over bid circular
in connection with the Offer by January 7, 1998 unless the Offeror
is prevented from doing so by the Company or force majeure and such
draws shall be used to make payments to shareholders of the Company
in exchange for their Shares in accordance with the Offer or in
accordance with a court ordered judgment for specific performance
of the Offeror's obligation to make and complete the Offer in
accordance with section 8.2 hereof.
(3) The Depositary shall be entitled to draw upon the letter of
credit by presenting a written demand for payment to such bank if
the Offeror does not make other arrangements for payment and such
draws shall be used to pay for the Shares deposited under the Offer
on the expiry date of the Offer if all of the conditions to the
Offer set out in Schedule "A" hereto have been satisfied or waived,
provided that the Depositary shall be entitled to draw only if it
has been advised by the Company that the condition contained in
paragraph 4(iii) of Schedule "A" hereto has been satisfied and has
not been jointly advised by counsel to the Company and counsel to
the Offeror that the condition contained in paragraph 4(ii) of
Schedule "A" has not been satisfied.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
4.1 REPRESENTATIONS. The Company hereby provides to the Offeror those
representations and warranties as set forth in Schedule "B" to this
Agreement (and acknowledges that the Offeror is relying upon those
representations and warranties in entering into this Agreement).
Page 19 of 27
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE OFFEROR
5.1 REPRESENTATIONS. The Offeror hereby represents and warrants to the
Company as provided in Schedule "C" to this Agreement (and
acknowledges that the Company is relying upon such representations
and warranties in entering into this Agreement).
ARTICLE VI
MUTUAL COVENANTS
6.1 CONSULTATION. The Offeror and the Company agree to consult with
each other in issuing any press releases or otherwise making public
statements with respect to the Offer and in making any filings with
any federal, provincial or state governmental or regulatory agency
or with any stock exchange with respect thereto. Each party shall
use its reasonable efforts to enable the other party to review and
comment on all such press releases prior to the release thereof.
6.2 FURTHER ASSURANCES. Subject to the terms and conditions herein,
the Offeror and the Company agree to use their respective
reasonable efforts to take, or cause to be taken, all action and to
do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations, to consummate the
transactions contemplated by this Agreement and the Offer. The
Company and the Offeror will, and will cause each of their
respective subsidiaries to, use their reasonable efforts (i) to
obtain all necessary waivers, consents and approvals from other
parties to material loan agreements, leases and other contracts or
agreements, (ii) to obtain all necessary consents, approvals and
authorizations as are required to be obtained under any federal,
provincial, state or foreign law or regulations with respect to
this Agreement or the Offer, (iii) to lift or rescind any
injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions
contemplated hereby or by the Offer, and (iv) to fulfil all
conditions and satisfy all provisions of this Agreement and the
Offer.
ARTICLE VII
TERMINATION
7.1 AUTOMATIC TERMINATION. Provided that the Offeror is not in breach
of this Agreement, the letter of credit referred to in section 3.3
hereof and any funds drawn under such letter of credit shall be
released to the Offeror and this Agreement will terminate
automatically upon:
(i) the expiry of the Offer if the Offeror has not purchased
Shares pursuant to the Offer; or
Page 20 of 27
<PAGE>
(ii) the occurrence of either of the events described in section
7.2(i) and section 7.2(ii).
7.2 FEES AND EXPENSES. The Company shall pay the Offeror a fee of
Cdn$1,000,000 within two business days of the earlier to occur of
the following events:
(i) the board of directors of the Company withdrawing its
determination referred to in section 1.2(a)(ii) hereof; or
(ii) a third party acquiring more than 50% of the Shares pursuant
to any transaction on or before April 30, 1998.
7.3 SURVIVAL. The mutual releases referred to in section 1.7 hereof
shall survive any termination of this
Agreement in accordance with sections 7.1 and 7.2 hereof.
ARTICLE VIII
MISCELLANEOUS
8.1 AMENDMENT OR WAIVER. This Agreement may be amended, modified or
superseded, and any of the terms, covenants, representations,
warranties or conditions hereof may be waived, but only by written
instrument executed by the Offeror and the Company; provided,
however, that either the Offeror or the Company may in its
discretion waive a condition herein which is solely for its benefit
without the consent of the other. No waiver of any nature, in any
one or more instances, shall be deemed or construed as a further or
continued waiver of any condition or any breach of any other term,
representation or warranty in this Agreement.
8.2 SPECIFIC PERFORMANCE. (1) The Offeror and the Company agree that
monetary damages would not sufficient to remedy any breach by the
Offeror of any term or provision of this Agreement and agree that
the Company will be entitled, in addition to any other remedy
available at law or in equity, to equitable relief, including
specific performance, in the event of any breach hereof.
(2) The Offeror and the Company further agree that if the
Offeror fails to complete its obligations pursuant to paragraphs
1.1 and Article III herein, then the Company may make an
application to a judge sitting on the Commercial List of the
Ontario Court (General Division) for an order of specific
performance compelling the Offeror to fulfil such obligations (the
"Application"). The Offeror further agrees that it will not in any
way oppose the nature of the relief sought and will consent to the
Application and the nature of the relief sought.
8.3 FIDUCIARY DUTIES. Nothing contained in this Agreement shall
prevent the Board of Directors of the Company from taking any
action which the Board of Directors of the Company determines in
good faith after receiving a written opinion of outside
Page 21 of 27
<PAGE>
counsel, or advice of outside counsel that is reflected in the
minutes of the Board of Directors of the Company, to the effect
that the Board of Directors of the Company is required to take
such action in order to discharge properly its fiduciary duties.
8.4 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement
between the parties with respect to the subject matter hereof and
supersede all prior agreements, representations, warranties,
arrangements or understandings (whether oral or in writing) with
respect thereto.
8.5 HEADINGS. The descriptive headings are for convenience of
reference only and shall not control or affect the meaning or
construction of any provisions of this Agreement.
8.6 NOTICES. All notices or other communications which are required or
permitted hereunder shall be communicated confidentially and in
writing and shall be sufficient if delivered personally, or sent by
confidential telecopier addressed as follows:
To the Offeror:
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia
20170-5100 U.S.A.
Attention: William Schrader, Chairman
Facsimile: (703) 904-1608
With a copy to:
Fraser & Beatty
100 King Street West
1 First Canadian Place
P.O. Box 100
Toronto, Ontario, M5X 1B2
Attention: Jeffery Barnes
Facsimile: (416) 863-4644
With a copy to:
Stikeman, Elliott
Suite 5300
Commerce Court West
Toronto, Ontario
M5L 2B9
Page 22 of 27
<PAGE>
Attention: Roderick F. Barrett
Facsimile: (416) 947-0866
To the Company:
iSTAR internet Inc.
Royal Bank Tower
200 Bay Street
North Tower, Suite 2200
Toronto, Ontario
M5J 2J4
Attention: Jack O. Kiervin, Chairman
Facsimile: (416) 363-6666
8.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each such counterpart shall be deemed to be an original
instrument but all such counterparts together shall constitute but one
Agreement.
8.8 EXPENSES. Each party will pay its own expenses in connection with this
Agreement and the transactions contemplated herein.
8.9 ASSIGNMENT. The Offeror may assign all or any part of its rights or
obligations under this Agreement to a direct or indirect wholly-owned
subsidiary of the Offeror, provided that any such assignment will have
no adverse tax or other effects to the Company or the Shareholders, and
provided further that if such assignment takes place, the Offeror shall
continue to be liable to the Company for any default in performance by
the assignee. This Agreement shall not otherwise be assignable by
either party without the prior written consent of the other party.
8.10 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants
and restrictions of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired or invalidated and the parties
shall negotiate in good faith to modify the Agreement to preserve each
party's anticipated benefits nder the Agreement.
8.11 CHOICE OF LAW. This Agreement shall be governed by, construed and
interpreted in accordance with the laws of the Province of Ontario.
8.12 ATTORNMENT. The Offeror agrees that any action or proceeding arising
out of or relating to this Agreement may be instituted in the courts of
Ontario, waives any objection which it may have now or hereafter to the
venue of any such action or proceeding, irrevocably submits to the
jurisdiction of the said courts in any such action or proceeding, agrees
to be bound by any judgment of the said courts and not to seek, and
hereby waives, any review of the merits of any such judgment by the
courts of any other jurisdiction and hereby
Page 23 of 27
<PAGE>
appoints Fraser & Beatty, 100 King Street West, 1 First Canadian Place,
P.O. Box 100, Toronto, Ontario, M5X 1B2 as its attorney for service
of process.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to
be executed on their behalf by their officers thereunto duly authorized as of
the date first written above.
PSINET INC.
(SIGNED) "WILLIAM SCHRADER"
---------------------------------------------
by: William Schrader
iSTAR internet inc.
(SIGNED) "CRAIG WALLACE"
---------------------------------------------
by: Craig Wallace
Page 24 of 27
<PAGE>
SCHEDULE "A"
TERMS OF THE OFFER
1. GENERAL TERMS. The Offer shall be made for all Shares and to all
Shareholders by a circular bid prepared in compliance with the
SECURITIES ACT (Ontario) and other applicable provincial securities laws
and in accordance with MJDS.
2. EXPIRY DATE. The Offer shall be open until January 30, 1998, provided
that if all Shares deposited under the Offer are taken up and paid for
on January 30, 1998, the Offeror may extend such offer period until such
later date as it may determine without the approval of the Company.
3. OFFER PRICE. The Offer shall be made for consideration of not less than
Cdn$0.75 per Share.
4. CONDITIONS OF THE OFFER. The Offer shall not be subject to any
conditions other than the following:
(i) there shall have been validly deposited under the Offer and not
withdrawn a number of Shares constituting at least 51% of the
outstanding Shares as of the Expiry Date;
(ii) at the time the Offeror proposes to take up and pay for the Shares,
there does not exist any prohibition at law against the Offeror
making the Offer or taking up and paying for all of the Shares
registered in the names of holders resident in Canada under the
Offer;
(iii)all outstanding warrants or options to acquire Shares shall have
been exercised, cancelled or otherwise terminated.
The foregoing conditions are for the exclusive benefit of the Offeror
and may be waived by the Offeror in whole or in part at any time and from
time to time.
Page 25 of 27
<PAGE>
SCHEDULE "B"
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
(a) The Company (including all entities controlled by the Company) does not
have assets located in the U.S. having an aggregate book value of US$15
million more.
(b) The Company did not make aggregate sales in or into the United States of
America of US$25 million or more during its most recent fiscal year.
(c) The Company is a "foreign private issuer" within the meaning of
Securities and Exchange Commission ("SEC") Rule 3b-4 and is not an
investment company registered or required to be registered under the
U.S. Investment Company Act of 1940, as amended.
(d) Less than 40% of each class of the Company's securities outstanding that
are subject to the Offer are held by U.S. holders (including affiliates
of the Company) and the Company's most recent annual report or annual
information form filed or submitted by the Company with any Canadian
federal or provincial securities regulator or the SEC did not contain
any information to the contrary.
(e) The aggregate trading volume of such securities on securities exchanges
and Nasdaq in the United States of America did not exceed the aggregate
trading volume of such securities on securities exchanges in Canada and
on the Canadian Dealing Network, Inc. ("CDN") over the 12-month period
prior to commencement of the Offer (based on volume figures published by
such exchanges, Nasdaq and CDN).
(f) None of the Shares is registered pursuant to section 12 of the United
States SECURITIES EXCHANGE ACT OF 1934, as amended, and the Company is
not an insurance company or a closed-end investment company.
(g) At the date hereof, the only outstanding securities convertible into
Shares are options to purchase an aggregate of 2,107,537 Shares at
exercise prices not less than $2.10 per share and a warrant outstanding
to purchase 48,107 Shares at an exercise price of $4.10 per share.
Page 26 of 27
<PAGE>
SCHEDULE "C"
REPRESENTATIONS AND WARRANTIES OF THE OFFEROR
(a) The Offeror has made arrangements to ensure that required funds are
available to effect payment in full for all Shares offered to be
acquired pursuant to the Offer.
(b) There are no Canadian provincial or United States federal securities
regulatory or New York state corporate approvals or consents necessary
to make and complete the Offer.
Page 27 of 27
