<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
PSINET INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
New York 4813 16-1353600
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number) Identification No.)
</TABLE>
510 Huntmar Park Drive, Herndon, Virginia 20170
(703) 904-4100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
David N. Kunkel, Esq.
Senior Vice President, General Counsel and Secretary
PSINet Inc.
510 Huntmar Park Drive, Herndon, Virginia 20170
Telephone No.: (703) 904-4100/Facsimile No.: (703) 904-9527
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_____________
Copies To:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue, New York, New York 10022
Attention: Richard F. Langan, Jr., Esq.
Bruce E. Rosenthal, Esq.
Telephone No.: (212) 940-3140/Facsimile No.: (212) 940-3111
_____________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Class of Securities Amount to be Offering Price Aggregate Offering Amount of
to be registered Registered Per Unit (1) Price (2) Registration Fee
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10% Senior Notes Due 2005, $600,000,000 $1,027.20 $616,320,000 $181,814.40
Series B
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</TABLE>
(1) Based on the average of the closing bid and asked price of $1,027.20 per
$1,000 principal amount of the Initial Notes (as defined herein) at close
of business on April 29, 1998.
(2) Estimated solely for purposes of calculating the registration fee
calculated pursuant to the provisions of Rule 457(c) under the Securities
Act of 1933, as amended, as the market value of the securities to be
canceled in the exchange.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF SUCH STATE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
April 30, 1998
_____________
PSINET INC.
Offer to Exchange
New 10% Senior Notes Due 2005
Which Have Been Registered Under the Securities Act
For all Outstanding 10% Senior Notes Due 2005
_____________
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , 1998, UNLESS EXTENDED
PSINet Inc., a New York corporation ("PSINet" or the "Company"), hereby
offers upon the terms and conditions set forth in this prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal" and together with the Prospectus, the "Exchange Offer") to exchange
up to an aggregate principal amount of $600,000,000 of its new 10% Senior Notes
due 2005, Series B (the "Exchange Notes") (as defined in that certain Indenture
dated as of April 13, 1998 (the "Indenture") by and between the Company and
Wilmington Trust Company, as Trustee ("Trustee")) for $600,000,000 aggregate
principal amount of the Company's outstanding 10% Senior Notes due 2005, Series
A (the "Initial Notes"). The terms of the Exchange Notes are substantially
identical in all material respects to those of the Initial Notes, except that
(i) the Exchange Notes will have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and therefore will not be subject to
certain restrictions on transfer applicable to the Initial Notes and (ii) the
holders of Exchange Notes generally will not be entitled to the rights of the
holders of Initial Notes under the Registration Rights Agreement including the
right to payment of Liquidated Damages (as defined) following consummation of
the Exchange Offer. See "Description of Notes." Holders of the Initial Notes
(the "Initial Holders"), together with Holders of the Exchange Notes (the
"Exchange Holders"), are referred to herein collectively as "Holders." The
Exchange Notes will be issued pursuant to, and the Exchange Holders will be
entitled to the benefit of, the Indenture governing the Notes. The Exchange
Notes, together with the Notes, are referred to herein collectively as the
"Notes."
The Exchange Notes will be senior unsecured obligations of the Company
ranking pari passu in right of payment with 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 Notes
will be effectively subordinated to all secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness and to the
claims of creditors and the holders of preferred stock, if any, of the Company's
subsidiaries. As of December 31, 1997, on a pro forma basis after giving effect
to the Initial Notes Offering (as defined) and the application of the net
proceeds therefrom, there would have been approximately $79.4 million of total
secured indebtedness outstanding to which Holders would have been effectively
subordinated in right of payment and approximately $38.9 million of total
liabilities of the Company's subsidiaries (including trade payables and accrued
liabilities) to which Holders would have been structurally subordinated. See
"Description of the Notes."
FOR A DISCUSSION OF CERTAIN MATTERS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS IN EVALUATING AN INVESTMENT IN THE EXCHANGE NOTES,
SEE "RISK FACTORS" COMMENCING ON PAGE 16.
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO INITIAL
HOLDERS ON OR ABOUT _________, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ______ , 1998.
(cover page continues)
<PAGE>
The Notes will mature on February 15, 2005. Interest on the Notes will be
payable semi-annually on August 15 and February 15 of each year, commencing
August 15, 1998. Concurrently with the closing of the Initial Notes Offering,
the Company deposited with the Escrow Agent (as defined) $138.7 million which,
together with the proceeds from the investment thereof, will be sufficient to
pay when due the first five semi-annual interest payments on the Notes. The
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after February 15, 2002, at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. In
addition, on or prior to February 15, 2001, the Company may redeem up to 35% of
the original aggregate principal amount of the Notes at a redemption price of
110.0% of the principal amount thereof plus accrued and unpaid interest to the
date of redemption, with the net cash proceeds of one or more Public Equity
Offerings (as defined) or the sale of capital stock to one or more Strategic
Investors (as defined), provided that at least 65% of the original aggregate
principal amount of the Notes remains outstanding immediately after such
redemption. In the event of a Change of Control (as defined), the Company will
be required to make an offer to purchase the Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest thereon,
if any, to the date of repurchase. See "Description of Notes -- Original
Redemption" and "-- Change of Control."
There is no established trading market for the Notes and the Company does
not intend to apply for listing on any securities exchange; however, the Notes
are eligible for trading in the Private Offerings, Resale and Trading through
Automated Linkages ("PORTAL") market of the National Association of Securities
Dealers, Inc. See "Plan of Distribution."
The Exchange Notes will bear interest from the most recent date to which
interest has been paid on the Initial Notes or, if no interest has been paid on
the Initial Notes, from April 13, 1998. Accordingly, if the relevant record
date for interest payment occurs after the consummation of the Exchange Offer,
registered holders of Exchange Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from April 13, 1998. If, however, the relevant record
date for interest payments occurs prior to the consummation of the Exchange
Offer, registered holders of Initial Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid or,
if no interest has been paid, from April 13, 1998. Initial Notes accepted for
exchange will cease to accrue interest from and after the date of consummation
of the Exchange Offer, except as set forth in the immediately preceding
sentence. Holders of Initial Notes whose Initial Notes are accepted for
exchange will not receive any payment in respect of interest on such Initial
Notes otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined). Based on interpretations of the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Initial Notes may be offered for resale,
resold and otherwise transferred by Holders thereof (other than any such Holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act")), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
Holders' business and that such Holder has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act) of such Exchange Notes. The Company acknowledges and each
Holder, other than a broker-dealer, must acknowledge that it has not engaged in,
does not intend to engage in, and has no arrangement or understanding with any
person to participate in the distribution of Exchange Notes. If any Holder is
an affiliate of the Company, is engaged in or intends to engage in, or has any
arrangement or understanding with any person to participate in the distribution
of the Exchange Notes to be acquired pursuant to the Exchange Offer, such Holder
(i) cannot rely on the applicable interpretations of the staff of the Commission
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer who holds Initial Notes acquired for its own account as
a result of market-making activities or other trading activities, and who
receives Exchange Notes in exchange for such Initial Notes pursuant to the
Exchange Offer, may be deemed an "underwriter" pursuant to the Securities Act in
connection with the resale of such Exchange Notes. Such broker-dealers who have
acquired Initial Notes as a result of market-making activities may use this
Prospectus, as amended or supplemented from time to time, in connection with
resales of Exchange
- ii -
<PAGE>
Notes received in exchange for Initial Notes to satisfy the prospectus delivery
requirement of the Securities Act. 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 has agreed to use its
best efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented, amended and current for a period of one year from the
Consummation Deadline (as defined) or such shorter period as will terminate when
all Initial Notes covered by such Exchange Offer Registration Statement have
been sold pursuant thereto. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. Tenders of
Initial Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date. If the Company terminates the Exchange Offer and does
not accept for exchange any of the Initial Notes, the Company will promptly
return Initial Notes to the holders thereof. See "The Exchange Offer."
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OF SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
UNTIL _______, 1998 (___ DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN
CONNECTION WITH SUCH TRANSACTION.
- iii -
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PROSPECTUS SUMMARY.................................................... 1
RISK FACTORS.......................................................... 16
USE OF PROCEEDS....................................................... 28
THE EXCHANGE OFFER.................................................... 29
CAPITALIZATION........................................................ 42
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA.................... 43
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 52
BUSINESS.............................................................. 63
MANAGEMENT............................................................ 78
COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS AND DIRECTORS.. 82
CERTAIN TRANSACTIONS.................................................. 86
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 90
DESCRIPTION OF NOTES.................................................. 92
PLAN OF DISTRIBUTION.................................................. 125
LEGAL MATTERS......................................................... 125
EXPERTS............................................................... 125
AVAILABLE INFORMATION................................................. 126
GLOSSARY.............................................................. 127
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-1
ANNEX A: FORM OF LETTER OF TRANSMITTAL................................ A-1
</TABLE>
_______________________
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN OF THE MATTERS DISCUSSED IN THIS PROSPECTUS, INCLUDING DOCUMENTS
INCORPORATED BY REFERENCE, MAY CONSTITUTE FORWARD-LOOKING STATEMENTS FOR
PURPOSES OF THE SECURITIES ACT AND THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). SUCH FORWARD-LOOKING STATEMENTS MAY INVOLVE
RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS AND
PERFORMANCE OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS OR
PERFORMANCE EXPRESSED OR IMPLIED BY SUCH STATEMENTS. CAUTIONARY STATEMENTS
REGARDING THE RISKS, UNCERTAINTIES AND OTHER FACTORS ASSOCIATED WITH SUCH
FORWARD-LOOKING STATEMENTS ARE DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE
16 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER
SUCH FACTORS.
ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY ARE EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
_______________________
- iv -
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents which have been filed by the Company with the
Commission are hereby incorporated in this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, which contains audited consolidated balance sheets of the
Company and its subsidiaries as of December 31, 1997 and 1996, and related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows for the years ended December 31, 1997, 1996 and 1995.
2. Part II, Item 2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30,1997, as amended.
3. The Company's Current Reports on Form 8-K dated July 31, 1997 (solely
insofar as it relates to the Company's Shareholder Rights Agreement dated May 8,
1996, as amended), August 20, 1997, January 7, 1998, January 22, 1998, February
12, 1998, March 10, 1998, March 26, 1998, April 8, 1998 and April 22, 1998.
4. The information set forth under the captions "Principal Shareholders,"
"Executive Officers" and "Executive Compensation" in the Company's definitive
Proxy Statement on Schedule 14A dated April 10, 1998.
5. The Company's Registration Statement on Form 8-A dated April 7, 1995, as
amended (registration no. 0-25812).
6. The Company's Registration Statement on Form 8-A dated June 4, 1996, as
amended (registration no. 0-25812).
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the offering of securities hereunder, shall be deemed to be
incorporated by reference in and to be a part of this Prospectus from the date
of filing of such reports and documents.
Any statement contained herein or in a document which is incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such prior statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available upon written or
oral request from the Company, without charge, to each person to whom a copy of
this Prospectus has been delivered, other than exhibits to those documents.
Exhibits are available for a reasonable fee. Requests should be directed to the
Office of the Secretary, PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia
20170 (telephone (703) 904-4100).
- v -
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus.
Prospective investors should carefully consider the factors set forth in this
Prospectus under the caption "Risk Factors." As used in this Prospectus, the
terms "Company" or "PSINet" mean PSINet Inc. and, unless the context
otherwise requires, its consolidated subsidiaries. Certain technical terms used
in this Prospectus are defined in the glossary which begins on page 128 of this
Prospectus.
THE COMPANY
PSINet is a leading global facilities-based provider of Internet access
services and related products to businesses. The Company provides dedicated and
dial-up Internet connectivity in 90 of the 100 largest metropolitan statistical
areas in the U.S. and in nine of the 20 largest international telecommunications
markets. The Company also offers Internet Protocol ("IP")-based value-added
services and products to businesses, including corporate intranets, Web hosting
and collocation, remote user access, multi-currency electronic commerce and
security services, that enable businesses to maximize utilization of their
corporate networks and the Internet. Additionally, the Company provides network
backbone services to other telecommunications carriers and Internet Service
Providers ("ISPs") to further exploit its network capacity. The Company owns
and operates a technologically advanced, high-speed frame relay network that, as
of March 1, 1998, served approximately 32,700 business accounts, including 51
ISPs, and connected to 400 points-of-presence ("POPs") in ten countries. The
Company's network is one of the primary backbones that comprise the Internet and
is connected with other large ISPs at 26 public and private peering points. The
Company believes that its scaleable IP-optimized network, in combination with
its highly trained, around-the-clock customer care team, enables the Company to
deliver superior performance and reliability. PSINet's mission is to build a
premier IP-based communications company. The Company grows its business through
multiple sales channels, including direct sales as well as resellers, and by
acquiring other ISPs and related businesses in key markets. By providing
services and products that enhance its customers' business processes through the
effective use of the Internet and related tools, the Company has increased
revenues from $8.7 million in 1993 to $121.9 million in 1997, representing a 94%
compounded annual growth rate. As part of its growth strategy, the Company
recently completed acquisitions of ISPs in Canada, France and Switzerland,
resulting in the addition of over 5,500 new business accounts and over 40 new
POPs. On a pro forma basis, after giving effect to these recent acquisitions,
1997 revenues would have been approximately $156.6 million.
The following table provides a brief overview of the Company's domestic and
international operations.
<TABLE>
<CAPTION>
PRO FORMA BUSINESS PLANNED BACKBONE
1997 REVENUES POPS ACCOUNTS RESELLERS BANDWIDTH COMMENCEMENT
(Millions) (at 3/1/98) (at 3/1/98) (at 3/1/98) CAPABILITY OF OPERATIONS
-------------- ----------- ----------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
U.S. $103.9 234 18,700 450 2,400Mbps 1989
CANADA 32.2 35 3,900 46 150 1996
U.K. 10.5 83 2,200 167 150 1995
EUROPE 5.8 45 4,200 216 150 1997
JAPAN 4.2 3 3,700 20 45 1994
------ --- ------ ---
$156.6 400 32,700 899
</TABLE>
PSINet recently expanded and enhanced its network by acquiring 10,000
equivalent route miles of state-of-the-art, fiber-based OC-48 bandwidth across
the United States from IXC Internet Services, Inc. ("IXC"), a subsidiary of
IXC Communications, Inc., one of the largest suppliers of digital transmission
and long distance telecommunications services in the United States. The Company
acquired the OC-48 bandwidth in the form of 20-year noncancellable indefeasible
rights of use ("IRUs"). The OC-48 bandwidth will be capable of transmitting
data at speeds of up to 2.4 Gbps, which the Company believes exceeds the highest
speed network backbone currently in use on the Internet. The acquisition of the
OC-48 bandwidth will increase the capacity of the Company's current network by
approximately 50 times and will significantly reduce data communications costs
per equivalent route
<PAGE>
mile as customer traffic is migrated on to the acquired bandwidth from bandwidth
currently leased from IXC and other telecommunications providers. The OC-48
bandwidth will enable the Company to offer higher-speed Internet connectivity
and a wider range of advanced value-added services, including IP voice and video
applications, to a larger customer base. The Company expects to receive delivery
of the first portion of the bandwidth, approximately 5,000 route miles of OC-12
(equivalent to 1,250 route miles of OC-48) connecting New York and Los Angeles
(and certain major cities in between), in the second quarter of 1998. See
"--Recent Developments" and "Strategic Alliance with IXC."
Internet access services is one of the fastest growing segments of the
global telecommunications services market. According to International Data
Corporation ("IDC"), a market research firm, the number of Internet users
worldwide reached 38 million in 1996 and is forecasted to grow to over 173
million by the year 2000. In the United States, IDC estimates that total
revenues from Internet access services and products reached $3.3 billion in 1996
with business connectivity and value-added services representing approximately
62% of the market. IDC forecasts the U.S. Internet access services market to
grow at a compound rate of over 50% per annum to $18.3 billion in 2000 with
business connectivity and value-added services representing over 75% of the
market. In Europe, IDC estimates that the total market for Internet access
services and products reached $676 million in 1996 with business connectivity
and value-added services representing approximately 56% of the market. IDC
forecasts the European Internet access market to grow at a compound rate of over
70% per annum to approximately $6.1 billion in 2000 with business connectivity
and value-added services representing approximately 65% of the market. The
Company believes, based on its operational knowledge of and experience in such
markets, that the Canadian and Japanese Internet access services and products
markets should grow at least at the same rate as the European market. Growth in
the demand for business connectivity is being driven by a number of factors
including an increase in online market penetration, particularly in the small
and mid-sized business segments, and an increase in the number of Internet
connections per business. As more businesses evolve from establishing an
Internet presence to requiring securely connected geographically dispersed
locations, remote user access to corporate networks, and electronic commerce
solutions, the demand for high-quality Internet connectivity and value-added
services will grow. Moreover, many organizations are increasingly outsourcing
certain information technology functions, such as maintenance of corporate Web
sites, to full-service ISPs in order to improve reliability and reduce costs.
PSINet has grown rapidly by targeting businesses in information-intensive
industries such as communications, education and research, energy, aerospace and
defense, finance, chemicals and pharmaceuticals. The Company's customers
consist primarily of medium-sized businesses and also include large
corporations, including 33 of the Fortune 100. The Company has invested in
growing and training its direct sales force and has developed significant
reseller and referral channels with selected telecommunications services
companies, equipment suppliers, systems integrators and computer retailers. The
Company believes that utilizing direct sales and value-added reseller channels
is particularly effective in targeting business customers, due to the technical
nature of the sales process and the requirement for turnkey solutions. The
Company has recently realigned its core domestic operations into three customer-
focused business units--Corporate Network Services, Carrier and ISP Services,
and Applications and Web Services--to more effectively meet the emerging needs
of the Internet marketplace. In addition, the Company has recently streamlined
its customer service and billing operations to provide faster, more responsive
and cost-effective service to its customers and is implementing scaleable
systems that will enable the Company to support a significantly larger and
increasingly international customer base. In executing its business strategy,
the Company has supplemented its executive management team through recent
additions of several senior-level executives from such multinational
telecommunications companies as MCI, Sprint and Bell Atlantic. See
"Management."
PSINet provides high quality IP-based services and products that are
tailored to meet the needs of businesses. The Company believes that the
business connectivity and value-added services markets are particularly
attractive due to low customer churn characteristics and the early stage of
market development. In addition, the Company believes that there is a
significant opportunity to upsell to higher service and product levels and
provide additional value-added services as business customers expand from
establishing basic Internet connectivity and corporate Web sites to utilizing
the Internet and corporate intranets for more advanced, mission-critical
applications. Moreover, the Company believes that smaller ISPs will continue to
seek network backbone services from large facilities-based ISPs that enable them
to sell Internet connectivity services without making significant investments in
facilities. Based on the Company's broad product and service offerings,
sophisticated IP-optimized network
- 2 -
<PAGE>
architecture and Internet brand name, the Company is well positioned to continue
to increase its account base and provide value-added IP-based services and
products to new and existing customers.
BUSINESS STRATEGY
PSINet is focused on rapidly growing its businesses through multiple
channels, including direct sales and resellers, and by acquiring other ISPs and
related businesses in key markets. The principal elements of the Company's
business strategy are as follows:
. Pursue Internal Growth Through Multiple Sales Channels. PSINet is
pursuing growth opportunities through multiple channels consisting of
its direct sales force, a reseller and referral program and strategic
alliances. The Company has built a direct sales force, which, as of
April 1, 1998, consisted of approximately 200 individuals (almost half
of whom are employed outside of the United States) who have a strong
Internet technical background and knowledge of potential applications of
the Internet to meet the needs of targeted business customers. The
Company has forged an authorized reseller and referral program with
selected telecommunications services and equipment suppliers, networking
service companies, systems integrators and computer retailers, which, as
of April 1, 1998, consisted of approximately 450 resellers and referral
sources in the United States and 449 outside of the United States. This
program enables the Company to utilize the sales and marketing resources
of its resellers and referral sources to offer PSINet Internet access
services and products to a broader and more diverse prospect base. The
Company also seeks to establish strategic alliances with selected
telecommunications carriers, such as it has with IXC, which may afford
the Company access to the carriers' customer base, offering the
Company's IP-based services and products on a private label or co-
branded basis thereby enabling these carriers to offer their customers
an integrated package of telecommunications and Internet services and
products. The Company provides training and ongoing support to the sales
representatives of companies with which it has reseller, referral and
strategic alliance relationships in order to strengthen the sales
representatives' knowledge of the Company's services and products and
brand loyalty to PSINet.
. Leverage Market Position to Drive Sales of Value-Added Services and
Products. PSINet intends to market aggressively value-added services and
products to its existing account base and prospective business
customers. The Company currently offers a number of value-added services
that can be bundled with Internet access services to provide complete,
turnkey solutions. The Company believes that providing value-added
services not only reduces customer churn by increasing customer
switching costs but also improves profitability through the sale of
higher margin value-added products. Further, the Company believes that
businesses will increasingly rely on these value-added products to
increase productivity, which will lead to additional service level
upgrades and increase customer retention. Currently, approximately 40%
of the Company's corporate customer account base uses more than one
service. The Company believes that there is a significant opportunity
within its existing account base to upgrade service levels and is
actively marketing additional services to these accounts. In addition,
the enhanced capacity resulting from the Company's acquisition of the
OC-48 bandwidth from IXC will enable the Company to offer a wider
variety of higher-speed Internet and Internet-related services and
products, such as IP-based multimedia voice and video services, which
are currently under development.
. Optimize Network to Reduce Operating Costs. PSINet remains focused on
reducing costs as a percentage of revenue by maintaining a scaleable
network and increasing utilization of and controlling strategic assets,
such as telecommunications bandwidth through IRUs. The Company's
flexible network architecture utilizes advanced ATM, ISDN and SMDS
compatible frame relay equipment, which allows the PSINet network to
cost-effectively scale the number of POPs and the number of users
accessing a POP in response to customer demand. The Company believes
that by offering Internet access services to both businesses and other
ISPs, it maximizes the utilization of its network infrastructure over
both daytime and evening hours. The Company recently enhanced its
network significantly by acquiring 20-year noncancellable IRUs in up to
10,000 equivalent route miles of state-
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of-the-art fiber-based OC-48 network bandwidth across the United States.
In addition, the Company recently entered into agreements to acquire
IRUs in certain transatlantic fiber optic bandwidth between the United
States, the United Kingdom and The Netherlands, representing an
important strategic step in its objective to be a leading facilities-
based ISP in the international Internet services market.
. Provide Superior Comprehensive Customer Service. PSINet believes that
superior customer service is a critical element in attracting and
retaining customers, and in deriving incremental revenues by selling an
expanding array of value-added services and greater bandwidth levels to
its business customer base. The Company has made significant investments
in customer service personnel and systems that enhance customer care and
service throughout the complete customer life cycle from order entry and
billing to selling of value-added services. To ensure consistency in the
quality and approach to customer care, both domestic and international
technical support associates attend an extensive technical training and
certification program. The Company monitors and responds to customer
needs by providing 24-hours per day, seven-days per week technical
support and service from its network operations center ("NOC") in
Troy, New York. As part of the Company's international expansion
strategy, the Company anticipates adding a fully redundant NOC in
Switzerland during 1998 and, subsequently, a third in Asia. In
connection with its customer services initiatives, the Company seeks to
continuously improve systems that increase productivity and enhance
customer satisfaction. The Company is currently in the process of
selecting and implementing improved, cost-effective and scaleable
billing systems that are designed to provide customers with accurate and
easy-to-understand invoicing. By maintaining centralized support
services, the Company seeks to increase operational efficiencies and
enhance the quality, consistency and scalability of its customer care.
. Accelerate Growth Through Acquisitions. PSINet intends to accelerate its
growth domestically and expand its presence in key markets
internationally by acquiring business-focused ISPs and related
businesses and assets. The Company seeks acquisition targets that, once
integrated into the Company's existing operations, will be accretive to
EBITDA (as defined). The Company intends to acquire smaller local or
regional ISPs in markets where it has an established POP and can benefit
from the increased network utilization and local sales channel. The
Company also intends to make strategic acquisitions in markets where it
currently does not have a presence or where the Company's current
presence would be significantly enhanced. Once an ISP has been acquired,
the Company typically integrates the ISP by migrating its customers on
to the PSINet network backbone, centralizing the back-office billing and
customer care functions and reducing redundant overhead. The Company may
also seek to acquire a competitive local exchange carrier ("CLEC") and
other businesses relating or complementary to the Company's existing
business, such as Web hosting or data center companies. The Company
currently has no definitive agreements or commitments relating to any
material acquisitions. The Company plans to effect future acquisitions
through the use of existing cash, cash generated from current operations
and from existing and future credit facilities, issuances of shares of
its common stock and the net proceeds of the Initial Notes Offering.
RECENT DEVELOPMENTS
Quarter Ended March 31, 1998
During its quarter ended March 31, 1998, the Company reported consolidated
revenue of $44.5 million, consolidated cash flow used in operations of
approximately $10.0 million, consolidated loss before interest, taxes,
depreciation and amortization, other income and charge for acquired in-process
research and development of ($10.5) million. As of March 31, 1998, the Company's
consolidated working capital deficit and consolidated long-term debt and
capitalized lease obligations, less current portion, were $34.9 million and
$74.7 million, respectively, as compared to a consolidated working capital and
consolidated long-term debt and capital lease obligations, less current portion,
of $1.3 million and $33.8 million, respectively, at December 31, 1997.
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Strategic Alliance with IXC
The Company recently acquired from IXC 20-year noncancellable indefeasible
rights of use in up to 10,000 equivalent route miles of fiber-based OC-48
network bandwidth in selected portions across the IXC fiber optic
telecommunications network within the United States (the "PSINet IRUs"). The
Company also entered into a joint marketing and services agreement with IXC,
allowing the parties to market each other's services and products.
The Company believes that the transaction with IXC offers significant
benefits and opportunities to the Company, including the following:
. Significant Enhancement of PSINet's Internet Backbone. The PSINet IRUs
represent an approximately 50-fold increase in the Company's network
capacity and will enable the Company to offer higher speed advanced
Internet connectivity and a wider range of advanced value-added
services, including IP voice and video applications, to a larger
customer base.
. Reduction in Future Data Communications Costs. The PSINet IRUs will
significantly reduce data communications costs per equivalent route mile
as the Company migrates customer traffic on to the acquired bandwidth
from bandwidth currently leased from IXC and other telecommunications
providers. By lowering its data communications costs as a percentage of
revenue, the Company expects to realize increased gross margins.
. Expansion of Revenue Base and Sales Channel Through Joint Marketing
Relationship. The joint marketing agreement enables IXC and the Company
to jointly pursue business prospects which have a growing need for
integrated telecommunications and Internet solutions. IXC will be
permitted to bundle its own telecommunications products with the
Company's full line of IP-based products and services for resale to
IXC's wholesale and retail customers under the IXC brand. This
relationship provides the Company with an important new distribution
channel that has the potential to result in a significant expansion of
the Company's revenue base.
. Advantageous and Flexible Network Configuration. The planned
configuration of the OC-48 bandwidth encompasses 14 of the 15 largest
U.S. markets (including Atlanta, Chicago, Dallas, Los Angeles, New York,
Philadelphia and Washington, D.C.) in which demand for the Company's
Internet services is currently the highest. To enhance the efficient
utilization of the bandwidth, the Company will be able to reconfigure
the location of the bandwidth and, through multiplexing, acquire
bandwidth in units of capacity lower than OC-48 (e.g., OC-12, OC-3 or
DS-3) to address changing patterns of customer demand.
. Significant Increase in Fixed Asset Base. Upon acceptance of all of the
bandwidth corresponding to the PSINet IRUs, the Company's fixed asset
base will increase by approximately $186 million. Based on an appraisal
by a nationally recognized valuation consultant commissioned by the
Company, the fair market value of the PSINet IRUs was estimated to be
between $280 million and $480 million.
The ability of the Company to realize these benefits is subject to certain
risks and uncertainties which are discussed under "Risk Factors" and elsewhere
in this Prospectus.
The PSINet IRUs were acquired in exchange for the issuance to IXC of
10,229,789 shares of common stock of the Company, representing approximately 20%
of the issued and outstanding common stock of the Company after giving effect to
such issuance and having an aggregate market value on February 25, 1998, the
date of such issuance, of approximately $78.6 million (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").
If the fair market value of such shares is less than $240 million at the earlier
of one year following delivery and acceptance of the total amount of such
bandwidth or February 25, 2002 (the "Determination Date"), PSINet will be
obligated to deliver to IXC such additional number of shares of the Company's
common stock or, at the sole option of the Company, cash or a combination
thereof equal to the shortfall (the "Contingent Payment Obligation"). See
"Strategic Alliance With IXC."
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International Acquisitions
Canada. In February 1998, PSINet acquired iSTAR internet Inc. ("iSTAR"),
one of the leading Canadian providers of Internet services and solutions for
business, institutions and individuals. The excess of the purchase price over
the fair values of the tangible assets acquired and liabilities assumed was
$19.5 million (see Note 11 to the Consolidated Financial Statements). This
acquisition establishes PSINet as the largest ISP in Canada with over 3,900
business and Web services customers as well as over 50,000 dial-up customer
accounts through over 35 POPs. After eliminating redundant network architecture
and administrative functions and migrating iSTAR's customers on to the
companies' integrated network backbone, the Company believes it will realize
significant cost savings in its Canadian operations beginning in 1998.
France. In October 1997, the Company acquired Serveur Telematique Internet
S.A. (doing business as "CalvaCom"), a leading ISP and Web hosting company in
France, for $3.1 million in cash. The acquisition established the Company's
market presence in France with over 1,500 dedicated and dial-up customer
accounts through 23 POPs. CalvaCom also has a significant commercial grade Web
design and hosting business providing service to such leading French companies
as Total S.A. and La Chemise Lacoste S.A.
Switzerland. In January 1998, PSINet acquired Internet Prolink S.A.
("Iprolink"), the leading commercial ISP in Switzerland, for $3.5 million in
cash. The acquisition expanded the Company's market presence in Switzerland by
adding approximately 1,500 dedicated and dial-up customer accounts and 14 POPs
in Switzerland and France. Iprolink also has relationships with over 170
resellers located throughout Switzerland, France and Germany to augment its
direct sales force.
____________________________
The Company's principal executive offices are located at 510 Huntmar Park
Drive, Herndon, Virginia 20170. The Company's telephone number is (703) 904-
4100 and, for further information, it may be contacted by e-mail at
[email protected].
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THE EXCHANGE OFFER
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Notes Offered.................................. $600,000,000 principal amount of new 10% Senior Notes due
2005, Series B (the "Exchange Notes").
The Exchange Offer............................. $1,000 principal amount of the Exchange Notes in exchange
for each $1,000 principal amount of $600,000,000
aggregate principal amount of 10% Senior Notes due 2005,
Series A, previously issued by the Company on April 13,
1998 (the "Initial Notes"). As of the date hereof,
$600,000,000 aggregate principal amount of Initial Notes
are outstanding. The Company will issue the Exchange
Notes to new Holders on or promptly after the Expiration
Date.
Based on an interpretation by the staff of the Commission
(the "Staff") set forth in no-action letters issued to
third parties, the Company believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for
Initial Notes may be offered for resale, resold and
otherwise transferred by such new Holder (other than any
such new Holder which is an affiliate of the Company or
is a broker-dealer which acquired such Initial Notes
directly from the Company) without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such new Holder's
business and that such new Holder has not engaged in,
does not intend to engage in, and has no arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes. Each Participating
Broker-Dealer that acquired such Initial Notes as a
result of market-making or other trading activity and
that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
Any Initial Holder who (i) is an affiliate of the
Company, (ii) does not acquire such Exchange Notes in the
ordinary course of its business, (iii) tenders in the
Exchange Offer with the intention to participate, or for
the purpose of participating, in a distribution of the
Exchange Notes, or (iv) is a broker-dealer which acquired
such Initial Notes directly from the Company, could not
rely on the position of the Staff enunciated in the Exxon
Capital No-Action Letter (as defined), the Morgan Stanley
No-Action Letter (as defined) or similar no-action
letters and, in the absence of an exemption therefrom,
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the
resale of the Exchange Notes. Failure to comply with such
requirements in such instance may result in such Holder
incurring liability under the Securities Act for which
the
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Holder is not indemnified by the Company.
No federal or state regulatory requirements must be
complied with or approval obtained in connection with the
Exchange Offer, other than registration requirements
under the Securities Act.
Expiration Date................................ 5:00 p.m., New York City time, on , 1998
(20 business days after effectiveness of the Exchange
Offer Registration Statement), unless the Exchange Offer
is extended by the Company in its sole discretion, in
which case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is extended.
Interest on the Exchange Notes and the
Initial Notes.................................. Each Exchange Note will bear interest from the most
recent date to which interest has been paid or duly
provided for on the Initial Note surrendered in exchange
for such Exchange Note or, if no such interest has been
paid or duly provided for on such Initial Note, from
April 13, 1998. Holders of the Initial Notes whose
Initial Notes are accepted for exchange will not receive
accrued interest on such Initial Notes for any period
from and after the last Interest Payment Date to which
interest has been paid or duly provided for on such
Initial Notes prior to the original issue date of the
Exchange Notes or, if no such interest has been paid or
duly provided for, will not receive any accrued interest
on such Initial Notes, and will be deemed to have waived
the right to receive any interest on such Initial Notes
accrued from and after such Interest Payment Date or, if
no such interest has been paid or duly provided for, from
and after April 13, 1998.
Conditions to the Exchange
Offer.......................................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer--Conditions."
Procedures for Tendering Initial Notes......... Each Initial Holder wishing to accept the Exchange Offer
must complete, sign and date the accompanying Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver the Letter of Transmittal, or such
facsimile, together with the Initial Notes and any other
required documentation to the Exchange Agent (as defined)
at the address set forth in the Letter of Transmittal.
Persons holding Initial Notes through the Depositary
(initially the Depository Trust Company ("DTC")) and
wishing to accept the Exchange Offer must do so pursuant
to DTC's Automated Tender Offer Program ("ATOP"), by
which each tendering participant will agree to be bound
by the Letter of Transmittal. By executing or agreeing
to be bound by the Letter of Transmittal, each Initial
Holder will represent to the Company that, among other
things, the Initial Holder or the person receiving such
Exchange Notes, whether or not
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such person is the Initial Holder, is acquiring
the Exchange Notes in the ordinary course of business
and that neither the Initial Holder nor any such other person
has any arrangement or understanding with any person to
participate in the distribution of such Exchange Notes
within the meaning of the Securities Act.
Special Procedures for Beneficial Owners....... Any beneficial owner whose Initial Notes are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered Initial Holder promptly and
instruct such registered Initial Holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of
Transmittal and delivering its Initial Notes, either make
appropriate arrangements to register ownership of the
Initial Notes in such owner's name or obtain a properly
completed bond power from the registered Initial Holder.
The transfer of registered ownership may take
considerable time.
Guaranteed Delivery Procedures................. Initial Holders who wish to tender their Initial Notes
and whose Initial Notes are not immediately available or
who cannot deliver their Initial Notes, the Letter of
Transmittal or any other documents required by the Letter
of Transmittal to the Exchange Agent (or comply with the
procedures for book-entry transfer) prior to the
Expiration Date must tender their Initial Notes according
to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights.............................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date pursuant to
the procedures described under "The Exchange
Offer--Withdrawals of Tenders."
Acceptance of Initial Notes and
Delivery of Exchange Notes..................... The Company will accept for exchange any and all Initial
Notes that are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to The Exchange
Offer will be delivered promptly following the Expiration
Date. See "The Exchange Offer--Terms of the Exchange
Offer."
Certain Federal Income Tax Consequences........ Counsel to the Company is of the opinion that there
should be no federal income tax consequences to Initial
Holders who elect to exchange Initial Notes for Exchange
Notes. In addition, there are certain U.S. federal
income tax consequences associated with purchasing,
holding and disposing of the Notes. See "Certain Federal
Income Tax Consequences."
Effect on Holders of Initial Notes............. As a result of the making of this Exchange Offer, the
Company will have fulfilled certain of its obligations
under the Registration Rights Agreement, and Initial
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Holders who do not tender their Initial Notes, except for
limited instances involving the Initial Holders that are
not eligible to participate in the Exchange Offer, will
not have any further registration rights under the
Registration Rights Agreement or otherwise. See "The
Exchange Offer--Registration Rights." Such Initial
Holders will continue to hold the untendered Initial
Notes and will be entitled to all the rights and subject
to all the limitations applicable thereto under the
Indenture, except to the extent such rights or
limitations, by their terms, terminate or cease to have
further effectiveness as a result of the Exchange Offer.
All untendered Initial Notes will continue to be subject
to certain restrictions on transfer. Accordingly, if any
Initial Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered Initial
Notes could be adversely affected. See "Risk
Factors--Restrictions on Resale; Absence of Public Market
for the Securities."
Exchange Agent................................. Wilmington Trust Company pursuant to the Exchange Agent
Agreement dated as of , 1998 between the
Company and Wilmington Trust Company.
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SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are substantially the same as the
form and terms of the Initial Notes (which they replace) except that (i) the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof and (ii) the holders of
the Exchange Notes, except for limited instances involving the Initial
Purchasers and certain holders of the Initial Notes who are not eligible to
participate in the Exchange Offer, will not be entitled to further registration
rights under the Registration Rights Agreement, which rights will be satisfied
when the Exchange Offer is consummated, and will not be entitled to any payments
of Liquidated Damages (as defined) for failure to satisfy such rights. The
Exchange Notes will evidence the same debt as the Initial Notes and will be
entitled to the benefits of the Indenture. From time to time in this
Prospectus, the Exchange Notes and the Initial Notes are collectively referred
to as the "Notes." See "Description of Notes."
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Notes Offered..................................... $600,000,000 principal amount of new 10% Senior Notes due
2005, Series B (the "Exchange Notes").
Maturity Date..................................... February 15, 2005.
Interest Payment Date............................. Interest will accrue at the rate of 10% per annum and will be
payable in cash semi-annually on February 15 and August 15 of
each year, commencing August 15, 1998.
Escrow Proceeds................................... Concurrently with the closing of the Initial Notes Offering
(as defined), the Company deposited $138.7 million with the
Escrow Agent (as defined), which, together with the proceeds
from the investment thereof, will be sufficient to pay when
due the first five semi-annual interest payments on the
Notes, with any balance to be retained by the Company. The
Notes are collateralized by a first priority security
interest in the Escrow Account (as defined). See
"Description of Notes--Disbursement of Funds; Escrow
Account."
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Ranking........................................... The Exchange Notes will be senior unsecured obligations of
the Company ranking pari passu in right of payment with 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
Exchange Notes will be effectively subordinated to all
secured indebtedness of the Company to the extent of the
value of the assets securing such indebtedness and to the
claims of creditors and the holders of preferred stock, if
any, of the Company's subsidiaries. As of December 31, 1997,
on a pro forma basis after giving effect to the Initial Notes
Offering and the application of the net proceeds therefrom,
there would have been approximately $79.4 million of total
secured indebtedness outstanding to which holders of Notes
would have been effectively subordinated in right of payment
and approximately $38.9 million of total liabilities of the
Company's subsidiaries (including trade payables and accrued
liabilities) to which holders of Notes would have been
structurally subordinated. See "Description of
Notes--General."
Sinking Fund...................................... None.
Optional Redemption............................... On or after February 15, 2002, the Notes will be redeemable
at the option of the Company, in whole at any time, or in
part from time to time, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the date
of redemption. In addition, on or prior to February 15,
2001, the Company may redeem up to 35% of the original
aggregate principal amount of the Notes at a redemption price
of 110.0% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of redemption, with the
net cash proceeds of one or more Public Equity Offerings (as
defined) or the sale of capital stock to one or more
Strategic Investors; provided that at least 65% of the
original aggregate principal amount of the Notes remain
outstanding immediately after such redemption. See
"Description of Notes--Optional Redemption."
Change of Control................................. In the event of a Change of Control (as defined), the Company
will be required to make an offer to purchase all of the
Exchange Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to
the date of repurchase. The Company may not have sufficient
funds or the financial resources necessary to satisfy its
obligations to repurchase the Exchange Notes and other debt
that may become repayable upon a Change of Control. See
"Risk Factors--Change of Control" and "Description of
Notes--Change of Control."
Certain Covenants................................. The Indenture governing the Notes contains covenants relating
to, among other things, the following matters: (i) limitation
on restricted payments; (ii) limitation on incurrence of
indebtedness; (iii) limitation on liens; (iv) limitation on
dividends and other payment restrictions affecting
subsidiaries; (v) limitation on mergers, consolidations and
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sales of assets; (vi) limitation on transactions with
affiliates; (vii) limitation on guarantees of indebtedness;
(viii) limitation on sale and leasebacks; (ix) limitation on
issuance and sale of subsidiary stock; (x) limitation on
unrestricted subsidiaries; (xi) limitation on line of
business; and (xii) financial reports.
GENERAL
Federal Income Tax Consequences................... Counsel to the Company is of the opinion that the exchange of
Initial Notes for Exchange Notes pursuant to the Exchange
Offer should not be taxable for U.S. federal income tax
purposes. Holders, however, are strongly urged to consult
their own tax advisors. See "Certain Federal Income Tax
Considerations."
Transfer Restrictions............................. For restriction on transfer of the Exchange Notes, see "The
Exchange Offer--Exchange Notes."
Exchange Offer; Registration Rights............... Pursuant to a registration rights agreement (the
"Registration Rights Agreement") by and among the Company
and the Initial Purchasers (as defined), the Company has
agreed (i) to file a registration statement (the "Exchange
Offer Registration Statement") with respect to an offer to
exchange the Initial Notes for Exchange Notes with the
Commission within 45 days of the Closing Date (as defined),
(ii) to use its best efforts to cause such registration
statement to be declared effective under the Securities Act
within 150 days of the Closing Date and (iii) to keep the
Exchange Offer open for a period of not less than 20 business
days and cause the Exchange Offer to be consummated no later
than the 30th business day after such registration statement
is declared effective by the Commission. In the event that
the Exchange Offer is not permitted by applicable law or
Commission policy, or if any holder of Initial Notes notifies
the Company prior to the 20th business day following the
consummation of the Exchange Offer that (a) it is prohibited
by law or Commission policy from participating in the
Exchange Offer, (b) it 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 it, or (c) it is a
broker-dealer and holds Initial Notes acquired directly from
the Company or any of the Company's affiliates, the Company
will file with the Commission a registration statement (the
"Shelf Registration Statement") to register for public
resale the Notes held by any such Holder who provides the
Company with certain information in the Shelf Registration
Statement. The Company will use its best efforts to cause
the applicable Shelf Registration Statement to be declared
effective by the Commission on or before the 60th day after
the filing of the Shelf Registration Statement. If the
Company defaults with respect to its obligations under the
Registration Rights Agreement (a "Registration Default"),
then the Company shall agree to pay to each Holder affected
thereby Liquidated Damages (as defined). The Company shall
not be required to pay Liquidated Damages for more
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than one Registration Default at any given time. See
"The Exchange--Offer Registration Defaults; Liquidated
Damages."
Use of Proceeds................................... The Company will not receive any cash proceeds from the
Exchange Offer. In consideration for issuing the Exchange
Notes in exchange for the Initial Notes, the Company will
receive Initial Notes in like principal amount. The Initial
Notes surrendered in exchange for the Exchange Notes will be
cancelled by the Company. For a description of the use of
proceeds from the Initial Notes Offering, see "Use of
Proceeds."
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RISK FACTORS
Prospective investors should carefully consider all of the information
set forth in this Prospectus and, in particular, should evaluate the specific
risk factors set forth under "Risk Factors," beginning on page 16, for a
discussion of certain risks involved with an investment in the Exchange Notes.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE, RATIO AND OPERATING DATA)
The following summary consolidated financial and operating data as of
and for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been
derived from the Company's audited Consolidated Financial Statements. The
summary pro forma consolidated financial data ("pro forma information") as of
and for the year ended December 31, 1997 has been derived from the Unaudited Pro
Forma Consolidated Financial Information included elsewhere in this Prospectus.
The unaudited pro forma consolidated statement of operations data and other
financial data give effect to the acquisitions of iSTAR, CalvaCom and Iprolink,
the incurrence of the Acquisition Credit Facility (as defined) and the issuance
of the IXC Initial Shares and the Contingent Payment Obligation as if each of
such transactions had occurred on January 1, 1997. The unaudited pro forma
consolidated balance sheet data give effect to the acquisitions of iSTAR and
Iprolink, the incurrence of the Acquisition Credit Facility and the issuance of
the IXC Initial Shares and the Contingent Payment Obligation as if each of the
transactions had occurred on December 31, 1997. The unaudited pro forma, as
adjusted, balance sheet data and statement of operations and other financial
data further adjusts the unaudited pro forma amounts to give effect to the
Initial Notes Offering and the application of the net proceeds therefrom as of
December 31, 1997 and January 1, 1997, respectively. In the opinion of
management, the pro forma information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair statement of the
information set forth herein. The information contained in this table should be
read in conjunction with "Selected Consolidated Financial and Operating Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds," the Company's Consolidated Financial
Statements and the notes thereto, iSTAR's Consolidated Financial Statements and
the notes thereto, and the Unaudited Pro Forma Consolidated Financial
Information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997
-----------------------------------
PRO FORMA,
1993 1994 1995 1996 ACTUAL PRO FORMA AS ADJUSTED
-------- --------- --------- --------- ---------- ---------- ------------
STATEMENT OF OPERATIONS DATA:
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C>
U.S.......................................... $ 8,665 $15,159 $ 36,252 $ 77,570 $103,952 $103,952 $ 103,952
International................................ -- 55 2,470 6,781 17,950 52,645 52,645
------- ------- -------- -------- -------- -------- ---------
8,665 15,214 38,722 84,351 121,902 156,597 156,597
Other income, net.............................. -- -- -- 5,417 -- -- --
Operating costs and expenses:
Data communications and
operations................................. 5,320 9,489 32,124 70,102 94,363 129,209 129,209
Sales and marketing.......................... 1,845 3,599 23,930 27,064 25,831 35,120 35,120
General and administrative................... 1,666 3,605 10,569 20,648 22,947 33,299 33,299
Depreciation and amortization................ 1,719 3,183 14,778 28,035 28,347 38,058 38,058
Intangible asset write-down.................. -- -- 9,938 -- -- 12,570 12,570
------- ------- -------- -------- -------- -------- ---------
Total operating costs and
expenses................................ 10,550 19,876 91,339 145,849 171,488 248,256 248,256
Loss from operations........................... (1,885) (4,662) (52,617) (56,081) (49,586) (91,659) (91,659)
Loss before income taxes....................... (2,159) (5,342) (53,160) (55,256) (46,078) (91,136) (151,911)
Net loss....................................... (1,913) (5,342) (53,160) (55,097) (45,602) (90,660) (151,435)
Return to preferred shareholders............... -- -- -- -- (411) (411) (411)
Net loss available to common
shareholders................................. (1,913) (5,342) (53,160) (55,097) (46,013) (91,071) (151,846)
Basic and diluted loss per share(1)............ (0.42) (2.01) (1.40) (1.14) (1.80) (3.00)
Shares used in computing basic and diluted
loss per share (in thousands)............... 12,805 26,485 39,378 40,306 50,536 50,536
</TABLE>
- 14 -
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997
------------------------------------
PRO FORMA,
1993 1994 1995 1996 ACTUAL PRO FORMA AS ADJUSTED
-------- --------- ---------- ---------- ---------- ---------- ------------
OTHER FINANCIAL DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows used in operating activities........ $ (209) $(1,097) $(30,093) $(32,543) $(15,457) $(36,490) $(94,515)
Cash flows used in investing activities........ (3,656) (1,937) (21,958) (7,897) (15,560) (10,122) (95,360)
Cash flows provided by (used in) financing
activities.................................... 5,490 4,527 151,403 (10,529) 12,598 29,306 590,056
EBITDA(2):
U.S.......................................... (166) (772) (26,930) (20,562) (13,071) (13,071) (13,071)
International................................ -- (707) (971) (7,484) (8,168) (27,960) (27,960)
------- ------- -------- -------- -------- -------- --------
(166) (1,479) (27,901) (28,046) (21,239) (41,031) (41,031)
Capital expenditures(3)........................ 7,043 5,009 45,166 38,390 50,068 59,300 59,300
Ratio of earnings to fixed charges(4).......... -- -- -- -- -- -- --
OTHER OPERATING DATA:
Number of POPs................................. 68 82 241 350 350 400 400
Number of customer accounts.................... 2,830 4,220 8,200 17,800 26,400 31,900 31,900
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1997
--------------------------------
PRO FORMA,
1993 1994 1995 1996 ACTUAL PRO FORMA AS ADJUSTED
-------- -------- --------- -------- -------- --------- -----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and short-term investments................ $ 1,865 $ 3,358 $102,710 $ 56,390 $ 33,322 $ 52,729 $474,826
Restricted cash and short-term
investments................................... -- -- -- 954 20,690 3,190 60,919
Restricted investments......................... -- -- -- -- -- -- 80,924
Total assets................................... 13,821 17,055 201,830 177,112 186,181 224,207 804,207
Lines of credit and current portion of
long-term debt and capital lease
obligations................................... 2,540 3,369 16,643 26,915 39,633 64,421 44,421
Long-term debt and capital lease
obligations, less current portion............. 3,581 4,397 24,130 26,938 33,820 35,006 635,006
Redeemable preferred and common
stock......................................... 6,725 13,617 -- -- -- -- --
Shareholders' equity (deficit)................. (1,427) (8,283) 143,230 89,783 73,429 66,429 66,429
</TABLE>
- ------------------------------------------------
(1) Basic and diluted loss per share for 1993 is not considered relevant given
the significant changes in the capital structure of the Company in
conjunction with its initial public offering of shares of its common stock
in 1995.
(2) Represents earnings (loss) before depreciation and amortization, interest
income and expense, other income, income tax expense (benefit), gain on sale
of subsidiary, equity in loss of affiliate and intangible asset write-down.
The Company has included information concerning EBITDA because it
understands that such information is used in the Internet services industry
as one measure of a company's operating performance and historical ability
to service debt. EBITDA is not determined in accordance with generally
accepted accounting principles, is not indicative of cash used by operating
activities and should not be considered in isolation or as an alternative
to, or more meaningful than, measures of performance determined in
accordance with generally accepted accounting principles. In addition,
EBITDA, as defined by the Company, may not be comparable to similarly titled
measures used by other companies.
(3) Includes cash expenditures and amounts financed under equipment financing
agreements.
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of losses before income taxes, equity in loss of affiliate
and fixed charges. Fixed charges consist of interest on all indebtedness,
amortization of debt financing costs and that portion of rental expense
which the Company believes to be representative of interest (deemed to be
one-third of rental expense). The deficiency for purposes of calculating
the ratio of earnings to fixed charges was $2,159,000, $5,307,000,
$52,956,000, $54,449,000, $46,078,000, $91,136,000 and $151,911,000 for the
years ended December 31, 1993, 1994, 1995, 1996, 1997, 1997 pro forma, and
1997 pro forma, as adjusted, respectively.
- 15 -
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the risk factors set
forth below, as well as the other information contained in this Prospectus, in
evaluating an investment in the securities offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus. Unless the
context otherwise requires, "PSINet" and the "Company" refer to PSINet Inc. and
its subsidiaries.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
Upon the consummation of the Initial Notes Offering, the Company
became highly leveraged. As of December 31, 1997, after giving pro forma effect
to the Initial Notes Offering (and the application of the net proceeds therefrom
as described in "Use of Proceeds") and the acquisitions of iSTAR and Iprolink,
the Company's total indebtedness would have been approximately $679.4 million,
representing 91.1% of total capitalization, and its interest expense would have
been $69.1 million (in comparison to the Company's actual interest expense of
$5.4 million for the year ended December 31, 1997). The Company's high level of
indebtedness could have several important effects on its future operations,
which could have important consequences to the Holders, including, the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on its indebtedness and, therefore,
will not be available for other purposes, (ii) covenants contained in the
Company's debt obligations will require the Company to meet certain financial
tests, and other restrictions will limit its ability to borrow additional funds
or to dispose of assets and may affect the Company's flexibility in planning
for, and reacting to, changes in its business, including possible acquisition
activities and capital expenditures, and (iii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired. The
Company's ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future operating performance
and economic, financial, competitive, regulatory and other factors affecting the
operations of the Company, many of which are beyond its control. There can be
no assurance that the Company's future operating performance will not be
adversely affected by some or all of these factors. Based upon the Company's
current level of operations, management believes that working capital from
operations, from existing credit facilities, from capital lease financings, and
from proceeds of future equity or debt financings (including, without
limitation, from the Initial Notes Offering), will be adequate to meet the
Company's presently anticipated future requirements for working capital, capital
expenditures and scheduled payments of interest on its debt (including the
Notes). There can be no assurance, however, that the Company's business will
generate sufficient cash flow from operations or that future working capital
borrowings will be available in an amount sufficient to enable the Company to
service its debt (including the Notes) or to make necessary capital
expenditures. Furthermore, there can be no assurance that the Company will be
able to raise additional capital for any such refinancing in the future. See
"Management's Discussion and Analysis of Financial Condition and Results and
Operations--Liquidity and Capital Resources."
OPERATING DEFICIT; CONTINUING LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING
RESULTS; ISTAR OPERATING LOSSES
The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and rapidly
evolving markets. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract and retain qualified
persons, and continue to upgrade its technologies and commercialize its network
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks and the failure to do so
could have a material adverse effect on the Company's business, financial
condition, results of operations and ability to pay when due principal, interest
and other amounts in respect of the Notes. Although the Company has experienced
revenue growth on an annual basis with revenue increasing from $38.7 million in
1995 to $84.4 million in 1996 to $121.9 million in 1997, it has incurred losses
and experienced negative EBITDA during each of such periods. The Company has
incurred net losses of $45.6 million, $55.1 million and $53.2 million and has
incurred negative EBITDA of $21.2 million, $28.0 million and $27.9 million for
each of the years ended December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997, the Company had a retained deficit of $162.6 million. In its
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, the
Company reported that it would achieve positive EBITDA sometime during the
second quarter of 1997 and would be profitable by the first quarter of 1998
-16-
<PAGE>
or prior thereto. The Company did achieve breakeven EBITDA in certain months of
the second and third quarters of 1997, but as a result of several factors that
arose subsequent to the date of the Company's filing of its Form 10-K for fiscal
1996, the Company was unable to meet certain of its prior objectives. Principal
among these factors adversely affecting the Company's operating performance were
delivery delays for Primary Rate Interface ("PRI") telecommunications facilities
required to meet customer demand, accelerated investment by the Company in its
overseas operations in order to respond to rapidly developing markets, and lower
than expected growth during the third quarter of 1997 in the demand for its
domestic Internet services. The Company expects to focus in the near term on
continuing to increase its corporate customer base and expanding its Carrier and
ISP Services business unit strategy which will require it to continue to incur
expenses for marketing, network infrastructure, personnel and the development of
new products and services. Such continued expenses may adversely impact cash
flow and operating performance. The Company also plans to continue to enhance
its network and the administrative and operational infrastructure necessary to
support its Internet access service domestically and internationally.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors, some
of which are outside the Company's control, including, among others, general
economic conditions, specific economic conditions in the Internet access
industry, user demand for Internet services, capital expenditures and other
costs relating to the expansion of operations and the Company network, the
introduction of new services by the Company or its competitors, the mix of
services sold and the mix of channels through which those services are sold,
pricing changes and new product introductions by the Company and its competitors
and delays in obtaining sufficient supplies of sole or limited source equipment
and telecom facilities (i.e., PRIs). As a strategic response to a changing
competitive environment, the Company may elect from time to time to make certain
pricing, service or marketing decisions that could have a material adverse
effect on the Company's business, results of operations and cash flow.
In February 1998, the Company acquired iSTAR, one of the leading
Canadian providers of Internet services and solutions. Prior to its acquisition
by the Company, iSTAR incurred a net loss of $39.1 million and had negative
EBITDA of $20.7 million for the twelve months ended November 30, 1997. While
the Company believes that after eliminating redundant network architecture and
administrative functions and taking other actions to integrate the operations of
iSTAR it will be able to realize significant cost savings on its Canadian
operations beginning in 1998, there can be no assurance that the Company's
integration of the operations of iSTAR will be accomplished successfully. The
inability of the Company to improve the operating performance of iSTAR's
business or to successfully integrate the operations of iSTAR could have a
material adverse effect on the Company's business, financial condition and
results of operations.
HOLDING COMPANY STRUCTURE; DEPENDENCE ON SUBSIDIARIES FOR REPAYMENT OF THE NOTES
The Company is an operating entity which also conducts a portion of
its business through its subsidiaries and may, in the future, conduct a greater
portion of its business through its subsidiaries. The Company's cash flow from
operations and consequent ability to service its debt, including the Notes, is,
therefore, in part, dependent (and may become more dependent) upon the earnings
of its subsidiaries and the distribution (through dividends or otherwise) of
those earnings to the Company, or upon loans, advances or other payments of
funds by those subsidiaries to the Company. The Company's subsidiaries will
have no obligation, contingent or otherwise to make any funds available to the
Company for payment of the principal of or interest on the Notes. The ability
of the Company's subsidiaries to make such payments will be subject to, among
other things, the availability of sufficient surplus funds, the terms of such
subsidiaries' indebtedness and applicable laws.
Claims of creditors of the Company's subsidiaries and holders of
preferred stock, if any, of such subsidiaries will have priority as to the
assets of such subsidiaries over the claims of the Company and the holders of
the Company's indebtedness, except to the extent that such subsidiaries have
provided guarantees of the Company's indebtedness and to the extent that loans
made by the Company to its subsidiaries are recognized as indebtedness.
Therefore, the Notes will be effectively subordinated in right of payment to all
existing and future indebtedness and other liabilities of the Company's
subsidiaries, including trade payables. As of December 31, 1997, after giving
pro forma effect to the Initial Notes Offering (and the application of the net
proceeds therefrom), the Company's subsidiaries would have had approximately
$38.9 million of total liabilities (including trade payables and accrued
liabilities). Under the terms of the Indenture, certain subsidiaries of the
Company will be restricted in their ability to incur debt in the future. The
Notes also will be effectively subordinated to any secured indebtedness of the
-17-
<PAGE>
Company because holders of such indebtedness will have claims that are prior to
the claims of the Holders with respect to the assets securing such indebtedness
except to the extent the Notes are equally and ratably secured by such assets.
See "Description of Notes--Certain Covenants."
COMPETITION
The market for Internet access and related services is highly
competitive. The industry has relatively insignificant barriers to entry and
numerous entities competing for the same customers. The Company expects that
competition will continue to intensify as the use of the Internet grows. The
tremendous growth and potential market size of the Internet access market has
attracted many new start-ups as well as existing businesses from different
industries. Current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers, and on-line service providers. The Company
believes that the primary competitive factors for the provision of Internet
services are quality of service, reliability, price, technical expertise, ease
of use, variety of value-added services, quality and availability of customer
support, experience of the supplier, geographic coverage and name recognition.
The Company's success in this market will depend heavily upon its ability to
provide high quality Internet connectivity and related services at competitive
prices. See "Business--Competition."
As a result of industry competition, the Company has encountered and
expects to continue to encounter pricing pressure, which in turn could result in
reductions in the average selling price of the Company's services. For example,
certain of the Company's competitors which are telecommunications companies,
including AT&T Corporation and MCI Communications Corp., may be able to provide
customers with reduced or free communications costs in connection with their
Internet access services or offer Internet access as a standard component of
their overall service package, thereby increasing price pressure on the Company.
The Company has in the past reduced prices on certain of its Internet access
options and may continue to do so in the future. There can be no assurance that
the Company will be able to offset the effects of any such price reductions with
an increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. The Company is not able presently to
predict the impact which future growth in the Internet access and on-line
services businesses will have upon competition in the industry. Increased price
or other competition could result in erosion of the Company's market share and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
As the Company continues to expand its operations outside the United
States, it will encounter new competitors and competitive environments. In some
cases, the Company will be forced to compete with and buy services from
government owned or subsidized telecommunications providers, some of which may
enjoy a monopoly on telecommunications services essential to the Company's
business. There can be no assurance that the Company will be able to purchase
such services at a reasonable price or at all. In addition to the risks
associated with the Company's previously described competitors, foreign
competitors may possess a better understanding of their local markets and better
working relationships with local infrastructure providers and others. There can
be no assurance that the Company can obtain similar levels of local knowledge,
and failure to obtain that knowledge could place the Company at a significant
competitive disadvantage.
RISKS ASSOCIATED WITH STRATEGIC ALLIANCE WITH IXC
The Company is subject to a variety of risks relating to its
transactions with IXC and the acquisition, operation and maintenance of the
bandwidth corresponding to the PSINet IRUs. Such risks include, among other
things, the following: (i) the risk that, if the difference between $240 million
and the fair market value of the IXC Initial Shares as of the Determination Date
or the Acceleration Date (as defined), as applicable, is significant,
satisfaction of the Contingent Payment Obligation by the Company through the
issuance of additional shares of common stock or, at the sole option of the
Company, by a payment of cash, or a combination of stock and cash, could result
in significant dilution to the Company's other shareholders and in IXC's owning
a significant, or even a controlling, portion of the Company's outstanding
common stock, and/or could necessitate a significant cash outlay by the Company,
which in any such event could have a material adverse effect on the Company, its
shareholders and the holders of the Notes; (ii) the risk that financial, legal,
technical and/or other matters may adversely affect IXC's ability to perform the
operation, maintenance and other services under the IRU Purchase Agreement with
respect to
-18-
<PAGE>
the bandwidth corresponding to the PSINet IRUs, which may adversely affect the
Company's use of such bandwidth; (iii) the risk that, in the event of a material
default by IXC under the IRU Purchase Agreement at such time as IXC is in
bankruptcy, the Company's use of the bandwidth corresponding to the PSINet IRUs
may be materially adversely affected or curtailed; (iv) the risk that the
Company will not have access to sufficient additional capital and/or financing
on satisfactory terms to enable it to make the necessary capital expenditures to
take full advantage of the PSINet IRUs; (v) the risk that IXC may not continue
to have the necessary financial resources to enable it to complete, or may
otherwise elect not to complete, its contemplated buildout of its fiber optic
telecommunications system or that such buildout may be delayed or otherwise
adversely affected by presently unforeseeable legal, technical and/or other
factors; (vi) the risk that, in the event of a change of control or change in
management of IXC, IXC's successor or new management, as the case may be, may
not share IXC's commitment to the buildout of its fiber optic telecommunications
system or may not otherwise allocate the necessary human, financial, technical
and other resources to satisfactorily meet its obligations to the Company under
the IRU Purchase Agreement that would adversely affect the Company's use of the
bandwidth corresponding to the PSINet IRUs; (vii) the risk that IXC, as the
Company's largest shareholder and through its chairman's seat on the Company's
Board of Directors, could subject the Company to certain conflicts of interest
or could influence the Company's management in a manner that could adversely
affect the Company's business or control of the Company; and (viii) the risk
that future sales by IXC of substantial numbers of shares of the Company's
common stock could adversely affect the market price of the Company's common
stock and make it more difficult for the Company to raise funds through equity
offerings and to effect acquisitions of businesses or assets in consideration
for issuances of its common stock. There can be no assurance that the Company
will be successful in overcoming these risks or any other problems encountered
in connection with its strategic alliance with IXC. See "Strategic Alliance With
IXC."
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND EXPANSION
The Company had 400 POPs as of March 1, 1998 and plans to continue to
expand the capacity of existing POPs as customer-driven demand dictates. The
Company's rapid growth has placed, and in the future may continue to place, a
strain on the Company's administrative, operational and financial resources and
has increased demands on its systems and controls. The Company anticipates that
its Carrier and ISP Services business unit, as well as other business growth,
may require continued enhancements to and expansion of its network. Competition
for qualified personnel in the Internet services industry is intense and there
are a limited number of persons with the requisite knowledge of and experience
in such industry. The process of locating, training and successfully
integrating qualified personnel into the Company's operations is often lengthy
and expensive. There can be no assurance that the Company will be successful in
attracting, integrating and retaining such personnel. In addition, there can be
no assurance that the Company's existing operating and financial control systems
and infrastructure will be adequate to maintain and effectively monitor future
growth. The inability to continue to upgrade the networking systems or the
operating and financial control systems, the inability to recruit and hire
necessary personnel, the inability to successfully integrate new personnel into
the Company's operations, the inability to manage its growth effectively or the
emergence of unexpected expansion difficulties could adversely affect the
Company's business, results of operations and financial condition.
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
The Company expects to continue to enhance its network in order to
maintain its competitive position and continue to meet the increasing demands
for service quality, availability and competitive pricing. In order to take
full advantage of the bandwidth acquired from IXC, in addition to other planned
capital expenditures, the Company expects to incur capital expenditures through
the end of the year 2000 of up to $95 million. In addition, the Company expects
to incur on an annual basis approximately $1.15 million in operation and
maintenance fees with respect to the PSINet IRUs per each 1,000 equivalent route
miles of OC-48 bandwidth accepted under the IRU Purchase Agreement. Other
planned capital expenditures expected to be incurred by the Company over
approximately the next three years include up to $35 million in connection with
the Company's anticipated buildout of its pan-European Internet network. The
Company is also obligated, under the terms of one of its Carrier and ISP
Services agreements, to provide the ISP customer with a rental facility of up to
$5.0 million for telecommunications equipment owned or leased by the Company and
deployed in the customer's network ($1.4 million drawn at December 31, 1997).
In addition, the Company may be obligated pursuant to the Contingent Payment
Obligation under the IRU Purchase Agreement to provide IXC with additional
shares of common stock and/or cash, at the Company's sole option, in an amount
equal to the difference between $240 million and the then fair market value of
-19-
<PAGE>
the IXC Initial Shares on the earlier of one year following delivery and
acceptance of the total bandwidth corresponding to the PSINet IRUs or February
25, 2002.
The Company believes it will have a reasonable degree of flexibility
to adjust the amount and timing of its capital expenditures in response to the
Company's then existing financing capabilities, market conditions, competition
and other factors. The Company believes that working capital generated from the
use of bandwidth corresponding to the PSINet IRUs, together with other working
capital from operations, from existing credit facilities, from capital lease
financings, and from proceeds of future equity or debt financings (which the
Company presently expects to be able to obtain when needed), will be sufficient
to meet the presently anticipated working capital and capital expenditure
requirements of its operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company may seek to raise additional funds in order to take
advantage of unanticipated opportunities, more rapid international expansion or
acquisitions of complementary businesses, or to develop new products or
otherwise respond to changing business conditions or unanticipated competitive
pressures. There can be no assurance that the Company will be able to raise
such funds on favorable terms. In the event that the Company is unable to
obtain such additional funds on acceptable terms, the Company may determine not
to enter into various expansion opportunities.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A component of the Company's strategy is its planned expansion into
international markets. There can be no assurance that the Company will be able
to obtain the permits and operating licenses required for it to operate, to hire
and train employees or to market, sell and deliver high quality services in
these markets. In addition to the uncertainty as to the Company's ability to
expand its international presence, there are certain risks inherent in doing
business on an international level, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing foreign operations, longer payment cycles, problems in
collecting accounts receivable, political instability, expropriation,
nationalization, war, insurrection and other political risks, fluctuations in
currency exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world and potentially adverse tax consequences, which could
adversely impact the success of the Company's international operations. The
Company may need to enter into joint ventures or other strategic relationships
with one or more third parties in order to conduct its foreign operations
successfully. There can be no assurance that such factors will not have an
adverse effect on the Company's future international operations and,
consequently, on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that laws or administrative
practice relating to taxation, foreign exchange or other matters of countries
within which the Company operates will not change. Any such change could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS AND STRATEGIC ALLIANCES
As part of its business strategy, the Company expects to continue to
seek to develop strategic alliances both domestically and internationally and/or
to acquire assets and businesses principally relating to or complementary to its
current operations. Any such future strategic alliances or acquisitions would
be accompanied by the risks commonly encountered in strategic alliances with or
acquisitions of companies. Such risks include, among other things, the
difficulty of integrating the operations and personnel of the companies, the
potential disruption of the Company's ongoing business, the inability of
management to maximize the financial and strategic position of the Company by
the successful incorporation of licensed or acquired technology and rights into
the Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management. There can be no assurance that
the Company would be successful in overcoming these risks or any other problems
encountered in connection with such strategic alliances or acquisitions.
In addition, if the Company were to proceed with one or more
significant acquisitions in which the consideration consists of cash, such as
the Company's recently completed transaction with iSTAR, a substantial
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<PAGE>
portion of the Company's available cash could be used to consummate such
acquisitions. If the Company were to consummate one or more significant
acquisitions or strategic alliances in which the consideration consists of
stock, such as the Company's recently completed transaction with IXC,
shareholders of the Company could suffer a significant dilution of their
ownership interests in the Company. Many of the businesses that might become
attractive acquisition candidates for the Company may have significant goodwill
and intangible assets, and acquisition of these businesses, if accounted for as
a purchase, would typically result in increases in the Company's amortization
expenses and the length of time over which they are reported. In connection with
acquisitions, the Company could incur substantial expenses, including the
expenses of integrating the business of the acquired company or the strategic
alliance with the Company's business. Such expenses, in addition to the
financial impact of such acquisitions, could have a material adverse effect on
the Company's business, financial condition and results of operations and could
cause substantial fluctuations in the Company's quarterly and yearly operating
results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the
continued contributions of its senior management team and technical, marketing
and sales personnel. The Company's employees may voluntarily terminate their
employment with the Company at any time. Competition for qualified employees
and personnel in the Internet services industry is intense and there are a
limited number of persons with knowledge of and experience in the Internet
service industry. The Company's success also will depend on its ability to
attract and retain qualified management, marketing, technical and sales
executives and personnel. The process of locating such personnel with the
combination of skills and attributes required to carry out the Company's
strategies is often lengthy. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could have a material
adverse effect on the Company's results of operations, product development
efforts and ability to expand its network infrastructure. There can be no
assurance that the Company will be successful in attracting and retaining such
executives and personnel. Any such event could have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The Company's products and services are targeted toward users of the
Internet, which has experienced rapid growth. The market for Internet access
and related services is relatively new and characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new product and service introductions. The Company's future success will
depend, in part, on its ability to effectively use leading technologies, to
continue to develop its technical expertise, to enhance its current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. There can be no assurance that
the Company will be successful in effectively using new technologies, developing
new services or enhancing its existing services on a timely basis or that such
new technologies or enhancements will achieve market acceptance. The Company
believes that its ability to compete successfully is also dependent upon the
continued compatibility and interoperability of its services with products and
architectures offered by various vendors. There can be no assurance that the
Company will be able to effectively address the compatibility and
interoperability issues raised by technological changes or new industry
standards. In addition, there can be no assurance that services or technologies
developed by others will not render the Company's services or technology
uncompetitive or obsolete.
In addition, critical issues concerning the commercial use of the
Internet remain unresolved and may impact the growth of Internet use, especially
in the business market targeted by the Company. Despite growing interest in the
many commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet, and a
lack of tools to simplify Internet access and use. In particular, numerous
published reports have indicated that a perceived lack of security of commercial
data, such as credit card numbers, has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security concerns. Published reports have also indicated that capacity
constraints caused by growth in the use of the Internet may, unless resolved,
impede further development of the Internet to the extent
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that users experience delays, transmission errors and other difficulties.
Further, the adoption of the Internet for commerce and communications,
particularly by those individuals and enterprises that have historically relied
upon alternative means of commerce and communications, generally requires the
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, enterprises that have already invested substantial
resources in other means of conducting commerce and exchanging information may
be particularly reluctant or slow to adopt a new strategy that may make their
existing personnel and infrastructure obsolete. The failure of the market for
business-related Internet solutions to continue to develop would adversely
impact the Company's business, financial condition and results of operations and
ability to make payments on the Notes.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK; REGULATORY
MATTERS
The law relating to liability of ISPs for information carried on or
disseminated through their networks is currently unsettled. A number of
lawsuits have sought to impose such liability for defamatory speech and
infringement of copyrighted materials. In one case, a federal district court
held that an online service provider could be found liable for defamatory matter
provided through its service, on the ground that the service provider exercised
active editorial control over postings to its service. Other courts have held
that online service providers and ISPs may, under certain circumstances, be
subject to damages for copying or distributing copyrighted materials. Certain
provisions of the Communications Decency Act, which imposed criminal penalties
for using an interactive computer service for transmitting obscene or indecent
communications, have been found unconstitutional by the U.S. Supreme Court. New
legislative attempts to curtail obscene or indecent communications are likely.
The imposition upon ISPs or web server hosts of potential liability for
materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company carries errors and omissions insurance with a basic policy
limitation of $2.0 million, subject to deductibles, exclusions and self-
insurance retention amounts. Such coverage may not be adequate or available to
compensate the Company for all liability that may be imposed. The imposition of
liability in excess of, or the unavailability of, such coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Although the Company's Internet operations are not currently subject
to direct regulation by the Federal Communications Commission (the "FCC") or
any other governmental agency (other than regulations applicable to businesses
generally), due to the increasingly widespread use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, user pricing, privacy, libel,
intellectual property protection and infringement, and technology export and
other controls. The FCC is currently reviewing its regulatory position on the
usage of the basic network and communications facilities by ISPs. Changes in
the regulatory structure and environment affecting the Internet access market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from Regional
Bell Operating Companies ("RBOCs") or other telecommunications companies,
could have an adverse effect on the Company's business. Although the FCC has
decided not to allow local telephone companies to impose per-minute access
charges on ISPs, the impact of this decision on the availability of telephone
service is the subject of a congressionally-mandated report. In addition, some
telephone companies are seeking relief through state regulatory agencies. Such
rules, if adopted, are likely to have a greater impact on consumer-oriented
Internet access providers than on business-oriented ISPs such as the Company.
Nonetheless, the imposition of access charges would affect the Company's costs
of serving dial-up customers and could have a material adverse effect on the
Company's business, financial condition and results of operations.
The law relating to the regulation and liability of Internet access
providers in relation to information carried or disseminated also is undergoing
a process of development in other countries. Decisions, laws, regulations and
other activities regarding regulation and content liability may significantly
affect the development and profitability of companies offering on-line and
Internet access services, including the Company.
The Company's wholly-owned subsidiary, PSINet Telecom Limited, has
received a license from the FCC to provide global facilities-based
telecommunications services, subjecting it to regulation as a non-dominant
international common carrier. Further, the Company is also considering the
financial, regulatory and operational
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implications of becoming or acquiring a competitive local exchange carrier
("CLEC") in certain selected cities. As a result, it is also possible that the
Company could become subject to further regulation by the FCC and/or another
regulatory agency, including state and local entities, as a provider of domestic
basic telecommunications services, particularly competitive local exchange
services.
The FCC exercises jurisdiction over all facilities of, and services
offered by, telecommunications common carriers to the extent that they involve
the provision, origination or termination of jurisdictionally interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they involve
origination or termination of jurisdictionally intrastate communications. In
addition, many regulations may be subject to judicial review, the result of
which the Company is unable to predict.
Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges or practices of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on the Company and to change its regulatory classification. The
Company believes that, in the current regulatory environment, the FCC is
unlikely to do so. International non-dominant carriers must maintain tariffs on
file with the FCC. Regulation of CLECs occurs on both a state and federal
level, to the extent CLECs provide interstate exchange access service.
Regulatory regimes vary from state to state, however, competing local exchange
carriers are non-dominant and are likely to be subject to a relaxed form of
regulation. Nevertheless, there are numerous state and federal proceedings that
may impose regulatory burdens on CLECs. The Company cannot predict the impact,
if any, that future regulation or regulatory changes may have on the Company.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
Certain of the Company's financing arrangements are secured by
substantially all of the Company's assets and stock of certain subsidiaries of
the Company. These financing arrangements require that the Company satisfy
certain financial covenants and currently prohibit the payment of dividends and
the repurchase of capital stock of the Company without, in each case, the
lender's consent. The Company's secured lenders would be entitled to foreclose
upon those assets in the event of a default under the financing arrangements and
to be repaid from the proceeds of the liquidation of those assets before the
assets would be available for distribution to the Holders in the event that the
Company is liquidated. In addition, the collateral security arrangements under
the Company's existing financing arrangements may adversely affect the Company's
ability to obtain additional borrowings.
RISK OF SYSTEM FAILURE OR SHUTDOWN
The success of the Company is dependent upon its ability to deliver
reliable, high-speed access to the Internet. The Company's network, as is the
case with other networks providing similar service, is vulnerable to damage or
cessation of operations from fire, earthquakes, severe storms, power loss,
telecommunications failures and similar events, particularly if such events
occur within a high traffic location of the network. The Company is also
dependent upon the ability and willingness of its telecommunications providers
to deliver reliable, high-speed telecommunications service through their
networks. While the Company's network has been designed with redundant circuits
among POPs to allow traffic rerouting, lab and field testing is performed before
integrating new and emerging technology into the network, and the Company
engages in capacity planning, there can be no assurance that the Company will
not experience failures or shutdowns relating to individual POPs or even
catastrophic failure of the entire network. The Company carries business
personal property insurance at scheduled locations (which are typically staffed
by Company personnel) and at unscheduled locations (which are typically
unstaffed) with basic policy limitations of $80 million and $2 million ($400,000
per unscheduled location outside of North America), respectively, and business
interruption insurance with a basic policy limitation of $5 million, in each
case subject to deductibles, exclusions and self-insurance retention amounts.
Such coverage may not be adequate or available to compensate the Company for all
losses that may occur. In addition, the Company generally attempts to limit its
liability to customers arising out of network failures through contractual
provisions disclaiming all such liability and, in respect of certain services,
limiting liability to a usage credit based upon the amount of time that the
system was not operational. There can be no assurance that such limitations
will be enforceable. In any event, significant or prolonged system failures or
shutdowns could damage the reputation of the Company and result in the loss of
customers.
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NETWORK SECURITY RISKS; RISKS ASSOCIATED WITH PROVIDING SECURITY SERVICES
Despite the implementation of network security measures by the
Company, such as limiting physical and network access to its routers, its
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by its customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to the Company's customers.
Furthermore, such inappropriate use of the Internet by third parties could also
potentially jeopardize the security of confidential information stored in the
computer systems of the Company's customers, which may deter potential customers
and adversely affect existing customer relationships. Security problems
represent an ongoing threat to public and private data networks. Attacks upon
the security of Internet sites and infrastructure continue to be reported to
organizations such as the CERT Coordination Center at Carnegie Mellon
University, which facilitates responses of the Internet community to computer
security events. Addressing problems caused by computer viruses, break-ins or
other problems caused by third parties could have a material adverse effect on
the Company.
The security services offered by the Company for use in connection
with its customers' networks also cannot assure complete protection from
computer viruses, break-ins and other disruptive problems. Although the Company
attempts to limit contractually its liability in such instances, the occurrence
of such problems may result in claims against or liability on the part of the
Company. Such claims, regardless of their ultimate outcome, could result in
costly litigation and could have a material adverse effect on the Company's
business or reputation or on its ability to attract and retain customers for its
products. Moreover, until more consumer reliance is placed on security
technologies available, the security and privacy concerns of existing and
potential customers may inhibit the growth of the Internet service industry and
the Company's customer base and revenues.
DEPENDENCE ON SUPPLIERS
The Company has few long-term contracts with its suppliers. The
Company is dependent on third party suppliers for its leased-line connections,
or bandwidth. Certain of these suppliers are or may become competitors of the
Company, and such suppliers are not subject to any contractual restrictions upon
their ability to compete with the Company. To the extent that these suppliers
change their pricing structures, the Company may be adversely affected.
Following the recent consummation of its transaction with IXC, the Company
anticipates that its dependence upon certain of these suppliers will be
decreased as it accepts delivery of OC-48 bandwidth under the IRU Purchase
Agreement. Nevertheless, until the IXC fiber optic telecommunications system is
completed (and IXC is not obligated under the IRU Purchase Agreement to extend
its buildout of the IXC system beyond approximately 6,640 unique route miles of
OC-48 bandwidth) and, in certain geographic areas, even after such completion,
the Company will continue to be dependent upon such suppliers. Moreover, any
failure or delay of IXC to deliver bandwidth under the IRU Purchase Agreement or
to provide operations, maintenance and other services with respect to such
bandwidth in a timely or adequate fashion could adversely affect the Company.
The Company is also dependent on certain third party suppliers of hardware
components. Although the Company attempts to maintain a minimum of two vendors
for each required product, certain components used by the Company in providing
its networking services are currently acquired or available from only one
source.
The Company has from time to time experienced delays in the receipt of
certain hardware components and telecommunications facilities, including, most
recently, delays in delivery of PRI telecommunications facilities (which connect
dial-up customers to the Company's network). A failure by a supplier to deliver
quality products on a timely basis, or the inability to develop alternative
sources if and as required, could result in delays which could materially
adversely affect the Company. The Company's remedies against suppliers who fail
to deliver products on a timely basis are limited by contractual liability
limitations contained in supply agreements and purchase orders and, in many
cases, by practical considerations relating to the Company's desire to maintain
good relationships with the suppliers. As the Company's suppliers revise and
upgrade their equipment technology, the Company may encounter difficulties in
integrating the new technology into the Company's network.
Certain of the vendors from whom the Company purchases
telecommunications bandwidth, including the RBOCs and other local exchange
carriers ("LECs"), currently are subject to tariff controls and other price
constraints which in the future may be changed. In addition, newly enacted
legislation will produce changes in the market for telecommunications services.
These changes may affect the prices charged by the RBOCs and other LECs to the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of
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operations. Moreover, the Company is subject to the effects of other potential
regulatory actions which, if taken, could increase the cost of the Company's
telecommunications bandwidth through, for example, the imposition of access
charges.
DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon
its technology and proprietary rights, although the Company believes that its
success is more dependent upon its technical expertise than its proprietary
rights. The Company relies on a combination of copyright, trademark and trade
secret laws and contractual restrictions to establish and protect its
technology. Nevertheless, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization or to develop similar technology independently, and there can be
no assurance that such measures are adequate to protect the Company's
proprietary technology. In addition, the Company's products may be licensed or
otherwise utilized in foreign countries where laws may not protect the Company's
proprietary rights to the same extent as do laws in the United States. It is
the Company's policy to require employees and consultants and, when obtainable,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with the Company. There can be no assurance that the steps taken
by the Company will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. The
Company is also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. From time to time
the Company has received claims of infringement of other parties' proprietary
rights. While the Company does not believe that it has infringed the
proprietary rights of other parties, there can be no assurance that third
parties will not assert infringement claims in the future with respect to the
Company's current or future products or that any such claims will not require
the Company to enter into license arrangements or result in protracted and
costly litigation, regardless of the merits of such claims. No assurance can be
given that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will be
entitled to require the Company to purchase any or all of the Notes held by such
Holder at the prices stated herein. However, the Company's ability to
repurchase the Notes upon a Change of Control may be limited by the terms of
then existing contractual obligations of the Company and its subsidiaries. In
addition, the Company may not have adequate financial resources to effect such a
purchase, and there can be no assurance that the Company would be able to obtain
such resources through a refinancing of the Notes to be purchased or otherwise.
If the Company fails to repurchase all of the Notes tendered for purchase upon
the occurrence of a Change of Control, such failure will constitute an Event of
Default (as defined) under the Indenture.
With respect to the sale of assets referred to in the definition of
Change of Control, the phrase "all or substantially all" as used in such
definition varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under the relevant law and is
subject to judicial interpretation. Accordingly, in certain circumstances there
may be a degree of uncertainty in ascertaining whether a particular transaction
would involve a disposition of "all or substantially all" of the assets of a
person and therefore it may be unclear whether a Change of Control has occurred
and whether the Notes are subject to an offer to purchase.
The Change of Control provision may not necessarily afford the Holders
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving the
Company that may adversely affect the Holders, because such transactions may not
involve a shift in voting power or beneficial ownership or, even if they do, may
not involve a shift of the magnitude required under the definition of Change of
Control to trigger such provisions. Except as described under "Description of
Notes--Change of Control," the Indenture does not contain provisions that
permit the Holders to require the Company to repurchase or redeem the Notes in
the event of a takeover, recapitalization or similar transaction.
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DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
Management will retain a significant amount of discretion over the
application of the net proceeds of the Initial Notes Offering (other than the
$138.7 million deposited into escrow on the Closing Date). Because of the
number and variability of factors that determine the Company's use of the net
proceeds of the Initial Notes Offering, there can be no assurance that such
applications will not vary substantially from the Company's current intentions.
Pending such utilization, the Company intends to invest the net proceeds of the
Initial Notes Offering in short-term investment grade and government securities.
See "Use of Proceeds."
BANKRUPTCY RISKS RELATED TO ESCROW ACCOUNT
The right of the Trustee (as defined) under the Indenture and the
Escrow Agreement (as defined) to foreclose upon and sell Escrow Collateral (as
defined) upon the occurrence of an Event of Default on the Notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against the Company or one or
more of its subsidiaries. Under applicable bankruptcy law, secured creditors
such as the Holders are prohibited from foreclosing upon or disposing of a
debtor's property without prior bankruptcy court approval. See "Description of
Notes--Disbursement of Funds; Escrow Account."
YEAR 2000
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company has established procedures for evaluating and
managing the risks and costs associated with this problem and believes that its
computer systems are currently Year 2000 compliant. However, many of the
Company's customers maintain their Internet connections on UNIX-based servers,
which may be impacted by Year 2000 complications. The failure of the Company's
customers to ensure that their servers are Year 2000 compliant could have a
material adverse effect on the Company's customers, which in turn could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Date Conversion."
RESTRICTIONS ON RESALE; ABSENCE OF PUBLIC MARKET FOR THE SECURITIES
The Initial Notes have not been registered under the Securities Act or
any state securities laws, and, unless so registered and to the extent not
exchanged for the Exchange Notes, may not be offered or sold except pursuant to
an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and any applicable state securities laws.
Any Initial Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of the Initial Notes outstanding. Following the
consummation of the Exchange Offer, holders of Initial Notes who did not tender
their Initial Notes generally will not have any further registration rights
under the Registration Rights Agreement, and such Initial Notes will continue to
be subject to certain restrictions or transfer. Accordingly, the liquidity of
the market for such Initial Notes could be adversely affected. The Initial
Notes are currently eligible for sale pursuant to Rule 144A through the PORTAL
market. Because the Company anticipates that most holders of Initial Notes will
elect to exchange such Initial Notes, the Company anticipates that the liquidity
of the market for any Initial Notes remaining after the consummation of the
Exchange Offer may be substantially limited.
The Exchange Notes will be new securities for which there currently is no
established trading market. The Company does not intend to apply for listing of
the Exchange Notes on any automated dealer quotation system. Although the
Initial Purchasers have informed the Company that they currently intend to make
a market in the Exchange Notes, the Initial Purchasers are not obligated to do
so, and any such market making may be discontinued at any time without notice.
The liquidity of any market for the Exchange Notes will depend upon the number
of holders of the Exchange Notes, the interest of securities dealers in making a
market in the Exchange Notes and other factors. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Exchange
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Notes. If an active trading market for the Exchange Notes does not develop, the
market price and liquidity of Exchange Notes may be adversely affected. If the
Exchange Notes are traded, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for similar
securities, the performance of the Company and certain other factors. The
liquidity of, and trading markets for, Exchange Notes also may be adversely
affected by general declines in the market for non-investment grade debt. Such
declines may adversely affect the liquidity of, and trading markets for, the
Exchange Notes, independent of the financial performance of or prospects for the
Company.
Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that the
market, if any, for the Exchange Notes will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on the holders of
the Exchange Notes.
PROCEDURES FOR TENDERING; CONSEQUENCES OF FAILURE TO EXCHANGE
Issuance of Exchange Notes in exchange for the Initial Notes pursuant to
the Exchange Offer will only be made following the prior satisfaction of the
procedures and conditions set forth in "The Exchange Offer--Procedures for
Tendering," including timely receipt by the Exchange Agent (as defined) of such
Initial Notes, and of a properly completed and duly executed Letter of
Transmittal. Initial Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
restricted securities and may not be offered or sold except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities law.
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical
fact are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may,"
"will," "should," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. These forward-looking statements, such as,
among others, those relating to the potential benefits to the Company resulting
from its acquisition of the OC-48 bandwidth from IXC, the revenue and
profitability levels of the Company's current operations and its operations
after integrating the operations of the companies it has recently acquired, and
other matters contained above and elsewhere in this Prospectus regarding matters
that are not historical facts, are only predictions. No assurance can be given
that the future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these forward-
looking statements are based upon a variety of assumptions relating to the
business of the Company, which, although presently considered reasonable by the
Company, may not be realized. Because of the number and range of the
assumptions underlying the Company's forward-looking statements, many of which
are subject to significant uncertainties and contingencies that are beyond the
reasonable control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this Prospectus. These forward-looking statements are based on
current expectations, and the Company assumes no obligation to update this
information. Therefore, the actual experience of the Company and results
achieved during the period covered by any particular forward-looking statements
may differ substantially from those projected. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.
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USE OF PROCEEDS
The net proceeds of the Initial Notes Offering, after deducting
discounts and commissions and expenses payable by the Company, were
approximately $580.75 million. Of such net proceeds, $138.7 million was used to
purchase U.S. Government Securities which are being held in an escrow account
for the benefit of the Holders to fund when due the first five scheduled
interest payments on the Notes. The Company used $20.0 million of the net
proceeds of the Initial Notes Offering to repay a portion of certain
indebtedness outstanding under its existing credit facility with Fleet National
Bank ("Fleet"), which portion of indebtedness was incurred as of January 29,
1998 to finance the Company's acquisition of iSTAR (the "Acquisition Credit
Facility") and for working capital purposes. The indebtedness that was repaid
bore interest at the prime rate plus 1.375% per annum and was scheduled to
mature on the earlier of (i) the consummation of a public offering by the
Company of its debt or equity securities or (ii) July 31, 1998. The balance of
the net proceeds are expected to be used to finance capital expenditures
(including, without limitation, facilities and equipment in connection with the
development and expansion of its domestic and international network, the
addition of two new international network operation centers and the
implementation of new customer support systems) and working capital requirements
(including, without limitation, debt service obligations) of the Company. In
addition, as described below, a portion of the net proceeds also is expected to
be used to make strategic investments in or acquisitions of certain businesses
or assets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Management will retain a significant amount of discretion over the
application of the net proceeds of the Initial Notes Offering (other than the
$138.7 million deposited into escrow). Because of the number and variability of
factors that determine the Company's use of the net proceeds of the Initial
Notes Offering, there can be no assurance that such applications will not vary
substantially from the Company's current intentions. Pending such utilization,
the Company intends to invest the net proceeds of the Initial Notes Offering in
short-term investment grade and government securities.
A portion of the net proceeds from the Initial Notes Offering also is
expected to be used for possible future investments, acquisitions or strategic
alliances in businesses or assets that are related or complementary to the
Company's existing business. See "Risk Factors--Risks Associated with
Acquisitions and Strategic Alliances." While the Company periodically evaluates
investment, acquisition and strategic alliance candidates, the Company has no
present commitments or agreements with respect to any such material investment,
acquisition or strategic alliance, although the Company presently is planning to
increase its ownership interest in iSTAR to 100%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--International
Operations."
The Company will not receive any cash proceeds from the Exchange
Offer. In consideration for issuing the Exchange Notes in exchange for the
Initial Notes, the Company will receive Initial Notes in like principal amount.
The Initial Notes surrendered in exchange for the Exchange Notes will be
canceled by the Company.
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes the material terms of the
Exchange Offer, including those set forth in the Letter of Transmittal
distributed with this Prospectus. This summary is qualified in its entirety by
reference to the full text of the documents underlying the Exchange Offer
(including the Indenture and the Registration Rights Agreement), which are
exhibits to the Exchange Offer Registration Statement.
REGISTRATION RIGHTS
The Initial Notes were sold by the Company to Donaldson, Lufkin & Jenrette
Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Chase Securities Inc. (the "Initial Purchasers") on April 13, 1998 (the "Closing
Date") pursuant to an Offering Memorandum (the "Initial Notes Offering"). The
Initial Notes were then subsequently resold to qualified institutional buyers
("QIBs") pursuant to Rule 144A and Regulation S under the Securities Act. In
connection with the Initial Notes Offering, the Company entered into the
Registration Rights Agreement, which requires, among other things, that the
Company (i) file with the Commission within 45 days following the Closing Date
(i.e., on or before May 28, 1998) a Registration Statement (the "Exchange Offer
Registration Statement") under the Securities Act with respect to an issue of
Exchange Notes of the Company identical in all material respects to the Initial
Notes (other than transfer restrictions, registration rights and the
requirement, under certain circumstances, to pay Liquidated Damages), (ii) use
its best efforts to cause such Exchange Offer Registration Statement to become
effective under the Securities Act within 150 days after the Closing Date (the
"Effectiveness Deadline"), (iii) upon the effectiveness of such Exchange Offer
Registration Statement, commence the Exchange Offer and keep the Exchange Offer
open for a period of not less than 20 Business Days, and (iv) use its best
efforts to cause the Exchange Offer to be consummated within 30 Business Days
after the Effective Date (such 30th day being the "Consummation Deadline").
The Exchange Offer would allow holders of the Initial Notes the
opportunity, with certain exceptions, to exchange their Initial Notes for a like
principal amount of Exchange Notes, which would be issued without a restrictive
legend and may generally be reoffered and resold by the Exchange Holder without
restrictions or limitations under the Securities Act, subject to the terms and
conditions enunciated by the staff of the Commission (the "Staff") in the Morgan
Stanley No-Action Letter (Morgan Stanley and Co., Inc. (available June 5, 1991))
----------------------------
and the Exxon Capital No-Action Letter (Exxon Capital Holdings Corporation
----------------------------------
(available May 13, 1989)), as interpreted in the Commission's letter to Shearman
--------
& Sterling dated July 2, 1993, and similar no-action letters. See Outside Front
- ----------
Cover, "Prospectus Summary--The Exchange Offer," and "--Resale of Exchange
Notes." However, any Initial Holder who (i) is an affiliate of the Company,
(ii) does not acquire the Exchange Notes in the ordinary course of business,
(iii) tenders in the Exchange Offer with the intention to participate, or for
the purpose of participating, in a distribution of the Exchange Notes, or (iv)
is a broker-dealer which acquired such Initial Notes directly from the Company,
is not entitled to rely on the position of the Staff in the no-action letters
referred to above and, in the absence of an exemption therefrom, must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with the resale of the Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes, where such Initial Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." The
Company has agreed to include in this Prospectus certain information necessary
to allow such broker-dealers to exchange such Initial Notes pursuant to the
Exchange Offer and to satisfy the prospectus delivery requirements in connection
with resales of Exchange Notes received by such broker-dealer in the Exchange
Offer. The Company has also agreed to maintain the effectiveness of the
Exchange Offer Registration Statement for such purposes for one year.
In addition, the Company agreed, pursuant to the Registration Rights
Agreement, to file a shelf registration statement pursuant to Rule 415 under the
Securities Act (the "Shelf Registration Statement"), registering for resale (i)
any Initial Notes held by persons who are not permitted by law or any policy of
the Commission to participate in the Exchange Offer and who satisfy certain
other conditions, (ii) any Exchange Notes acquired in the Exchange Offer by any
holder who must comply with the prospectus delivery requirements of the
Securities Act in connection with the resales of such Exchange Notes if this
Prospectus is not appropriate or available for such resales by such
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holder or (iii) any Initial Notes held by a broker-dealer which were acquired
directly from the Company or one of its affiliates. To participate in such a
shelf registration, any such Holder of Notes must so notify the Company within
10 Business Days following consummation of the Exchange Offer and provide to the
Company the information requested by the Company within 10 Business Days of such
request. The Company has agreed to file with the Commission such a shelf
registration statement no later than 30 days after the earlier of (i) the date
on which the Company determines that the Exchange Offer is not permitted by
applicable law or (ii) the date on which the Company receives the notice from
the Holder as specified above, and to use its best efforts to cause such Shelf
Registration Statement to become effective under the Securities Act as soon as
practicable but in no event later than 60 days after the filing of the Shelf
Registration Statement (or such longer period, not to exceed 150 days after the
filing of the Shelf Registration Statement, as may be necessary to avoid
conflicts with existing contractual obligations of the Company) (such 60th day
or longer period the "Effectiveness Deadline"). In addition, the Company agreed
to use its best efforts to keep such Shelf Registration Statement continually
effective, supplemented and amended for a period of at least two years following
the Closing Date, or such shorter period as will terminate when all Initial
Notes covered by such Shelf Registration Statement have been sold pursuant
thereto.
REGISTRATION DEFAULTS; LIQUIDATED DAMAGES
If the applicable registration statement or amendment is not timely filed
or declared effective or thereafter ceases to be effective or fails to be usable
for its intended purpose without being succeeded immediately by a post-effective
amendment that cures such failure and is itself immediately declared effective,
or if the Exchange Offer has not been consummated on or prior to the
Consummation Deadline (any of the above events a "Registration Default"), the
Company has agreed to pay liquidated damages ("Liquidated Damages") to each
holder of Initial Notes affected thereby in an amount equal to $.05 per week for
each $1,000 in principal amount of Notes held by such Holder for each week or
portion thereof that the Registration Default continues for the first 90-day
period immediately following the occurrence of such Registration Default. The
amount of such liquidated damages will increase by an additional $.05 per week
per $1,000 in principal amount of Initial Notes for each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of liquidated damages of $.50 per week per $1,000 in principal amount of Initial
Notes, provided that the Company shall in no event be required to pay Liquidated
Damages for more than one Registration Default at any given time. Following the
cure of any default, the payment of Liquidated Damages in respect of the Notes
will cease. Notwithstanding the fact that any Initial Notes for which
Liquidated Damages are due cease to be Transfer Restricted Securities, all
obligations of the Company to pay Liquidated Damages with respect to such
securities outstanding prior to the time such Initial Notes ceased to be
Transfer Restricted Securities shall survive until such time as such obligations
shall have been satisfied in full.
Except as aforesaid, this Prospectus may not be used for any offer to
resell, resale or other transfer of Exchange Notes.
Except as set forth above, after consummation of the Exchange Offer,
Holders of Notes have no registration or exchange rights under the Registration
Rights Agreement. See "--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
_________________, 1998 (20 Business Days after the effective date of the
Exchange Offer Registration Statement), unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next Business Day
after the previously scheduled expiration date. In no event will the Expiration
Date be extended to a date more than 30 Business Days after effectiveness of the
Exchange Offer Registration Statement.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Initial Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--
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Conditions" shall not have been satisfied, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a public announcement thereof.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Initial
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time
on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Initial Notes accepted in the Exchange Offer. Initial Holders may tender some
or all of their Initial Notes pursuant to the Exchange Offer; however, Initial
Notes may be tendered only in integral multiples of $1,000. The form and terms
of the Exchange Notes are substantially the same as the form and terms of the
Initial Notes except that (i) the Exchange Notes have been registered under the
Securities Act and hence will not bear legends restricting the transfer thereof
and (ii) holders of the Exchange Notes generally will not be entitled to certain
rights under the Registration Rights Agreement or Liquidated Damages, which
rights generally will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Initial Notes and will be
entitled to the benefits of the Indenture.
Initial Holders do not have any appraisal or dissenters' rights under the
New York Business Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Initial Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Initial
Holders pursuant to the Exchange Agent Agreement for the purpose of receiving
the Exchange Notes from the Company.
If any tendered Initial Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Initial Notes will be
returned, without expense, to the tendering Initial Holder thereof as promptly
as practicable after the Expiration Date.
Initial Holders who tender Initial Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Initial Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
INTEREST ON EXCHANGE NOTES
Each Exchange Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Initial Note surrendered in
exchange for such Exchange Note or, if no such interest has been paid or duly
provided for on such Initial Note, from April 13, 1998. Holders of the Initial
Notes whose Initial Notes are accepted for exchange will not receive accrued
interest on such Initial Notes for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such
Initial Notes prior to the original issue date of the Exchange Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Initial Notes, and will be deemed to have waived the right to
receive any interest on such Initial Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after April 13, 1998. Interest on the Notes will be payable semi-annually
on February 15 and August 15 of each year, commencing August 15, 1998.
PROCEDURES FOR TENDERING INITIAL NOTES
Only Initial Holders may tender such Initial Notes in the Exchange Offer.
To tender in the Exchange Offer, an Initial Holder must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal
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or such facsimile, together with the Initial Notes and any other required
documents, to the Exchange Agent so as to be received by the Exchange Agent at
the address set forth below prior to 5:00 p.m., New York City time, on the
Expiration Date. Delivery of the Initial Notes may be made by book-entry
transfer of such Initial Notes into the Exchange Agent's account at DTC ("Book-
Entry Transfer") in accordance with the procedures described below. Confirmation
of such Book-Entry Transfer must be received by the Exchange Agent prior to the
Expiration Date.
By executing the Letter of Transmittal, each Initial Holder will make to
the Company the representation set forth below in the second paragraph under the
heading "--Resale of Exchange Notes."
The tender by an Initial Holder and the acceptance thereof by the Company
will constitute an agreement between such Initial Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF INITIAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Initial Holder promptly and instruct
such registered Initial Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Initial Notes tendered pursuant thereto (i) are signed by the
registered Initial Holder, unless such Initial Holder has completed the box
entitled "Special Exchange Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) are tendered for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantee must be by a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States, or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Initial Holder of any Initial Notes listed therein, such Initial
Notes must be endorsed or accompanied by a properly completed bond power, signed
by such registered Initial Holder as such registered Initial Holder's name
appears on such Initial Notes, with the signature thereon guaranteed by an
Eligible Institution.
If the Letter of Transmittal or any Initial Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Initial Notes and withdrawal of tendered
Initial Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Initial Notes not properly tendered or any Initial
Notes the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Initial Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Initial Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Initial Holders
of defects or irregularities with respect to tenders of Initial Notes, none of
the Company, the Exchange Agent or any other person shall incur any
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liability for failure to give such notification. Tenders of Initial Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Initial Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Initial
Holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
BOOK-ENTRY DELIVERY PROCEDURES
Within two Business Days after the date of this Prospectus, the Exchange
Agent will establish accounts with respect to the Initial Notes at DTC (the
"Book-Entry Transfer Facility") for purposes of the Exchange Offer. Any
financial institution that is a participant in the Book-Entry Transfer Facility
systems may make book-entry delivery of the Initial Notes by causing DTC to
transfer such Initial Notes into the Exchange Agent's account at such Book-Entry
Transfer Facility in accordance with such Book-Entry Transfer Facility's
procedures for such transfer. Timely book-entry delivery of Initial Notes
pursuant to the Exchange Offer, however, requires receipt of a confirmation of a
Book-Entry Transfer ("Book-Entry Confirmation") prior to the Expiration Date.
In addition, although delivery of Initial Notes may be effected through book-
entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility, the Letter of Transmittal (or a manually signed facsimile thereof),
together with any required signature guarantees and any other required
documents, or an Agent's Message in connection with a book-entry transfer, must,
in any case, be delivered or transmitted to and received by the Exchange Agent
at its address set forth on the back cover page of this Prospectus prior to the
Expiration Date to receive Exchange Notes for tendered Initial Notes, or the
guaranteed delivery procedure described below must be complied with. Tender
will not be deemed made until such documents are received by the Exchange Agent.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
TENDER OF INITIAL NOTES HELD THROUGH DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program (ATOP). Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer
Initial Notes to the Exchange Agent in accordance with DTC's ATOP procedures for
transfer. DTC will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received an expressed acknowledgment from a participant in DTC that
is tendering Initial Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the applicable Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that such participant has received and
agrees to be bound by the applicable Notice of Guaranteed Delivery), and that
the Company may enforce such agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
Initial Holders who wish to tender their Initial Notes and (i) whose
Initial Notes are not immediately available, (ii) who cannot deliver their
Initial Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Initial Holder, the certificate number(s) of such
Initial Notes and the principal amount of Initial Notes tendered, stating that
the tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of Transmittal
(or facsimile thereof), together with the certificate(s) representing the
Initial Notes (or a Book-Entry Confirmation
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transfer of such Initial Notes into the Exchange Agent's account at DTC) and any
other documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Initial Notes in proper form for transfer (or a Book-Entry Confirmation transfer
of such Initial Notes into the Exchange Agent's account at DTC) and all other
documents required by the Letter of Transmittal, are received by the Exchange
Agent within three New York Stock Exchange trading days after the Expiration
Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Initial Holders who wish to tender their Initial Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Initial Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at the address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Initial Notes to be withdrawn (the "Depositor"),
(ii) identify the Initial Notes to be withdrawn (including the certificate
number(s) and principal amount of such Initial Notes, or, in the case of Initial
Notes transferred by book-entry transfer, the name and number of the account at
DTC to be credited), (iii) be signed by the Initial Holder in the same manner as
the original signature on the Letter of Transmittal by which such Initial Notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Initial Notes into the name of the person withdrawing the tender and (iv)
specify the name in which any such Initial Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form
and eligibility (including time or receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Initial Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Initial Notes so withdrawn are validly retendered.
Any Initial Notes which have been tendered but which are not accepted for
exchange will be returned to such Initial Holder without cost to such Initial
Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Initial Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange any Initial Notes, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Initial
Notes, if:
(a) in the opinion of counsel to the Company, the Exchange Offer or any
part thereof contemplated herein violates any applicable law or interpretation
of the Staff;
(b) any action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development shall have occurred in any such action or proceeding with
respect to the Company;
(c) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby;
(d) any cessation of trading on The Nasdaq Stock Market or any exchange, or
any banking moratorium, shall have occurred, as a result of which the Company is
unable to proceed with the Exchange Offer; or
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(e) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Exchange Offer
Registration Statement or proceedings shall have been initiated or, to the
knowledge of the Company, threatened for that purpose.
If the Company determines in its reasonable judgment that any of the
foregoing conditions are not satisfied, the Company may (i) refuse to accept any
Initial Notes and return all tendered Initial Notes to the tendering Initial
Holders, (ii) extend the Exchange Offer and retain all Initial Notes tendered
prior to the expiration of the Exchange Offer, subject, however, to the rights
of Initial Holders to withdraw such Initial Notes (see "--Withdrawals of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Initial Notes which have not
been withdrawn.
EXCHANGE AGENT
Wilmington Trust Company will act as Exchange Agent for the Exchange Offer
with respect to the Initial Notes.
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Initial Notes and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent, addressed as follows:
By Registered or Certified Mail or Overnight Courier:
Attn: Kristin Long
Wilmington Trust Company
Corporate Trust Operations
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
By Facsimile (for Eligible Institutions Only): (302) 651-1079
Confirm by Telephone: (302) 651-1562
Kristin Long
FEES AND EXPENSES
The expenses of soliciting Initial Notes for exchange will be borne by the
Company. The principal solicitation is being made by mail by the Exchange
Agent. However, additional solicitation may be made by telephone, facsimile or
in person by officers and regular employees of the Company and its affiliates
and by persons so engaged by the Exchange Agent.
The Company will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith and pay other registration expenses, including fees and
expenses of the Trustee (as defined), filing fees, blue sky fees and printing
and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Initial Notes pursuant to the Exchange Offer. If, however, certificates
representing the Exchange Notes or the Initial Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered Holder of the Initial Notes
tendered, or if tendered Initial Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of the Initial Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered Initial Holder or any other person) will be payable by the
tendering Initial Holder.
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ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Initial Notes, which is the aggregate principal amount of the Initial Notes, as
reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized in
connection with the Exchange Offer. The expenses of the Initial Notes Offering
and the Exchange Offer will be amortized over the term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
Staff's Exxon Capital No-Action Letter, Morgan Stanley No-Action Letter,
Shearman & Sterling No-Action Letter, and other interpretive letters addressed
to third parties in other transactions; however, the Company has not sought its
own interpretive letter addressing such matters and there can be no assurance
that the Staff would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer in exchange for Initial Notes may be offered for resale, resold
and otherwise transferred by such an Exchange Holder (other than an Exchange
Holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such Exchange Holder's
business and that such Exchange Holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such Exchange Notes. However, any
Initial Holder who (i) is an "affiliate" of the Company (within the meaning of
Rule 405 under the Securities Act), (ii) does not acquire such Exchange Notes in
the ordinary course of its business, (iii) intends to participate in the
Exchange Offer for the purpose of distributing Exchange Notes, or (iv) is a
broker-dealer who purchased such Initial Notes directly from the Company, (a)
will not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Initial Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Initial Notes unless such
sale is made pursuant to an exemption from such requirements. In addition, as
described below, if any broker-dealer holds Initial Notes acquired for its own
account (a "Participating Broker-Dealer"), then such Participating Broker-Dealer
may be deemed a statutory "underwriter" within the meaning of the Securities Act
and must deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such Exchange Notes.
As a condition to its participation in the Exchange Offer, each Initial
Holder (including, without limitation, any Holder who is a Participating Broker-
Dealer) shall furnish, upon the request of the Company, prior to the
consummation of the Exchange Offer, a written representation to the Company
(contained in the Letter of Transmittal) to the effect that (i) it is not an
affiliate of the Company, (ii) any Exchange Notes to be received by it are being
acquired in the ordinary course of its business, and (iii) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution (within the meaning of the
Securities Act) of such Exchange Notes. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Initial Notes for its own account as a result
of market-making activities or other trading activities (and not directly from
the Company) and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, such a Participating Broker-Dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. Based on the position taken by the Staff in the interpretive letters
referred to above, the Company believes that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes received upon exchange of such Initial Notes with a prospectus meeting the
requirements of the Securities Act, which may be the prospectus prepared for an
exchange offer so long as it contains a description of the plan of distribution
with respect to the resale of such Exchange Notes. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer during the period referred to below in
connection with resales of Exchange Notes received in exchange for Initial Notes
where such Initial Notes were acquired by such Participating Broker-Dealer for
its own account as a result of market-making or other trading activities.
Subject to certain provisions set forth in the Registration Rights Agreement,
the Company shall use its best efforts to keep the Exchange Offer Registration
Statement continuously effective, supplemented
-36-
<PAGE>
and amended to the extent necessary to ensure that it is available for sales of
Exchange Notes by Participating Broker-Dealers, and to ensure that the Exchange
Offer Registration Statement conforms with the requirements of the Securities
Act and the policies, rules and regulations of the Commission as announced from
time to time, for a period of one year from the Consummation Deadline or such
shorter period as will terminate when all Initial Notes covered by the Exchange
Offer Registration Statement have been sold pursuant thereto. See "Plan of
Distribution." Any Participating Broker-Dealer who is an affiliate of the
Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of
Exchange Notes."
Each Initial Holder and each Affiliated Market Maker, by acquisition of an
Initial Note, agrees that, upon receipt of notice from the Company that (i) the
issuance by the Commission of any stop order suspending the effectiveness of the
Exchange Offer Registration Statement under the Securities Act or of the
suspension by any state securities commission of the qualification of the
Initial Notes from offering or sale in any jurisdiction, or the initiation of
any proceeding for any of the preceding purposes; or (ii) the existence of any
fact or the happening of any event that makes any statement of a material fact
made in the Exchange Offer Registration Statement or this Prospectus, or any
amendment or supplement thereto or any document incorporated by reference herein
untrue, or that requires the making of any additions or changes in the Exchange
Offer Registration Statement or this Prospectus in order to make the statements
herein, in light of the circumstances under which they were made, not misleading
(in each case, a "Suspension Notice"), such Holder or person shall discontinue
disposition of the Initial Notes pursuant to this Prospectus until such Holder
or person has received copies of the supplemented or amended Prospectus or such
Holder or person is advised in writing by the Company that use of the Prospectus
may be resumed and has received copies of any additional or supplemental filings
that are incorporated by reference in the Prospectus (in each case, the
"Recommencement Date"). In addition, each Holder or person will be deemed to
have agreed that it will either (i) destroy any Prospectuses, other than
permanent file copies, then in such Holder or person's possession which have
been replaced by the Company with more recently dated Prospectuses or (ii)
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such Holder's or person's possession of the
Prospectus covering such Initial Notes that was current at the time of receipt
of the Suspension Notice. The Company shall extend the time period regarding
the effectiveness of the Exchange Offer Registration Statement by a number of
days equal to the number of days in the period from and including the date of
delivery of the Suspension Notice to the date of delivery of the Recommencement
Date.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Initial Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of Initial Notes outstanding. Following the
consummation of the Exchange Offer, Initial Holders who did not tender their
Initial Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Initial Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Initial Notes could be adversely affected. The Initial Notes
are currently eligible for sale pursuant to Rule 144A through PORTAL. Because
the Company anticipates that most Initial Holders will elect to exchange such
Initial Notes for Exchange Notes pursuant to the Exchange Offer due to the
absence of restrictions on the resale of Exchange Notes (except for applicable
restrictions on any Exchange Holder who is an affiliate of the Company or is a
broker-dealer which acquired the Initial Notes directly from the Company) under
the Securities Act, the Company anticipates that the liquidity of the market for
any Initial Notes remaining after the consummation of the Exchange Offer may be
substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Initial Holders who do not tender their Initial Notes, except for certain
instances involving the Initial Purchasers or Initial Holders who are not
eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages for failure to register. Accordingly, any
Initial Holder that does not exchange its Initial Notes for Exchange Notes will
continue to hold the untendered Initial Notes and will be entitled to all the
rights and subject to all the limitations applicable thereto under the
Indenture, except to the extent that such rights or limitations, by their terms,
terminate or cease to have further effectiveness as a result of the Exchange
Offer.
The Initial Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of the
Securities Act. Accordingly, such Initial Notes may be resold only (i)
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<PAGE>
to the Company or any of its subsidiaries, (ii) inside the United States to a
QIB in a transaction complying with Rule 144A under the Securities Act, (iii)
inside the United States to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act), an "accredited
investor" that, prior to such transfer, furnishes (or has furnished on its
behalf by a U.S. broker-dealer) to the Trustee a signed letter containing
certain representations and agreements relating to the restrictions on transfer
of the Notes (the form of which letter can be obtained from such Trustee), (iv)
outside the United States in compliance with Rule 904 under the Securities Act,
(v) pursuant to the exemption from registration provided by Rule 144 under the
Securities Act (if available), or (vi) pursuant to an effective registration
statement under the Securities Act. Each accredited investor that is not a QIB
and that is an original purchaser of any of the Initial Notes from the Initial
Purchasers will be required to sign a letter confirming that such person is an
accredited investor under the Securities Act and that such person acknowledges
the transfer restrictions summarized herein.
OTHER
Participation in the Exchange Offer is voluntary and Initial Holders should
carefully consider whether to accept the offer to exchange their Notes. Initial
Holders are urged to consult their financial and tax advisors in making their
own decision on what action to take with respect to the Exchange Offer. The
Company may in the future seek to acquire untendered Initial Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plans to acquire any Initial Notes
that are not tendered in the Exchange Offer or to file a registration statement
to permit resales of any untendered Initial Notes.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of material United States federal income
tax consequences relevant in the opinion of Nixon, Hargrave, Devans & Doyle LLP,
counsel to the Company, to the exchange of Initial Notes for Exchange Notes
pursuant to the Exchange Offer and the purchase, ownership and disposition of
the Notes, but does not purport to be a complete analysis of all potential tax
effects. This summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, published
rulings and court decisions, all as in effect and existing on the date hereof
and all of which are subject to change at any time, which change may be
retroactive. Such counsel has relied upon representations by the Company and
its officers with respect to factual matters for purposes of this summary. This
summary is not binding on the Internal Revenue Service or on the courts, and no
ruling will be requested from the Internal Revenue Service on any issues
described below. There can be no assurance that the Internal Revenue Service
will not take a different position concerning the matters discussed below and
that such positions of the Internal Revenue Service would not be sustained.
This summary applies only to those persons who are the initial holders
of Notes, who acquired the Notes for cash and who hold Notes as capital assets.
It does not address the tax consequences to taxpayers who are subject to special
rules (such as financial institutions, tax-exempt organizations, insurance
companies and, except as discussed below under "Certain U.S. Federal Income Tax
Considerations for Non-U.S. Holders," persons who are not "U.S. Holders"). A
"U.S. Holder" means a beneficial owner of a Note who purchased the Notes
pursuant to the Initial Notes Offering that is for U.S. federal income tax
purposes (i) a citizen or resident of the United States; (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof; (iii) an estate the income
of which is subject to U.S. federal income taxation regardless of its source; or
(iv) a trust if (A) a court within the United States is able to exercise primary
supervision over the administration of the trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER
OF A NOTE IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF SUCH HOLDER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES.
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<PAGE>
EXCHANGE OF INITIAL NOTES FOR EXCHANGE NOTES
Pursuant to this Prospectus, the Company is offering to effect a registered
exchange offer for the Initial Notes, through which holders would be entitled to
exchange the Initial Notes for Exchange Notes that would be substantially
identical in all material respects to the Initial Notes, except that the
Exchange Notes would be registered and therefore would not be subject to
transfer restrictions. Alternatively, the Company may file a Shelf Registration
Statement with respect to the Notes which, if effective, would have the effect
of eliminating transfer restrictions on the Notes, thereby permitting their
resale. Neither participation in this Exchange Offer nor the filing of a Shelf
Registration Statement as described above should result in a taxable exchange to
the Company or any Holder of a Note. No taxable exchange should occur or should
be deemed to occur because there would be no material alteration in the terms of
the Notes and any modification of the terms of the Notes resulting from such an
action would be by operation of the original terms of the Notes pursuant to a
unilateral act by the Company. As a result, counsel to the Company is of the
opinion that there should be no U.S. federal income tax consequences to Initial
Holders electing to exchange Initial Notes for Exchange Notes. If, however,
such transaction were treated as an "exchange" for U.S. federal income tax
purposes, the transaction should constitute a recapitalization for U.S. federal
income tax purposes. Under the rules applicable to recapitalizations, counsel
to the Company is of the opinion that Initial Holders electing to exchange
Initial Notes for Exchange Notes should not recognize any gain or loss upon such
exchange.
INTEREST
The stated interest on the Notes generally will be taxable to a U.S.
Holder as ordinary income at the time that it is paid or accrued, in accordance
with the holder's method of accounting for federal income tax purposes.
SALE, EXCHANGE AND REDEMPTION OF NOTES
A sale, exchange or redemption of Notes will result in taxable gain or
loss equal to the difference between the amount of cash or other property
received and the Holder's adjusted tax basis in the Note. A Holder's adjusted
tax basis for determining gain or loss on the sale or other disposition of a
Note will initially equal the cost of the Note to such Holder and will be
decreased by the amount of any principal payments received by such Holder. Gain
or loss upon a sale, exchange, or redemption of a Note will be capital gain or
loss if the Note is held as a capital asset. With respect to individual
Holders, if the Note is held for more than 18 months, the maximum rate of tax on
any capital gain is 20%, and if the Note is held for more than one year and up
to 18 months, the maximum rate of tax on any capital gain is 28%. The
distinction between capital gain or loss and ordinary income or loss is also
relevant for purposes of, among other things, limitations on the deductibility
of capital losses.
LIQUIDATED DAMAGES
If, within the applicable period after the original issuance of the Initial
Notes, the Company has not filed an Exchange Offer Registration Statement or a
Shelf Registration Statement with respect to the Initial Notes, as the case may
be, or if the Company otherwise defaults with respect to its obligations under
the Registration Rights Agreement, Liquidated Damages shall become payable in
cash with respect to the applicable Initial Notes. See "The Exchange Offer--
Registration Defaults; Liquidated Damages." According to regulations under the
Code, the possibility of a change in the interest rate will not affect the
amount of interest income recognized by a U.S. Holder if the likelihood of the
change, as of the date the Notes are issued, is remote. The Company believes
that the likelihood of a change in the interest rate on the Notes is remote and
does not intend to treat the possibility of a change in the interest rate as
affecting the yield to maturity of any Note. If, as anticipated, the issue
price of the Notes will equal their stated principal amount, and because the
likelihood of a change in the interest rate is remote, the Notes will not be
issued with original issue discount.
Although the characterization of such Liquidated Damages is uncertain,
Liquidated Damages probably would constitute contingent interest, which
generally is not includible in income before it is fixed or paid. If Liquidated
Damages become fixed or paid, it should be included in the Holder's gross income
in accordance with the Holder's method of accounting for federal income tax
purposes.
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<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following summary describes certain United States federal income
and estate tax consequences of the ownership of Notes as of the date hereof by
any Holder who is a beneficial owner of a Note but is not a "U.S. Holder" (a
"Non-U.S. Holder").
Under present United States federal income and estate tax law, and
subject to the discussion below concerning backup withholding:
(a) generally no withholding of United States federal income tax will
be required with respect to payment by the Company or any paying agent of
principal or interest on a Note owned by a Non-U.S. Holder, provided (i) that
the beneficial owner does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote within the meaning of section 871(h)(3) of the Code and the regulations
thereunder, (ii) the beneficial owner is not a "controlled foreign
corporation" (as defined in Section 957 of the Code) that is related directly,
indirectly or constructively to the Company through stock ownership and (iii)
the beneficial owner satisfies the statement requirement (described generally
below) set forth in section 871(h) and section 881(c) of the Code and the
regulations thereunder;
(b) generally no withholding of United States federal income tax will
be required with respect to any gain or income realized by a Non-U.S. Holder
upon the sale, exchange or retirement of a Note; and
(c) a Note beneficially owned by an individual who at the time of
death is a Non-U.S. Holder generally will not be includible in the individual's
gross estate for the purposes of the United States federal estate tax as a
result of such individual's death, provided that such individual does not at the
time of death actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote within the
meaning of section 871(h)(3) of the Code and provided that the interest payments
with respect to such Note will not have been, if received at the time of such
individual's death, effectively connected with the conduct of a United States
trade or business by such individual.
To satisfy the requirement referred to in (a)(iii) above, the
beneficial owner of such Note, or a financial institution holding the Note on
behalf of such owner, must provide, in accordance with specified procedures, the
Company or a paying agent of the Company with a statement to the effect that the
beneficial owner is not a U.S. person. Pursuant to current temporary
Regulations, these requirements will be met if (1) the beneficial owner provides
the payor his name and address, and certifies, under penalties of perjury, that
he is not a U.S. person (which certification may be made on an Internal Revenue
Service Form W-8 (or successor or substitute form)) or (2) a financial
institution that holds customers' securities in the ordinary course of its trade
or business and holds the Note on behalf of the beneficial owner certifies,
under penalties of perjury, that such statement has been received by it (or by
another financial institution acting on behalf of the Non-U.S. Holder), and
furnishes a paying agent with a copy thereof.
Regulations recently issued by the Internal Revenue Service, which
will be effective for payments made after December 31, 1998 (subject to certain
transition rules), make modifications to the certification procedures applicable
to Non-U.S. Holders. In general, these regulations unify certain certification
procedures and forms and clarify and modify reliance standards. A Non-U.S.
Holder should consult its own tax advisor regarding the effect of the new
Regulations.
If a Non-U.S. Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of interest
made to Non-U.S. Holders will generally be subject to a 30% withholding tax, or
such lower rate as may be specified by an applicable income tax treaty, unless
the beneficial owner of the Note provides the Company or its paying agent, as
the case may be, with a properly executed (1) Internal Revenue Service Form 1001
(or successor form) claiming an exemption from withholding under the benefit of
a tax treaty or (2) Internal Revenue Service Form 4224 (or successor form)
stating that interest paid on the Note is not subject to withholding tax because
it is effectively connected with the beneficial owner's conduct of a trade or
business in the United States.
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<PAGE>
If a Non-U.S. Holder is engaged in a trade or business in the United
States and interest on the Note is effectively connected with the conduct of
such trade or business, the Non-U.S. Holder, although exempt from the
withholding tax discussed above, will generally be subject to United States
federal income tax on such interest on a net income basis in the same manner as
if it were a United States person. In addition, if such holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable year, or such lower
rate as may be specified by an applicable income tax treaty, subject to
adjustments.
Any gain or income realized upon the sale, exchange or retirement of a
Note generally will not be subject to United States federal income tax unless
(i) such gain or income is effectively connected with a trade or business in the
United States of the Non-U.S. Holder, or (ii) in the case of a Non-U.S. Holder
who is a nonresident alien individual, such Holder is present in the United
States for 183 days or more in the taxable year of such sale, exchange or
retirement, and certain other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The "backup" withholding and information reporting requirements may
apply to certain payments of principal and interest on a Note and to certain
payments or proceeds of the sale or retirement of a Note. The Company, its
agent, a broker, the Trustee or any paying agent, as the case may be, is
required to withhold tax from any payment that is subject to backup withholding
at a rate of 31% of such payment if the holder fails to furnish his taxpayer
identification number (social security number or employer identification
number), to certify that such holder is not subject to backup withholding rules.
Certain holders (including, among others, all corporations) are not subject to
the backup withholding and reporting requirements.
Under current Treasury Regulations, backup withholding and information
reporting do not apply to payments made by the Company or any agent thereof (in
its capacity as such) to a holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder as set
forth in the third paragraph under "Certain U.S. Federal Income Tax
Considerations for Non-U.S. Holders" or has otherwise established an exemption
(provided that neither the Company nor such agent has actual knowledge that the
holder is a U.S. Holder or that the conditions of any other exemption are not in
fact satisfied). Payments of the proceeds from the sale by a holder who is not
a U.S. Holder of a Note made to or through a foreign office of a broker will not
be subject to U.S. information reporting or backup withholding, except that if
the broker is a U.S. person, a controlled foreign corporation for U.S. tax
purposes or a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified three-year
period, U.S. information reporting may apply to such payments.
Payments of the proceeds from the sale of a Note to or through the
United States office of a broker is subject to U.S. information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
non-U.S. status or otherwise establishes an exemption from U.S. information
reporting and backup withholding.
In October 1997, Regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a Note or proceeds from the sale of a Note that are made after
December 31, 1998. Among other things, such regulations expand the number of
foreign intermediaries that are potentially subject to information reporting and
address certain documentary evidence requirements relating to exemption from the
general backup withholding requirements. Holders of the Notes should consult
their tax advisors concerning possible application of the final regulations to
any payments made on or with respect to the Notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder may be claimed as a credit against such holder's United States federal
income tax liability.
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<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents, restricted
cash and investments, and capitalization of the Company as of December 31, 1997
on (i) an actual basis, (ii) a pro forma basis to give effect to the issuance of
IXC Initial Shares and the Contingent Payment Obligation, the acquisitions of
iSTAR and Iprolink, the incurrence of the Acquisition Credit Facility and the
increase in the number of authorized shares of common stock and (iii) on a pro
forma, as adjusted basis which further adjusts the pro forma amounts to give
effect to the Initial Notes Offering and the application of the net proceeds
therefrom, as if each had occurred on December 31, 1997. This table should be
read in conjunction with the Consolidated Financial Statements and notes
thereto, the Unaudited Pro Forma Consolidated Financial Information and notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Use of Proceeds" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
-------------- ------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS)
Cash and cash equivalents.................................................... $ 33,322 $ 52,729 $ 474,826
========= ========= =========
Restricted cash and investments.............................................. $ 20,690 $ 3,190 $ 141,843
========= ========= =========
Lines of credit and current portion of long-term debt and capital lease
obligations................................................................. $ 39,633 $ 64,421 $ 44,421
--------- --------- ---------
Long-term debt:
Notes offered hereby...................................................... -- -- 600,000
Notes payable with banks.................................................. 4,200 4,200 4,200
Other notes payable....................................................... 585 585 585
Capital lease obligations................................................. 29,035 30,221 30,221
--------- --------- ---------
Total long-term debt.................................................... 33,820 35,006 635,006
--------- --------- ---------
Shareholders' equity:
Preferred stock, $.01 par value; 29,324,858 shares authorized; no
shares issued and outstanding.......................................... -- -- --
Convertible preferred stock, $.01 par value; $50 stated value; 675,142
shares authorized; 600,000 shares issued and outstanding............... 28,135 28,135 28,135
Common stock, $.01 par value; 100,000,000 shares authorized, actual;
250,000,000 shares authorized, pro forma and pro forma, as
adjusted; 40,577,342 shares outstanding, actual; 50,807,131 shares
outstanding, pro forma and pro forma, as adjusted...................... 406 508 508
Capital in excess of par value............................................ 210,162 396,035 396,035
Retained deficit.......................................................... (162,649) (169,649) (169,649)
Treasury stock, 99,556 shares, at cost.................................... (2,005) (2,005) (2,005)
Cumulative foreign currency translation adjustment........................ (620) (620) (620)
Bandwidth asset to be delivered under IRU agreement....................... -- (185,975) (185,975)
--------- --------- ---------
Total shareholders' equity.............................................. 73,429 66,429 66,429
--------- --------- ---------
Total capitalization.................................................... $ 146,882 $ 165,856 $ 745,856
========= ========= =========
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE, RATIO AND OPERATING DATA)
The following table sets forth for the periods indicated selected
consolidated financial and operating data for the Company. The consolidated
balance sheet data and consolidated statement of operations data as of and for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived
from the Company's Consolidated Financial Statements, which have been audited by
Price Waterhouse LLP, independent accountants. The following selected
consolidated financial and operating data are qualified by and should be read in
conjunction with the more detailed Consolidated Financial Statements and notes
thereto and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- ---------- ---------- ----------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenue.................................................................. $ 8,665 $15,214 $ 38,722 $ 84,351 $121,902
Other income, net........................................................ -- -- -- 5,417 --
------- ------- -------- -------- --------
8,665 15,214 38,722 89,768 121,902
Operating costs and expenses:
Data communications and operations..................................... 5,320 9,489 32,124 70,102 94,363
Sales and marketing.................................................... 1,845 3,599 23,930 27,064 25,831
General and administrative............................................. 1,666 3,605 10,569 20,648 22,947
Depreciation and amortization.......................................... 1,719 3,183 14,778 28,035 28,347
Intangible asset write down............................................ -- -- 9,938 -- --
------- ------- -------- -------- --------
Total operating costs and expenses..................................... 10,550 19,876 91,339 145,849 171,488
------- ------- -------- -------- --------
Loss from operations..................................................... (1,885) (4,662) (52,617) (56,081) (49,586)
Interest expense......................................................... (311) (731) (1,964) (5,025) (5,362)
Interest income.......................................................... 37 86 1,625 3,794 3,059
Other income............................................................. -- -- -- 2,863 110
Gain on sale of subsidiary............................................... -- -- -- -- 5,701
Equity in loss of affiliate.............................................. -- (35) (204) (807) --
------- ------- -------- -------- --------
Loss before income taxes................................................. (2,159) (5,342) (53,160) (55,256) (46,078)
Income tax benefit....................................................... 246 -- -- 159 476
------- ------- -------- -------- --------
Net loss................................................................. (1,913) (5,342) (53,160) (55,097) (45,602)
------- ------- -------- -------- --------
Return to preferred shareholders......................................... -- -- -- -- (411)
------- ------- -------- -------- --------
Net loss available to common shareholders................................ $(1,913) $(5,342) $(53,160) $(55,097) $(46,013)
Basic and diluted loss per share(1)...................................... $(0.42) $(2.01) $(1.40) $(1.14)
Shares used in computing basic and diluted loss per share
(in thousands)......................................................... 12,805 26,485 39,378 40,306
OTHER FINANCIAL DATA:
Cash flows used in operating activities.................................. (209) (1,097) (30,093) (32,543) (15,457)
Cash flows used in investing activities.................................. (3,656) (1,937) (21,958) (7,897) (15,560)
Cash flows provided by (used in) financing activities.................... 5,490 4,527 151,403 (10,529) 12,598
EBITDA (2)............................................................... (166) (1,479) (27,901) (28,046) (21,239)
Capital expenditures (3)................................................. 7,043 5,009 45,166 38,390 50,068
Ratio of earnings to fixed charges (4)................................... -- -- -- -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments........................................... $ 1,865 $ 3,358 $102,710 $ 56,390 $ 33,322
Restricted cash and short-term investments................................ -- -- -- 954 20,690
Total assets.............................................................. 13,821 17,055 201,830 177,112 186,181
Lines of credit and current portion of long-term debt and capital lease
obligations............................................................ 2,540 3,369 16,643 26,915 39,633
Long-term debt and capital lease obligations, less
current portion......................................................... 3,581 4,397 24,130 26,938 33,820
Redeemable preferred and common stock...................................... 6,725 13,617 -- -- --
Shareholders' equity (deficit)............................................. (1,427) (8,283) 143,230 89,783 73,429
OTHER OPERATING DATA:
Number of POPs............................................................. 68 82 241 350 350
Number of customer accounts................................................ 2,830 4,220 8,200 17,800 26,400
</TABLE>
- -------------------------------------------------
(1) Basic and diluted loss per share for 1993 is not considered relevant given
the significant changes in the capital structure of the Company in
conjunction with its initial public offering of shares of its common stock
in 1995.
(2) Represents earnings (loss) before depreciation and amortization, interest
income and expense, other income, income tax expense (benefit), gain on sale
of subsidiary, equity in loss of affiliate and intangible asset write-down.
The Company has included information concerning EBITDA because it
understands that such information is used in the Internet services industry
as one measure of a company's operating performance and historical ability
to service debt. EBITDA is not determined in accordance with generally
accepted accounting principles, is not indicative of cash used by operating
activities and should not be considered in isolation or as an alternative
to, or more meaningful than, measures of performance determined in
accordance with generally accepted accounting principles. In addition,
EBITDA, as defined by the Company, may not be comparable to similarly titled
measures used by other companies.
(3) Includes cash expenditures and amounts financed under equipment financing
agreements.
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of losses before income taxes, equity in loss of affiliate
and fixed charges. Fixed charges consist of interest on all indebtedness,
amortization of debt financing costs and that portion of rental expense
which the Company believes to be representative of interest (deemed to be
one-third of rental expense). The deficiency for purposes of calculating the
ratio of earnings to fixed charges was $2,159,000, $5,307,000, $52,956,000,
$54,449,000 and $46,078,000 for the years ended December 31, 1993, 1994,
1995, 1996 and 1997, respectively.
-44-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet at December
31, 1997 presents, on a pro forma basis, the Company's consolidated financial
position assuming the acquisitions of iSTAR and Iprolink, the incurrence of the
Acquisition Credit Facility and the issuance of the IXC Initial Shares and the
Contingent Payment Obligation had been consummated on December 31, 1997. The
following Unaudited Pro Forma Consolidated Balance Sheet, as adjusted, at
December 31, 1997 further gives effect to the Initial Notes Offering and the
application of the net proceeds therefrom as of December 31, 1997. The following
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
December 31, 1997 (collectively with the Unaudited Pro Forma Consolidated
Balance Sheet, the ''Pro Forma Financial Information'') present, on a pro forma
basis, the Company's consolidated results of operations assuming the
acquisitions of iSTAR, CalvaCom and Iprolink, the incurrence of the Acquisition
Credit Facility and the issuance of the IXC Initial Shares and the Contingent
Payment Obligation had been consummated on January 1, 1997. The following
Unaudited Pro Forma Consolidated Statement of Operations, as adjusted, for the
year ended December 31, 1997 further gives effect to the Initial Notes Offering
and the application of the net proceeds therefrom as of January 1, 1997.
The Unaudited Pro Forma Consolidated Balance Sheet at December 31, 1997
combines the audited Consolidated Balance Sheet of the Company as of December
31, 1997, the unaudited Consolidated Balance Sheet of iSTAR as of November 30,
1997 and the unaudited Balance Sheet of Iprolink as of December 31, 1997. The
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997 combines the audited Consolidated Statement of Operations of
the Company for the year ended December 31, 1997, the unaudited Consolidated
Statement of Operations of iSTAR for the twelve month period from December 1,
1996 through November 30, 1997, the unaudited Statement of Operations of
CalvaCom for the ten month period from January 1, 1997 through October 31, 1997
and the unaudited Statement of Operations of Iprolink for the year ended
December 31, 1997.
The Pro Forma Financial Information is not intended to be indicative
of the results which would actually have been obtained had the transactions
described above occurred on the dates indicated or which may be obtained in the
future. The pro forma adjustments are based upon available information and
assumptions that the Company believes are reasonable in the circumstances. The
Pro Forma Financial Information should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto for the year ended December
31, 1997 and iSTAR's Consolidated Financial Statements and notes thereto for the
year ended May 31, 1997 and for the three months ended August 31, 1997, included
elsewhere in this Prospectus.
The acquisitions of iSTAR, CalvaCom and Iprolink have been accounted
for as purchase business combinations and, accordingly, the purchase price has
been allocated to tangible assets acquired and liabilities assumed, based upon
their respective fair values, with the excess allocated to intangible assets to
be amortized over the estimated economic lives of the intangible assets from the
respective dates of acquisition. The consolidated retained deficit reflected in
the Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1997
includes the effect of the write-off of intangible assets consisting of in-
process research and development costs of $7.0 million related to the
acquisition of iSTAR. The effect of this charge has not been reflected in the
accompanying Unaudited Pro Forma Consolidated Statement of Operations as it is a
non-recurring charge. As part of the iSTAR transaction, the Company is planning
to seek approval of iSTAR's shareholders to increase its ownership interest in
iSTAR to 100%. The estimated cost of increasing the Company's ownership interest
in iSTAR of $3.1 million plus transaction expenses is not reflected in the
accompanying Pro Forma Financial Information.
-45-
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION> PRO FORMA,
PSINET iSTAR OTHER PRO OFFERING AS
INC.(1) INTERNET INC.(2) ACQUISITIONS(3) ADJUSTMENTS(4) FORMA(5) ADJUSTMENTS(4) ADJUSTED(6)
------- --------------- --------------- ------------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.................... $121,902 $ 29,338 $5,357 $156,597 $ 156,597
Operating cost and expenses:
Data communications and
operations............ 94,363 31,561 3,285 129,209 129,209
Sales and marketing...... 25,831 8,406 883 35,120 35,120
General and
administrative........ 22,947 9,082 1,270 33,299 33,299
Depreciation and
amortization.......... 28,347 5,799 355 $ 3,557 2a 38,058 38,058
Intangible asset
writedown............. -- 12,570 -- 12,570 12,570
------- ------ ------ --------- ------- -------- -------
Total operating costs
and expenses........ 171,488 67,418 5,793 3,557 248,256 248,256
------- ------ ------ --------- ------- -------- -------
Loss from operations......... (49,586) (38,080) (436) (3,557) (91,659) (91,659)
Interest expense............. (5,362) (1,016) (3) (1,975) 2b (8,356) (6,775)2c (69,131)
Interest income.............. 3,059 8 1 3,068 3,068
Other income................. 110 -- -- 110 110
Gain on sale of subsidiary... 5,701 -- -- 5,701 5,701
------- ------ ------ --------- ------- -------- -------
Loss before income taxes..... (46,078) (39,088) (438) (5,532) (91,136) (60,775) (151,911)
Income tax benefit........... 476 -- -- 476 476
------- ------ ------ --------- ------- -------- -------
Net loss..................... (45,602) (39,088) (438) (5,532) (90,660) (60,775) (151,435)
Return to preferred
shareholders............ (411) -- -- (411) (411)
------- ------ ------ --------- ------- -------- -------
Net loss available to common
shareholders........... $(46,013) $(39,088) $ (438) $(5,532) $(91,071) $(60,775) $(151,846)
======= ======= ====== ======= ======== ======== =========
Basic and diluted loss
per share................. $ (1.14) $ (1.80) $ (3.00)
======== ======= =========
Shares used in computing
basic and diluted loss per
share (in thousands)...... 40,306 50,536 50,536
======== ====== ========
</TABLE>
- -----------------------------------------
(1) Reflects the audited consolidated results of operations of the Company for
the year ended December 31, 1997.
(2) Amounts have been derived from the unaudited consolidated results of
operations of iSTAR for the twelve months ended November 30, 1997 prepared
in accordance with U.S. generally accepted accounting principles. Certain
amounts have been reclassified to conform with the Company's presentation.
(3) Amounts have been derived from the unaudited results of operations of
CalvaCom for the ten months ended October 31, 1997 and the unaudited results
of operations of Iprolink for twelve months ended December 31, 1997. The
results of operations of CalvaCom from November 1, 1997 to December 31, 1997
are included in the Company's results of operations for the year ended
December 31, 1997.
(4) See Notes to Unaudited Pro Forma Consolidated Statement of Operations (Note
2--Pro Forma Adjustments).
(5) Reflects the results of operations of the Company, on a pro forma basis,
assuming the acquisitions of iSTAR, CalvaCom and Iprolink, the incurrence of
the Acquisition Credit Facility and the issuance of the IXC Initial Shares
and the Contingent Payment Obligation had been consummated as of January 1,
1997.
(6) Further gives effect to the Initial Notes Offering and the application of
the net proceeds therefrom as of January 1, 1997.
-46-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 1--BASIS OF PRESENTATION
The Unaudited Pro Forma Consolidated Statement of Operations for the
twelve months ended December 31, 1997 reflects the results of operations of the
Company for the twelve months ended December 31, 1997 on a pro forma basis,
assuming the acquisitions of iSTAR, CalvaCom and Iprolink (collectively, the
"Acquisitions"), the incurrence of the Acquisition Credit Facility and the
issuance of the IXC Initial Shares and the Contingent Payment Obligation, and on
a pro forma, as adjusted basis, further assuming the Initial Notes Offering and
the application of the net proceeds therefrom, had been consummated on January
1, 1997. The Unaudited Pro Forma Consolidated Statement of Operations does not
give effect to any potential cost savings and synergies that could result from
the Acquisitions or any adjustments such as incremental revenue or amortization
expense or potential reductions in operating costs associated with the Company's
acquisition of the PSINet IRUs. No adjustment has been made to include interest
income earned on the net proceeds from the Initial Notes Offering pending their
application as set forth under "Use of Proceeds."
Management believes that the assumptions used in preparing the
Unaudited Pro Forma Consolidated Statement of Operations provide a reasonable
basis for presenting all of the significant effects of the transactions
described above, 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 Statement of Operations.
NOTE 2--PRO FORMA ADJUSTMENTS
(a) Reflects the increase in depreciation ($776,000) and amortization
($2,781,000) resulting from the allocation of the purchase price to the acquired
net tangible and intangible assets (principally tradename, customer
relationships, goodwill, assembled workforce and existing technology) relating
to the Acquisitions. The assigned lives of the acquired intangible assets range
from one to 10 years.
(b) Reflects the increase in interest expense from the incurrence of the
Acquisition Credit Facility ($20,000,000) at an annual rate of 9.875%. If the
interest rate on the Acquisition Credit Facility changed by 0.5%, interest
expense would change by $100,000 on an annual basis.
(c) Reflects the following (in thousands of U.S. dollars):
<TABLE>
<S> <C>
Interest expense on the Notes offered hereby (assumed interest rate of 10.0%)......... $60,000
Amortization of deferred financing costs associated with the Offering (assumed
$19,250,000).......................................................................... 2,750
Interest expense avoided through repayment of the Acquisition Credit Facility......... (1,975)
-------
$60,775
=======
</TABLE>
NOTE 3--BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share are computed using net loss available
to common shareholders divided by the weighted average number of shares of the
Company's common stock that were outstanding during the periods presented. As
all common stock equivalents and contingently issuable shares are antidilutive,
basic and diluted loss per share are the same for all periods presented.
-47-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 4--INTANGIBLE ASSET WRITE-DOWN
During the twelve months ended November 30, 1997, iSTAR wrote-off
$12.6 million related to the permanent impairment of certain intangible assets,
mainly customer lists and goodwill, which resulted from iSTAR's acquisitions of
consumer-oriented ISPs and Internet-oriented professional service companies. In
accordance with guidelines of the Commission, this non-recurring charge has not
been eliminated from the Unaudited Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1997.
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.
-48-
<PAGE>
aPAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
OFFERING PRO
PSINET ISTAR OTHER ADUST- PRO ADJUST- FORMA, AS
ASSETS INC.(1) INTERNETINC.(2) ACQUISITIONS MENTS(4) FORMA(5) MENTS(4) ADJUSTED(6)
--------- -------------- ----------- ------- ------- -------- -----------
Current assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents...... $ 33,322 $ 1,814 $ 93 17,500 2a $ 52,729 422,097 2e $ 474,826
Restricted cash and short-term
investments................. 20,690 -- -- (17,500)2a 3,190 57,729 2e 60,919
Accounts receivable, net....... 11,022 6,154 394 17,570 17,570
Notes receivable............... 7,224 251 -- 7,475 7,475
Prepaid expenses............... 1,478 1,275 -- 2,753 2,753
Other current assets........... 5,162 -- 64 5,226 5,226
--------- -------- ---- -------- --------- -------- ---------
Total current assets..... 78,898 9,494 551 -- 88,943 479,826 568,769
Property and equipment, net.... 95,619 9,459 173 2,328 2a 107,579 107,579
Goodwill and other intangibles,
net......................... 4,675 -- -- 15,967 2a 20,642 20,642
Restricted investments......... -- -- -- -- 80,924 2e 80,924
Other assets and deferred
charges..................... 6,899 -- 54 -- 7,043 19,250 2e 26,293
--------- -------- ---- -------- --------- -------- ---------
Total assets................... $ 186,181 $ 18,953 $778 $ 18,295 $ 224,207 $580,000 $ 804,207
========= ======== ==== ======== ========= ======== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit................ $ 5,648 $ 1,755 -- $ 7,403 $ 7,403
Current portion of long-term
debt........................ 33,985 3,033 -- 20,000 2a 57,018 (20,000)2e 37,018
Trade accounts payable......... 25,031 8,085 $168 33,284 33,284
Accrued payroll and related
expenses.................... 4,636 182 -- 4,818 4,818
Other accounts payable and
accrued liabilities......... 2,382 2,442 542 6,157 2a 11,523 11,523
Deferred revenue............... 5,944 996 -- 6,940 6,940
--------- -------- ---- --------- ---------
Total current liabilities... 77,626 16,493 710 26,157 120,986 (20,000) 100,986
Long-term debt................. 33,820 1,186 -- 35,006 600,000 2e 635,006
Other liabilities.............. 1,306 480 -- 1,786 1,786
--------- -------- ---- --------- ---------
Total liabilities.............. 112,752 18,159 710 26,157 157,778 580,000 737,778
--------- -------- ---- -------- --------- -------- ---------
Shareholders' equity:
Preferred stock................ -- -- -- -- --
Convertible preferred stock.... 28,135 -- -- 28,135 28,135
Common stock................... 406 64,384 68 (64,452)2a
102 2b 508 508
Capital in excess of par
value....................... 210,162 2,016 -- (2,016)2a
78,540 2b
107,333 2c 396,035 396,035
Retained deficit............... (162,649) (65,606) -- 58,606 2a (169,649) (169,649)
Treasury stock................. (2,005) -- -- (2,005) (2,005)
Cumulative foreign currency
translation adjustment...... (620) -- -- (620) (620)
Bandwidth asset to be delivered
under IRU agreement......... -- -- -- (78,642)2b
(107,333)2c (185,975) (185,975)
--------- -------- ---- -------- --------- -------- ---------
Total shareholders' equity..... 73,429 794 68 (7,862) 66,429 -- 66,429
--------- -------- ---- -------- --------- -------- ---------
Total liabilities and
shareholders' equity......... $ 186,181 $ 18,953 $778 $ 18,295 $ 224,207 $580,000 $ 804,207
========= ======== ==== ======== ========= ======== =========
</TABLE>
- ---------------------------------
(1) Reflects the audited consolidated financial position of the Company as of
December 31, 1997.
(2) Reflects the unaudited consolidated financial position of iSTAR as of
November 30, 1997.
(3) Reflects the unaudited financial position of Iprolink as of December 31,
1997.
(4) See Notes to Unaudited Pro Forma Consolidated Balance Sheet (Note 2--Pro
Forma Adjustments).
(5) Reflects the consolidated financial position of the Company, on a pro forma
basis, assuming the acquisition of iSTAR and Iprolink, the incurrence of the
Acquisition Credit Facility and the issuance of the IXC Initial Shares and
the Contingent Payment Obligation had been consummated on December 31, 1997.
(6) Further gives effect to the Initial Notes Offering and the application of
the net proceeds therefrom as of December 31, 1997.
-49-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
NOTE 1--BASIS OF PRESENTATION
The Unaudited Pro Forma Consolidated Balance Sheet as of December 31,
1997 reflects the consolidated financial position of the Company as of December
31, 1997, on a pro forma basis, assuming the acquisitions of iSTAR, CalvaCom and
Iprolink (collectively, the ''Acquisitions''), the incurrence of the Acquisition
Credit Facility and the issuance of the IXC Initial Shares and Contingent
Payment Obligation had been consummated on December 31, 1997. The Unaudited Pro
Forma Consolidated Balance Sheet, as adjusted, as of December 31, 1997 further
gives effect to the Initial Notes Offering and the application of the net
proceeds therefrom, assuming such offering had been consummated on December 31,
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 Acquisitions, that the pro
forma adjustments give appropriate effect to those assumptions and that the pro
forma adjustments are properly applied in the Unaudited Pro Forma Consolidated
Balance Sheet.
NOTE 2--PRO FORMA ADJUSTMENTS
(a) Reflects the acquisitions of iSTAR and Iprolink and the incurrence
of the Acquisition Credit Facility. The Company has allocated the purchase price
of the acquisitions to the tangible and intangible assets acquired and
liabilities assumed based on fair values, fair value having been determined by
appraisal and other valuation techniques. Upon the incurrence of the Acquisition
Credit Facility, the restriction on $17,500,000 of cash and short-term
investments was released. The following is a summary of the adjustment for
goodwill and other intangibles:
<TABLE>
<CAPTION>
(IN THOUSANDS
OF U.S. DOLLARS)
<S> <C>
Tradename.................................................................. $ 770
Customer relationships..................................................... 1,120
Goodwill................................................................... 11,922
In-process research and development........................................ 7,000
Write-off of in-process research and development........................... (7,000)
Assembled workforce........................................................ 910
Existing technology........................................................ 1,245
-------
$15,967
=======
</TABLE>
The adjustment to retained deficit at December 31, 1997 gives effect to the
write-off of $7.0 million of in-process research and development associated with
the acquisition of iSTAR.
(b) Reflects the recording of the issuance of the IXC Initial Shares, at a
price of $7.6875 per share (based on the last reported sale price of the
Company's common stock on The Nasdaq Stock Market on February 25, 1998, the date
of the closing) in exchange for the PSINet IRUs.
(c) Reflects the recording of the Company's Contingent Payment Obligation
pursuant to the IRU Purchase Agreement to deliver IXC Additional Shares or, at
the Company's sole option, cash, or a combination thereof to IXC on the
Determination Date, or the Acceleration Date, as applicable. The Contingent
Payment Obligation is measured 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 Payment Obligation of three to four years. Other
assumptions utilized in the Black-Scholes model include the closing market price
per share of the common stock on the date of the closing as reported by The
Nasdaq Stock Market ($7.6875), an exercise price of $23.46 (which is the price
per share required in order for the
-50-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (Continued)
AS OF DECEMBER 31, 1997
NOTE 2--PRO FORMA ADJUSTMENTS--(CONTINUED)
calculation of the 10,229,789 IXC Initial Shares to result in a value equal to
$240 million), expected volatility of 76% and an interest rate of 11%. The
amount recorded for the fair value of the Contingent Payment Obligation could be
adjusted upward in a future period under certain circumstances.
(d) This amount represents the aggregate fair value of the IXC Initial
Shares and the Contingent Payment 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 IRU Purchase Agreement, multiplied by (ii) the aggregate
of $78,642,000 (the fair value of the IXC Initial Shares determined as of the
date of issuance) and $107,333,000 (the amount recorded for the Contingent
Payment 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
Payment 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.
(e) Reflects the Initial Notes Offering, net of discounts and
commissions and estimated expenses of $19,250,000, and the repayment of the
Acquisition Credit Facility. As required by the terms of the Notes, the Company
deposited with the Escrow Agent $138,700,000, which, together with the proceeds
of the investment thereof, will be sufficient to pay when due the first five
semi-annual interest payments on the Notes.
-51-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. The results shown herein are not necessarily indicative of the
results to be expected in any future periods. This discussion contains certain
forward-looking statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events could differ
materially from the forward-looking statements as a result of a number of
factors. For a discussion of the risk factors that could cause actual results to
differ materially from the forward-looking statements, see "Risk Factors" set
forth elsewhere in this Prospectus.
GENERAL
PSINet is a leading global facilities-based provider of Internet
access services and related products to businesses. The Company provides
dedicated and dial-up Internet connectivity in 90 of the 100 largest
metropolitan statistical areas in the U.S. and in nine of the 20 largest
international telecommunications markets. The Company also offers IP-based
value-added services and products to businesses, including corporate intranets,
Web hosting and collocation, remote user access, multi-currency electronic
commerce and security services, that enable businesses to maximize utilization
of their corporate networks and the Internet. Additionally, the Company provides
network backbone services to other telecommunications carriers and ISPs to
further exploit its network capacity. The Company owns and operates a
technologically advanced, high-speed frame relay network that, as of March 1,
1998, served approximately 32,700 business accounts, including 51 ISPs, and
connected to 400 POPs in ten countries. The Company's network is one of the
primary backbones that comprise the Internet and is connected with other large
ISPs at 26 public and private peering points. The Company believes that its
scaleable IP-optimized network, in combination with its highly trained, around-
the-clock customer care team, enables the Company to deliver superior
performance and reliability. PSINet's mission is to build a premier IP-based
communications company. The Company grows its business through multiple sales
channels, including direct sales as well as resellers, and by acquiring other
ISPs and related businesses in key markets. By providing services and products
that enhance its customers' business processes through the effective use of the
Internet and related tools, the Company has increased revenues from $8.7 million
in 1993 to $121.9 million in 1997, representing a 94% compounded annual growth
rate.
The Company, founded in 1989, was the first commercial ISP and offered
Internet connectivity to businesses and, in 1993, commenced offering dial-up
Internet connectivity to individual consumers in the U.S. on a nationwide basis.
The Company funded the initial buildout of its domestic network and expansion of
its operations through the private placement of equity securities and through
capital lease financings. Since 1993, the Company has pursued a strategy of both
internal growth and growth through acquisitions of complementary businesses to
increase both individual and business customer accounts, enter into new
geographic markets and increase its service and product offerings. During 1995,
the Company raised net proceeds of $47.3 million through an initial public
offering of common stock and an additional $86.6 million through a follow-on
public offering of common stock to continue the buildout of its domestic network
and to increase its sales, marketing and customer support infrastructure.
In mid-1996, in response to market pressures in the consumer dial-up
Internet access business, the Company altered its strategy to include providing
wholesale access services to consumer-oriented ISPs in the United States, rather
than providing consumer access services directly. To further refine its focus on
providing business Internet services, in February 1997, the Company sold its
software subsidiary for cash consideration of $12.0 million and $8.5 million as
repayment of intercompany debt owed by the subsidiary to the Company. In
December 1997, the Company realigned its core domestic operations into three
customer-focused business units to more effectively meet the emerging needs of
the Internet marketplace. These business units are comprised of the Corporate
Network Services group, which provides high quality Internet connectivity
services to business customers, the Carrier and ISP Services group, which
delivers Internet access services on a private-label basis to other ISPs and
telecommunications services providers, and the Applications and Web Services
group, which provides value-added IP-based services and products to new and
existing business customers. Beginning in the third quarter of 1996, the
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<PAGE>
Company hired several new executive officers with extensive experience in the
telecommunications industry to assist the Company in executing its business
strategy.
The Company derives a majority of its revenues from providing Internet
access services to business customers and other ISPs. Business customers are
typically signed to contracts that range from one to three years. Revenues
generated from business customers are typically comprised of recurring monthly
fees, installation and start-up charges and sales of related equipment and
services. Revenues from other ISPs are generated pursuant to network access
agreements which typically require a minimum number of subscribers and obligate
the ISP customers to pay specified monthly fees to the Company for each
subscriber using the PSINet network. In addition, the Company provides a variety
of value-added services, including, among others, corporate intranets, Web
hosting, security services, commerce solutions and other advanced IP-based
applications, including, among others, Internet fax. Revenues from value-added
services are typically in the form of monthly charges and are often bundled with
Internet access services.
Since the commencement of its operations, the Company has undertaken a
program of developing and expanding its data communications network. In
connection with this program, the Company has made significant investments in
telecommunications circuits and equipment to produce an IP-optimized,
geographically dispersed, ATM, ISDN and SMDS compatible frame relay network.
These investments generally are made in advance of anticipated customer growth
and resulting revenue. As part of the Company's ongoing efforts to further
expand and enhance its network, the Company recently completed a transaction
with IXC to acquire 20-year IRUs in up to 10,000 equivalent route miles of
fiber-based OC-48 network bandwidth across the United States in exchange for the
issuance to IXC of approximately 20% of the Company's common stock. This
transaction will increase the Company's network capacity by approximately 50
times, is expected to significantly reduce its future data communications and
operations costs per equivalent mile and will enable the Company to offer a
wider variety of higher-speed Internet and Internet-related services to a larger
customer base. As a result, the Company anticipates that its data communications
and operations costs as a percentage of revenue will decrease as the Company
substitutes the acquired bandwidth for leased circuit arrangements with IXC as
well as other telecommunications carriers.
INTERNATIONAL OPERATIONS
The Company currently has operations in nine of the 20 largest
international telecommunications markets including Canada, the United Kingdom,
France, Switzerland, Germany, The Netherlands, Belgium, Italy and Japan. The
Company typically enters a new market through an investment in a start-up
company within the particular market or by acquiring a local ISP. In February
1998, the Company acquired approximately 23.4 million common shares
(representing approximately 80% of the outstanding common shares) of iSTAR, one
of the leading Canadian providers of Internet services and solutions for
businesses, institutions and individuals, pursuant to a January 6, 1998 cash
offer to purchase all of the outstanding common shares of iSTAR for cash
consideration of Cdn. $0.75 (US $0.52) per share. The excess of the purchase
price for the iSTAR common shares acquired by the Company, including assumed
liabilities and transaction expenses, over the fair values of the tangible
assets acquired and liabilities assumed was $19.5 million. The Company will
record a charge for in-process research and development of approximately $7.0
million related to the iSTAR acquisition in the first quarter of 1998. As part
of the iSTAR transaction, the Company is planning to seek approval of iSTAR's
shareholders to increase its ownership interest in iSTAR to 100%. The Company
has sufficient voting power in iSTAR stock to obtain such approval, subject to
certain rights of contestation of iSTAR's shareholders and other interested
parties. The Company estimates that the cost of increasing its ownership
interest in iSTAR will be approximately $3.1 million plus transaction expenses.
As part of the Company's continuing strategy to offer Internet-based
business communications services and solutions globally, in January 1998, the
Company acquired Iprolink, an Internet service provider in Switzerland, for
approximately $3.5 million in cash, and, in October 1997, acquired CalvaCom, an
Internet service provider in France, for approximately $3.1 million in cash.
For the year ended December 31, 1997, the Company's revenue from
international operations increased to $18.0 million (14.7% of consolidated
revenue) from $6.8 million (8% of consolidated revenue) for 1996. On a pro forma
basis, giving effect to the acquisitions of iSTAR, Iprolink and CalvaCom,
approximately 34% of the Company's consolidated revenue was derived from
international operations.
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<PAGE>
QUARTER ENDED MARCH 31, 1998
During its quarter ended March 31, 1998, the Company reported consolidated
revenue of $44.5 million, consolidated cash flow used in operations of
approximately $10.0 million, consolidated loss before interest, taxes,
depreciation and amortization, other income, and charge for acquired in-process
research and development of $(10.5) million. As of March 31, 1998, the Company's
consolidated working capital deficit and consolidated long-term debt and
capitalized lease obligations, less current portion, were $34.9 million and
$74.7 million, respectively, as compared to a consolidated working capital and
consolidated long-term debt and capital lease obligations, less current portion
of $1.3 million and $33.8 million, respectively, at December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
Revenue. Revenue is derived primarily from the sale of Internet
access and related services to businesses. Revenue increased by 45% to $121.9
million in 1997, from $84.4 million in 1996. The increase was attributable to a
number of factors, including an increase in the number of business customer and
ISP accounts, an increase in the average annual revenue realized per new
customer account and an increase in sales by the Company's international
subsidiaries. The growth was driven by an expansion of the Company's sales force
and greater public awareness and utilization of the Internet.
In comparison with 1996, revenue for 1997 was affected by the sale in
1996 of the Company's individual consumer accounts and related assets and by the
sale in 1997 of the Company's software subsidiary, which together provided $15.6
million of revenue in 1996 but only $0.3 million in 1997. If such revenue was
excluded from 1996 revenue, the Company's growth in revenue from 1996 to 1997
would have been 77% instead of 45%. Revenue growth in 1997 was also impacted by
a drop in the customer retention rate from 94% in 1996 to 82% in 1997, which was
attributable in part to an initiative by the Company to remove certain non-
performing accounts.
The Company's customer account base increased by 48% to 26,400
business customers at December 31, 1997, including 47 ISPs, from 17,800 business
customers, including 22 ISPs, at December 31, 1996. The Company's revenue from
international operations increased by 165% to $18.0 million in 1997 from $6.8
million in 1996, principally as a result of significant growth in the Company's
operations in the United Kingdom, Japan and Canada.
Other Income, Net. The Company did not have other income, net, in
1997, compared with $5.4 million during 1996, consisting of the consideration
received, net of related asset costs and expenses, relating to the sale of the
Company's individual consumer subscribers and certain related tangible and
intangible assets during the second and third quarters of 1996.
Data Communications and Operations. Data communications and
operations expenses consist primarily of leased long distance and local circuit
costs as well as personnel and related operating expenses associated with
network operations, customer support and field service. Data communications and
operations expenses were $94.4 million (77.4% of revenue) during 1997, an
increase of $24.3 million from $70.1 million (83.1% of revenue) during 1996. The
increase in expenses related principally to increases in (i) leased long
distance, dedicated customer and dial-up circuit costs, (ii) expenditures for
additional PRIs to support the growth of the Company's Carrier and ISP Services
business, and (iii) personnel costs resulting from the expansion of the
Company's network operations, customer support and field service staff. Circuit
costs relating to the Company's new and expanded POPs and PRIs generally are
incurred by the Company in advance of anticipated growth in the Company's
customer base. Although the Company expects that data communications and
operations expenses will continue to increase as the Company's customer base
grows, it anticipates that such expenses will continue to decrease over time as
a percentage of revenue due to decreases in unit costs and continued increases
in network utilization. In particular, the Company anticipates that costs for
data communications and operations as a percentage of revenue will decrease as
the Company accepts
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<PAGE>
delivery of bandwidth from IXC and, in connection therewith, substitutes this
bandwidth for leased circuit arrangements with IXC as well as with other
telecommunications carriers.
Sales and Marketing. Sales and marketing expenses consist primarily
of sales and marketing personnel costs, advertising costs, distribution costs
and related occupancy costs. Sales and marketing expenses were $25.8 million
(21.2% of revenue) during 1997, a decrease of $1.3 million from $27.1 million
(32.1% of revenue) during 1996. The decrease resulted principally from
reductions in costs following the sale of the Company's individual consumer
subscribers and related infrastructure in 1996 and the sale of its software
operations in 1997, which were offset in part by an increase in sales and
marketing expenses relating to the expansion of the Company's operations. All
advertising and marketing costs are expensed in the period incurred. The Company
expects that as a result of continued emphasis on expanding all of its lines of
business and increasing its business customer base, sales and marketing expenses
will grow, primarily with respect to marketing personnel costs and advertising,
but should continue to decrease as a percentage of revenue.
General and Administrative. General and administrative expenses
consist primarily of salaries and occupancy costs for executive, financial,
legal and administrative personnel and provision for uncollectible accounts
receivable. General and administrative expenses were $22.9 million (18.8% of
revenue) during 1997, an increase of $2.3 million from $20.6 million (24.5% of
revenue) during 1996. The increase resulted from the addition of management
staff and related operating expenses across the organization, including in
conjunction with the Company's expansion outside of the United States, and
increases in the provision for doubtful accounts receivable. These expenses were
in part offset by decreased expenses following the sale of the Company's
individual consumer subscribers and related assets in 1996 and the sale of its
software operations in 1997.
Depreciation and Amortization. Depreciation and amortization costs
were $28.3 million (23.3% of revenue) during 1997, an increase of $0.3 million
from $28.0 million (33.2% of revenue) during 1996. Depreciation costs increased
due to additional capital expenditures associated with network infrastructure
enhancements, which were partially offset by decreases in costs resulting from
the elimination of depreciation and amortization that had been associated with
the individual consumer subscriber and software assets sold in 1996 and 1997,
respectively. The Company anticipates that as the Company accepts delivery of
bandwidth from IXC, and as the operations and assets of companies recently
acquired are integrated with existing operations, the Company's depreciation and
amortization expenses will increase significantly.
Interest Expense. Interest expense was $5.4 million during 1997, an
increase of $0.4 million from $5.0 million in 1996. The increase was principally
due to increased borrowings and capital lease obligations incurred by the
Company to finance network expansion and to fund working capital requirements.
As the Company continues the international expansion of its network and
positions itself to take advantage of certain anticipated benefits resulting
from the recently completed transaction with IXC, the Company expects, subject
to applicable financing agreements, to incur increased borrowings and capital
lease obligations which will further increase the amount of the Company's
interest expense.
Interest Income. Interest income was $3.1 million during 1997, a
decrease of $0.7 million from $3.8 million in 1996. The decrease was principally
due to a reduction in the amount of cash and short-term, interest- bearing
investments held by the Company.
Gain on Sale of Subsidiary. The gain on the sale of subsidiary of
$5.7 million in 1997 relates to the sale in the first quarter of 1997 of the
Company's software subsidiary as discussed above.
Net Loss and Loss Per Share. As a result of the factors discussed
above, the Company's net loss for 1997 was $45.6 million (37.4% of revenue), or
$1.14 basic and diluted loss per share, a $9.5 million improvement from a net
loss in 1996 of $55.1 million (65.3% of revenue), or $1.40 basic and diluted
loss per share. The return to preferred shareholders, which comprises the
dividends with respect to the Company's Series B 8% Convertible Preferred Stock
("Series B Preferred Stock") and accretion of the related conversion premium
on the Series B Preferred Stock, is included in the calculation of the net loss
available to common shareholders used to compute basic and diluted loss per
share. Because inclusion of common stock equivalents is antidilutive, basic and
diluted loss per share are the same for each year presented.
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<PAGE>
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
Revenue. Revenue increased by 118% to $84.4 million in 1996 from
$38.7 million in 1995. The increase was attributable to a number of factors,
including an increase in the number of business subscribers facilitated by an
increase in the number of POPs in operation, an expansion of the Company's sales
force, and greater public awareness and utilization of the Internet.
The Company's business account base increased by 117% to 17,800
business customers including 22 ISPs at December 31, 1996, from 8,200 business
customers at December 31, 1995. The Company's network infrastructure increased
to 350 POPs at December 31, 1996 from 240 POPs at December 31, 1995.
Other Income, Net. Other income, net, was $5.4 million during 1996,
consisting of the consideration received, net of related asset costs and
transfer expenses, relating to the sale of the Company's individual consumer
subscribers and certain related tangible and intangible assets in connection
with the implementation of the Company's Carrier and ISP strategy during the
second and third quarters of 1996. The Company did not have other income, net,
in 1995.
Data Communications and Operations. Data communications and
operations expenses were $70.1 million (83.1% of revenue) during 1996, an
increase of $38.0 million from $32.1 million (83.0% of revenue) during 1995. The
increase in expenses related principally to increases in (i) costs associated
with providing dedicated circuits to the Company's business customers and (ii)
circuit costs relating to the Company's new POPs deployed in late 1995 and early
1996. The increase also was due, to a lesser extent, to an increase in personnel
costs resulting from the expansion of the Company's network operations, customer
support and field service staff concentrated in late 1995 and early 1996. The
number of network operations, customer support and field service personnel
employed by the Company at December 31, 1996 was lower than the number of such
personnel employed at December 31, 1995 due to the transfer of approximately 75
employees to another ISP in connection with the sale of the consumer ISP
business and entry into the Carrier and ISP Services market.
Sales and Marketing. Sales and marketing expenses were $27.1 million
(32.1% of revenue) during 1996, an increase of $3.2 million from $23.9 million
(61.8% of revenue) during 1995. The increase resulted principally from an
increase in sales and marketing activity relating to the Company's subsidiaries
in Canada and the United Kingdom during such period.
General and Administrative. General and administrative expenses were
$20.6 million (24.5% of revenue) during 1996, an increase of $10.0 million from
$10.6 million (27.3% of revenue) during 1995. The increase in 1996 principally
related to increased general and administrative staff and activity as compared
to 1995.
Depreciation and Amortization. Depreciation and amortization costs
were $28.0 million (33.2% of revenue) during 1996, an increase of $13.2 million
from $14.8 million (38.2% of revenue) during 1995. A significant portion of this
increase related to POP expansion and existing POP equipment upgrades as well as
the effect of capital expenditures on facility expansions required as a result
of additional hiring in sales, marketing and administration in 1995 and early
1996. Additionally, a full year of amortization in 1996 on certain intangible
assets recorded in connection with acquisitions completed in 1995 contributed to
this increase.
Interest Expense. Interest expense increased to $5.0 million in
1996, an increase of $3.0 million from $2.0 million in 1995. The increase was
principally due to increased borrowings and capital lease obligations incurred
by the Company to finance network expansion and to fund working capital
requirements.
Interest Income. Interest income was $3.8 million in 1996, an
increase of $2.2 million from $1.6 million in 1995. The increase was principally
due to the investment of proceeds from the Company's public equity offering in
December 1995.
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Other Income. Other income of $2.9 million in 1996 relates to the
recognition of realized gains on equity securities that were sold by the
Company, which the Company did not have in 1995.
Net Loss and Loss Per Share. As a result of the factors discussed
above, the Company's net loss for 1996 was $55.1 million (65.3% of revenue), or
$1.40 basic and diluted loss per share, $1.9 million higher in amount but better
on a percentage of revenue and per share basis than the net loss of $53.2
million (137.5% of revenue), or $2.01 basic and diluted loss per share for 1995.
INCOME TAXES
At December 31, 1997, the Company had domestic net operating loss
carryforwards of approximately $123.1 million for federal income tax purposes.
These net operating loss carryforwards may be carried forward in varying amounts
until 2012, and may be limited in their use under Section 382 of the Internal
Revenue Code in the event of significant changes in the Company's ownership. In
accordance with generally accepted accounting principles, the Company has
provided a valuation allowance for net deferred tax assets arising from these
carryforwards since realization of these benefits cannot be reasonably assured.
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial
data, and such data expressed as a percentage of revenue, for the eight quarters
ended December 31, 1997. In the opinion of management, the unaudited financial
information set forth below has been prepared on the same basis as the audited
financial information included elsewhere herein and includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------
1996 1997
--------------------------------------------- ------------------------------------
Mar 31 June 30 Sep 30 Dec 31 Mar 31 June 30 Sep 30 Dec 31
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands of U.S. dollars, except per share amounts)
Revenue.............................. $ 17,181 $ 20,219 $ 24,147 $ 22,804 $ 25,639 $ 29,507 $ 32,001 $ 34,755
Other income, net.................... -- 2,400 3,017 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
17,181 22,619 27,164 22,804 25,639 29,507 32,001 34,755
Operating costs and expenses:
Data communications and operations. 13,942 16,529 19,698 19,933 20,968 22,114 23,765 27,516
Sales and marketing................ 7,844 7,021 6,000 6,199 6,002 5,858 6,210 7,761
General and administrative......... 5,475 4,228 5,309 5,636 5,481 6,141 5,354 5,971
Depreciation and amortization...... 6,182 7,026 8,377 6,450 8,034 6,058 6,557 7,698
-------- -------- -------- -------- -------- -------- -------- --------
Total operating costs and
expenses..................... 33,443 34,804 39,384 38,218 40,485 40,171 41,886 48,946
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations................. (16,262) (12,185) (12,220) (15,414) (14,846) (10,664) (9,885) (14,191)
Interest expense..................... (857) (1,386) (1,411) (1,371) (1,350) (1,297) (1,516) (1,199)
Interest income...................... 1,224 943 1,179 448 775 670 550 1,064
Other income......................... 1,068 1,776 19 -- (25) (32) 177 (10)
Gain on sale of subsidiary........... -- -- -- -- 5,701 -- -- --
Equity in loss of affiliate.......... (100) (107) (100) (500) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Loss before income taxes............. (14,927) (10,959) (12,533) (16,837) (9,745) (11,323) (10,674) (14,336)
Income tax benefit................... 39 40 40 40 476 -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss............................. $(14,888) $(10,919) $(12,493) $(16,797) $ (9,269) $(11,323) $(10,674) $(14,336)
-------- -------- -------- -------- -------- -------- -------- --------
Return to preferred shareholders..... -- -- -- -- -- -- -- (411)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss available to common
shareholders......................... $(14,888) $(10,919) $(12,493) $(16,797) $ (9,269) $(11,323) $(10,674) $(14,747)
======== ======== ======== ======== ======== ======== ======== ========
Basic loss per share(1)........... $(0.39) $(0.28) $(0.31) $(0.42) $(0.23) $(0.28) $(0.26) $(0.36)
======== ======== ======== ======== ======== ======== ======== ========
Diluted loss per share(1)......... $(0.39) $(0.28) $(0.31) $(0.42) $(0.23) $(0.28) $(0.26) $(0.36)
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing loss per
share (in thousands)............ 38,178 39,379 39,888 40,085 40,158 40,225 40,407 40,436
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
_______________________
(1) Since there are changes in the weighted average number of shares outstanding
each quarter, the sum of the loss per share by quarter may not equal the
loss per share for 1996 and 1997.
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<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------
1996 1997
---------------------------------- ----------------------------
Mar 31 JUNE 30 SEP 30 Dec 31 Mar 31 JUNE 30 SEP 30 DEC 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Other income, net........................... -- 11.8 12.5 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
100.0 111.8 112.5 100.0 100.0 100.0 100.0 100.0
Operating costs and expenses:
Data communications and operations........ 81.1 81.7 81.6 87.4 81.8 74.9 74.3 79.2
Sales and marketing....................... 45.7 34.7 24.8 27.2 23.4 19.9 19.4 22.3
General and administrative................ 31.9 20.9 22.0 24.7 21.4 20.8 16.7 17.2
Depreciation and amortization............. 36.0 34.8 34.7 28.3 31.3 20.5 20.5 22.1
----- ----- ----- ----- ----- ----- ----- -----
Total operating costs and expenses..... 194.7 172.1 163.1 167.6 157.9 136.1 130.9 140.8
----- ----- ----- ----- ----- ----- ----- -----
Loss from operations........................ (94.7) (60.3) (50.6) (67.6) (57.9) (36.1) (30.9) (40.8)
Interest expense............................ (5.0) (6.9) (5.8) (6.0) (5.2) (4.4) (4.7) (3.4)
Interest income............................. 7.1 4.7 4.9 2.0 3.0 2.3 1.7 3.1
Other income................................ 6.2 8.8 0.1 -- (0.1) (0.1) 0.6 (0.1)
Gain on sale of subsidiary.................. -- -- -- -- 22.2 -- -- --
Equity in loss of affiliate................. (0.5) (0.5) (0.5) (2.2) -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Loss before income taxes.................... (86.9) (54.2) (51.9) (73.8) (38.0) (38.3) (33.3) (41.2)
Income tax benefit.......................... 0.2 0.2 0.2 0.2 1.8 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net loss.................................... (86.7)% (54.0)% (51.7)% (73.6)% (36.2)% (38.3)% (33.3)% (41.2)%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's quarterly operating results have fluctuated and will
continue to fluctuate from period to period depending upon such factors as the
success of the Company's efforts to expand its customer base, changes in and the
timing of expenditures relating to the continued expansion of the Company's
network, the delivery of the bandwidth corresponding to the PSINet IRUs, the
development of new services, the success of sales and marketing efforts, changes
in pricing policies by the Company or its competitors, and certain factors
relating to the Company's acquisition strategy as further described under
"Liquidity and Capital Resources."
In view of the significant historical growth of the Company's
operations, the Company believes that period-to-period comparisons of its
financial results should not be relied upon as an indication of future
performance and that the Company may experience significant period-to-period
fluctuations in operating results in the future. The Company expects to focus in
the near term on building and increasing its customer base and increasing its
network utilization both through internal growth and through acquisitions which
may require it from time to time to increase its expenditures for personnel,
marketing, network infrastructure and the development of new services.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has satisfied its 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 equity securities.
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Cash flows used in operating activities were $15.5 million, $32.5
million and $30.1 million for 1997, 1996 and 1995, respectively. Cash flows from
operating activities can vary significantly from period to period depending upon
the timing of operating cash receipts and payments, especially accounts
receivable, prepaid expenses and other assets, and accounts payable and accrued
liabilities. In all three years, the Company's net loss was the primary
component of cash used in operating activities, offset by significant non-cash
depreciation and amortization expenses relating to the Company's network and
intangible assets.
Cash flows used in investing activities were $15.6 million, $7.9
million and $22.0 million for 1997, 1996 and 1995, respectively. The expansion
of the Company's network resulted in capital expenditures of $50.0 million,
$38.4 million and $45.2 million for those same three years (which included
capital expenditures financed under equipment financing agreements aggregating
$37.4 million, $25.6 million and $29.1 million for the respective
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periods). Cash flows used in investing activities for 1997 benefited from the
Company's sale of its software subsidiary for cash consideration of $12.0
million and the receipt of $8.5 million of repayments of intercompany debt owed
by the subsidiary to the Company. Investing cash flows for 1997 were reduced by
the $19.7 million increase in "restricted cash and short-term investments,"
$17.5 million of which supported a $15.4 million irrevocable letter of credit
issued by a bank on behalf of PSINet in conjunction with the acquisition of
iSTAR. This restriction was removed in February 1998 when the Company finalized
the funding for this acquisition. During 1997, the Company invested $3.0 million
in equity and debt securities with original maturities of greater than 90 days
and received $7.6 million from the maturity or sale of certain equity
investments held by the Company.
Cash flows provided by (used in) financing activities were $12.6
million for 1997, ($10.5) million for 1996, and $151.4 million for 1995. In
November 1997, the Company completed a private placement of 600,000 shares of
its Series B Preferred Stock for gross proceeds of $30.0 million. In 1997, 1996
and 1995, the Company made repayments aggregating $27.7 million, $19.8 million
and $5.8 million, respectively, on its capital lease obligations and financing
facilities and received proceeds from the issuance of notes payable of $6.4
million, $8.3 million and $8.3 million, respectively. Additionally, in 1995, the
Company had net proceeds from three separate common and preferred stock
offerings totaling $146.9 million.
As of December 31, 1997, the Company had $54.0 million of cash, cash
equivalents, restricted cash and short-term investments.
CAPITAL STRUCTURE
The Company's capital structure consists of lines of credit, capital
lease obligations and notes payable, preferred stock and common stock.
Total borrowings at December 31, 1997 were $73.4 million, which
included $5.6 million under operating lines of credit and $67.8 million under
capital lease obligations and notes payable. The Company also had $16.4 million
of letters of credit (including the iSTAR-related letter of credit) outstanding
as of December 31, 1997. As of that date, the aggregate unused portion under the
Company's various financing arrangements for purchases of equipment and other
fixed assets was $24.6 million. The aggregate unused portion of the Company's
operating lines of credit (some of which are subject to a borrowing base
formula) was $0.6 million.
The Company's bank financing arrangements in the United States, which
are secured by substantially all of the Company's assets, require the Company to
satisfy certain financial covenants such as those relating to liquidity,
tangible net worth, EBITDA, leverage and debt service and prohibit the payment
of cash dividends and the repurchase of capital stock of the Company without the
lender's consent. In particular, the Company is required to maintain: a ratio of
consolidated cash and accounts receivable to debt of at least 0.9 to 1.0 for the
quarters ending March 31, 1998, June 30, 1998 and September 30, 1998 and of at
least 1.0 to 1.0 for each fiscal quarter thereafter; consolidated tangible net
worth of at least $70.0 million for the quarter March 31, 1998, plus 80% of all
positive net income earned after September 30, 1997 plus 50% of the cumulative
net tangible proceeds of the sale of capital stock after September 30, 1997,
excluding the proceeds of the sale of Series B Preferred Stock completed on
November 10, 1997; EBITDA of not less than negative $12.5 million, negative $5.0
million, and positive $4.0 million for each of the fiscal quarters ending March
31, 1998, June 30, 1998, and September 30, 1998, respectively; a ratio of
consolidated total liabilities (other than deferred service contract revenue and
the Contingent Payment Obligation to IXC) to tangible net worth of no more than
1.75 to 1.0, 1.75 to 1.0 and 1.50 to 1.0 for the quarters ending March 31, 1998,
June 30, 1998, and September 30, 1998, respectively, and a ratio of EBITDA to
consolidated debt service payments (exclusive of any interest accreting in
respect of the Company's Contingent Payment Obligation to IXC) in respect of any
fiscal quarter commencing with the quarter ending December 31, 1998 of at least
1.25 to 1.0. The Company was in compliance with all such covenants at December
31, 1997.
Additionally, in November 1997, the Company completed a private
placement of 600,000 shares of its 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 the Company's option, the Company's
Series B Preferred Stock. The Series B Preferred Stock is convertible into a
number of shares of the Company's 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
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may be reset at the end of the first and second anniversary dates, under certain
circumstances, to the stock's then current market value. At the third
anniversary date, the conversion price may be reset under certain circumstances,
to 95% of the stock's then current market value. To reflect the nature of the
conversion rights, preferred stock has been reduced by $1,500,000 with a
corresponding increase to capital in excess of par value. The Series B Preferred
Stock may be redeemed, at the Company's 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 which may be made
pursuant to the IRU Purchase Agreement, neither the Company nor any subsidiary
will (i) redeem, purchase or otherwise acquire directly or indirectly any common
stock or other junior securities, (ii) 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 the
Company's 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 (iii) 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); provided, however, that the Company may 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
(a) for up to an aggregate amount not to exceed, at any point in time the sum
of: (i) $10 million plus (ii) an amount equal to 100% of the aggregate net cash
proceeds received by the Company 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 (iii) an amount
equal to 50% of the Company's cumulative consolidated positive earnings before
interest, taxes, depreciation and amortization as reported by the Company in
respect of each fiscal quarter of the Company commencing with the fiscal quarter
ending December 31, 1997 or (b) pursuant to the right of first offer granted
pursuant to the IRU Purchase Agreement, provided that immediately after giving
effect thereto, the Company's consolidated shareholders' equity will not be less
than $20 million.
COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS
As of December 31, 1997, the Company had commitments to certain
telecommunications vendors totaling $31.2 million. The commitments require
minimum monthly usage levels of data and voice communications over the next five
years. Additionally, the Company has various agreements to lease office space
and facilities and, as of December 31, 1997, the Company was obligated to make
future minimum lease payments of $22.2 million on non-cancelable operating
leases expiring in various years through 2005. The Company is obligated, under
the terms of one of its Carrier and ISP Services agreements, to provide the ISP
customer with a rental facility of up to $5.0 million for telecommunications
equipment owned or leased by the Company and deployed in the customer's network.
At December 31, 1997, the Company had provided $1.4 million of equipment under
this facility.
In February 1998, the Company completed the acquisition of 79.7% of
the outstanding shares of iSTAR. The excess of the purchase price over the fair
values of the tangible assets acquired and liabilities assumed was $19.5
million. Financing for the acquisition of iSTAR was provided by a $20,000,000
facility from Fleet, which matures on the earlier of (i) the consummation of a
public offering by the Company of its debt or equity securities or (ii) July 31,
1998. The loan provides for interest on the outstanding balance at a rate per
annum equal to the prime rate plus 1.375%. Additionally, the loan has been
incorporated into the Company's existing credit facility with Fleet and is
secured by substantially all of the Company's assets, including a pledge of
certain of its subsidiaries' stock (including, without limitation, the acquired
iSTAR common shares). The Company expects to repay the loan with a portion of
the net proceeds of the Offering. See "Use of Proceeds."
In order to take full advantage of the bandwidth acquired from IXC, in
addition to other planned capital expenditures, the Company expects to incur
capital expenditures through the end of the year 2000 of up to approximately $95
million. Such capital expenditures are expected to be incurred in the deployment
of high activity POPs throughout the United States and abroad 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, the Company expects to incur on an
annual basis approximately $1.15 million in operation and maintenance fees with
respect to the PSINet IRUs for each 1,000 equivalent route miles of OC-48
bandwidth accepted from IXC. Other planned capital expenditures expected to be
incurred by the Company over approximately the next three years include up to
$35 million in connection with the
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Company's anticipated buildout of its international Internet network and a
network operations center in Switzerland. In connection with the buildout of its
international network, the Company has recently entered into agreements to
acquire IRUs in certain transatlantic fiber optic bandwidth between the United
States, the United Kingdom and Europe, for which it has secured financing.
The Company presently believes, based on the flexibility it expects to
have in the timing of its orders of bandwidth corresponding to the PSINet IRUs,
in outfitting its POPs with appropriate telecommunications and computer
equipment, and in controlling the pace and scope of its anticipated buildout of
its international Internet network, that it will have a reasonable degree of
flexibility to adjust the amount and timing of such capital expenditures in
response to the Company's then existing financing capabilities, market
conditions, competition and other factors. Accordingly, the Company believes
that working capital generated from the use of bandwidth corresponding to the
PSINet IRUs, together with other working capital from operations, from existing
credit facilities, from capital lease financings, and from proceeds of future
equity or debt financings (which the Company presently expects to be able to
obtain when needed), will be sufficient to meet the currently anticipated
working capital and capital expenditure requirements of its operations. There
can be no assurance, however, that the Company will have access to sufficient
additional capital and/or financing on satisfactory terms to enable it to meet
its capital expenditure and working capital requirements. See "Risk Factors--
Need for Additional Capital to Finance Growth and Capital Requirements."
As more fully described under "Strategic Alliance with IXC," the
Company could be obligated in accordance with the Contingent Payment Obligation
to provide IXC with additional shares of the Company's common stock and/or cash,
at the Company's sole option, as of the Determination Date or the Acceleration
Date, as applicable. In the event the Contingent Payment Obligation to IXC
becomes payable, the Company presently believes that, because it may be
satisfied by the Company, at its sole option, by delivery of additional shares
of common stock or cash or a combination thereof, the Company 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 the Company. See "Risk Factors--
Risks Associated with Strategic Alliance with IXC."
OTHER POSSIBLE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
The Company anticipates that it 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 PSINet's
existing business. Certain of these strategic relationships may involve other
telecommunications companies that desire to enter into joint marketing and
services arrangements with the Company pursuant to which the Company would
provide Internet and Internet-related services to such companies, which
transactions, if deemed appropriate by the Company, may also be effected in
conjunction with an equity and/or debt investment by such companies in the
Company. Such relationships and acquisitions may require additional financing
and may be subject to the consents of the Company's lenders and other third
parties.
YEAR 2000 DATE CONVERSION
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. Based
upon a review of its technology and software, the Company has concluded that
there are no material issues regarding its Year 2000 compliance that will not be
resolved through normal software upgrades and replacements that will be made
through 1999. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material adverse effect on the
Company.
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RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which the Company implemented for its December 31, 1997
consolidated financial statements. SFAS No. 128 requires the Company to report
both basic and diluted earnings per share ("EPS") calculations as well as
provide a reconciliation between basic and diluted EPS computations. All prior-
period EPS data presented has been restated to conform with the provisions of
SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
The Statement establishes standards for reporting and displaying comprehensive
income, as defined, and its components. The Company plans to adopt the
Statement's disclosure requirements in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. The Statement establishes
standards for the way companies report information about operating segments in
annual and interim financial statements. Generally, the Statement requires
financial information to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company plans to adopt the Statement's disclosure requirements in
1998.
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BUSINESS
PSINet is a leading global facilities-based provider of Internet
access services and related products to businesses. The Company provides
dedicated and dial-up Internet connectivity in 90 of the 100 largest
metropolitan statistical areas in the U.S. and in nine of the 20 largest
international telecommunications markets. The Company also offers IP-based
value-added services and products to businesses, including corporate intranets,
Web hosting and collocation, remote user access, multi-currency electronic
commerce and security services, that enable businesses to maximize utilization
of their corporate networks and the Internet. Additionally, the Company provides
network backbone services to other telecommunications carriers and ISPs to
further exploit its network capacity. The Company owns and operates a
technologically advanced, high-speed frame relay network that, as of March 1,
1998, served approximately 32,700 business accounts, including 51 ISPs, and
connected to 400 POPs in ten countries. The Company's network is one of the
primary backbones that comprise the Internet and is connected with other large
ISPs at 26 public and private peering points. The Company believes that its
scaleable IP-optimized network, in combination with its highly trained, around-
the-clock customer care team, enables the Company to deliver superior
performance and reliability. PSINet's mission is to build a premier IP-based
communications company. The Company grows its business through multiple sales
channels, including direct sales as well as resellers, and by acquiring other
ISPs and related businesses in key markets. By providing services and products
that enhance its customers' business processes through the effective use of the
Internet and related tools, the Company has increased revenues from $8.7 million
in 1993 to $121.9 million in 1997, representing a 94% compounded annual growth
rate. As part of its growth strategy, the Company recently completed
acquisitions of ISPs in Canada, France and Switzerland, resulting in the
addition of over 5,500 new business accounts and over 40 new POPs. On a pro
forma basis, after giving effect to these recent acquisitions, 1997 revenues
would have been approximately $156.6 million.
PSINet recently expanded and enhanced its network by acquiring 10,000
equivalent route miles of state-of-the-art, fiber-based OC-48 capacity bandwidth
across the United States from IXC. The Company acquired the OC-48 bandwidth in
the form of 20-year noncancellable indefeasible rights of use ("IRUs"). The
OC-48 bandwidth will be capable of transmitting data at speeds of up to 2.4
Gbps, which the Company believes exceeds the highest speed backbone currently in
use on the Internet. The acquisition of the bandwidth will increase the capacity
of the Company's current network by approximately 50 times and will
significantly reduce data communications costs per equivalent route mile as
customer traffic is migrated on to the acquired bandwidth from bandwidth
currently leased from IXC and other telecommunications providers. The OC-48
bandwidth will enable the Company to offer higher-speed Internet connectivity
and a wider range of advanced value-added services, including IP voice and video
applications, to a larger customer base. The Company expects to receive delivery
of the first portion of the bandwidth, approximately 5,000 route miles of OC-12
(equivalent to 1,250 route miles of OC-48) connecting New York and Los Angeles
(and certain major cities in between), in the second quarter of 1998. See
"Prospectus Summary--Recent Developments" and "Strategic Alliance with IXC."
INDUSTRY OVERVIEW
Overview. Internet access services is one of the fastest growing segments
of the global telecommunication services market place. According to IDC, the
number of Internet users worldwide reached 38 million in 1996 and is forecasted
to grow to over 173 million by the year 2000. Internet access services represent
the means by which ISPs interconnect either businesses or individual consumers
to the Internet's resources or to corporate intranets and extranets. Access
services include dial-up access for individuals and small businesses and high-
speed dedicated access used primarily by mid-sized and larger organizations. In
addition to Internet access services, business-focused ISPs are increasingly
providing a range of value-added services, including managed access (i.e.,
intranets), shared and dedicated Web hosting, security services, and advanced
applications such as IP-based voice, fax and video services. These services are
being used by business customers to enhance productivity, ensure reliability and
reduce costs.
The ISP market is segmented into large national or multinational ISPs
("Tier 1 ISPs"), which are typically full-service providers that offer a broad
range of Internet access and value-added services to businesses, and regional
and local ISPs ("Tier 2" and "Tier 3 ISPs"), which typically offer a smaller
range of products and services to both individuals and business customers and
may specialize in the provision of one IP-based product or service. Tier 1 ISPs
also provide wholesale services by reselling capacity on their networks to
smaller regional and local ISPs,
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thereby enabling these smaller ISPs to provide Internet services on a private
label basis without building their own facilities. In 1996, The Yankee Group, a
market research firm, estimated that the top six Tier 1 ISPs (including the
Company) represented approximately 50% of the market for business connectivity
and value-added services. Tier 1 ISPs exchange Internet traffic at multiple
public peering points known as network access points ("NAPs") and through
private peering arrangements. As the number of ISPs have grown, Tier 1 ISPs have
increased their requirements for peering arrangements thereby increasing the
barriers to entry into the top-tier. Tier 2 and Tier 3 ISPs generally rely on
Tier 1 ISPs for Internet access and interconnection. The ISP market is highly
fragmented with over 4,000 providers estimated to be doing business in the U.S.
and Canada alone. Because of the low barriers to entry, there are many local and
regional ISPs entering the market, which has caused the level of competition to
intensify. In addition, there recently have been certain large acquisitions of
ISPs by multinational telecommunications companies seeking to offer a more
complete package of telecommunications products to their customers.
Market Size and Growth. The domestic Internet service market is
forecast to continue its rapid growth for the foreseeable future. IDC estimates
that the U.S. Internet service market's aggregate annual revenues may grow from
$3.3 billion in 1996 to $18.3 billion in the year 2000, reflecting a compounded
annual growth rate of over 50%. According to IDC estimates, in 1996, business
connectivity and value-added services represented approximately 62% of this
market.
Growth in U.S. demand for business connectivity is being driven by a number
of factors, including an increase in online market penetration, particularly in
the small and medium-sized business segments, and an increase in the number of
Internet connections per business. Specifically, IDC forecasts dedicated
business connectivity revenues to grow from approximately $1.9 billion in 1996
to $6.7 billion in 2000, representing a compounded annual growth rate of
approximately 36%. In addition, as more businesses evolve from establishing an
Internet presence to requiring secure connectivity between geographically-
dispersed locations, remote access to corporate networks and electronic commerce
solutions, the demand for high quality Internet connectivity and value-added
services and products should grow. IDC forecasts that value-added services
revenues will grow rapidly from $125 million in 1996 to $7.0 billion in 2000,
representing a compounded annual growth rate of approximately 174%.
In Europe, IDC estimates that the total market for Internet access
services and products reached $676 million in 1996 with business connectivity
and value-added services representing approximately 56% of the market. IDC
forecasts the European Internet access and services market to grow at a compound
rate of over 70% per annum to approximately $6.1 billion in 2000 with business
connectivity and value-added services representing approximately 65% of the
market. The Company believes, based on its operational knowledge of and
experience in such markets, that the Canadian and Japanese Internet access
services and products markets should grow at least at the same rate as the
European market.
Growth in Business Use of the Internet. Since the commercialization
of the Internet in the early 1990s, businesses have rapidly established
corporate Internet sites and connectivity as a means to expand customer reach
and improve communications efficiency. Currently, many businesses are utilizing
the Internet as a lower-cost alternative to certain traditional
telecommunications services. For example, many corporations are connecting their
remote locations using intranets to enable efficient communications with
employees, customers and suppliers worldwide, providing remote access for a
mobile workforce, reducing telecommunications costs by using value-added
services such as IP-based fax and videoconferencing, and migrating legacy
database applications to run over IP-based networks. Businesses of all sizes are
demanding advanced, highly reliable solutions designed specifically to enhance
productivity and improve efficiency. Moreover, businesses are seeking national
and global ISPs that can securely and efficiently connect multiple,
geographically-dispersed locations, provide global remote access capabilities
and offer a full range of value-added services that meet their particular
networking needs.
THE PSINET SOLUTION
PSINet provides high quality IP-based services and products that are
tailored to meet the needs of businesses. The Company offers Internet access
services ranging from low-cost dial-up connections to high-speed continuous
access in the U.S. and nine of the 20 largest international telecommunications
markets. The Company also offers a variety of value-added services such as the
provisioning of corporate intranets, Web hosting, security, multi-currency
electronic commerce solutions and advanced applications which can be bundled
with Internet access
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services to provide complete, turnkey solutions. The Company believes that the
business market is particularly attractive due to its low customer churn
characteristics, relatively low penetration and early stage of development. In
addition, the Company believes that within the business access marketplace there
is a significant opportunity to upsell to higher service levels and provide
additional value-added services as businesses grow from establishing basic
Internet connectivity and corporate Web sites to utilizing the Internet and
corporate intranets for more advanced, mission-critical applications. Further,
the Company believes that small and medium sized businesses will continue to
seek to outsource certain information technology functions to large full-service
ISPs to reduce costs and improve service levels. Moreover, the Company believes
that regional and local ISPs will continue to seek business relationships with
large, Tier 1 ISPs that enable them to sell Internet connectivity services
without making significant investments in facilities.
THE PSINET STRATEGY
PSINet is focused on rapidly growing its businesses through multiple
channels, including direct sales and resellers, and by acquiring other ISPs and
related businesses in key markets. The principal elements of the Company's
business strategy are as follows: (1) pursue internal growth through multiple
sales channels; (2) leverage its market position to drive sales of value-added
services and products; (3) optimize its network to reduce operating costs; (4)
provide superior comprehensive customer service; and (5) accelerate growth
through acquisitions. Key elements of the Company's business strategy are
summarized below:
. Pursue Internal Growth Through Multiple Sales Channels. PSINet is pursuing
growth opportunities through multiple channels consisting of its direct sales
force, a reseller and referral program and strategic alliances. The Company
has built a direct sales force, which, as of April 1, 1998, consisted of
approximately 200 individuals (almost half of whom are employed outside of
the United States) who have a strong Internet technical background and
knowledge of potential applications of the Internet to meet the needs of
targeted business customers. The Company has forged an authorized reseller
and referral program with selected telecommunications services and equipment
suppliers, networking service companies, systems integrators and computer
retailers, which as of April 1, 1998, consisted of approximately 450
resellers and referral sources in the United States and 449 outside of the
United States. This program enables the Company to utilize the sales and
marketing resources of its resellers and referral sources to offer PSINet
Internet access services and products to a broader and more diverse prospect
base. The Company also seeks to establish strategic alliances with selected
telecommunications carriers, such as it has with IXC, which may afford the
Company access to the carriers' customer base, offering the Company's IP-
based services and products on a private label or co-branded basis thereby
enabling these carriers to offer their customers an integrated package of
telecommunications and Internet services and products. The Company provides
training and ongoing support to the sales representatives of companies with
which it has reseller, referral and strategic alliance relationships in order
to strengthen the sales representatives' knowledge of the Company's services
and products and brand loyalty to PSINet.
. Leverage Market Position to Drive Sales of Value-Added Services and Products.
PSINet intends to market aggressively value-added services and products to
its existing account base and prospective business customers. The Company
currently offers a number of value-added services that can be bundled with
Internet access services to provide complete, turnkey solutions. The Company
believes that providing value-added services not only reduces customer churn
by increasing customer switching costs but also improves profitability
through the sale of higher margin value-added products. Further, the Company
believes that businesses will increasingly rely on these value-added products
to increase productivity, which will lead to additional service level
upgrades and increase customer retention. Currently, approximately 40% of the
Company's corporate customer account base uses more than one service. The
Company believes that there is a significant opportunity within its existing
account base to upgrade service levels and is actively marketing additional
services to these accounts. In addition, the enhanced capacity resulting from
the Company's acquisition of the OC-48 bandwidth from IXC will enable the
Company to offer a wider variety of higher-speed Internet and Internet-
related services and products, such as IP-based multimedia voice and video
services, which are currently under development.
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. Optimize Network to Reduce Operating Costs. PSINet remains focused on
reducing costs as a percentage of revenue by maintaining a scaleable network
and increasing utilization of and controlling strategic assets, such as
telecommunications bandwidth through IRUs. The Company's flexible network
architecture utilizes advanced ATM, ISDN and SMDS compatible frame relay
equipment, which allows the PSINet network to cost-effectively scale the
number of POPs and the number of users accessing a POP in response to
customer demand. The Company believes that by offering Internet access
services to both businesses and other ISPs, it maximizes the utilization of
its network infrastructure over both daytime and evening hours. The Company
recently enhanced its network significantly by acquiring 20-year
noncancellable IRUs in up to 10,000 equivalent route miles of state-of-the-
art fiber-based OC-48 network bandwidth across the United States. In
addition, the Company recently entered into agreements to acquire IRUs in
certain transatlantic fiber optic bandwidth between the United States, the
United Kingdom and The Netherlands, representing an important strategic step
in its objective to be a leading facilities-based ISP in the international
Internet services market.
. Provide Superior Comprehensive Customer Service. PSINet believes that
superior customer service is a critical element in attracting and retaining
customers, and in deriving incremental revenues by selling an expanding array
of value-added services and greater bandwidth levels to its business customer
base. The Company has made significant investments in customer service
personnel and systems that enhance customer care and service throughout the
complete customer life cycle from order entry and billing to selling of
value-added services. To ensure consistency in the quality and approach to
customer care, both domestic and international technical support associates
attend an extensive technical training and certification program. The Company
monitors and responds to customer needs by providing 24-hours per day, seven-
days per week technical support and service from its NOC in Troy, New York.
As part of the Company's international expansion strategy, the Company
anticipates adding a fully redundant NOC in Switzerland during 1998 and,
subsequently, a third in Asia. In connection with its customer services
initiatives, the Company seeks to continuously improve systems that increase
productivity and enhance customer satisfaction. The Company is currently in
the process of selecting and implementing improved, cost-effective and
scaleable billing systems that are designed to provide customers with
accurate and easy-to-understand invoicing. By maintaining centralized support
services, the Company seeks to increase operational efficiencies and enhance
the quality, consistency and scalability of its customer care.
. Accelerate Growth Through Acquisitions. PSINet intends to accelerate its
growth domestically and expand its presence in key markets internationally by
acquiring business-focused ISPs and related businesses and assets. The
Company seeks acquisition targets that, once integrated into the Company's
existing operations, will be accretive to EBITDA. The Company intends to
acquire smaller local or regional ISPs in markets where it has an established
POP and can benefit from the increased network utilization and local sales
channel. The Company also intends to make strategic acquisitions in markets
where it currently does not have a presence or where the Company's current
presence would be significantly enhanced. Once an ISP has been acquired, the
Company typically integrates the ISP by migrating its customers on to the
PSINet network backbone, centralizing the back-office billing and customer
care functions and reducing redundant overhead. The Company may also seek to
acquire a CLEC and other businesses relating or complementary to the
Company's existing business, such as Web hosting or data center companies.
The Company currently has no definitive agreements or commitments relating to
any material acquisitions. The Company plans to effect future acquisitions
through the use of existing cash, cash generated from current operations and
from existing and future credit facilities, issuances of shares of its common
stock and the net proceeds of the Initial Notes Offering.
PSINET SERVICES
PSINet offers a broad range of reliable, high-speed Internet access
options and related services in the U.S. and international markets at a variety
of prices designed to meet the requirements of commercial, educational,
governmental and other organizations that link their computers, networks and
information servers to, or otherwise seek to benefit from the use of, the
Internet. The Company provides Internet solutions to help business and other
organizations reduce costs, increase productivity and access new markets. Access
options range from dial-up services to high-speed continuous access provided by
dedicated circuits. The Company believes that its broad range
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of competitively priced Internet services and products allows the Company to
compete effectively in the Internet access market for corporate and other
institutional customers. The Company has recently organized its core operations
into three customer-focused business units--Corporate Network Services, Carrier
and ISP Services, and Applications and Web Services--in an effort to better
align its operations with the needs of the emerging Internet marketplace.
Connectivity Services. PSINet offers global connectivity services,
including a variety of dial-up and dedicated access solutions in bundled and
unbundled packages, which provide high-speed continuous access to the Internet
for businesses' local area networks ("LANs"). The Company provides turnkey
configuration solutions encompassing such services as domain name ("DNS")
registration, line ordering and installation, IP address assignment, router
configuration, installation and management, security planning and management and
technical consultation services. All of the Company's connectivity customers
receive 24-hours per day, seven-days per week technical support. The Company
also offers a full range of customer premise equipment ("CPE") required to
connect to the Internet, including routers, Channel Service Units/Data Service
Units ("CSU/DSUs"), software, and other products, as needed. Due to its
business relationships with a variety of vendors, the Company is able to offer
competitive hardware pricing and bundled service offerings to its customers.
. Dedicated Access. PSINet offers a broad line of high-speed dedicated
connectivity services which provide business customers with direct access
to a full range of Internet applications. The Company's flagship access
service, InterFrame(R), provides companies with robust, full-time,
dedicated Internet connectivity in a range of access speeds, from 56 Kbps
to 10 Mbps. InterFrame is designed to offer comprehensive network security
and to help ensure bandwidth availability for priority business
applications. The Company believes that the traffic-management advantages
of the frame relay technology deployed in its network provide its customers
with fully integrated Internet access and improved performance. For higher
bandwidth needs, the Company provides its InterMAN(R) access service in
major U.S. cities in connection speeds ranging from 1.5 Mbps to 45 Mbps.
InterMAN is a turnkey solution in which the Company provides, installs and
maintains equipment at the customers' premises. InterMAN affords cost
advantages over competitive dedicated access services by utilizing high-
speed SMDS and ATM data transmission technologies.
. Dial-up Access. The Company's LAN-Dial(R) dial-up services offer a cost-
effective, entry-level Internet solution that provides access to the
Company's advanced network backbone via ordinary telephone lines. PSINet's
LAN-ISDN service provides dial-up access through digital ISDN lines at
speeds more than twice those of currently available advanced modems.
Value-Added Services. PSINet believes that business customers on a
worldwide basis will continue to increase their use of the Internet as a
business tool and will increasingly rely upon an expanding range of value-added
services to enhance productivity, reduce costs and improve service reliability.
The Company offers a variety of value-added services, including intranets,
remote access, Web hosting, electronic commerce, collocation, security services,
and applications, including fax and electronic mail, designed to meet the
diverse networking needs of businesses. In addition, in order to capitalize on
its technologically advanced, high-capacity network backbone, the Company
intends to continue to develop new IP-based services and products that increase
customer use of the Internet, including bandwidth-intensive multimedia services
such as voice and video conferencing over the Internet.
. Intranets. The Company's IP-optimized network allows it to create private
IP networks (known as "intranets" or "virtual private networks") that are
designed to securely isolate internal network traffic from public Internet
traffic and provide each site on the intranet access to other sites on the
intranet as well as to the Internet. The Company's PSI IntraNet(R) service
integrates an organization's multiple sites in different countries throughout
the world by providing IP connectivity with access speeds ranging from 56
Kbps to 2 Mbps. By combining the security and control of a private network
with cost-effective Internet-compatible connectivity, PSI IntraNet provides a
turnkey solution for equipment management support and offers significant
savings over traditional WAN solutions.
. Web Hosting. The Company provides a line of Web hosting and multimedia
streaming services that permit companies to market themselves and their
products on the Internet without having to invest in
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technology infrastructure and operations staff. The PSIWeb(R) services are
backed by the industry's first 100% uptime guarantee and by the Company's
advanced network backbone, which provides highly reliable Internet
connectivity. PSIWeb offers options such as complete electronic commerce
solutions as well as "TV on the WEB LIVE," a joint service offering from the
Company and Gardy McGrath International, which is an end-to-end solution for
video broadcasting of live events over the Internet.
. Security Solutions. The proprietary nature of business Internet traffic
demands protection from unauthorized access. The Company delivers a range of
managed security services that were developed in conjunction with certain
strategic partners and are backed by the expertise of the Company's Security
Planning and Response Team ("SPART"). The Company's RouteWaller(R) service
provides cost-effective perimeter defense with sophisticated remote user
authentication that helps to ensure that no strategic applications or data
can be accessed until the user has proven his or her access clearance.
SecureEnterprise(R) is the Company's management service designed to protect
enterprises with a full-featured, application-layer firewall.
. Remote Access. Today's work force increasingly operates outside the
traditional office setting. The Company's InterRamp(R) Remote Access service
enables mobile personnel to access their corporate network and systems
resources using the Internet from over 2,400 POPs in over 150 countries
through the Company's strategic relationship with iPass, an international
data communications network. In most locations where business is conducted,
InterRamp Remote Access offers full Internet access through a local telephone
call. As part of InterRamp Remote Access service, the Company provides its
customers with a special account management system that enables customers'
MIS administrators to control user access and monitor usage statistics.
. Multi-Currency Electronic Commerce. The Company's PSIWeb eCommerce(SM)
service provides a turnkey solution to create and manage "Virtual
Storefronts" and is designed to give shoppers the ability to make secure
purchases in thei local currency using the Web. PSIWeb eCommerce integrates
payment systems engineered for security with virtual store technology,
through alliances with CyberCash, Inc. and Mercantec, Inc., to facilitate a
seamless shopping experience. In addition, PSIWeb Worldpay(SM) provides a
cost-effective electronic commerce solution for selling goods and services to
an international audience. Developed in association with Worldpay Ltd., an
electronic commerce transaction clearing house, and National Westminster Bank
PLC, PSIWeb Worldpay enables customers around the world to make real-time
purchases using the Web in over 100 currencies.
. Collocation. The Company's PSIWeb Co-Locate(SM) service enables
companies to house business-critical servers in secure off-site facilities
with improved bandwidth management and reliable connections. Collocation
facilities are situated on the highest bandwidth portions of the Company's
infrastructure in order to facilitate optimal performance and high-speed
capabilities.
. Faxing. Since a significant portion of telecommunications traffic consists of
fax transmissions, companies are looking for ways to better manage fax costs.
The Companys InternetPaper(SM) service supports hard-copy distribution of
electronic documents from desktop PCs to any fax machine in the world. This
service offers centralized management of document distribution, thereby
significantly reducing transmission costs.
. Electronic Mail. PSIMail(SM) enables customers to outsource their e-mail
service and its management to the Company's highly trained systems
administrators and support staff. For a minimal monthly fee, the Company
establishes accounts, manages the servers and provides full accessibility to
e-mail for its customers while saving them the investment in additional
servers and staff.
Carrier and ISP Services. In 1996, to maximize utilization of its
network, PSINet formed its Carrier and ISP Services business unit to provide
dial-up Internet access to telecommunications carriers and consumer-based ISPs
whose customers typically access the network during evening hours when business
use tends to be minimal. The Company has recently expanded this business unit to
offer peering and transit services to telecommunications carriers and other ISPs
and to offer its connectivity and value-added services for resale, on a private
label basis, to larger telecommunications carriers and other ISPs that require
high quality business services and products to
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enhance their product portfolio. Through such services, which the Company
expects will be further expanded as a result of the increased network capacity
provided by its recent acquisition of OC-48 bandwidth from IXC, the Company has
the opportunity to significantly increase its distribution channel.
. Consumer Dial-up Access. The Company provides dial-up access to consumer-
oriented ISPs enabling them to expand their geographic reach and network
capacity by purchasing from the Company access to the Company's IP-optimized
network through 269 POPs in the United States and Canada. The Company offers
programs that provide smaller ISPs the opportunity to increase their user
base over time and provide larger ISPs the opportunity to cost-effectively
manage their rapid growth.
. Peering and Transit. In order to support the exchange of information between
ISPs, which is critical to the effective operation of the Internet, the
Company offers free private peering for all U.S.-based ISPs. Private peering
allows other ISPs' traffic to directly reach the Company's customers, which
improves network performance and, the Company believes, thereby promotes
customer satisfaction. Furthermore, the Company offers, for a fee, transit
service, which allows an ISP to transfer traffic through the Company's
network to another ISP. Transit service enables ISPs to reduce their data
communications expense by leasing network utilization from the Company in
lieu of leasing point-to-point circuits from other telecommunications
providers.
. Commercial Private Label Services. For companies with which PSINet has
strategic alliances, such as IXC, the Company provides its market-tested
services on a private label basis. This allows these companies to market and
resell the Company's services under their own brand while leveraging the
Company's nationwide network and expertise in service delivery. The Company
assists in training the sales and support staffs of these companies and
provides technical support to facilitate their resale efforts.
Services and Product Development. As part of PSINet's ongoing efforts
to develop IP-based services and products that enable businesses to take maximum
advantage of their corporate networks and the Internet, PSINet has continually
invested in service and product development programs. Since its inception, the
Company has introduced to the Internet marketplace several major new services,
including the first LAN-based dial-up TCP/IP access service, the first managed
Internet security service, the first ISP electronic commerce service and the
first ISP intranet service. Major services and products currently under
development include multimedia services, such as voice and video conferencing
over the Internet, and higher speed connectivity services.
PSINET'S NETWORK
Overview. PSINet owns and operates an international, high capacity,
IP-optimized network which, as of March 1, 1998, was comprised of 400 POPs, of
which 234 were within the United States and 166 were located throughout Canada,
Europe and Japan. The Company's network design enables customers to access the
Internet through dedicated connections or by using a modem to call locally and
connect to the nearest Company POP. The Company remains focused on reducing
costs by maintaining a scaleable network and increasing utilization and control
of strategic assets, such as telecommunications bandwidth through IRUs. The
PSINet IRUs acquired from IXC, which will increase the Company's network
capacity by 50 times, and a transatlantic IRU, which the Company has recently
entered into an agreement to acquire, are expected to decrease the Company's per
unit cost of backbone circuits by up to 90% compared with leasing similar
capacity.
Network Infrastructure. PSINet has engineered an IP-optimized
network by integrating advanced Internet routers with high-speed frame relay
switching equipment that is compatible with ATM, ISDN, and SMDS transmission
technologies. The Company has planned for growth by ensuring that the network is
scaleable, flexible, fault tolerant, open standards-based and remotely
manageable.
. Scaleable. PSINet's flexible, multi-layer network architecture utilizes a
high-speed switching fabric which enables the Company to grow the number of
POPs and the number of users served in an incremental manner that matches
investment with demand. The network's scalability extends beyond the
currently installed base of 400 POPs to allow for growth to 2,000 POPs
without fundamental design changes.
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. Flexible. PSINet's network architecture consists of an Internet routing
infrastructure overlaid upon a fast packet switching fabric that enables
the Company to provide reliable, high-speed connections and provides its
customers the ability to manage bandwidth by type of application and to
accommodate applications that are delay-sensitive. The Company is able to
use its flexible network architecture in concert with its remote monitoring
capability to accommodate changing customer usage patterns and patterns of
traffic that, if left unmanaged, could otherwise degrade network
performance.
. Fault Tolerant. Redundancy and adaptive technology in PSINet's network
reduces the impact of isolated failures on the customer's experience.
Adaptive technology incorporated into the Company's Internet router
infrastructure compensates automatically for circuit failures that might
otherwise interrupt the flow of customer traffic. Key switching and router
elements are redundantly configured to further reduce the impact of
individual component failures. In addition, the Company has an
uninterruptible power supply at each POP, limiting the impact of local
power outages on the Company's network.
. Open. PSINet's network is based on the open internetworking protocol
standard TCP/IP and on relevant international standards relating to
transmission and modulation technologies. The Company is able to install a
variety of equipment types and capacities without impacting network
interoperability. As a result, the Company's network can be upgraded
incrementally and benefit from multi-vendor supply strategies.
. Manageable. From its NOC, the Company is able to monitor the network
remotely, perform network diagnostics and equipment surveillance, and
initialize customers. As a result of the Company's network architecture and
its experience in Internet network management, these tasks can be performed
remotely regardless of POP location or network status. This capability
allows the Company to respond quickly to network problems and to control
costs associated with on-site network configuration and repair.
Domestic Growth. As part of PSINet's ongoing efforts to control
strategic assets and further expand and enhance its network, the Company
recently acquired from IXC 20-year IRUs in up to 10,000 equivalent route miles
of fiber-based OC-48 network bandwidth across the United States. The PSINet
IRUs, upon acceptance of the corresponding bandwidth, will increase the
Company's network capacity by approximately 50 times, thereby enabling the
Company to offer a wider variety of higher-speed Internet and Internet-related
services and products to a larger customer base. The Company expects to accept
its first portion of the bandwidth, approximately 5,000 route miles of OC-12
(equivalent to 1,250 route miles of OC-48) connecting New York and Los Angeles
(and certain major cities in between), in the second quarter of 1998 with full
delivery anticipated to be completed no earlier than the first quarter of 2000
and no later than the first quarter of 2001. The Company expects to make use of
its current equipment infrastructure when the first deliveries of bandwidth from
IXC are accepted and intends to continue to evaluate and implement technologies,
such as SONET, as additional capacity is delivered. In key geographically-
dispersed cities along the configuration of the OC-48 bandwidth (e.g., Atlanta,
Chicago, Dallas, Los Angeles and Washington, D.C.), the Company plans to build
5,000-10,000 sq. ft. data center facilities specifically designed for
application hosting, collocation services and high capacity access to the
Company's network, including peering and transit connectivity and modems for
dial-up access. The Company is also investing in PRI circuits, which provide
dial-up access to its POPs, in order to increase the capacity available for its
consumer-oriented ISP customers. The Company anticipates that it will
significantly increase its dial-up capacity in 1998 as a result of this
investment in PRIs, which the Company believes will enhance revenue growth in
its Carrier and ISP Services business unit. Approximately 60% of the Company's
current dial-up capacity is accessible at 56Kbps modem speeds and the Company
plans to upgrade its remaining dial-up capacity to 56 Kbps. All newly deployed
modems will support this technology. PSINet may use the bandwidth acquired from
IXC for the provision of Internet services and is subject to restrictions on
certain other uses of the bandwidth. See "Strategic Alliance with IXC--Certain
Restrictions on Use and Transfer of Bandwidth." The Company is also considering
the financial, regulatory and operational implications of becoming or acquiring
a CLEC in certain selected cities.
International Expansion. PSINet believes that the market for Internet
services outside of the U.S. will grow more rapidly than the U.S. market over
the next few years. Therefore, the Company expects to expand its network in
Canada, Mexico, Europe and Asia, as well as in other select international
markets, and to acquire fiber-based IRUs in these regions to support demand
growth and reduce costs. The Company is targeting cities with a high
concentration of businesses for international expansion with the objective, over
the long-term, of providing
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local access to its services and products to 70% of the businesses in those
cities. The Company recently entered into an agreement to acquire an IRU in
transatlantic network bandwidth and expects to acquire IRUs for bandwidth in
Canada and for bandwidth throughout Europe within the next two years. The
Company also continues to evaluate alternatives for transpacific IRU capacity.
Peering Arrangements. PSINet maintains peering relationships with
national, regional and local ISPs by either private peering with the ISPs or by
participation in various public peering locations, known as network access
points ("NAPs"). As of March 1, 1998, the Company maintained more than 1,500
Mbps (1.5 Gbps) of peering connectivity with 16 private agreements and 10 NAP
connections strategically placed throughout the United States, the UK, Canada,
Japan and Europe. Recently, certain companies that have previously offered
peering have cut back or eliminated peering relations and are establishing new,
more restrictive criteria for peering. The Company expects that, due to its
offering of peering with any of the estimated 4,000 ISPs in the United States
without settlement charges, it will substantially increase the number of ISPs
with which it peers over the next two years. The Company believes that by
entering into direct peering relationships with a large number of ISPs, the
Company's business customers will receive better service and the highest quality
network performance.
Global Network Management. PSINet believes that it offers superior
network management capabilities which enhance the Company's customer
satisfaction. The Company has established a 24-hours per day, seven-days per
week NOC in the United States that allows for continuous monitoring of the
Company's international network, managing of traffic, and customer problem
resolution. Back-up operating facilities manned by trained personnel are
available at the Company's offices in Herndon, Virginia and Cambridge, England
in the event the U.S. NOC experiences service interruptions or other
difficulties. PSINet is building its European Technical Center ("ETC") in
Switzerland as a second NOC with global capabilities equivalent to those in the
U.S. NOC. Furthermore, the Company anticipates that as it expands its presence
in Asia it will construct a third NOC in that region.
SALES AND MARKETING
PSINet has built a multi-channel sales and marketing infrastructure in
an effort to respond effectively to the growing opportunities in the business
Internet market. The Company seeks to attract and retain customers by offering
its services and products through its direct sales force and its authorized
reseller and referral program and by seeking to forge strategic relationships
with selected telecommunications carriers. The Company believes that this multi-
channel approach will enable it to utilize the technical skills and experience
of its direct sales force to penetrate the Company's targeted customer base
while utilizing the potentially greater sales and marketing resources of the
resellers, referral sources and companies with which the Company has strategic
alliances to offer PSINet services and products to a broader and more diverse
potential customer base.
Direct Sales. PSINet has built a direct sales force, which, as of
April 1, 1998, consisted of approximately 200 individuals (almost half of whom
are employed outside of the United States) who have a strong Internet technical
background and knowledge of potential applications of the Internet to meet the
critical needs of targeted business customers. Direct sales tactics include
direct contacts with targeted ISPs and potential significant corporate accounts
by the Company's sales representatives and systems engineers, inbound and
outbound telemarketing, direct mail efforts, seminars and trade show
participation. The Company has developed programs to attract and train high
quality, motivated sales representatives that, in addition to having strong
Internet technical skills and knowledge of potential applications of the
Internet, have consultative sales experience. These programs include technical
sales training, consultative selling technique training, sales compensation plan
development and sales representative recruiting profile identification. Sales
representatives from the Company's U.S. and international operations jointly
attend training programs in order to ensure an integrated sales approach
domestically and internationally.
Reseller and Referral Program. PSINet has forged an authorized
reseller and referral program with selected telecommunications service
companies, equipment suppliers, networking service companies, systems
integrators and computer retailers. This program, through which the Company has
established, as of April 1, 1998, approximately 450 formal and informal
arrangements in the United States and 449 outside of the United States, affords
the Company an indirect distribution mechanism in its targeted markets and is
designed to enable the Company to utilize the potentially greater sales and
marketing resources of the resellers and referral sources to offer PSINet
services and products to a broader and more diverse potential customer base.
Participants in the Company's reseller and referral program include Ascend
Communications, Inc., a manufacturer and developer of
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telecommunications equipment, CompUSA, a computer equipment and software
retailer, and XLConnect Solutions, Inc., a provider of computer networking
consulting services. The Company provides training and ongoing support to the
sales representatives of companies with which it has reseller and referral
relationships in order to strengthen the sales representatives' knowledge of the
Company's services and products and brand loyalty to PSINet. The Company
believes that the reseller and referral program has enabled the Company to
achieve greater market reach with reduced overhead costs and to use the reseller
and referral sources to assist in the delivery of complete solutions to meet
customer needs. The Company has a team of 13 individuals who pursue reseller and
referral arrangements for PSINet.
Strategic Alliances. In 1997, PSINet launched its strategic alliance
program, pursuant to which it seeks to establish strategic alliances with
selected telecommunications carriers which may afford the Company access to
recurring revenue from the carriers' customer base, while enabling the carriers
to offer their customers an integrated package of telecommunications and
Internet services and products. The Company believes that these strategic
alliances may facilitate the cost-effective acquisition of business customers
and increase the Company's network utilization. IXC is the first
telecommunications carrier with which PSINet has entered into a strategic
alliance and the Company presently is pursuing other strategic alliance
opportunities. See "Strategic Alliance with IXC." It is anticipated that, in
most cases (such as IXC), the companies with which the Company has strategic
alliances will offer PSINet services and products on an unbranded or co-branded
basis or under only their own trademark. As with the reseller and referral
program, the Company provides training and ongoing support to the sales
representatives of companies with which it has strategic alliances in order to
strengthen the sales representatives' knowledge of the Company's services and
products and brand loyalty to PSINet.
Marketing. PSINet's marketing program is intended to build national
and local strength and awareness of the PSINet brand. The Company uses radio and
print advertising in targeted markets and publications to enhance awareness and
acquire leads for the Company's direct sales team and companies with which the
Company has resale, referral or strategic alliance relationships. The Company's
print advertisements are placed in trade journals and special-interest
publications. The Company employs public relations personnel in-house and works
with an outside public relations agency to provide broad coverage in the
Internet and computer networking fields. The Company also attempts to create
brand awareness by participating in industry trade shows such as Networld,
Interop, InterNet World and COMDEX, based on the size and vertical makeup of the
trade show audience, and relationships with industry groups and the media. The
Company also uses direct mailings, telemarketing programs, Web marketing, co-
marketing agreements and joint promotional efforts to reach new corporate
customers. The Company attempts to retain its customers through active and
responsive customer support as well as by continually offering new value-added
services.
CUSTOMERS
The Company had, as of March 1, 1998, approximately 32,700 business
customers, including 51 ISP customers. The Company's customers include
businesses in the aerospace, finance, communications, computer data processing
and related industries, governmental agencies and educational and research
institutions as well as other ISPs pursuant to the Company's recently formed
Carrier and ISP Services business unit. The following is a list of certain
business customers in each of nine selected industry groups to which the Company
provided Internet access and related services in February 1998:
AEROSPACE AND DEFENSE COMPUTER & DATA SERVICES
Boeing Company Automatic Data Processing, Inc.
Lockheed Martin Corporation Computer Sciences Corporation
Northrop Grumman Corporation Dun & Bradstreet Corp.
Microsoft Corporation
Oracle Corporation
Unisys Corp.
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AIRLINES ELECTRONICS
AMR/The Sabre Group Applied Material, Inc.
Continental Airlines, Inc. Intel Corporation
Trans World Airlines, Inc. Litton Applied Technology
United Airlines, Inc. Motorolo, Inc.
Westinghouse Electric Corporation
BANKS INSURANCE
Bankers Trust New York Corporation Cigna Corporation
Chase Manhattan Bank Prudential Corporation
First Chicago NBD Corporation Travelers Group Inc.
First Union Corporation
Wells Fargo Bank NA
BROKERAGES/FINANCE ISPS
American Express Company Earthlink Network, Inc.
Donaldson, Lufkin & Jenrette Mindspring Enterprises, Inc.
Securities Corporation IDT Corporation
Federal National Mortgage Association WebTV Networks, Inc.
Lehman Brothers Inc.
Merrill Lynch & Co.
Morgan Stanley Dean Witter Discover & Co.
Paine Webber Incorporated
Salomon Smith Barney Inc.
COMPUTERS
Apple Computer, Inc.
Digital Equipment Corporation
Hewlett-Packard Company
Quantum Business Engineering
Sun Microsystems, Inc.
CUSTOMER SUPPORT
High quality customer service and support is critical to the Company's
objective of retaining and developing its customers. The Company has made
significant investments in customer service personnel and systems that enhance
customer care and service throughout the complete customer life cycle from order
entry and billing to selling of value-added services. The Company's technical
support group consists of over 90 individuals, over 80% of whom have college-
level or technical education. To ensure consistency in the quality and approach
to customer care, both domestic and international associates attend an intensive
technical training and certification program at the Company's U.S. NOC. The
Company's U.S. NOC monitors and responds to customer needs by providing 24-hours
per day, seven-days per week technical support and service. The Company's
customer support group utilizes a leading customer support trouble ticketing and
workflow management system from Remedy Corporation to track, route and report on
customer service issues. Network operations can remotely service customer
connections to the Company's network. In addition, field service personnel are
dispatched in the event of an equipment failure that cannot be serviced
remotely. As part of the Company's international expansion strategy, the Company
anticipates adding a fully redundant NOC in Switzerland during 1998 and,
subsequently, a third in Asia. In connection with its customer care initiatives,
the Company seeks to continuously improve systems that increase productivity and
enhance customer satisfaction. The Company has recently reengineered its
customer care program to address the complex needs of its business customers and
is scaling its customer care resources to keep pace with projected increases in
customer requirements. By maintaining centralized support services, the Company
seeks to increase operational efficiencies and enhance the quality, consistency
and scalability of customer care. The Company is currently in the process of
selecting and implementing high quality, cost-effective and scaleable billing
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systems to replace its existing systems in order to provide customers on a
global basis with uniform and easy-to-understand invoicing.
COMPETITION
The market for Internet access and related services is highly
competitive. The industry has relatively insignificant barriers to entry and
numerous entities competing for the same customers. The Company expects that
competition will continue to intensify as the use of the Internet grows. The
tremendous growth and potential market size of the Internet access market has
attracted many new start-ups as well as existing businesses from different
industries. Current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers and, to a lesser extent, on-line service
providers. The Company believes that the primary competitive factors for the
provision of Internet services are quality of service, reliability, price,
technical expertise, ease of use, variety of value-added services, quality and
availability of customer support, experience of the supplier, geographic
coverage and name recognition. The Company's success in this market will depend
heavily upon its ability to provide high quality Internet connectivity and
value-added Internet services at competitive prices.
ISPs. According to industry sources, there are over 4,000 ISPs in
the United States and Canada as of December 31, 1997, consisting of national,
regional and local providers. The Company's current primary competitors include
other ISPs with a significant national presence which focus on business
customers, such as UUNet Technologies, Inc. ("UUNet"), Bolt, Beranek & Newman,
Inc. ("BBN") and NETCOM On-Line Communications Services, Inc. ("Netcom"),
each of which, as described below, has recently been acquired by larger
telecommunications companies. While the Company believes that its level of
customer service and support and target market focus distinguish it from these
competitors, many of these competitors, because they are owned by larger
telecommunications companies, have greater market share, brand recognition, and
financial, technical and personnel resources than the Company. The Company also
competes with unaffiliated regional and local ISPs in its targeted geographic
regions.
Telecommunications Carriers. The major long distance companies (also
known as interexchange carriers or IXCs), including AT&T Corporation ("AT&T"),
MCI Communications Corp. ("MCI"), and Sprint Corporation ("Sprint"), offer
Internet access services and compete with the Company. The recent reforms in the
federal regulation of the telecommunications industry have created greater
opportunities for ILECs, including the RBOCs and other competitive CLECs, to
enter the Internet connectivity market. In order to address the Internet
connectivity requirements of the business customers of long distance and local
carriers, the Company believes that there is a move toward horizontal
integration by ILECs and CLECs through acquisitions or joint ventures with and
the wholesale purchase of connectivity from ISPs. The WorldCom, Inc.
("WorldCom")/MFS Communications, Inc. ("MFS")/UUNet consolidation (and
WorldCom's pending acquisition of MCI), GTE Corporation's ("GTE") recent
acquisition of BBN and the recent acquisition by ICG Communications, Inc.
("ICG") of Netcom are indicative of this trend. Accordingly, the Company
expects that it will experience increased competition from the traditional
telecommunications carriers. Many of these telecommunications carriers, in
addition to their greater network coverage, market presence, and financial,
technical and personnel resources, also have large existing commercial customer
bases.
Cable Companies, Direct Broadcast Satellite and Wireless
Communications Companies. Many of the major cable companies have announced
that they are exploring the possibility of offering Internet connectivity,
relying on the viability of cable modems and economical upgrades to their
networks. Continental Cablevision, Inc. and Tele-Communications, Inc. ("TCI")
have recently announced trials to provide Internet cable service to their
residential customers in select areas. Cable companies, however, are faced with
large-scale upgrades of their existing plant equipment and infrastructure in
order to support connections to the Internet backbone via high-speed cable
access devices. Additionally, their current subscriber base and market focus is
residential which requires that they partner with business-focused providers or
undergo massive sales and marketing and network development efforts in order to
target the business sector. Several announcements also recently have been made
by other alternative service companies approaching the Internet connectivity
market with various wireless terrestrial and satellite-based service
technologies. These include Hughes Network Systems' announcement that it will
provide high-speed data through direct broadcast satellite technology; CAI
Wireless Systems Inc.'s ("CAI Wireless") announcement of an MMDS wireless
cable operator launching data services via 2.5 to 2.7 GHz and high-speed
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wireless modem technology; and WinStar Communications, a 38 GHz radio company
that wholesales its network capacity to other carriers and now offers high-speed
Internet access to business customers.
On-line Service Providers. The dominant on-line service providers,
including Microsoft Network, America Online, Incorporated ("America Online")
and Prodigy, Inc. ("Prodigy"), have all entered the Internet access business
by engineering their current proprietary networks to include Internet access
capabilities. The Company competes to a lesser extent with these service
providers, which currently are primarily focused on the consumer marketplace and
offer their own content, including chat rooms, news updates, searchable
reference databases, special interest groups and shopping. While Compuserve
recently announced it also will target Internet connectivity for the small to
medium-sized business market, this will require a significant transition from a
consumer market focus to a business market focus.
The Company believes that its ability to attract business customers
and to market value-added services are keys to its future success. However,
there can be no assurance that its competitors will not introduce comparable
services or products at similar or more attractive prices in the future or that
the Company will not be required to reduce its prices to match competition.
Recently, many competitive ISPs have shifted their focus from individual
customers to business customers. Moreover, there can be no assurance that more
of the Company's competitors will not shift their focus to attracting business
customers, resulting in even more competition for the Company. There can be no
assurance that the Company will be able to offset the effects of any such
competition or resulting price reductions. Increased competition could result in
erosion of the Company's market share and could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors--Competition."
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon
its technology and proprietary rights, although the Company believes that its
success is more dependent upon its technical expertise than its proprietary
rights. The Company relies on a combination of copyright, trademark and trade
secret laws and contractual restrictions to establish and protect its
technology. There can be no assurance that the steps taken by the Company will
be adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. The Company is also subject
to the risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others.
REGULATORY MATTERS
In recent years, there have been U.S. and foreign legislation and
other initiatives to impose criminal liability on persons sending or displaying
in a manner available to minors indecent material on an interactive computer
service such as the Internet as well as on entities knowingly permitting
facilities under its control to be used for such activities. These initiatives
may decrease demand for Internet access, chill the development of Internet
content, or have other adverse effects on Internet access providers such as the
Company.
Recent FCC regulations may increase competitive activity in the
Internet access industry by RBOCs and other companies. The 1996 U.S. Federal
telecommunications legislation contains certain provisions which allow the RBOCs
to provide electronic publishing of information and databases under certain
conditions, which conditions have been successfully challenged in federal
district court. These regulations and legislation may result in additional
competitive pressures on the Company or have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company provides Internet access, in part, through transmissions
over public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for communications. The Company
presently is considered an enhanced services provider and, therefore, is not
currently subject to direct regulation or access charges imposed by the FCC or
any other agency for such operations, other than regulations applicable to
businesses generally. The FCC is currently reviewing its regulatory position on
the usage of the basic network and communications facilities by ISPs. Changes in
the regulatory structure and environment affecting the Internet access market
could result in increased costs being imposed on the Company.
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In addition, the Company's wholly-owned subsidiary, PSINet Telecom
Limited, has received a license to provide global facilities-based
telecommunications services, subjecting it to regulation as a non-dominant
international common carrier. Further, the Company is also considering the
financial, regulatory and operational implications of becoming or acquiring a
CLEC in certain selected cities. As a result, it is also possible that the
Company could become subject to further regulation by the FCC and/or another
regulatory agency, including state and local entities, as a provider of domestic
basic telecommunications services, particularly competitive local exchange
services.
As a general matter, the FCC has chosen not to exercise its statutory
power to closely regulate non-dominant carriers. Nevertheless, non-dominant
carriers are subject to complaints for failure to comply with statutory
requirements or agency regulations or rules. International non-dominant carriers
must maintain tariffs on file with the FCC. Regulation of CLECs occurs both on a
federal and state level, however, CLECs are also considered non-dominant and
subject to relaxed regulatory requirements. The Company cannot predict the
impact, if any, that future regulation may have on its business.
EMPLOYEES
As of March 1, 1998, the Company had approximately 922 full-time
employees (553 in the United States and 369 outside of the United States),
including approximately 391 in data communications and operational positions,
322 in sales and marketing and 209 in general and administrative positions. The
Company believes that its relations with its employees are good. None of the
Company's employees are represented by a labor union or covered by a collective
bargaining agreement and the Company has never experienced a work stoppage.
PROPERTIES
PSINet's principal administrative, operational and marketing and sales
facilities total approximately 50,280 square feet and are located in an office
park in Herndon, Virginia. The Company occupies 36,080 square feet of this space
under two leases which expire in September 2003 and include five-year renewal
options. Additionally, 14,200 square feet is occupied pursuant to a lease which
expires in February 1999. The Company also leases approximately 15,000 square
feet of office space in a second office park located in Herndon, Virginia,
approximately 48,480 and 13,500 square feet of office space in two office parks
located in Reston, Virginia and approximately 23,760 square feet of office space
for its network operations center in Troy, New York. The Company leases regional
sales and field support offices in Santa Clara, California; E1 Segundo,
California; Orlando, Florida; Tampa, Florida; Norcross, Georgia; Chicago,
Illinois; New York, New York and Dallas, Texas.
The Company's Canadian subsidiary leases approximately 24,000 square
feet and 5,600 square feet in Toronto, Canada under two separate leases which
expire in December 2004 and October 2000, respectively. The Company's recently
acquired iSTAR subsidiary leases approximately 79,128 square feet in various
cities across Canada, including 21,870 square feet in Ottawa under a lease which
expires in October 2005 and 11,890 square feet in Toronto under a lease which
expires in January 2006. Additionally, iSTAR has operations in leased
facilities in Montreal, Dartmouth, Halifax, Vancouver, Calgary, Edmonton and
Winnipeg, Canada. The Company's subsidiary in the United Kingdom leases
approximately 13,200 square feet in Cambridge, England under a lease which
expires in September 2005. The Company's subsidiary in Japan leases
approximately 7,100 square feet in Tokyo, Japan under a lease which expires in
May 2000. The Company's principal European administrative, operational,
marketing and sales facilities total approximately 3,900 square feet and are
located in Nyon, Switzerland. Additionally, the Company has European operations
in leased facilities in Brussels, Belgium, Velizy, France, Ismaning, Germany and
Amsterdam, The Netherlands.
The Company leases or is otherwise provided with the right to utilize
space in various geographic locations to provide an operational facility for
certain of its POPs.
The Company believes that these facilities are adequate for its
current needs and that suitable additional space, should it be needed, will be
available to accommodate expansion of the Company's operations on commercially
reasonable terms.
LEGAL PROCEEDINGS
From time to time, the Company has been involved in certain disputes
and threatened with or named as a defendant in lawsuits and administrative
claims. Certain of such disputes, lawsuits and threatened litigation include
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claims asserting alleged breach of agreements and certain of them relate to
relatively novel or unresolved issues of law arising out of or relating to the
developing nature of the Internet and on-line services industries. See "Risk
Factors--Potential Liability for Information Disseminated through Network;
Regulatory Matters."
On November 25, 1997, Chatterjee Management Company ("Chatterjee")
initiated arbitration proceedings against the Company before the International
Chamber of Commerce, Court of Arbitration, in London, England, with respect to a
joint venture agreement dated as of September 19, 1996 previously entered into
by Chatterjee and the Company. As previously disclosed by the Company in various
filings with the Commission, on September 19, 1996, the Company and Chatterjee
signed an agreement pursuant to which the Company and an investment group led by
Chatterjee would establish a joint venture for the purpose of building an
Internet network across Europe and providing Internet-related services in
Europe. Such investment group was to invest up to $41 million in the joint
venture. No monies were invested by Chatterjee or the investment group pursuant
to the joint venture agreement nor were any other actions undertaken to
implement it. Following the signing of the agreement, the parties acknowledged
structural difficulties associated with the joint venture as originally
contemplated, which prevented implementation of it. Instead, they sought, for
several months, to negotiate a direct investment in the Company by Chatterjee in
lieu of the prior agreement. Those negotiations were not successful.
In the arbitration proceeding, Chatterjee has now alleged that the
Company breached the joint venture agreement by repudiating its obligations
under the agreement and by breaching a covenant not to compete. In the
arbitration, Chatterjee requests an award declaring that the agreement is still
valid and binding upon the parties and that the Company stands in breach of the
agreement, directing the Company to specifically perform its obligations under
the agreement or, in the alternative, awarding Chatterjee compensatory damages
in an amount not less than $25 million, awarding Chatterjee profits that the
Company has earned or stands to earn in Europe, and awarding Chatterjee the
costs of arbitration, including attorneys' fees, and interest on the award of
damages. The Company believes that Chatterjee's claims are without merit and
intends vigorously to defend itself in the arbitration.
In addition, the Company from time to time receives communications
from third parties asserting alleged infringement of patents, trademarks and
service marks of others. Although there is currently no material litigation
arising out of any alleged infringement of patents, trademarks or service marks,
there can be no assurance that litigation will not be commenced regarding these
or other matters.
The Company is not involved in any other legal proceedings which the
Company believes would, if adversely determined, have a material adverse effect
upon its business, financial condition or results of operations. There can be no
assurance whether these matters will be determined in a manner which is
favorable to the Company or, if adversely determined, whether such determination
would have a material adverse effect upon the Company's business, financial
condition or results of operations.
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<PAGE>
MANAGEMENT
The following sets forth certain information concerning the directors
and certain executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
SENIOR EXECUTIVE OFFICERS:
<S> <C> <C>
William L. Schrader(1)(3)..................... 46 Chairman of the Board of Directors, President and
Chief Executive Officer (Founder)
Harold S. Wills............................... 56 Executive Vice President, Chief Operating Officer
and Director
David N. Kunkel............................... 55 Senior Vice President, General Counsel, Secretary
and Director
Edward D. Postal.............................. 42 Senior Vice President and Chief Financial Officer
John J. Chidester............................. 39 Senior Vice President, U.S. Sales and Marketing
CERTAIN VICE PRESIDENTS:
James R. Davin................................ 41 Vice President and Chief Technical Officer
Mark S. Fedor................................. 34 Vice President, Engineering
Harry G. Hobbs................................ 44 Vice President, Customer Administration
Volker Kleinn.................................. 58 Vice President, European Operations
John F. Kraft................................. 46 Vice President, Carrier and ISP Services
Mitchell Levinn................................ 38 Vice President, Network Operations
Michael Mael................................... 41 Vice President, Application and Web Services
Michael J. Malesardi.......................... 37 Vice President and Controller
NON-EXECUTIVE DIRECTORS:
William H. Baumer(1)(2)(3)..................... 65 Director
Ian P. Sharp(2)................................ 66 Director
Ralph J. Swett(1).............................. 63 Director
William A. Wilson(2)(3)........................ 52 Director
</TABLE>
_____________________________
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Financing Committee.
WILLIAM L. SCHRADER is the founder of the Company and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company since its inception. Prior to forming the Company, Mr. Schrader served
as President and Chief Executive Officer of NYSERNet Inc., a provider of data
networking services in New York State ("NYSERNet"), from January 1986 to
December 1989. Mr. Schrader also was a co-founder, and, from May 1984 until
February 1987, served as Executive Director of the Cornell Theory Center, a
National Science Foundation supercomputer center. Mr. Schrader's term of
office as a director of the Company expires in 1999.
HAROLD S. WILLS has served as a director and Executive Vice President
and Chief Operating Officer of the Company since April 1996 and as Acting Chief
Financial Officer of the Company from April 1996 to October 1996. Mr. Wills
served as Chief Operating Officer of Hospitality Information Networks, Inc., a
provider of information services for the hospitality industry, from July 1995
through January 1996. Mr. Wills also held various positions including,
Managing Director, International Computer Services, Technical Service Director
and Sales Director of Granada Group PLC, a computer services provider, from
September 1991 through September 1995. Mr. Wills's term of office as a
director of the Company expires in 1998.
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<PAGE>
DAVID N. KUNKEL has served as Senior Vice President of the Company
since September 1996, as a director and Secretary of the Company since September
1995, as Vice President of the Company since July 1995 and as General Counsel of
the Company since June 1995. Mr. Kunkel also served as Vice President of
International Operations of the Company from April 1996 to September 1996 and as
Senior Counsel to Nixon, Hargrave, Devans & Doyle LLP, outside counsel to the
Company, from July 1995 through December 1995. Prior to July 1995, Mr. Kunkel
was a partner with the law firm of Nixon, Hargrave, Devans & Doyle LLP for 16
years and served as outside counsel to NYSERNet from 1986 until 1989 and to the
Company from its inception until July 1995. Mr. Kunkel's term of office as a
director of the Company expires in 1999.
EDWARD D. POSTAL has served as Senior Vice President and Chief
Financial Officer of the Company since August 1997 and served as Vice President
and Chief Financial Officer of the Company since October 1996. Prior to joining
the Company, Mr. Postal served as Senior Vice President, Chief Financial
Officer and a director of The Hunter Group, Inc., a systems integration
consulting firm, from March 1995 to October 1996, as Vice President and Chief
Financial Officer of The Wyatt Company, an international employee benefits and
human resources consulting firm (currently Watson Wyatt Worldwide), from
December 1991 to October 1994 and as controller/treasurer of The Wyatt Company
from November 1985 to December 1991. From 1981 to November 1985, Mr. Postal
served in various financial management positions at Satellite Business Systems,
a satellite communications company acquired by MCI in 1985, and, prior thereto,
held various positions at Touche Ross & Co. (currently Deloitte & Touche LLP).
JOHN J. CHIDESTER has served as Senior Vice President of the Company
since November 1997. Prior to joining the Company, Mr. Chidester served as
Vice President Enterprise Management Services of MCI Systemhouse, Inc., a
systems integration, consulting and technology deployment company, from March
1997 to November 1997, as Executive Vice President Sales and Marketing of
XLConnect Solutions, Inc., a systems integration company, from March 1996 to
January 1997, and as Vice President Sales of MCI from 1980 to March 1996.
JAMES R. DAVIN has served as Vice President and Chief Technical
Officer of the Company since February 1997. From January 1995 until February
1997, Mr. Davin held various positions with the Company, including Assistant
Director of Engineering, Assistant Director of New Product Development and
Senior Scientist. Prior to joining the Company, Mr. Davin served as a member
of the technical staff of Bell Communications Research Inc., a telephone
engineering and consulting company, from August 1992 to January 1995, as a
member of the research staff at the Massachusetts Institute of Technology from
June 1988 to August 1992 and as an engineer for Proteon Inc., a provider of
network access solutions, from February 1987 to June 1988.
MARK S. FEDOR has served as Vice President, Engineering of the
Company since February 1997. From November 1989 until February 1997, Mr. Fedor
held various positions with the Company, including Director of Engineering.
HARRY G. HOBBS has served as Vice President, Customer Administration
of the Company since September 1997. Prior to joining the Company, Mr. Hobbs
served as Vice President, Customer Care for American Personal Communications,
LP, a provider of wireless communications services and an affiliate of Sprint
Spectrum, from February 1995 to August 1997. Prior thereto, Mr. Hobbs served
in various positions in the Customer Service, Operations and Large Account
Support groups at MCI, including Vice President, Global Customer Service from
September 1993 to February 1995, Director, Operations from March 1992 to
February 1995 and Director, Large Account Group from November 1990 to March
1992.
VOLKER KLEINN has served as Vice President, European Operations of the
Company since April 1997. Prior to joining the Company, Mr. Kleinn was
employed as a free-lance consultant advising a U.S.-based virtual reality
software company in establishing business operations in Europe from January 1997
to April 1997 and served as Vice President Europe of Sense8, a U.S.-based
virtual reality software company, from January 1996 to December 1996. Prior
thereto, Mr. Kleinn was employed as a free-lance consultant advising several
Swiss and French software companies from July 1995 to December 1995, served as
President of Megalon S.A., a Swiss software publishing company, from February
1994 to June 1996 and served as Vice President Europe of Autodesk, Inc., a
leading supplier of various software products, from February 1990 to January
1994.
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<PAGE>
JOHN F. KRAFT has served as Vice President, Carrier and ISP Services
of the Company since December 1997, served as Vice President, Wholesale Network
Services of the Company from July 1997 to December 1997 and was the General
Manager of Wholesale Network Services of the Company from July 1996 to July
1997. Prior to joining the Company, Mr. Kraft served as a Director of Sales of
the Mid-Atlantic Division of MCI Business Services, a unit of MCI, from February
1986 to July 1997.
MITCHELL LEVINN has served as Vice President, Network Operations of
the Company since February 1995. Prior thereto, Mr. Levinn had been Director
of Operations of the Company since its inception. Prior to joining the Company,
Mr. Levinn served as Director of the Computer Science Laboratory of the
Computer Science Department at Rensselaer Polytechnic Institute from June 1985
to December 1990.
MICHAEL MAEL has served as Vice President, Application and Web
Services of the Company since December 1997, served as Vice President, Web
Services of the Company from September 1997 to December 1997 and served as
General Manager, PSINet Web Business of the Company from May 1997 to August
1997. Prior to joining the Company, Mr. Mael served in various positions in
the Business Management and Marketing groups at MCI, including Director,
Business Management, Director, Marketing and Director, Strategic Alliances, from
February 1992 to May 1997. From July 1990 to February 1992, Mr. Mael was
employed as a consultant at Aladdin Partners, an independent management
consulting firm.
MICHAEL J. MALESARDI has served as Vice President and Controller of
the Company since July 1997. Prior to joining the Company, Mr. Malesardi
served as Director of Financial Administration of Watson Wyatt Worldwide, an
international employee benefits and human resources consulting firm ("Watson
Wyatt"), from April 1995 to May 1997 and as Controller of Watson Wyatt from
February 1992 to April 1995. From September 1982 to February 1992, Mr.
Malesardi held various positions at Price Waterhouse LLP, the latest as Senior
Audit Manager.
WILLIAM H. BAUMER has served as a director of the Company since 1993.
Mr. Baumer has been a Professor of Philosophy at the University at Buffalo
since 1971 and was the Acting Chairman of the Department of Economics at the
University at Buffalo from June 1992 until June 1995. Mr. Baumer also served
as Treasurer and Vice President of NYSERNet from January 1986 to December 1990
and from December 1989 to December 1990, respectively. Mr. Baumer's term of
office as a director of the Company expires in 1998.
IAN P. SHARP has served as a director of the Company since September
1996. Mr. Sharp is currently retired and was the President and founder of I.P.
Sharp Associates, a software development company, from December 1964 through
July 1989. Mr. Sharp's term of office as a director of the Company expires in
1999.
RALPH J. SWETT has served as a director of the Company since February
25, 1998, effective upon the closing of the Company's transaction with IXC as
described herein under "Strategic Alliance with IXC." Mr. Swett has served as
Chairman of IXC Communications since its formation in July 1992 and served as
Chief Executive Officer and President of IXC Communications from July 1992 to
October 1997. Prior thereto, Mr. Swett served as Chairman of the Board and
Chief Executive Officer of Communications Transmission, Inc. ("CTI") from 1986
to 1992. From 1969 to 1986, Mr. Swett served in increasingly senior positions
(Vice President, President and Chairman) of Times Mirror Cable Television
("TMCT"), a subsidiary of Times Mirror and a previous owner of IXC Carrier,
and as a Vice President of Times Mirror from 1981 to 1986. Mr. Swett has
served as Chairman of IXC Carrier since 1979 and served as its Chief Executive
Officer from 1986 to October 1997 and its President from 1991 to October 1997.
Mr. Swett has managed communications businesses for the past 26 years. Mr.
Swett's term of office as a director of the Company expires in 1998, although,
pursuant to the terms of the IRU Purchase Agreement, it is the present intention
of the Company to nominate Mr. Swett to stand for re-election to the Company's
Board of Directors at its 1998 Annual Meeting of Shareholders for a term
expiring in 2000, subject to his earlier resignation if IXC shall no longer own
at least 95% of the IXC Initial Shares. See "Strategic Alliance With IXC."
WILLIAM A. WILSON has served as a director of the Company since
September 1996. Since February 1998, Mr. Wilson has served as Vice President,
Finance and Chief Financial Officer of XCOM Technologies, Inc., a competitive
local exchange carrier. From October 1997 to February 1998, Mr. Wilson served
as a consultant to several private companies. From June 1997 to October 1997,
Mr. Wilson served as Senior Vice President, Finance and Chief Financial Officer
of Computervision Corporation, a software publishing and development company.
Prior
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<PAGE>
thereto, Mr. Wilson was Executive Vice President and Chief Financial
Officer of Arch Communications Group, Inc., a wireless messaging company ("Arch
Communications"), from June 1996 to June 1997 and was Vice President, Finance
and Chief Financial Officer of Arch Communications from January 1989 to June
1996. Mr. Wilson's term of office as a director of the Company expires in
1999.
COMMITTEES OF THE PSINET BOARD
The PSINet Board has three committees, the Audit Committee, the
Compensation Committee and the Financing Committee. The Audit Committee, among
other things, recommends the firm to be appointed as independent accountants to
audit the Company's financial statements, discusses the scope and results of the
audit with the independent accountants, reviews with management and the
independent accountants the Company's interim and year-end operating results,
considers the adequacy of the internal accounting controls and audit procedures
of the Company and reviews the non-audit services to be performed by the
independent accountants. The current members of the Audit Committee are Messrs.
Baumer, Sharp and Wilson.
The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's
Executive Stock Option Plan, Executive Stock Incentive Plan and Strategic Stock
Incentive Plan. The current members of the Compensation Committee are Messrs.
Baumer, Schrader and Swett.
The Financing Committee was formed in December 1997. The Financing
Committee may authorize and approve debt financings, lease financings and equity
financings subject to certain limitations. The current members of the Financing
Committee are Messrs. Baumer, Schrader and Wilson.
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COMPENSATION AND OTHER INFORMATION
CONCERNING OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth in summary form the compensation paid by the
Company to its chief executive officer and to each of its four most highly
compensated executive officers other than the chief executive officer as of
December 31, 1997 for services rendered to the Company in all capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS(1)($) COMPENSATION OPTIONS(#) COMPENSATION($)
------------------ ---- -------- ---------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader................. 1997 $248,519 $150,000 $ 7,457 (2) -- $3,135
Chairman, President and 1996 194,471 2,438 2,015 (2) -- 3,135(3)
Chief Executive Officer 1995 169,104 45,514 6,245 (2) -- 2,635(3)
David N. Kunkel(4)................. 1997 $299,327 $100,000 $ 6,550 (5) 100,000 (6) $3,125(7)
Senior Vice President, General 1996 272,596 103,438 88,474 (8) 251,193 (9) --
Counsel and Secretary 1995 77,038 106,323(10) 25,988(11) --(12) --
Harold S. Wills(13)................ 1997 $252,654 $100,000 $ 9,929(14) 250,000(15) $3,125(7)
Executive Vice President and 1996 146,154 77,500 30,825(16) 250,000(17) --
Chief Operating Officer
Edward D. Postal(18)............... 1997 $204,077 $ 75,000 $ 6,880(19) 75,000(20) $3,125(7)
Senior Vice President and 1996 34,865 60,872 -- 100,000(21) --
Chief Financial Officer
Volker Kleinn(22)................... 1997 $164,784 $ 99,557 -- 125,000(21) --
Vice President,
European Operations
</TABLE>
____________________
(1) Amounts reported in respect of a particular fiscal year reflect bonuses
earned for services rendered in that fiscal year regardless of when paid.
(2) Consists of (i) $5,107 and $6,245 paid to Mr. Schrader with respect to
installation of a security system at Mr. Schrader's home in 1997 and 1995,
respectively, and (ii) a car allowance of $2,350 and $2,015 in 1996 and
1997, respectively.
(3) Consists of: (i) insurance premiums in the amount of $2,135 paid by the
Company in each of 1995, 1996 and 1997 with respect to the proportionate
beneficial interest of Mr. Schrader's spouse in an insurance policy on Mr.
Schrader's life and (ii) matching contributions made to Mr. Schrader's
account under the Company's 401(k) Plan in the amount of $500 in 1995 and in
the amount of $1,000 in each of 1996 and 1997.
(4) Mr. Kunkel joined the Company as General Counsel in June 1995. Accordingly,
no information is provided for periods prior thereto with respect to Mr.
Kunkel.
(5) Consists of (i) payments made to Mr. Kunkel in connection with his
relocation as follows: $830 for certain closing costs on the sale of his
primary residence and $2,176 for certain carrying costs for his residence
pending such sale and (ii) a car allowance of $3,544.
(footnotes continue on next page)
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<PAGE>
(footnotes continued from prior page)
(6) Issued pursuant to the Company's Executive Stock Option Plan.
(7) Consists of matching contributions made to the named officer's account
under the Company's 401(k) Plan in the years indicated.
(8) Consists of payments made to Mr. Kunkel in connection with his relocation
as follows: $52,175 pursuant to an agreement to guarantee Mr. Kunkel a
minimum price on the sale of his primary residence and $36,299 for certain
carrying costs for his residence pending such sale.
(9) Consists of options issued in connection with a company-wide repricing of
certain previously granted options as of April 5, 1996. Does not include
options with respect to 18,494 shares granted in February 1996 (with
respect to 1995) which were replaced in connection with such repricing or
options with respect to 75,000 shares of Common Stock granted in November
1996 which were cancelled as of December 31, 1996 due to failure to satisfy
certain vesting conditions.
(10) Includes a signing bonus of $50,000 and a performance bonus of $50,000 paid
to Mr. Kunkel pursuant to his employment agreement with the Company.
(11) Consists of payments made to Mr. Kunkel in connection with his relocation
as follows: $13,456 for moving expenses, $9,200 for certain closing costs
on his new home and $3,332 for installation of a security system at his new
home.
(12) Does not include options with respect to 251,193 shares issued under the
Company's Executive Stock Incentive Plan pursuant to Mr. Kunkel's
employment agreement with the Company which were replaced in connection
with a company-wide repricing as of April 5, 1996. See footnote 9 above.
(13) Mr. Wills joined the Company as Executive Vice President and Chief
Operating Officer in April 1996. Accordingly, no information is provided
for periods prior thereto with respect to Mr. Wills.
(14) Consists of (i) $6,051 paid to Mr. Wills for installation of a security
system at his home and (ii) a car allowance of $3,878.
(15) Consists of (i) 200,000 options issued under the Company's Executive Stock
Option Plan and (ii) 50,000 options issued under the Company's Executive
Stock Incentive Plan.
(16) Consists of (i) payments made to Mr. Wills in connection with his
relocation as follows: $15,271 for certain closing costs on his new home
and $15,298 for moving expenses and (ii) a car allowance of $256.
(17) Consists of options issued under the Company's Executive Stock Incentive
Plan. Does not include options with respect to 100,000 shares of Common
Stock granted in November 1996 which were cancelled as of December 31, 1996
due to failure to satisfy certain vesting conditions.
(18) Mr. Postal joined the Company as Vice President and Chief Financial Officer
in October 1996. Accordingly, no information is provided for periods prior
thereto with respect to Mr. Postal.
(19) Represents a car allowance to Mr. Postal.
(20) Consists of (i) 38,950 options issued under the Company's Executive Stock
Option Plan and (ii) 36,050 options issued under the Company's Executive
Stock Incentive Plan.
(21) Issued pursuant to the Company's Executive Stock Incentive Plan
(22) Mr. Kleinn joined the Company as Vice President, European Operations in
April 1997. Accordingly, no information is provided for periods prior
thereto with respect to Mr. Kleinn.
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OPTION GRANTS
The following table sets forth certain information, as of December 31,
1997, concerning individual grants of stock options made during the fiscal year
ended December 31, 1997 to the persons named in the Summary Compensation Table
above.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1997
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------------- AT ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES EXERCISE EXPIRATION ----------------------------
NAME GRANTED(#) IN FISCAL YEAR(1) PRICE ($/SH) DATE 5% 10%
---- ------------------- ----------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David N. Kunkel....... 100,000(2) 2.07% $7.00 03/12/07 $440,226 $1,115,620
Harold S. Wills....... 200,000(2) 4.13% $7.00 03/12/07 $880,452 $2,231,239
50,000(3) 1.03 8.25 10/18/07 259,419 657,419
Edward D. Postal...... 38,950(2) .81% $7.00 03/12/07 $171,468 $ 434,534
36,050(3) .75 8.25 10/18/07 187,041 473,990
Volker Kleinn......... 125,000(3) 2.58% $5.88 04/23/07 $461,844 $1,170,405
</TABLE>
____________________
(1) Based upon total grants of options in respect of 4,841,600 shares of Common
Stock made during 1997.
(2) Granted under the Company's Executive Stock Option Plan. Vest monthly over
48 months from the anniversary of the grant, subject to continued employment
by the Company on each of such dates.
(3) Granted under the Company's Executive Stock Incentive Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to the continued
employment by the Company on each of such dates.
Under each of the Company's Executive Stock Incentive Plan, Executive
Stock Option Plan, Directors Stock Incentive Plan and Strategic Stock Incentive
Plan, upon the acquisition of beneficial ownership of 30% or more of the
Company's outstanding Common Stock by any person other than a wholly-owned
subsidiary of the Company or the occurrence of certain other change in control
events specified in such plans, including certain mergers, consolidations and
transfers of all or substantially all of the Company's assets, all options and
stock appreciation rights will become fully exercisable and all restricted stock
awards will become immediately vested.
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AGGREGATE YEAR-END OPTION VALUES
The following table provides information concerning the number of
unexercised options held by the individuals named in the Summary Compensation
Table as of December 31, 1997. Also reported are the values for "in the
money" options, which represent the positive spread between the exercise price
and the fair market value of the Company's Common Stock as of December 31, 1997.
AGGREGATED OPTION EXERCISES 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)(1)
SHARES ACQUIRED VALUE ------------------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNERCISABLE
- -------------------------- ---------------- -------- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader....... 1,000 $4,275 361,400 65,600 $1,133,935 $231,240
David N. Kunkel........... -- -- 174,359 176,835 -- --
Harold S. Wills........... -- -- 139,583 360,417 -- --
Edward D. Postal.......... -- -- 37,972 137,028 -- --
Volker Kleinn............. -- -- 20,833 104,167
------- ------- --------- -------
734,147 844,047 1,133,935 231,240
</TABLE>
____________________
(1) Based upon a closing price of $5.125 on December 31, 1997, as reported on
The Nasdaq Stock Market.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with and each of Messrs.
Kunkel, Wills, Postal and Kleinn. The Company also has employment agreements
with most of its other executive officers other than Mr. Schrader pursuant to
which they serve in their respective capacities.
Mr. Kunkel's employment agreement provides for a five-year term ending
in June 2000 and a current annual base salary of $315,000, and also provides for
a performance bonus of $100,000 or greater for each of 1997 and subsequent years
as determined by the Compensation Committee.
Mr. Wills's employment agreement provides for a three-year term ending
April 1999 and a current annual base salary of $315,000, and also provides for a
performance bonus of $75,000 or greater in 1997 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chairman.
Mr. Postal's employment agreement provides for a three-year term
ending October 1999 and a current annual base salary of $236,250, and also
provides for a performance bonus of $60,000 or greater for each of 1997 and
subsequent years as determined by the Compensation Committee.
Mr. Kleinn's employment agreement provides for a three-year term
ending April 2000 and a current annual base salary of SFr. 360,000 (equivalent
to $247,176 as of December 31, 1997), and also provides for a performance bonus
of SFr. 220,000 (equivalent to $151,052 as of December 31, 1997) in 1997,
prorated based upon the number of days Mr. Kleinn was employed by the Company
in 1997, and for performance bonuses in subsequent years, subject to achievement
of certain performance objectives, as determined by the Company's Chief
Operating Officer.
These employment agreements also provide for standard employee benefits,
including, without limitation, participation in the Company's 401(k) plan and
bonus plan as well as life, health, accident and disability insurance. These
agreements also provide for a 24-month non-competition period. If the Company
elects to enforce such non-competition restrictions, these officers are
entitled, for a period of 24 months after termination of their employment, to
receive their then current base salary and all benefits being provided to them
at the time of termination. Options
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awarded pursuant to these agreements are subject to immediate vesting upon the
occurrence of certain change in control events.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, the members of the
Compensation Committee of the PSINet Board initially consisted of Messrs.
Baumer and Schrader and Wade Woodson, who resigned from the PSINet Board
effective as of February 25, 1998 after five years of distinguished service to
the Company. In May 1997, Mr. Woodson was replaced on the Compensation
Committee by Mr. Wilson, who between October 1997 and December 1997, was
temporarily replaced on the Compensation Committee by Mr. Sharp. Effective as
of February 25, 1998, Mr. Wilson was replaced on the Compensation Committee by
Mr. Swett. Mr. Schrader is the Chairman of the PSINet Board, President and
Chief Executive Officer of the Company. None of such persons other than Mr.
Schrader is an executive officer or employee of the Company.
COMPENSATION OF DIRECTORS
Directors, other than those who also are employees or consultants of
the Company or are serving on the PSINet Board as representatives of a
shareholder, receive annual fees of $5,000 and are eligible for awards under the
Company's Directors Stock Incentive Plan (the "Directors' Plan"). The
Directors' Plan provides for initial option grants with respect to 10,000 shares
of Common Stock ("Initial Grants") to be made to each eligible director upon
his or her first election to the PSINet Board and, thereafter, for annual grants
of options to purchase 2,000 shares of Common Stock to be made to each eligible
director who has served on the PSINet Board for at least 12 months. Each of
Messrs. Sharp and Wilson received Initial Grants upon their election to the
PSINet Board in accordance with the Directors' Plan. In addition, directors who
are not also officers of the Company receive fees of $1,000 per day for
committee meetings and consultations not in conjunction with a PSINet Board
meeting. Directors also are reimbursed for certain reasonable expenses incurred
in attending Board or committee meetings. The Company has issued to Mr. Baumer
warrants to purchase 25,000 shares of Common Stock for $1.60 per share in return
for Mr. Baumer's services as a director of the Company. Mr. Baumer also holds
warrants to purchase an additional 25,000 shares in return for consulting
services rendered to the Company by Mr. Baumer. Each of these warrants became
fully vested effective September 9, 1996. Other than these fees and awards and
the warrants issued to Mr. Baumer, no member of the PSINet Board receives any
fees or other compensation for serving in such capacity.
CERTAIN TRANSACTIONS
STRATEGIC ALLIANCE WITH IXC
General Terms. In February 1998, the Company acquired from IXC 20-year
noncancellable indefeasible rights of use in up to 10,000 equivalent route miles
of fiber-based OC-48 network bandwidth (the "PSINet IRUs") in selected
portions across the IXC fiber optic telecommunications system within the United
States (the "Available System") in exchange for the issuance to IXC of
10,229,789 shares of common stock of the Company, $.01 par value per share (the
"Common Stock"), representing approximately 20% of the issued and outstanding
Common Stock of the Company after giving effect to such issuance and having an
aggregate market value of $78,641,502 based on the closing market price per
share of the Common Stock as reported by The Nasdaq Stock Market on such date of
$7.6875 (the "IXC Initial Shares"), pursuant to an IRU and Stock Purchase
Agreement, dated as of July 22, 1997, between the Company and IXC, as amended
(the "IRU Purchase Agreement"). Under the IRU Purchase Agreement, if the fair
market value of the IXC Initial Shares (based on the volume-weighted average
closing market price per share of the Common Stock as reported by The Nasdaq
Stock Market over the 20 trading day period immediately preceding the applicable
date of determination) is less than $240 million at the earlier of one year
following delivery and acceptance of the total amount of bandwidth corresponding
to the PSINet IRUs or the fourth anniversary of the closing of the transaction
(i.e., February 25, 2002) (the "Determination Date"), the Company will be
obligated to provide IXC with additional shares of Common Stock (the "IXC
Additional Shares" and, together with the IXC Initial Shares, the "IXC
Transaction Shares") or, at the sole option of the Company, cash or a
combination thereof equal to the shortfall (the "Contingent Payment
Obligation"). The Company has the right to
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accelerate the Contingent Payment Obligation to any date (the "Acceleration
Date") prior to the Determination Date. In addition, the right of IXC to receive
IXC Additional Shares and/or cash pursuant to the Contingent Payment Obligation
will terminate on such date as the fair market value of the IXC Initial Shares
(as determined above) is equal to or greater than $240 million.
PSINet IRUs. The total amount of bandwidth corresponding to the
PSINet IRUs is contemplated to be delivered to the Company (to the extent then
available) in specified minimum increments every six months during the two year
period following the closing. In the event IXC or its affiliates adds an
additional route to its telecommunications system in the United States, such
route will be deemed to be part of the PSINet IRUs if there are at least a
specified number of fibers in such route (net of the number of fibers therein
granted by IXC or its affiliates to unaffiliated third parties). Under certain
circumstances, the Company also will be permitted to order bandwidth on portions
of the Available System in excess of 10,000 route miles, for which the Company
would pay additional costs. Based on information presently available to the
Company from IXC, approximately 5,000 route miles of OC-12 (equivalent to 1,250
route miles of OC-48) bandwidth corresponding to the PSINet IRUs (connecting New
York and Los Angeles and certain major cities in between) have been completed to
date by IXC on the Available System and are expected to be made available to the
Company in the second quarter of 1998 and approximately 3,400 additional route
miles of bandwidth on the Available System are currently being engineered or
under construction and are expected to be made available to the Company prior to
the end of 1998. IXC has granted the Company a security interest in, among
other collateral, a portion of the IRUs underlying the PSINet IRUs granted to
IXC by IXC Carrier, Inc., its direct parent company, and in a portion of certain
other IRUs in IXC's fiber optic telecommunications system to secure the
performance of IXC's obligations under the IRU Purchase Agreement to deliver the
PSINet IRUs.
Although IXC is not contractually obligated to complete and make
available to the Company any route miles of bandwidth beyond the approximately
6,640 unique route miles of OC-48 bandwidth set forth in the IRU Purchase
Agreement, until the Available System consists of at least 10,000 unique route
miles of OC-48 bandwidth, IXC is obligated to permit the Company to "double
up" (i.e., so that the Company may have IRUs in up to two OC-48 equivalents of
bandwidth) on such completed portion of the Available System selected by the
Company as is equal in length to the shortfall. For example, if the length of
the Available System is 8,000 route miles, the Company would be entitled to IRUs
in up to two OC-48 equivalents of bandwidth on up to 2,000 route miles and no
more than one OC-48 of bandwidth on the remaining 6,000 route miles. The
Company will be deemed to have accepted 100% of the bandwidth corresponding to
the PSINet IRUs pursuant to the IRU Purchase Agreement if by "doubling up" on
completed portions of the Available System it has received IRUs in at least
10,000 equivalent route miles of OC-48 bandwidth on the Available System.
As discussed under "Risk Factors--Risks Associated with Strategic
Alliance with IXC," there can be no assurance that IXC will be able to complete
and make available to PSINet a total of 10,000 unique route miles of OC-48
bandwidth (including, without limitation, the 3,400 route miles currently being
engineered or under construction that are intended for delivery to the Company
as part of the PSINet IRUs). Nevertheless, the Company is confident in IXC's
ability to complete the entire 10,000 route miles based on (i) IXC's strong
commitment to complete the buildout of its nationwide telecommunications
network, as indicated by statements to members of the Company's management,
repeated disclosures contained in publicly available documents filed by IXC
Communications with the Commission and IXC Communications' progress to date in
completing significant portions of its expanded network, and (ii) recent
statements from IXC's president and chief executive officer confirming that the
buildout of the portion of the IXC fiber optic telecommunications system
required to be completed and made available to the Company pursuant to the IRU
Purchase Agreement has been fully financed.
IXC will provide customary operation and maintenance services with
respect to the bandwidth delivered to the Company at specified prices and terms,
the total cost of which to the Company on an annual basis is expected to be
approximately $1.15 million per each 1,000 equivalent route miles of OC-48
bandwidth accepted under the IRU Purchase Agreement. IXC also will furnish
multiplexing, reconfiguration and collocation services with respect to such
bandwidth as requested by the Company at agreed upon fees.
IXC is obligated to complete and make available to the Company
approximately 6,640 unique route miles of OC-48 bandwidth on the Available
System pursuant to the IRU Purchase Agreement. The PSINet IRUs in the bandwidth
required to be made available to the Company include access to, and space for
telecommunications
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equipment in, 58 of IXC's junction or terminal points-of-presence (the "IXC
POPs") located on its fiber optic telecommunications system throughout the
United States, including, among other locations, such major metropolitan areas
as Atlanta, Chicago, Cleveland, Dallas, Houston, Los Angeles, New York,
Philadelphia, Phoenix and Washington D.C. The PSINet IRUs also entitle the
Company to the use of key infrastructure devices contained within each IXC POP,
such as multiplexing gear, fiber distribution equipment and other electrical,
electronic and optronic equipment that facilitate the efficient utilization of
the bandwidth corresponding to the PSINet IRUs. The bandwidth corresponding to
the PSINet IRUs will be "long haul" (as opposed to local access), although the
Company's access to the IXC POPs on the Available System will give it access to
certain local markets as well.
Certain Restrictions on Use and Transfer of Bandwidth. PSINet may
use the bandwidth acquired from IXC for any purpose in connection with the
provision of Internet services and at a rate of DS-3 (45 Mbps) or less for non-
Internet telecommunications transport, but is restricted from using such
bandwidth to deliver any private line or long distance switched telephone
services (based on non-Internet telephone switching technologies) to any third
party. The effect of these restrictions on the Company's use of the bandwidth
corresponding to the PSINet IRUs may be generally summarized as follows: the
Company may use (i) the bandwidth in conjunction with both Internet-related and
non-Internet-related technology for purposes of providing Internet services;
(ii) the bandwidth in conjunction with Internet-related technology to provide
any hitherto non-Internet service (for example, Internet-based voice telephone
service); and (iii) up to 45 Mbps of the bandwidth (or more, with the specific
written approval of IXC) in conjunction with non-Internet-related technology in
order to provide non-Internet services, including, without limitation, public or
private data services (such as ATM transport services), or transport services
for network applications (such as telemetry, video or multimedia conferencing).
In addition, the Company may not effect any sale, swap, lease or other
transfer of such bandwidth to any unaffiliated third party except (i) in
connection with the offering of Internet connectivity services or (ii) in
connection with a bona fide financing arrangement. Any transferee of bandwidth
acquired from IXC, other than in connection with a bankruptcy of the Company,
will be subject to the terms and conditions of the IRU Purchase Agreement,
including, without limitation, the foregoing restrictions.
Joint Marketing and Services Agreement. In connection with this
transaction, on July 22, 1997, PSINet and IXC also entered into a Joint
Marketing and Services Agreement (the "Marketing Agreement") pursuant to which
each party will be entitled to market the products and services of the other.
Pursuant to the Marketing Agreement, the Company will provide IXC with managed
connectivity services, value-added services and opportunity consulting services
for specified fees which, in light of the strategic importance to the Company of
the PSINet IRUs and the Company's other arrangements with IXC described herein,
the Company has agreed will be, or will be equal to, the lowest offered by the
Company. IXC will be permitted to use the Company's products and services for
its own purposes and to resell them to its wholesale and retail customers under
the IXC brand.
The Marketing Agreement will expire on the date of termination of the
IRU Purchase Agreement (i.e., an approximately 20 year term), subject to earlier
termination or expiration as provided in the Marketing Agreement. The Marketing
Agreement contemplates that IXC will be permitted to provide Internet services
to its customers pursuant to the Marketing Agreement in the geographic areas in
which the Company presently or at any time during the term of the Marketing
Agreement provides services to its customers; provided, however, that to the
extent that IXC desires to provide Internet services to its customers located in
a geographic area where the Company has an affiliate, strategic partner or
cooperating provider offering services, the provision of services in such
geographic area will be subject to negotiation and agreement between IXC and
such affiliate, strategic partner or cooperating provider, who will deal with
IXC for such purposes through the Company. The Marketing Agreement restricts
IXC from offering any service for sale or distribution through any of its
customers or for resale for multiple end-use in any particular geographic area
until such service is made generally available by the Company for multiple end-
user use in such geographic area.
Although the Company and IXC intend to cooperate with each other with
respect to future business opportunities, the Marketing Agreement does not
preclude either the Company or IXC from either competing with each other or
dealing with third parties with respect to sales of services contemplated by the
Marketing Agreement.
IXC Transaction Shares. IXC has been granted certain demand and
"piggyback" registration rights with respect to the IXC Transaction Shares
pursuant to a registration rights agreement between IXC and the Company.
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Pursuant to the IRU Purchase Agreement, Ralph J. Swett, IXC Communications'
chairman, was elected, effective as of the closing of the transaction, to the
Company's Board of Directors, and the IRU Purchase Agreement provides that the
Company's Chairman will recommend that Mr. Swett continue to be re-elected to
the Company's Board for so long as IXC continues to own at least 95% of the IXC
Initial Shares. In the event IXC proposes to sell or otherwise dispose of any
of the IXC Transaction Shares (other than pursuant to a pledge to an
unaffiliated third party lender), the Company has a right of first offer to
acquire the shares proposed to be sold at the closing market price per share of
the Common Stock (as reported by The Nasdaq Stock Market or the principal
securities exchange on which the Common Stock is then listed) on the date notice
of such proposed sale is given to the Company. In addition, neither IXC, IXC
Communications nor any of their controlled affiliates may sell or otherwise
dispose of any shares of the Company's Common Stock during the six-month period
preceding or following the Determination Date or during the six-month period
following the Acceleration Date. Other than as set forth above and except for
transfer restrictions existing from time to time under applicable federal and
state securities laws, the IXC Transaction Shares are not subject to any
transfer restrictions or to any voting restrictions or other agreements.
IXC. IXC is an indirect wholly owned subsidiary of IXC
Communications, Inc. ("IXC Communications"). IXC Communications is one of the
largest suppliers of digital transmission and long distance services in the
United States. IXC Communications owns and operates one of the newest
nationwide digital networks and makes network capacity available to local
telephone companies, national and regional long distance carriers, value-added
carriers, cable and utility companies and ISPs that offer residential and
commercial customer services. IXC Communications services include 1+ switched
and 1+ dedicated outbound calling, 800/888 switched and dedicated inbound
calling, calling card and debit card services, high-speed digital bandwidth
products and broadband services. IXC's principal offices are located at City
View Center, 1122 Capitol of Texas Highway South, Austin, Texas 78746.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's Common Stock, as of April 3 1998, by (i) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each director and director nominee of the Company who owns shares of
the Company's Common Stock; (iii) each executive officer named in the Summary
Compensation Table appearing under "Compensation and Other Information
Concerning Officers and Directors--Executive Compensation Summary;" and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION> AMOUNT BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) PERCENT OF CLASS
------------------------ ----------------------------- ----------------
<S> <C> <C>
IXC Internet Services, Inc.................................. 10,229,789 (2) 20.1%
William L. Schrader......................................... 5,737,477 (3) 11.3
David N. Kunkel............................................. 220,106 (4) *
Harold S. Wills............................................. 204,007 (5) *
William H. Baumer........................................... 90,988 (6) *
Edward D. Postal............................................ 77,251 (7) *
Volker Kleinn............................................... 44,104 (8) *
Ralph J. Swett.............................................. 10,000 (9) *
Ian P. Sharp................................................ 4,375 (10) *
William A. Wilson........................................... 4,375 (10) *
Executive officers and directors as a group (24 persons).... 7,385,755 (11) 14.5
</TABLE>
____________________
* Less than 1%
(1) The persons named in the table have sole voting and dispositive power
with respect to all shares of the Company's Common Stock shown as beneficially
owned by them, subject to the information contained in the notes to the table
and to community property laws, where applicable.
(2) These shares were issued to IXC in consideration for the Company's
acquisition of the PSINet IRUs on February 25, 1998 upon the closing of the
transaction with IXC under the IRU Purchase Agreement (which number of shares is
equal to 19.99999% of the issued and outstanding shares of Common Stock after
giving effect to the issuance of such shares and to 224,274 shares of Common
Stock issuable upon exercise of outstanding warrants). IXC's address is City
View Center, 1122 Capitol of Texas Highway South, Austin, Texas 78746. See
"Strategic Alliance with IXC."
(3) Includes (i) 427,000 shares issuable upon the exercise of vested
options and options which are deemed to be presently exercisable, (ii) 2,170,457
shares which are pledged with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") in respect of a non-recourse loan of up to $4,800,000, of
which $39,996.98 (including principal and interest) was outstanding as of April
3, 1998, which relates to a margin brokerage account Mr. Schrader maintains with
Merrill Lynch and provides for a standard margin interest rate currently equal
to 8.375% per annum, and (iii) 3,140,020 shares which are pledged with
NationsBank in respect of two lines of credit providing Mr. Schrader with up to
$2,250,000 on an aggregate basis, of which $2,043,959.54 (including principal
and interest) was outstanding as of April 3, 1998, at an interest rate equal to
the 30 day LIBOR rate plus 2.5% per annum. Does not include 1,227,435 shares
beneficially owned by Mr. Schrader's wife. Mr. Schrader disclaims beneficial
ownership of the shares beneficially owned by his wife. Mr. Schrader's address
is c/o PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia, 20170.
(4) Includes 217,577 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. Does not include
233,616 shares issuable upon the exercise of options which are not deemed to be
presently exercisable or 30,571 shares beneficially owned by Mr. Kunkel's wife.
Mr. Kunkel disclaims beneficial ownership of the shares beneficially owned by
his wife.
(footnotes continue on next page)
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(footnotes continued from previous page)
(5) Includes 197,916 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. Does not include
402,084 shares issuable upon the exercise of options which are not deemed to be
presently exercisable.
(6) Includes 50,000 shares issuable upon the exercise of outstanding
warrants and 1,000 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include 1,000
shares issuable upon the exercise of options which are not deemed to be
presently exercisable.
(7) Includes 62,451 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable. Does not include
212,549 shares issuable upon the exercise of options which are not deemed to be
presently exercisable.
(8) Includes 35,104 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include 109,896
shares issuable upon the exercise of options which are not deemed to be
presently exercisable.
(9) Does not include 10,229,789 shares beneficially owned by IXC, of
which Mr. Swett is the chairman of the board. Mr. Swett disclaims beneficial
ownership of the shares beneficially owned by IXC. See "Strategic Alliance
With IXC."
(10) Consists solely of shares issuable upon the exercise of vested
options and options which are deemed to be presently exercisable. In each case,
does not include approximately 5,625 shares issuable upon the exercise of
options which are not deemed to be presently exercisable.
(11) See notes (3) through (10) above. Includes also approximately
1,671,650 shares issuable upon the exercise of vested options and options which
are deemed to be presently exercisable granted to 23 executive officers and
directors. Does not include approximately 2,552,393 shares issuable upon the
exercise of outstanding options granted to 22 executive officers and directors
which are not deemed to be presently exercisable.
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DESCRIPTION OF NOTES
The Initial Notes were issued and the Exchange Notes will be issued
under an Indenture dated as of April 13, 1998 (the "Indenture") between the
Company and Wilmington Trust Company, as trustee (the "Trustee" or "Escrow
Agent"), a copy of which will be made available to Holders of the Notes upon
request to the Company.
The following summaries of the material provisions of the Indenture,
the Escrow Agreement and the Registration Rights Agreement do not purport to be
complete, and where reference is made to particular provisions of the Indenture,
the Escrow Agreement and the Registration Rights Agreement such provisions,
including the definitions of certain terms, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a part
of the Indenture, the Escrow Agreement and the Registration Rights Agreement by
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Initial Notes have not been registered under the Securities Act and are subject
to certain transfer restrictions. For definitions of certain capitalized terms
used in the following summary, see "--Certain Definitions" or "The Exchange
Offer--Registration Defaults; Liquidated Damages."
GENERAL
The Notes will mature on February 15, 2005 and are limited to
$600,000,000 aggregate principal amount. Each Note will bear interest at the
rate set forth on the cover page hereof from April 13, 1998 or from the most
recent interest payment date to which interest has been paid, payable
semiannually on February 15 and August 15 in each year, commencing August 15,
1998, to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the February 1 or August 1 immediately
preceding such interest payment date. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in the City of New York maintained for such purposes
(which initially will be the corporate trust office of the Trustee); provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer, exchange or redemption of Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
All payments of principal and interest will be made by the Company in
same day funds. The Notes will trade in the Same-Day Funds Settlement System of
The Depository Trust Company (the "Depositary" or "DTC") until maturity, and
secondary market trading activity for the Notes will therefore settle in same
day funds.
DISBURSEMENT OF FUNDS; ESCROW ACCOUNT
Concurrently with the consummation of the Initial Notes Offering,
pursuant to the Indenture, the Company deposited with the Escrow Agent
approximately $138.7 million of the net proceeds from the Initial Notes Offering
in an escrow account (the "Escrow Account") held by the Escrow Agent for the
benefit of the Trustee for the benefit of the Holders in accordance with an
escrow agreement between the Company and the Escrow Agent (the "Escrow
Agreement"). The Escrow Agreement provides, among other things, that funds may
be disbursed from the Escrow Account for interest payments the Company makes on
the Notes. The Escrow Agent has been instructed to cause all funds in the
Escrow Account to be invested, pending disbursement, in U.S. Government
Securities and temporarily in certain Cash Equivalents. The funds in the Escrow
Account will be sufficient to pay, when due, the first five semi-annual interest
payments on the Notes.
Under the Escrow Agreement, the Company granted to the Trustee, for
the benefit of the Holders, a first priority and exclusive security interest in
the Escrow Account and the proceeds thereof (the "Escrow Collateral"). The
Escrow Agreement provides that the Escrow Agent, upon notice from the Trustee
and as agent for Trustee, may foreclose on the Escrow Collateral upon
acceleration of the maturity of the Notes. Under the terms of the Indenture,
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the proceeds of the Escrow Collateral will be applied, first, to amounts owing
to the Escrow Agent in respect of fees and expenses of the Escrow Agent, and
second, to the Indenture Obligations of the Company to the Holders under the
Notes and the Indenture. The ability of Holders to realize upon the Escrow
Collateral may be subject to certain bankruptcy law limitations in the event of
the bankruptcy of the Company.
Upon payment in full of the first five scheduled semi-annual interest
payments, if no Default has occurred and is continuing, the Escrow Collateral,
if any then remaining, will be released to the Company.
OPTIONAL REDEMPTION
On or after February 15, 2002, the Notes will be redeemable at the
option of the Company, in whole at any time, or in part from time to time, on
not less than 30 nor more than 60 days' prior notice in amounts of $1,000 or an
integral multiple thereof at the following redemption prices (expressed as
percentages of the principal amount), if redeemed during the 12-month period
beginning on February 15 of the years indicated below:
YEAR Redemption Price
---- ----------------
2002................................................. 105.0%
2003................................................. 102.5%
2004 and thereafter.................................. 100.0%
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the date of redemption (subject to the
rights of holders of record on relevant record dates to receive interest due on
an interest payment date).
In addition, on or prior to February 15, 2001, the Company may, at its
option, use the Net Cash Proceeds of one or more Public Equity Offerings or the
sale of Capital Stock of the Company (other than Disqualified Stock) to a
Strategic Investor in a single transaction or a series of related transactions,
to redeem up to an aggregate of 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price equal to 110.0% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least 65% of the
original aggregate principal amount of the Notes remains outstanding immediately
following such redemption. In order to effect the foregoing redemption, the
Company must mail a notice of redemption no later than 45 days after the related
Public Equity Offering or sale to a Strategic Investor and must consummate such
redemption within 60 days of the closing of the Public Equity Offering or sale
to a Strategic Investor.
If less than all of the Notes are to be redeemed, the Trustee shall
select the Notes or portions thereof to be redeemed pro rata, by lot or by any
other method the Trustee shall deem fair and reasonable.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each Holder shall
have the right to require that the Company purchase all such Holder's Notes in
whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash, in an amount equal to 101% of the
principal amount of such Notes or portion thereof, plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Purchase
Date"), pursuant to the offer described below (the "Change of Control Offer")
and in accordance with the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of Notes, by first-class mail, postage prepaid, at his or her address appearing
in the security register, stating that a Change of Control has occurred and the
date of such event, the
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circumstances and relevant facts regarding such Change of Control; the purchase
price and the purchase date, which shall be fixed by the Company on a business
day no earlier than 30 days nor later than 60 days from the date such notice is
mailed, or such later date as is necessary to comply with requirements under the
Exchange Act; that any Note not tendered will continue to accrue interest; that,
unless the Company defaults in the payment of the Change of Control Purchase
Price, any Notes accepted for payment pursuant to the Change of Control Offer
shall cease to accrue interest after the Change of Control Purchase Date; and
certain other procedures that a Holder must follow to accept a Change of Control
Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that
the Company will have sufficient funds or financial resources necessary to pay
the Change of Control Purchase Price for all of the Notes that might be
delivered by Holders seeking to accept the Change of Control Offer. See "Risk
Factors--Change of Control." The failure of the Company to make or consummate
the Change of Control Offer or pay the Change of Control Purchase Price when due
will give the Trustee and the Holders the rights described under "Events of
Default."
The term "all or substantially all" as used in the definition of
"Change of Control" has not been definitively interpreted under New York law
(which is the governing law of the Indenture) to represent a specific
quantitative test. As a consequence, in the event the Holders elected to
exercise their rights under the Indenture and the Company elected to contest
such election, there could be no assurance as to how a court interpreting New
York law would interpret the phrase.
The existence of a holder's right to require the Company to repurchase
such Holder's Notes upon a Change of Control may deter a third party from
acquiring the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with a Change of Control Offer.
RANKING
The Notes will be senior unsecured obligations of the Company, and the
Indebtedness represented by the Notes and the payment of principal of, premium,
if any, and interest on the Notes will rank pari passu in right of payment with
all other existing and future unsecured and unsubordinated indebtedness of the
Company and senior in right of payment to all existing and future Subordinated
Indebtedness of the Company. The Notes will be effectively subordinated to
secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness. The Notes will also be effectively subordinated to
the claims of creditors of the Company's subsidiaries and to the interests of
holders of preferred stock, if any, of such subsidiaries. As of December 31,
1997, on a pro forma basis after giving effect to the Initial Notes Offering and
the application of the net proceeds therefrom, there would have been
approximately $79.4 million of total secured indebtedness outstanding to which
Holders would have been effectively subordinated in right of payment and
approximately $38.4 million of total liabilities of the Company's subsidiaries
(including trade payables and accrued liabilities) to which Holders would have
been structurally subordinated.
The Notes will not be entitled to any security, except as described
under "--Disbursement of Funds; Escrow Account" and will not be entitled to
the benefit of any guarantees except under the limited circumstances described
under "--Certain Covenants--Limitation on Issuances of Guarantees of
Indebtedness."
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. (a) The Company shall not, and shall not
cause or permit any Subsidiary to, directly or indirectly, Incur any
Indebtedness (other than the Notes); provided, however, that the Company may
Incur Indebtedness, and the Company or any Subsidiary may Incur Acquired
Indebtedness, if, at the time of such Incurrence, the Debt to Annualized
Operating Cash Flow Ratio would be less than or equal to 6.0 to 1.0 prior to
April 1, 2001, or less than or equal to 5.5 to 1.0 on or after April 1, 2001.
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(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to any of the following, each of which shall be given independent effect:
(i) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness (other than Acquired Indebtedness) consisting of Capital Lease
Obligations, Purchase Money Obligations, installment sales, mortgage
financings or other obligations incurred for the purpose of financing all
or any part of the purchase price, cost of design, development,
acquisition, construction or improvement of real or personal property
(including, without limitation, rights of indefeasible use or similar
rights), tangible or intangible, used or to be used in connection with the
Telecommunications Business or a credit facility or a master lease
arrangement entered into for the purpose of providing such financing,
provided that such Indebtedness (exclusive of the interest portion thereof
and reasonable costs of financing) does not exceed the lesser of Fair
Market Value or the purchase price and related costs of design,
development, acquisition, construction or improvement of such assets or
property at the time of such Incurrence;
(ii) the Incurrence by the Company or any of its Subsidiaries of
any Indebtedness, and any refinancings (as defined) of such Indebtedness,
so long as the aggregate principal amount of such Indebtedness shall not
exceed $50 million at any one time outstanding;
(iii) the Incurrence by the Company of Indebtedness (other than
Acquired Indebtedness) in an aggregate principal amount not to exceed two
(2) times the sum of the Net Cash Proceeds received by the Company after
the date of the Indenture (other than from the issuance of Disqualified
Stock in any case) in connection with any Public Equity Offerings or sale
of Capital Stock (other than Disqualified Stock) to any Strategic Investor
to the extent that such Net Cash Proceeds have not been used pursuant to
clause (a)(3) or clause (b)(viii) of "--Limitation on Restricted
Payments" described below; provided that such Indebtedness does not mature
prior to the Stated Maturity of the Notes or has an Average Life to Stated
Maturity at least equal to the Notes;
(iv) the Incurrence by the Company or any Subsidiary of any
Indebtedness entered into in the ordinary course of business (a) pursuant
to Interest Rate Agreements entered into to protect the Company or any
Subsidiary against fluctuations in interest rates in respect of
Indebtedness of the Company or any Subsidiary as long as the notional
principal amount of such Interest Rate Agreements does not exceed the
aggregate principal amount of such Indebtedness then outstanding, (b) under
any Currency Hedging Arrangements entered into to protect the Company or
any Subsidiary against fluctuations in the value of any currency or (c)
under any Commodity Price Protection Agreements entered into to protect the
Company or any Subsidiary against fluctuations in the price of any
commodity;
(v) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of bid, performance or advance payment bonds,
standby letters of credit and appeal or surety bonds entered into in the
ordinary course of business and not in connection with the borrowing of
money;
(vi) Indebtedness outstanding under the Notes or the Indenture
(or Guarantees of the Notes issued under the Indenture), other Indebtedness
existing on the date of the Indenture or other Indebtedness represented by
shares of Series B Preferred Stock issued on or after the date of the
Indenture as a dividend on shares of Series B Preferred Stock outstanding
on the date of the Indenture (or shares of Series B Preferred Stock issued
as a dividend in respect of any such shares of additional Series B
Preferred Stock so issued);
(vii) the Incurrence of (a) Indebtedness of any Subsidiary owed
to and held by the Company or another Subsidiary and (b) Indebtedness of
the Company owed to and held by any Subsidiary or represented by a
guarantee of Indebtedness of any Subsidiary which such Subsidiary is
otherwise permitted to Incur under the Indenture; provided that upon either
(i) the transfer or other disposition by a Subsidiary or the Company of any
Indebtedness so permitted to a Person other than the Company or a
Subsidiary or (ii) the issuance, sale, transfer or other disposition of
Capital Stock (including by amalgamation, consolidation or merger) of a
Subsidiary (such that upon such sale, transfer or other disposition such
Subsidiary would no longer meet the definition of a Subsidiary) to a Person
other than the Company or a Subsidiary, the provisions of this clause (vii)
shall no longer be applicable to such Indebtedness and such
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Indebtedness shall be deemed to have been Incurred at the time of such
issue, sale, transfer or other disposition;
(viii) Indebtedness incurred by the Company or any Subsidiary
under a Permitted Credit Facility or Debt Securities, provided that the
aggregate principal amount at any time outstanding under this clause (viii)
does not exceed $150 million; and
(ix) any amendments, supplements, modifications, deferrals,
renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi), (vii) and (viii) above, and
this clause (ix), including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower (or its successor) of the Indebtedness being
refinanced and the aggregate principal amount of Indebtedness and accrued
interest represented thereby (or the accreted value thereof as of the date
of refinancing) is not increased by such refinancing plus the lesser of (I)
the stated amount of any premium or other payment required to be paid in
connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (II) the amount of premium or other
payment actually paid at such time to refinance the Indebtedness, plus, in
either case, the amount of expenses of the Company or such borrower
incurred in connection with such refinancing and, in the case of any
refinancing of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Notes at least to the same extent
as the Indebtedness being refinanced and such refinancing does not reduce
the Average Life to Stated Maturity or the Stated Maturity of such
Subordinated Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness under
this covenant, Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of "--Limitations on
Issuances of Guarantees of Indebtedness."
(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness may be Incurred through paragraph (a) of this
covenant or by meeting the criteria of one or more of the types of Indebtedness
described in paragraph (b) of this covenant (or the definitions of the terms
used therein), the Company, in its sole discretion, (i) may classify such item
of Indebtedness under and comply with either of such paragraphs (or any of such
definitions), as applicable, (ii) may classify and divide such item of
Indebtedness into more than one of such paragraphs (or definitions), as
applicable, and (iii) may elect to comply with such paragraphs (or definitions),
as applicable, in any order.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on
any shares of the Company's Capital Stock (other than dividends or
distributions solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, the Company's Capital Stock or any Capital Stock of
any Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem,
defease, retire or otherwise acquire for value, prior to any scheduled
principal payment, sinking fund payment or maturity, any Subordinated
Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital
Stock of any Subsidiary to any Person (other than (a) to the Company or any
of its Wholly Owned Subsidiaries or (b) to all holders of any class, series
or the same type of Capital Stock of such Subsidiary on a pro rata basis;
provided that in the
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case of this clause (b) such dividend or distribution shall not constitute
Indebtedness or Disqualified Stock); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v),
other than any such action that is a Permitted Payment (as defined below),
collectively, "Restricted Payments") (the amount of any such Restricted
Payment, if other than cash, as determined, in good faith, by the Board of
Directors of the Company, whose determination shall be conclusive and evidenced
by a board resolution), unless (1) immediately before and immediately after
giving effect to such proposed Restricted Payment on a pro forma basis, no
Default or Event of Default shall have occurred and be continuing; (2)
immediately before and immediately after giving effect to such Restricted
Payment on a pro forma basis, the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under paragraph (a) of the
provisions described under "--Limitation on Indebtedness;" and (3) after
giving effect to the proposed Restricted Payment, the aggregate amount of all
such Restricted Payments declared or made after the date of the Indenture, does
not exceed the sum (A) (i) the Cumulative Operating Cash Flow determined at the
time of such Restricted Payment less (ii) 150% of cumulative Consolidated
Interest Expense determined for the period (treated as one accounting period)
commencing on the date of the original issue of the Notes and ending on the last
day of the most recent fiscal quarter immediately preceding the date of such
Restricted Payment for which consolidated financial information of the Company
is required to be available; plus (B) the aggregate Net Cash Proceeds received
after the date of the Indenture by the Company from the issuance or sale (other
than to any of its Subsidiaries) of Qualified Capital Stock of the Company or
any options, warrants or rights to purchase such Qualified Capital Stock of the
Company (except to the extent such proceeds are used to purchase, redeem or
otherwise retire Capital Stock or Subordinated Indebtedness as set forth below
in clause (ii) or (iii) of paragraph (b) below); plus (C) the aggregate Net Cash
Proceeds received after the date of the Indenture by the Company (other than
from any of its Subsidiaries) upon the exercise of any options, warrants or
rights to purchase Qualified Capital Stock of the Company; plus (D) the
aggregate Net Cash Proceeds received after the date of the Indenture by the
Company from the conversion or exchange, if any, of debt securities or
Redeemable Capital Stock of the Company or its Subsidiaries into or for
Qualified Capital Stock of the Company plus, to the extent such debt securities
or Redeemable Capital Stock were issued after the date of the Indenture, the
aggregate of Net Cash Proceeds from their original issuance; plus (E) in the
case of the disposition or repayment of any Investment constituting a Restricted
Payment, an amount equal to the lesser of (x) the cash return of capital with
respect to such Investment (less the cost of disposition and taxes, if any) and
(y) the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vi) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (x) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration;
(ii) the repurchase, redemption, or other acquisition or
retirement for value of any shares of any class of Capital Stock of the
Company in exchange for (including any such exchange pursuant to the
exercise of a conversion right or privilege in connection with which cash
is paid in lieu of the issuance of fractional shares or scrip), or out of
the Net Cash Proceeds of a substantially concurrent issuance and sale for
cash (other than to a Subsidiary) of, other shares of Qualified Capital
Stock of the Company; provided that the Net Cash Proceeds from the issuance
of such shares of Qualified Capital Stock are excluded from clause (3)(B)
of paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or
acquisition for value or payment of principal of any Subordinated
Indebtedness or Redeemable Capital Stock in exchange for, or in an amount
not in excess of the Net Cash Proceeds of, a substantially concurrent
issuance and sale for cash (other than to any Subsidiary of the Company) of
any Qualified Capital Stock of the Company, provided that the Net Cash
Proceeds from the issuance of such shares of Qualified Capital Stock are
excluded from clause (3)(B) of paragraph (a) of this Section;
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(iv) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of principal of any
Subordinated Indebtedness (other than Redeemable Capital Stock) through the
substantially concurrent issuance of new Subordinated Indebtedness of the
Company, provided that any such new Subordinated Indebtedness (1) shall be
in a principal amount that does not exceed the principal amount and accrued
interest thereon so refinanced or the accreted value thereof as of the date
of refinancing (or, if such Subordinated Indebtedness provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, then such lesser amount as of the date
of determination), plus the lesser of (I) the stated amount of any premium
or other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing; (2) has an Average
Life to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Notes; (3) has a Stated Maturity for its final scheduled
principal payment later than the Stated Maturity for the final scheduled
principal payment of the Notes; and (4) is expressly subordinated in right
of payment to the Notes at least to the same extent as the Subordinated
Indebtedness to be refinanced;
(v) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of any Redeemable Capital
Stock through the substantially concurrent issuance of new Redeemable
Capital Stock of the Company, provided that any such new Redeemable Capital
Stock (1) shall have an aggregate liquidation preference that does not
exceed the aggregate liquidation preference of the amount so refinanced;
(2) has an Average Life to Stated Maturity greater than the remaining
Average Life to Stated Maturity of the Notes; and (3) has a Stated Maturity
later than the Stated Maturity for the final scheduled principal payment of
the Notes;
(vi) the repurchase of shares of, or options to purchase shares
of, common stock of the Company or any of its Subsidiaries from employees,
officers, consultants or directors or any former employees, officers,
consultants or directors of the Company or any of its Subsidiaries (or
permitted transferees of such employees, officers, consultants or directors
or former employees, officers, consultants or directors), pursuant to the
terms of the agreements (including employment agreements) or plans (or
amendments thereto) or other arrangements or transactions approved by the
Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases in any
calendar year shall not exceed $1 million and $3 million in the aggregate
pursuant to this clause (vi);
(vii) the (a) payment of dividends on the Company's Series B
Preferred Stock (in the form of cash or additional shares of Series B
Preferred Stock) in an aggregate amount not to exceed $3 million in any
calendar year (provided that such amounts may, to the extent not previously
paid, be aggregated through the period prior to the conversion or
redemption of such Series B Preferred Stock) and (b) redemption of any
shares of Series B Preferred Stock outstanding on the date of the Indenture
(including any shares of Series B Preferred Stock issued on or after the
date of the Indenture as dividends thereon or in respect of such additional
shares so issued) pursuant to the terms of such shares of Series B
Preferred Stock as in effect on the date of the Indenture (or as such terms
may be amended, from time to time, to the extent that any such amendment
has been determined by the Board of Directors, in good faith, not to
adversely affect the holders of the Notes);
(viii) Investments in any Person engaged principally in the
Telecommunications Business on the date of such Investments; provided that
the aggregate amount of any such Investments made pursuant to this clause
(viii) does not exceed the sum of (A) the amount of the Net Cash Proceeds
received by the Company after the date of the Indenture as a capital
contribution or from the sale of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the Company, except to the
extent that such Net Cash Proceeds are used to Incur Indebtedness pursuant
to clause (iii) of paragraph (b) under the covenant described above under
"--Limitation on Indebtedness" or to make Restricted Payments pursuant to
clause (3) of paragraph (a), or clauses (ii), (iii) or (iv) of this
paragraph (b), of this "Limitation on Restricted Payments" covenant, plus
(B) the net reduction in Investments made pursuant to this clause (viii)
resulting from distributions on or repayments of such Investments or from
the Net Cash Proceeds from the sale of any such Investments (except in each
case to the extent any such payments or proceeds are included
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in the calculation of Consolidated Net Income) or from such Person becoming
a Wholly Owned Subsidiary (valued in each case as provided in the
definition of "Permitted Investments");
(ix) the payment or declaration of any dividend or the making of
any distribution on or the redemption of rights or any securities issued
pursuant to the Company Rights Agreement;
(x) the payment of cash in lieu of the issuance of fractional
shares pursuant to any agreement, warrant or option and any repurchase or
other acquisition of fractional shares from time to time; and
(xi) the acquisition of Capital Stock of the Company by the
Company in connection with the cashless exercise of any options, warrants
or similar rights issued by the Company on or prior to January 1, 1998.
In determining the amount of Restricted Payments permissible under
this covenant, amounts expended pursuant to clauses (i), (vi), (vii), (viii),
(ix) and (x) shall be included, without duplication, as Restricted Payments and
shall not be deemed a Permitted Payment for purposes of the calculation required
by paragraph (a) of this covenant.
Limitation on Transactions with Affiliates. The Company will not,
and will not permit any of its Subsidiaries to, directly or indirectly, enter
into any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with or for the benefit of any Affiliate of the Company (other than
the Company or a Wholly Owned Subsidiary) unless such transaction or series of
related transactions is entered into in good faith and in writing and (a) such
transaction or series of related transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than those that
would be reasonably expected to be available in a comparable transaction in
arm's-length dealings with an unrelated third party, (b) with respect to any
transaction or series of related transactions involving aggregate value in
excess of $5 million, the Company delivers an officers' certificate to the
Trustee certifying that such transaction or series of related transactions
complies with clause (a) above, and (c) with respect to any transaction or
series of related transactions involving aggregate value in excess of $10
million, either (A) such transaction or series of related transactions has been
approved by a majority of the Disinterested Directors of the Company, or in the
event there is only one Disinterested Director, by such Disinterested Director,
or (B) the Company delivers to the Trustee a written opinion of an investment
banking firm of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of transaction or
series of related transactions for which an opinion is required stating that the
transactions or series of related transactions is fair to the Company or such
Subsidiary from a financial point of view; provided, however, that this covenant
shall not apply to: (a) compensation, severance and employee benefit
arrangements with any officer, director or employee of the Company, including
under any stock option or stock incentive plans, in the ordinary course of
business; (b) any transaction solely between or among the Company and/or any
Subsidiaries, if such transaction does not otherwise violate the terms of the
Indenture; (c) any transaction otherwise permitted by the terms of the section
of the Indenture described under "--Limitations on Restricted Payments"; (d)
the execution and delivery of or payments made under any tax sharing agreement
between or among any of the Company and any Subsidiary; (e) licensing or
sublicensing of use of any intellectual property by the Company or any
Subsidiary to the Company, any other Subsidiary of the Company or to any
Permitted Joint Venture; provided that the licensor shall continue to have
access to such intellectual property to the extent necessary for the conduct of
its business and, in the case of any Permitted Joint Venture, that the terms of
any such arrangement are fair and reasonable to the Company or any such
Subsidiary as determined in good faith by the Board of Directors; (f)
arrangements between the Company and any Subsidiary of the Company for the
purpose of providing services or employees to the Company or such Subsidiary;
and (g) transactions undertaken pursuant to the IXC Agreement and other
agreements entered into in connection therewith and in effect on the date of the
Indenture (or as such other agreements may be amended, from time to time, to the
extent that any such amendment has been determined by the Board of Directors, in
good faith, not to adversely affect the Holders).
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any
kind upon any property or assets (including any intercompany notes) of the
Company or any Subsidiary owned on the date of the Indenture or acquired after
the date of the Indenture, or any income or profits therefrom, unless the Notes
are directly secured equally and ratably with (or, in the case of
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Subordinated Indebtedness, prior or senior thereto, with the same relative
priority as the Notes shall have with respect to such Subordinated Indebtedness)
the obligation or liability secured by such Lien except for any Permitted Liens.
Limitation on Sale of Assets. (a) The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, consummate an Asset
Sale unless (i) at least 75% of the consideration from such Asset Sale is
received in cash or other comparable consideration (as described below) and (ii)
the Company or such Subsidiary receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares or assets subject to
such Asset Sale (as determined by the Board of Directors of the Company and
evidenced in a board resolution). The following types of consideration shall be
deemed "comparable consideration" for the purposes of this covenant: (A) Cash
Equivalents, (B) liabilities (contingent or otherwise) of the Company or a
Subsidiary assumed by the transferee (or its designee) such that the Company or
such Subsidiary has no further liability therefor, and (C) any securities, notes
or other obligations received by the Company or any such Subsidiary from such
transferee that, within 60 days after receipt, are converted by the Company or
such Subsidiary into cash.
(b) The Company or a Subsidiary may, within 365 days of the Asset Sale
invest the Net Cash Proceeds thereof in Telecommunications Assets or to repay
any Pari Passu Indebtedness of the Company or any Subsidiary (including the
repurchase of Notes). The amount of such Net Cash Proceeds not used or invested
within 365 days of the Asset Sale as set forth in this paragraph constitutes
"Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million,
the Company will apply the Excess Proceeds to the repayment of the Notes and any
other Pari Passu Indebtedness outstanding with similar provisions requiring the
Company to make an offer to purchase such Indebtedness with the proceeds from
any Asset Sale as follows: (A) the Company will make an offer to purchase (an
"Offer") from all Holders in accordance with the procedures set forth in the
Indenture in the maximum principal amount (expressed as a multiple of $1,000) of
Notes that may be purchased out of an amount (the "Note Amount") equal to the
product of such Excess Proceeds multiplied by a fraction, the numerator of which
is the outstanding principal amount of the Notes, and the denominator of which
is the sum of the outstanding principal amount of the Notes and such Pari Passu
Indebtedness (subject to proration in the event such amount is less than the
aggregate Offered Price (as defined herein) of all Notes tendered) and (B) to
the extent required by such Pari Passu Indebtedness to permanently reduce the
principal amount of such Pari Passu Indebtedness, the Company will make an offer
to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari
Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess
of the Excess Proceeds over the Note Amount; provided that in no event will the
Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount
exceeding the principal amount of such Pari Passu Indebtedness plus the amount
of any premium required to be paid to repurchase such Pari Passu Indebtedness.
The offer price for the Notes will be payable in cash in an amount equal to 100%
of the principal amount of the Notes plus accrued and unpaid interest, to the
date (the "Offer Date") such Offer is consummated (the "Offered Price"), in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate Offered Price of the Notes tendered pursuant to the Offer is less
than the Note Amount relating thereto or the aggregate amount of Pari Passu
Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu
Debt Amount, the Company will use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes and Pari Passu
Indebtedness surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a pro rata
basis. Upon the completion of the purchase of all the Notes tendered pursuant
to an Offer and the completion of a Pari Passu Offer, the amount of Excess
Proceeds, if any, shall be reset at zero.
(d) The Indenture will provide that, if the Company becomes obligated
to make an Offer pursuant to clause (c) above, the Notes and the Pari Passu
Indebtedness shall be purchased by the Company, at the option of the holders
thereof, in whole or in part in integral multiples of $1,000, on a date that is
not earlier than 30 days and not later than 60 days from the date the notice of
the Offer is given to Holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act.
(e) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and
any other applicable securities laws or regulations in connection with an Offer.
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Limitation on Issuances of Guarantees of Indebtedness. (a) The
Company will not permit any Subsidiary, directly or indirectly, to guarantee,
assume or in any other manner become liable with respect to any Pari Passu
Indebtedness or Subordinated Indebtedness of the Company unless such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee of the Notes on the same terms as the guarantee of
such Indebtedness except that (A) such guarantee need not be secured unless
required pursuant to "--Limitation on Liens" and (B) if such Indebtedness is
by its terms expressly subordinated to the Notes, any such assumption, guarantee
or other liability of such Subsidiary with respect to such Indebtedness shall be
subordinated to such Subsidiary's Guarantee of the Notes at least to the same
extent as such Indebtedness is subordinated to the Notes; provided that this
paragraph shall not apply to any guarantee or assumption of liability of
Indebtedness permitted under the Indenture as described in clauses (i), (ii),
(iv), (v), (vii) and (viii) of paragraph (b) of "--Limitation on
Indebtedness."
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of
the Notes shall provide by its terms that it (and all Liens securing the same)
shall be automatically and unconditionally released and discharged upon any
sale, exchange or transfer, to any Person not an Affiliate of the Company, of
all of the Company's Capital Stock in, or all or substantially all the assets
of, such Subsidiary, which transaction is in compliance with the terms of the
Indenture and such Subsidiary is released from its guarantees of other
Indebtedness of the Company or any Subsidiaries.
Limitation on Sale and Leaseback Transactions. The Company will not,
and will not permit any Subsidiary of the Company to, directly or indirectly,
enter into any Sale-Leaseback Transaction with respect to any property or assets
(whether now owned or hereafter acquired) unless (i) the sale or transfer of
such property or assets to be leased is treated as an Asset Sale and complies
with the "--Limitation on Sale of Assets" covenant and (ii) the Company or
such Subsidiary would be entitled under the "--Limitation on Indebtedness"
covenant to incur any Indebtedness (with the lease obligations being treated as
Indebtedness for purposes of ascertaining compliance with this covenant unless
such lease is properly classified as an operating lease under GAAP) in respect
of such sale and leaseback transaction.
The foregoing restriction does not apply to any Sale-Leaseback
Transaction if (i) the lease is for a period, including renewal rights, not in
excess of three years; (ii) the transaction is solely between the Company and
any Wholly Owned Subsidiary or any Wholly Owned Subsidiary and any other Wholly
Owned Subsidiary; and (iii) the transaction is consummated within 180 days of
the acquisition by the Company or its Subsidiary of the property or assets
subject to such sale-leaseback or entered into within 180 days after the
purchase or substantial completion of the construction of such property or
assets (or 270 days in the event that the only condition delaying such
consummation is the receipt of applicable regulatory approvals).
Limitation on Issuance and Sale of Subsidiary Capital Stock. The
Company will not permit (a) any Subsidiary of the Company to issue any Capital
Stock, except for (i) Capital Stock issued or sold to, held by or transferred to
the Company or a Wholly Owned Subsidiary, (ii) Capital Stock issued by a Person
prior to the time (A) such Person becomes a Subsidiary, (B) such Person merges
with or into a Subsidiary or (C) a Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C) (excluding for purposes of this proviso, shares of Capital Stock issued in
connection with customary accelerated vesting provisions contained in option or
similar plans or agreements which are accelerated as a result of a change of
control of such Person and which option or similar plans or agreements were not
adopted or implemented solely in anticipation of or in connection with such
transaction) or (b) any Person (other than the Company or a Wholly Owned
Subsidiary) to acquire Capital Stock of any Subsidiary from the Company or any
Subsidiary, except, in the case of each of clause (a) or (b), (1) upon the
acquisition of all the outstanding Capital Stock of such Subsidiary in
accordance with the terms of the Indenture, (2) if, immediately after giving
effect to such issuance or sale, such Subsidiary would no longer constitute a
Subsidiary, and any Investment in such Person remaining after giving effect to
such issuance or sale would have been permitted to be made under "--Limitations
on Restricted Payments" if made on the date of such issuance or sale, (3)
issuances of director's qualifying shares, or sales to foreign nationals of
shares of Capital Stock of foreign Subsidiaries, to the extent required by
applicable law or to maintain the limited liability status of such foreign
Subsidiaries or (4) issuances or sales of common stock of a Subsidiary, provided
that the Company or such Subsidiary applies the Net Cash Proceeds, if any, in a
manner which does not violate the provisions of the Indenture to the extent
applicable (excluding for purposes of this proviso, shares of Capital Stock
issued in connection with customary accelerated
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vesting provisions contained in option or similar plans or agreements which are
accelerated as a result of a change of control of such Person and which option
or similar plans or agreements were not adopted or implemented solely in
anticipation of or in connection with such transaction).
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to (i) pay dividends or make any other distribution on its Capital
Stock, (ii) pay any Indebtedness owed to the Company or any other Subsidiary,
(iii) make any Investment in the Company or any other Subsidiary or (iv)
transfer any of its properties or assets to the Company or any other Subsidiary,
except for: (a) any encumbrance or restriction, with respect to a Subsidiary
that is not a Subsidiary of the Company on the date of the Indenture, in
existence at the time such Person becomes a Subsidiary of the Company and not
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary; (b) encumbrances or restrictions (I) by reason of applicable law,
(II) under the Indenture, or (III) in any agreement, instrument or indenture
governing or relating to Indebtedness in respect of any Permitted Credit
Facility; (c) customary non-assignment provisions of any contract or lease of
any Subsidiary entered into in the ordinary course of business; (d) encumbrances
or restrictions imposed pursuant to Indebtedness or contracts entered into in
connection with Permitted Liens, but solely to the extent such encumbrances or
restrictions affect only the property or assets subject to such Permitted Lien;
(e) any encumbrance or restriction imposed pursuant to contracts for the sale of
assets with respect to the assets to be sold pursuant to such contract; and (f)
any encumbrance or restriction existing under any agreement that extends,
renews, refunds, refinances or replaces the agreements containing the
encumbrances or restrictions in the foregoing clauses (a) through (e), or in
this clause (f), provided that the terms and conditions of any such encumbrances
or restrictions are no more restrictive in any material respect than those under
or pursuant to the agreement evidencing the Indebtedness so extended, renewed,
refinanced or replaced.
Limitations on Unrestricted Subsidiaries. The Company will not make,
and will not permit its Subsidiaries to make, any Investment in Unrestricted
Subsidiaries if, at the time thereof, the aggregate amount of such Investments
would exceed the amount of Restricted Payments then permitted to be made
pursuant to the "--Limitation on Restricted Payments" covenant. Any
Investments in Unrestricted Subsidiaries permitted to be made pursuant to this
covenant will be treated as a Restricted Payment in calculating the amount of
Restricted Payments made by the Company.
Provision of Financial Statements. After the earlier to occur of the
consummation of the Exchange Offer and the 150th calendar day following the date
of original issue of the Notes, whether or not the Company is subject to Section
13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted
under the Exchange Act, file with the Commission the annual reports, quarterly
reports and other documents which the Company would have been required to file
with the Commission pursuant to Sections 13(a) or 15(d) if the Company were so
subject, such documents to be filed with the Commission on or prior to the date
(the "Required Filing Date") by which the Company would have been required so
to file such documents if the Company were so subject. The Company will also in
any event (x) within 15 days of each Required Filing Date (i) transmit by mail
to all Holders, as their names and addresses appear in the security register,
without cost to such Holders and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to Sections 13(a) or 15(d) of the
Exchange Act if the Company were subject to either of such Sections and (y) if
filing such documents by the Company with the Commission is not permitted under
the Exchange Act, promptly upon written request and payment of the reasonable
cost of duplication and delivery, supply copies of such documents to any
prospective Holder at the Company's cost. If any Guarantor's financial
statements would be required to be included in the financial statements filed or
delivered pursuant to the Indenture if the Company were subject to Section 13(a)
or 15(d) of the Exchange Act, the Company shall include such Guarantor's
financial statements in any filing or delivery pursuant to the Indenture. The
Indenture also provides that, so long as any of the Notes remain outstanding,
the Company will make available to any prospective purchaser of Notes or
beneficial owner of Notes in connection with any sale thereof the information
required by Rule 144A(d)(4) under the Securities Act, until the earlier of such
time as the Company has completed its offer to exchange the Notes for securities
identical in all material respects which have been registered under the
Securities Act or such time as the Holders thereof have disposed of such Notes
pursuant to an effective registration statement under the Securities Act.
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Limitation on Business. The Company will not, and will not permit
any of the Subsidiaries to, engage in a business which is not substantially a
Telecommunications Business.
CONSOLIDATION, MERGER OR SALE OF ASSETS
The Company will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis to any other Person or group of affiliated Persons, unless at the time and
after giving effect thereto (i) either (a) the Company will be the continuing
corporation in the case of a consolidation or merger involving the Company or
(b) the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis (the "Surviving Entity") will be a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and such Person expressly assumes, by a
supplemental indenture, in a form reasonably satisfactory to the Trustee, all
the obligations of the Company under the Notes, the Indenture, the Escrow
Agreement and the Registration Rights Agreement, as the case may be, and the
Notes, the Indenture, the Escrow Agreement and the Registration Rights Agreement
will remain in full force and effect as so supplemented; (ii) immediately after
giving effect to such transaction on a pro forma basis (and treating any
Indebtedness not previously an obligation of the Company or any of its
Subsidiaries which becomes the obligation of the Company or any of its
Subsidiaries as a result of such transaction as having been incurred at the time
of such transaction), no Default or Event of Default will have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under paragraph (a) of the
provisions of "--Certain Covenants--Limitation on Indebtedness;" (iv) at the
time of the transaction, each Guarantor, if any, unless it is the other party to
the transactions described above, will have by supplemental indenture confirmed
that its Guarantee shall apply to such Person's obligations under the Indenture
and the Notes; and (v) at the time of the transaction the Company or the
Surviving Entity will have delivered, or caused to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each to the effect that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
transaction and the supplemental indenture in respect thereof comply with the
Indenture. Notwithstanding the foregoing, the Company (i) may merge or
consolidate with any Wholly Owned Subsidiaries, and (ii) the Company may merge
or consolidate into any Person in a transaction designed solely for the purpose
of effecting a change in the jurisdiction of incorporation of the Company within
the United States of America.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Person, such Surviving Person shall
succeed to, and be substituted for, and exercise every right and power of, the
Company, and the Company shall be discharged from all obligations and covenants
under the Indenture, the Notes, the Escrow Agreement and the Registration Rights
Agreement.
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on
any Note when it becomes due and payable, and such default shall continue
for a period of 30 days;
(ii) there shall be a default in the payment of the principal of
(or premium, if any, on) any Note at its Maturity (upon acceleration,
optional or mandatory redemption, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach,
of any covenant or agreement of the Company or any Guarantor under the
Indenture, the Escrow Agreement, the Registration Rights Agreement
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or any Guarantee (other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in clause (i), (ii)
or in clause (b), (c) or (d) of this clause (iii)) and such default or
breach shall continue for a period of 30 days after written notice has been
given, by certified mail, (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes; (b) there shall be a default in
the performance or breach of the provisions described in "--Consolidation,
Merger, Sale of Assets;" (c) the Company shall have failed to make or
consummate an Offer in accordance with the provision described in
"--Certain Covenants--Limitation on Sale of Assets;" or (d) the Company
shall have failed to make or consummate a Change of Control Offer in
accordance with the provisions of "--Change of Control;"
(iv) (a) any default by the Company or any Subsidiary in the
payment of the principal, premium, if any, or interest has occurred with
respect to amounts in excess of $10 million under any agreement, indenture
or instrument evidencing Indebtedness when the same shall become due and
payable in full and such default shall have continued after any applicable
grace period and shall not have been cured or waived and, if not already
matured at its final maturity in accordance with its terms, the holder of
such Indebtedness shall have the right to accelerate such Indebtedness or
(b) any event of default as defined in any agreement, indenture or
instrument of the Company evidencing Indebtedness in excess of $10 million
shall have occurred and the Indebtedness thereunder, if not already matured
at its final maturity in accordance with its terms, shall have been
accelerated;
(v) any Guarantee shall for any reason cease to be, or shall for
any reason be asserted in writing by any Guarantor or the Company not to
be, in full force and effect and enforceable in accordance with its terms,
except to the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments or orders for the payment of money in
excess of $10 million, either individually or in the aggregate, shall be
rendered against the Company and not paid unless covered by financially
sound third-party insurers, or any Subsidiary or any of their respective
properties and is not discharged and for which there shall have been a
period of 60 consecutive days during which a stay of enforcement of such
judgment or order, by reason of an appeal or otherwise, shall not be in
effect;
(vii) any holder or holders of at least $10 million in aggregate
principal amount of Indebtedness of the Company or any Subsidiary after a
default under such Indebtedness shall notify the Trustee of its
commencement of proceedings to foreclose on any assets of the Company or
any Subsidiary that have been pledged to or for the benefit of such holder
or holders to secure such Indebtedness or shall commence proceedings, or
take any action (including by way of set-off), to retain in satisfaction of
such Indebtedness or to collect on, seize, dispose of or apply in
satisfaction of Indebtedness, assets of the Company or any Subsidiary
(including funds on deposit or held pursuant to lock-box and other similar
arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Significant Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law or (b) a decree or order adjudging the
Company or any Significant Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Significant Subsidiary under any applicable federal or
state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company or any
Significant Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their respective
affairs, and any such decree or order for relief shall continue to be in
effect, or any such other decree or order shall be unstayed and in effect,
for a period of 60 consecutive days;
(ix) (a) the Company or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any
other case or proceeding to be adjudicated bankrupt or insolvent, (b) the
Company or any Significant Subsidiary consents to the entry of a decree or
order for relief in respect of the Company or such Significant Subsidiary
in an involuntary case or proceeding under any applicable Bankruptcy Law or
to the commencement of any bankruptcy or insolvency case or proceeding
against it, (c) the Company or any Significant Subsidiary files a petition
or answer or consent seeking reorganization or relief under any applicable
federal or state law, (d) the Company or any
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Significant Subsidiary (I) consents to the filing of such petition or the
appointment of, or taking possession by, a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Company or such
Significant Subsidiary or of any substantial part of the Company's
Consolidated properties, (II) makes an assignment for the benefit of
creditors or (III) admits in writing its inability to pay its debts
generally as they become due or (e) the Company or any Significant
Subsidiary takes any corporate action in furtherance of any such actions in
this paragraph (ix); or
(x) the Company shall challenge the Lien on the Escrow Collateral
under the Escrow Agreement prior to the time that the Escrow Collateral is
to be released to the Company or the Escrow Agreement becomes, or the
Company asserts that the Escrow Agreement is, invalid or unenforceable,
otherwise than in accordance with its terms.
If an Event of Default (other than as specified in clauses (viii) and
(ix) of the prior paragraph with respect to the Company) shall occur and be
continuing with respect to the Indenture, the Trustee or the Holders of not less
than 25% in aggregate principal amount of the Notes then outstanding may, and
the Trustee at the request of such holders shall, declare all unpaid principal
of, premium, if any, and accrued interest on all Notes to be due and payable, by
a notice in writing to the Company (and to the Trustee if given by the Holders)
and upon any such declaration, such principal, premium, if any, and interest
shall become due and payable immediately. If an Event of Default specified in
clause (viii) or (ix) of the prior paragraph occurs with respect to the Company
and is continuing, then all the Notes shall ipso facto become and be due and
payable immediately in an amount equal to the principal amount of the Notes,
together with accrued and unpaid interest, to the date the Notes become due and
payable, without any declaration or other act on the part of the Trustee or any
holder. Thereupon, the Trustee may, at its discretion, proceed to protect and
enforce the rights of the Holders by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree
for payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes
then outstanding, (iii) the principal of and premium, if any, on any Notes then
outstanding which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes and (iv) to the
extent that payment of such interest is lawful, interest upon overdue interest
at the rate borne by the Notes; and (b) all Events of Default, other than the
non-payment of principal of the Notes which have become due solely by such
declaration of acceleration, have been cured or waived as provided in the
Indenture. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
The Holders of not less than a majority in aggregate principal amount
of the Notes outstanding may on behalf of the Holders of all outstanding Notes
waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of, premium, if any, or interest on any
Note or in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the Holder of each Note affected
by such modification or amendment.
The Company is also required to notify the Trustee within 30 days of
the occurrence of any Default unless such Default shall have been cured. The
Company is required to deliver to the Trustee, on or before a date not more than
60 days after the end of each fiscal quarter and not more than 120 days after
the end of each fiscal year, a written statement as to compliance with the
Indenture, including whether or not any Default has occurred that is not cured.
The Trust Indenture Act contains limitations on the rights of the
Trustee, should it become a creditor of the Company or any Guarantor, if any, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Trustee is permitted to engage in other transactions, provided that if it
acquires any conflicting interest it must eliminate such conflict upon the
occurrence of an Event of Default or resign.
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DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company, any such Guarantor and any other obligor
under the Indenture shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes, except for (i) the rights of
Holders of such outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments are
due, (ii) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes, and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee and (iv) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and any Guarantor released with respect to certain
covenants that are described in the Indenture ("covenant defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes. In the event covenant
defeasance occurs, certain events (not including non-payment, bankruptcy and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
the Notes as expressly provided for in the Indenture) as to all outstanding
Notes under the Indenture when (a) either (i) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid or Notes whose payment has been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust as provided for in the Indenture) have been
delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee for cancellation (x) have become due and payable, (y)
will become due and payable at their Stated Maturity within one year, or (z) are
to be called for redemption within one year under arrangements reasonably
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company; and the Company or any
Guarantor has irrevocably deposited or caused to be deposited with the Trustee
as trust funds in trust an amount in United States dollars sufficient to pay and
discharge the entire indebtedness on the Notes not theretofore delivered to the
Trustee for cancellation, including principal of, premium, if any, and accrued
interest at such Maturity, Stated Maturity or redemption date; (b) the Company
or any Guarantor has paid or caused to be paid all other sums payable under the
Indenture by the Company and any Guarantor; and (c) the Company has delivered to
the Trustee an officers' certificate and an opinion of independent counsel each
stating that (i) all conditions precedent under the Indenture relating to the
satisfaction and discharge of such Indenture have been complied with and (ii)
such satisfaction and discharge will not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which the Company, any Guarantor or any Subsidiary is a party or
by which the Company, any Guarantor or any Subsidiary is bound.
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the
Company, each Guarantor, if any, and the Trustee with the consent of the Holders
of at least a majority in aggregate principal amount of the Notes then
outstanding; provided, however, that no such modification or amendment may,
without the consent of the Holder of each outstanding Note affected thereby: (i)
change the Stated Maturity of the principal of, or any installment of interest
on, or change to an earlier date any redemption date of, or waive a default in
the payment of the principal, or interest on, any such Note or reduce the
principal amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the coin or currency in which the
principal of any such Note or any premium or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after the
redemption date); (ii) amend, change or modify the obligation of the Company to
make and consummate an Offer to such holder with respect to any Asset Sale or
Asset Sales in accordance with "--Certain Covenants--Limitation on Sale of
Assets" or the obligation of the Company to make and consummate a Change of
Control Offer in the event of a Change of Control in accordance with "--Change
of Control," including, in each case, amending, changing or modifying any
definitions relating thereto; (iii) reduce the percentage in principal amount of
such outstanding Notes, the consent of
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whose Holders is required for any such supplemental indenture, or the consent of
whose Holders is required for any waiver or compliance with certain provisions
of the Indenture; (iv) modify any of the provisions relating to supplemental
indentures requiring the consent of holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to increase the
percentage of such outstanding Notes required for such actions or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the holder of each such Note affected thereby; (v) except
as otherwise permitted under "--Consolidation, Merger or Sale of Assets,"
consent to the assignment or transfer by the Company or any Guarantor of any of
its rights and obligations under the Indenture; (vi) amend or modify any of the
provisions of the Indenture in any manner which subordinates the Notes issued
thereunder in right of payment to any other Indebtedness of the Company or which
subordinates any Guarantee in right of payment to any other Indebtedness of the
Guarantor issuing any such Guarantee; or (vii) modify the provisions of the
Escrow Agreement or the Indenture relating to the Escrow Collateral in any
manner adverse to the Holders or release any of the Escrow Collateral from the
Lien under the Escrow Agreement or permit any other obligation to be secured by
the Escrow Collateral.
Notwithstanding the foregoing, without the consent of any Holders, the
Company, any Guarantor and the Trustee may modify or amend the Indenture or any
Guarantee: (a) to evidence the succession of another Person to the Company or a
Guarantor, and the assumption by any such successor of the covenants of the
Company or such Guarantor in the Indenture, the Notes, the Registration Rights
Agreement, the Escrow Agreement and in any Guarantee in accordance with "--
Consolidation, Merger or Sale of Assets"; (b) to add to the covenants of the
Company, any Guarantor or any other obligor upon the Notes for the benefit of
the Holders or to surrender any right or power conferred upon the Company or any
Guarantor or any other obligor upon the Notes, as applicable, in the Indenture,
in the Notes or in any Guarantee; (c) to cure any ambiguity, or to correct or
supplement any provision in the Indenture, the Notes or any Guarantee which may
be defective or inconsistent with any other provision in the Indenture, the
Notes or any Guarantee or make any other provisions with respect to matters or
questions arising under the Indenture, the Notes or any Guarantee; provided
that, in each case, such provisions shall not adversely affect the interest of
the Holders; (d) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act; (e) to add a Guarantor under the Indenture; (f) to evidence and provide the
acceptance of the appointment of a successor Trustee under the Indenture; or (g)
to mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the Holders as additional security for the payment
and performance of the Company's and any Guarantor's obligations under the
Indenture, in any property, or assets, including any of which are required to be
mortgaged, pledged or hypothecated, or in which a security interest is required
to be granted to the Trustee pursuant to the Indenture or otherwise.
The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
GOVERNING LAW
The Indenture, the Notes and any Guarantee will be governed by, and
construed in accordance with, the internal laws of the State of New York,
without giving effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue as Trustee with such conflict or resign as Trustee.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which has not been cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture or the
Escrow Agreement at the request of any Holder of Notes unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
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CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing
at the time such Person becomes a Subsidiary or (ii) assumed in connection with
the acquisition of assets from (or merger or consolidation with or into) such
Person, in each case, other than Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary or such acquisition, as the
case may be, provided that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of, or substantially
contemporaneously with, the consummation of the transactions by which such
Person becomes a Subsidiary or such asset acquisition shall not constitute
Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any
other Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Subsidiary to any other Person, or any acquisition or purchase of Capital Stock
of any other Person by the Company or any Subsidiary, in either case pursuant to
which such Person shall become a Subsidiary or shall be consolidated, merged
with or into the Company or any Subsidiary or (ii) any acquisition by the
Company or any Subsidiary of the assets of any Person which constitute
substantially all of an operating unit or line of business of such Person or
which is otherwise outside of the ordinary course of business of the Company or
such Subsidiary.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease
or other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of: (i) any
Capital Stock of any Subsidiary; (ii) all or substantially all of the properties
and assets of any division or line of business of the Company or its
Subsidiaries; or (iii) any other properties or assets of the Company or any
Subsidiary other than in the ordinary course of business. For the purposes of
this definition, the term "Asset Sale" shall not include any transfer of
properties and assets (A) that is governed by the provisions described under
"--Consolidation, Merger or Sale of Assets," (B) that is by the Company to any
Wholly Owned Subsidiary or by any Wholly Owned Subsidiary to the Company or any
other Wholly Owned Subsidiary in a manner which does not violate the terms of
the Indenture, (C) that is of obsolete equipment in the ordinary course of
business, (D) the Fair Market Value of which in the aggregate does not exceed $5
million in any transaction or series of related transactions, (E) that is made
in accordance with the provisions described under "--Certain Covenants--
Limitations on Restricted Payments," (F) which constitutes the granting of any
Permitted Lien and (G) that is transferred in exchange for Telecommunications
Assets; provided, that if the Fair Market Value of the assets to be transferred
by the Company or such Subsidiary under this clause (G), plus the Fair Market
Value of any other consideration paid or credited by the Company or such
Subsidiary exceeds $10 million, such transaction shall require approval of the
Board of Directors of the Company.
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment of such Indebtedness multiplied by (b) the amount of each such principal
payment by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of
1978, as amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Business Day" means 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.
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"Capital Lease Obligation" of any Person means any obligation of
such Person and its subsidiaries on a Consolidated basis under any capital lease
of real or personal property which, in accordance with GAAP, has been recorded
as a capital lease obligation.
"Capital Stock" (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of common stock and preferred stock of such Person and (ii) with
respect to any Person that is not a corporation, any and all partnership,
membership or other equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing
not more than one year after the date of acquisition, issued by the United
States of America, or an instrumentality or agency thereof, and guaranteed fully
as to principal, premium, if any, and interest by the United States of America,
(ii) any certificate of deposit, maturing not more than one year after the date
of acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital and
surplus and undivided profits of not less than $500 million, whose short term
debt has a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's Investors Service, Inc. ("Moody's")
or any successor rating agency or "A-1" (or higher) according to Standard &
Poor's Corporation ("S&P") or any successor rating agency, (iii) commercial
paper, maturing not more than 270 days after the date of acquisition, issued by
a corporation (other than an Affiliate or Subsidiary of the Company) organized
and existing under the laws of the United States of America with a rating, at
the time as of which any investment therein is made, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P and (iv) any money
market deposit accounts issued or offered by a domestic commercial bank having
capital and surplus in excess of $500 million; provided that the short term debt
of such commercial bank has a rating, at the time of Investment, of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following
events: (i) any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person
shall be deemed to have beneficial ownership of all shares that such Person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 50% of the
total outstanding Voting Stock of the Company (other than IXC, IXC
Communications, Inc. or any controlled affiliate thereof, in any case pursuant
to the issuance by the Company of shares of Capital Stock in satisfaction of any
obligations under the terms of the IXC Agreement); (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such Board of Directors then in office; (iii)
the Company consolidates with or merges with or into any Person or conveys,
transfers or leases all or substantially all of its assets to any Person, or any
corporation consolidates with or merges into or with the Company in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for cash, securities or other property,
other than any such transaction where the outstanding Voting Stock of the
Company is not changed or exchanged at all (except to the extent necessary to
reflect a change in the jurisdiction of incorporation of the Company or where no
"person" or "group" owns, immediately after such transaction, directly or
indirectly, more than 50% of the total outstanding Voting Stock of the surviving
corporation); or (iv) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which complies with the
provisions described under "--Consolidation, Merger or Sale of Assets." The
good faith determination of the Board, based upon the advice of outside counsel,
of the beneficial ownership of securities of the Company within the meaning of
Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent
contrary controlling judicial precedent or contrary written interpretation
published by the Commission.
"Closing Date" means April 13, 1998.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or if at any time
after the execution of the Indenture such Commission is not existing and
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performing the duties now assigned to it under the Trust Indenture Act then the
body performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations in
commodity prices.
"Company" means PSINet Inc., a corporation incorporated under the
laws of New York, until a successor Person shall have become such pursuant to
the applicable provisions of the Indenture, and thereafter "Company" shall
mean such successor Person.
"Company Rights Agreement" means the Rights Agreement, dated as of
May 8, 1996, between the Company and First Chicago Trust Company of New York, as
in effect on the date of the Indenture (or as amended, from time to time, to the
extent that such amendment has been determined by the Board of Directors, in
good faith, not to adversely affect the holders of the Notes).
"Consolidated" means consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any
period, the provision for federal, state, local and foreign income taxes of such
Person and its Consolidated subsidiaries for such period as determined in
accordance with GAAP.
"Consolidated Interest Expense" of any Person means, without
duplication, for any period, the sum of (a) the interest expense of such Person
and its subsidiaries for such period, on a Consolidated basis in accordance with
GAAP, including, without limitation, (i) amortization of debt discount, (ii) the
net costs associated with Interest Rate Agreements, Currency Hedging Agreements
and Commodity Price Protection Agreements (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation and (iv) accrued
interest, plus (b) (i) the interest component of the Capital Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such Person
and its subsidiaries plus (c) the interest expense actually paid by such Person
under any Guaranteed Debt of such Person and any subsidiary to the extent not
included under clause (a)(iv) above, plus (d) the aggregate amount for such
period of cash or non-cash dividends on any Redeemable Capital Stock or
Preferred Stock of the Company and its Subsidiaries, in each case as determined
on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net
income of the Company and any Subsidiary for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (a) all
extraordinary gains or losses for such period, (b) all gains or losses from the
sales or other dispositions of assets out of the ordinary course of business
(net of taxes, fees and expenses relating to the transaction giving rise
thereto) for such period: (c) that portion of such net income derived from or in
respect of investments in Persons other than Subsidiaries, except to the extent
actually received in cash by the Company or any Subsidiary (subject, in the case
of any Subsidiary, to the provisions of clause (f) of this definition); (d) the
portion of such net income (or loss) allocable to minority interests in any
Person (other than a Subsidiary) for such period, except to the extent the
Company's allocation portion of such Person's net income for such period is
actually received in cash by the Company or any Subsidiary (subject, in the case
of any Subsidiary, to the provisions of clause (f) of this definition); (e) the
net income (or loss) of any other Person combined with the Company or any
Subsidiary on a "pooling of interests" basis attributable to any period prior
to the date of combination; and (f) the net income of any Subsidiary to the
extent that the declaration of dividends or similar distributions by that
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Subsidiary or its Capital Stock
holders.
"Consolidated Operating Cash Flow" means, with respect to any
period, Consolidated Net Income for such period increased (without duplication),
to the extent deducted in calculating such Consolidated Net Income, by (a)
Consolidated Income Tax Expense for such period; (b) Consolidated Interest
Expense for such period; and (c) depreciation, amortization and any other non-
cash items for such period (other than any non-cash item which requires the
accrual of, or a reserve for, cash charges for any future period) of the Company
and any Subsidiary,
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including, without limitation, amortization of capitalized debt issuance costs
for such period, all of the foregoing determined on a consolidated basis in
accordance with GAAP minus non-cash items to the extent they increase
Consolidated Net Income (including the partial or entire reversal of reserves
taken in prior periods) for such period.
"Consummation Deadline" means the consummation of the Exchange Offer
in accordance with the provisions described in "The Exchange Offer--Registration
Rights."
"Cumulative Operating Cash Flow" means, as at any date of
determination, the positive cumulative Consolidated Operating Cash Flow realized
during the period commencing on the original issue date of the Notes and ending
on the last day of the most recent fiscal quarter immediately preceding the date
of determination for which consolidated financial information of the Company is
available or, if such cumulative Consolidated Operating Cash Flow for such
period is negative, the negative amount by which cumulative Consolidated
Operating Cash Flow is less than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar agreements
or arrangements designed to protect against the fluctuations in currency values.
"Debt Securities" means any debt securities issued by the Company in a
public offering or private placement.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of
(a) the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) four times the Consolidated Operating Cash Flow
for the latest fiscal quarter for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (i) any Person that
is a Subsidiary on the Determination Date (or would become a Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed to have
been a Subsidiary at all times during such Measurement Period, (ii) any Person
that is not a Subsidiary on such Determination Date (or would cease to be a
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed not to have been a Subsidiary at any time during such Measurement Period,
and (iii) if the Company or any Subsidiary shall have in any manner (x) acquired
(through an Acquisition or the commencement of activities constituting such
operating business) or (y) disposed of (by an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any operating
business during such Measurement Period or after the end of such period and on
or prior to such Determination Date, such calculation will be made on a pro
forma basis in accordance with GAAP as if, in the case of an Acquisition or the
commencement of activities constituting such operating business, all such
transactions had been consummated prior to the first day of such Measurement
Period (it being understood that in calculating Consolidated Operating Cash Flow
the exclusions set forth in clauses (a) through (f) of the definition of
Consolidated Net Income shall apply to an Acquired Person as if it were a
Subsidiary).
"Default" means any event which is, or after notice or passage of any
time or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the Board of Directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the Notes; provided, further, that any Capital Stock
that would not constitute Disqualified
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Stock but for provisions thereof giving holders thereof the right to require
such person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the Notes shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained in
"Limitation on Sale of Assets" and "Change of Control" described above and such
Capital Stock specifically provides that such person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Sale of Assets" and "Change of Control" provisions described
above.
"Escrow Agent" means Wilmington Trust Company, as escrow agent under
the Escrow Agreement, until a successor replaces it in accordance with the
provisions of the Escrow Agreement and thereafter means such successor.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Exchange Agent" means Wilmington Trust Company, as exchange agent
under the Exchange Agent Agreement, until a successor replaces it in
accordance with the provisions of the Exchange Agent Agreement and thereafter
means such successor.
"Exchange Notes" means Notes issued in exchange for Initial Notes
pursuant to the Registration Rights Agreement.
"Fair Market Value" means, with respect to any asset or property,
the sale value that would be reasonably expected to be obtained in an arm's-
length transaction between an informed and willing seller under no compulsion to
sell and an informed and willing buyer under no compulsion to buy. Fair Market
Value shall be determined by the Board of Directors of the Company acting in
good faith and shall be evidenced by a resolution of the Board of Directors.
"Generally Accepted Accounting Principles" or "GAAP" means
generally accepted accounting principles in the United States, consistently
applied, which are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's
Indenture Obligations.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor or (v) otherwise to assure a creditor
against loss; provided that the term "guarantee" shall not include
endorsements for collection or deposit, in either case in the ordinary course of
business.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to execute
a guarantee of the Notes pursuant to the "Limitation on Issuance of Guarantees
of Indebtedness" covenant until a successor replaces such party pursuant to the
applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Incur" means, with respect to any Indebtedness or other obligation
of any Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of a Person existing at
the time such Person
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becomes a Subsidiary or is merged or consolidated with or into the Company or
any Subsidiary shall be deemed to be Incurred at such time.
"Indebtedness" means, with respect to any Person, without
duplication, (i) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services, excluding any trade payables
and other accrued current liabilities arising in the ordinary course of
business, (ii) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, (iii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (unless the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising in
the ordinary course of business, (iv) all obligations under Interest Rate
Agreements, Currency Hedging Agreements or Commodity Price Protection Agreements
of such Person, (v) all Capital Lease Obligations of such Person, (vi) all
Indebtedness referred to in clauses (i) through (v) above of other Persons and
all dividends of other Persons, the payment of which is guaranteed by such
Person or which is otherwise secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not directly assumed or become liable for the payment of such Indebtedness,
(vii) all Redeemable Capital Stock issued by such Person valued at the greater
of its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends, and (viii) any refinancing of any liability of the types
referred to in clauses (i) through (vii) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be
determined in good faith by the Board of Directors of the issuer of such
Redeemable Capital Stock. In no event shall "Indebtedness" include any trade
payable or other current liabilities arising in the ordinary course of business.
The amount of any item of Indebtedness shall be the amount of such Indebtedness
properly classified as a liability on a balance sheet prepared in accordance
with GAAP.
"Indenture Obligations" means the obligations of the Company and any
other obligor under the Indenture or under the Notes (including any Guarantor)
to pay principal of, premium, if any, and interest when due and payable, and all
other amounts due or to become due under or in connection with the Indenture,
the Notes and the performance of all other obligations to the Trustee and the
Holders under the Indenture and the Notes, according to the respective terms
thereof.
"Interest Rate Agreements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
interest rate protection agreements (including, without limitation, interest
rate swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Initial Notes" means Notes issued in the Initial Notes Offering on
April 13, 1998.
"Initial Notes Offering" means the Offering of Initial Notes pursuant
to the Offering Memorandum dated April 7, 1998.
"Investment" means, with respect to any Person, directly or
indirectly, any advance, loan (including guarantees), or other extension of
credit or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase, acquisition or ownership by such Person of any
Capital Stock, bonds, notes, debentures or other securities issued or owned by
any other Person and all other items that would be classified as investments on
a balance sheet prepared in accordance with GAAP.
"IXC" means IXC Internet Services, Inc., a Delaware corporation, and
any successors or assigns under the IXC Agreement.
"IXC Agreement" means the IRU and Stock Purchase Agreement, dated as
of July 22, 1997, between the Company and IXC, as amended, pursuant to which the
Company acquired from IXC 20-year noncancellable
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indefeasible rights of use, as in effect on the date of the Indenture (or as
further amended, from time to time, to the extent that such amendment has been
determined by the Board of Directors, in good faith, not to adversely affect the
Holders).
"Lien" means any mortgage or deed of trust, pledge, lien (statutory
or otherwise), security interest, hypothecation, or other encumbrance upon or
with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than (i) any lease
properly classified as an operating lease under GAAP, (ii) intellectual property
licensing arrangements or (iii) cancellation or termination rights or provisions
contained in agreements governing any indefeasible rights of use or similar
property rights which do not materially impair the use of the property or
interest which is the subject of such cancellation or termination rights or
provisions.
"Liquidated Damages" has the meaning provided in Section 5 of the
Registration Rights Agreement.
"Maturity" means, when used with respect to the Notes, the date on
which the principal of the Notes becomes due and payable as therein provided or
as provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control Offer in respect of a Change of Control, call
for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset Sales)
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any Wholly
Owned Subsidiary) net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the subject of such Asset
Sale, (iv) amounts required to be paid to any Person (other than the Company or
any Subsidiary) owning a beneficial interest in the assets subject to the Asset
Sale and (v) amounts contractually required to be deposited into escrow or
similar trust arrangements and other appropriate amounts to be provided by the
Company or any Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against, any liabilities associated with such Asset Sale and retained by
the Company or any Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale or reimbursement
obligations related to letters of credit issued against liabilities associated
therewith, all as reflected in an officers' certificate delivered to the Trustee
(which amounts shall become Net Cash Proceeds only at such time as they are
released from escrow or such trust arrangements or otherwise cease to be
reserved or subject to other obligations to third parties) and (b) with respect
to any issuance or sale of Capital Stock or options, warrants or rights to
purchase Capital Stock, or debt securities or Capital Stock that have been
converted into or exchanged for Capital Stock as referred to under "--Certain
Covenants--Limitation on Restricted Payments," the proceeds of such issuance or
sale in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Subsidiary), net of attorney's fees, accountant's fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale (or conversion in the case of debt
securities or Capital Stock that have been converted) and net of taxes paid or
payable as a result thereof.
"Notes" means the Initial Notes and the Exchange Notes issued from
time to time under the Indenture.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company
that is pari passu in right of payment to the Notes and (b) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment to such
Guarantee.
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"Permitted Credit Facility" means any unsubordinated commercial term
loan and/or revolving credit facility entered into principally with commercial
banks and/or other financial institutions typically party to commercial loan
agreements and any refinancing thereof.
"Permitted Investment" means (i) Investments in any Wholly Owned
Subsidiary or any Person which, as a result of, or in connection with, such
Investment, (a) becomes a Wholly Owned Subsidiary or (b) is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to, or is liquidated into, the Company or any Wholly Owned
Subsidiary; (ii) Indebtedness of the Company or a Subsidiary described under
clauses (iv) and (vii) of paragraph (b) under "--Certain Covenants--Limitation
on Indebtedness"; (iii) Investments in any of the Notes; (iv) Investments in
Cash Equivalents; (v) Investments acquired by the Company or any Subsidiary in
connection with an Asset Sale permitted under "--Certain Covenants--Limitation
on Sale of Assets" to the extent such Investments are non-cash proceeds as
permitted under such covenant; (vi) Investments in existence or contractually
committed to on the date of the Indenture and any extension, modification or
renewal of any such Investment that does not increase the amount of such
Investment; (vii) guarantees of Indebtedness of a Wholly Owned Subsidiary given
by the Company or another Wholly Owned Subsidiary and guarantees of Indebtedness
of the Company given by any Subsidiary, in each case, not otherwise in violation
of the terms of the Indenture; (viii) advances to employees or officers of the
Company in the ordinary course of business so long as the aggregate amount of
such advances shall not exceed $2 million outstanding at any one time; (ix) any
Investment in the Company by any Subsidiary of the Company; provided, that any
such Investment in the form of Indebtedness shall be Subordinated Indebtedness;
(x) accounts receivable created or acquired in the ordinary course of business
of the Company or any Subsidiary and Investments arising from transactions by
the Company or any Subsidiary with trade creditors or customers in the ordinary
course of business (including any such Investment received pursuant to any plan
of reorganization or similar arrangement pursuant to the bankruptcy or
insolvency of such trade creditors or customers or otherwise in settlement of a
claim); (xi) loans in the ordinary course of business to employees, officers or
directors of the Company or a Subsidiary to purchase Capital Stock of the
Company pursuant to the terms of stock benefit plans; (xii) Investments the
consideration of which is Capital Stock of the Company; (xiii) Investments in or
acquisitions of Capital Stock or other obligations, property or securities of
Persons (other than Affiliates) received in the bankruptcy or reorganization of
or by such Person or otherwise taken in settlement or satisfaction of claims,
disputes or judgments, and, in each case, extensions, modifications and renewals
thereof; (xiv) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility and workers' compensation, performance and other
similar deposits; (xv) Investments, not to exceed $100 million at any one time
outstanding, to obtain noncancellable indefeasible rights of use to, or capacity
in, fiber-based bandwidth (or similar network bandwidth), related equipment
and/or other Telecommunications Assets in the ordinary course of the Company's
business; and (xvi) any other Investments in an aggregate amount not to exceed
$50 million at any one time outstanding. In connection with any assets or
property contributed or transferred to any Person as an Investment, such
property and assets shall be equal to the Fair Market Value (as determined by
the Company's Board of Directors) at the time of such Investment.
"Permitted Joint Venture" means a corporation, partnership or other
Person engaged in a Telecommunications Business over which the Company has,
directly or indirectly, the power to direct the policies, management and affairs
in all material respects.
"Permitted Lien" means:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired; (2) taxes not
yet delinquent or which are being contested in good faith; (3) security for
payment of workers' compensation or other insurance or arising under workers'
compensation laws or similar legislation; (4) good faith deposits in connection
with bids, tenders, leases, contracts (other than contracts evidencing
Indebtedness); (5) zoning restrictions, easements, licenses, reservations, title
defects, rights of others for rights of way, utilities, sewers, electric lines,
telephone or telegraph lines, and other similar purposes, provisions, covenants,
conditions, waivers, restrictions on the use of property or irregularities of
title (and with respect to leasehold interests, mortgages, obligations, liens
and other encumbrances incurred, created, assumed or permitted to
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exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which materially
impairs the use of any parcel of property material to the operation of the
business of the Company or any Subsidiary or the value of such property for the
purpose of such business; (6) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds; or (7) operation of law in
favor of landlords, carriers, warehousemen, bankers, mechanics, materialmen,
laborers, employees or suppliers, incurred in the ordinary course of business
for sums which are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of business of
the Company or any Subsidiary;
(d) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clause (i) of
paragraph (b) of "--Certain Covenants--Limitation on Indebtedness" which
attaches within 180 days of the incurrence of such Indebtedness or the date of
delivery of such property or asset (whichever occurs later); provided that such
Liens only extend to such acquired, developed or constructed property and any
accessories, accessions, additions, replacements and proceeds thereof;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(f) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clauses (ii), (iv) or
(viii) of paragraph (b) of "--Limitation on Indebtedness;"
(g) any Lien in favor of the Company or any Wholly Owned Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Subsidiaries other than the
property or assets of the Acquired Person covered thereby or the property assets
so acquired;
(i) any Lien in favor of the Trustee for the benefit of the Holders or
the Trustee arising under the provisions in the Indenture or the Escrow
Agreement;
(j) any Lien encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the Company
or any Subsidiary if and to the extent arising in the ordinary course of
business, including rights of offset and set-off;
(k) any Lien in favor of customs or revenue authorities to secure
payment of customs duties in connection with the importation of goods in the
ordinary course of business;
(l) leases, subleases, licenses or other similar rights granted to
third Persons not interfering with the ordinary course of business of the
Company or its Subsidiaries;
(m) any Lien securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to such
letters of credit; and
(n) any Lien securing any refinancing, in whole or in part, of any
obligation or Indebtedness described in the foregoing clauses (a) through (m)
(other than clause (e)) so long as no additional collateral is granted as
security thereby.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
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"Preferred Stock" means, with respect to any Person, any Capital
Stock of any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of Capital
Stock (other than Disqualified Stock) of the Company with gross proceeds to the
Company of at least $25 million pursuant to a registration statement that has
been declared effective by the Commission pursuant to the Securities Act (other
than a registration statement on Form S-8 or otherwise relating to equity
securities issuable under any employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien
on assets related to the business of the Company and any additions,
replacements, modifications and accessions thereto, which are purchased by the
Company at any time after the Notes are issued; provided that (i) the security
agreement or conditional sales or other title retention contract pursuant to
which the Lien on such assets is created (collectively a "Purchase Money
Security Agreement") shall be entered into within 180 days after the purchase
or substantial completion of the construction of such assets and shall at all
times be confined solely to the assets so purchased or acquired, any additions,
replacements, modifications and accessions thereto and any proceeds and products
therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection with
the purchase of additions and accessions thereto and except in respect of fees
and other obligations in respect of such Indebtedness and (iii) (A) the
aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Purchase Money Security Agreement are entered into
exceed 100% of the purchase price to the Company of the assets subject thereto
or (B) the Indebtedness secured thereby shall be with recourse solely to the
assets so purchased or acquired, any additions, replacements, modifications and
accessions thereto and any proceeds and products therefrom.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by
its terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is or upon the happening of an event or passage of
time would be, required to be redeemed prior to the Stated Maturity of the
principal of the Notes or is redeemable at the option of the holder thereof at
any time prior to such Stated Maturity, or is convertible into or exchangeable
for debt securities at any time prior to such Stated Maturity at the option of
the holder thereof.
"Registration Default" has the meaning provided in Section 5 of the
Registration Rights Agreement.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions pursuant to which the Company or a Subsidiary sells or
transfers any property or asset in connection with the leasing, or the resale
against installment payments, of such property or asset to the seller or
transferor.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Shelf Registration Statement" means a shelf registration statement
pursuant to Rule 415 of the Securities Act.
"Stated Maturity" means, when used with respect to any Indebtedness
or any installment of interest thereon, the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled
Affiliate of any Person which is or a controlled Affiliate of which is) engaged
principally in the Telecommunications Business and which has a Total Market
Capitalization of at least $500 million.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor expressly subordinated by its terms in right of payment to the Notes
or the Guarantee of such Guarantor, as the case may be.
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"subsidiary" means, with respect to any Person, a corporation,
association or other business entity (i) of which outstanding Capital Stock
having at least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of voting
interest is owned, directly or indirectly, by such Person and/or one or more
subsidiaries of such Person.
"Subsidiary" means any subsidiary of the Company other than an
Unrestricted Subsidiary.
"Telecommunications Assets" means all assets (including Capital
Stock), rights (contractual or otherwise) and properties, real or personal,
whether tangible or intangible, used or intended for use in connection with a
Telecommunications Business.
"Telecommunications Business" means, when used in reference to any
Person, that such Person is engaged primarily in (i) the business of
transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities, (ii) the business
of creating, developing or marketing communications related network equipment or
services or computer-based information or (iii) businesses reasonably related
thereto, which determination shall, in any such case, be made in good faith by
the Board of Directors.
"Total Consolidated Indebtedness" means, as at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and any Subsidiary, on a Consolidated basis in accordance with GAAP,
outstanding as of such date of determination, after giving effect to any
Incurrence of Indebtedness and the application of the proceeds therefrom giving
rise to such determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists
with respect to shares of any such class, the value of such shares for purposes
of clause (b) of the preceding sentence shall be determined by the Board in good
faith and evidenced by a resolution of the Board filed with the Trustee.
Notwithstanding the foregoing, unless the Person's Common Stock is listed on any
national securities exchange or on The Nasdaq National Market, the "Total
Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and any
subsidiaries (including the fair market value of their debt and equity), as
determined by an independent banking firm of national standing with experience
in such valuations and evidenced by a written opinion in customary form filed
with the Trustee; provided that for purposes of any such determination, the
enterprise value of the Person shall be calculated as if the Person were a
publicly held corporation without a controlling stockholder. For purposes of
any such determination, such banking firm's written opinion may state that such
fair market value is no less than a specified amount and such opinion may be as
of a date no earlier than 90 days prior to the date of such determination.
"Trading Day" with respect to a securities exchange or automated
quotation system means a day on which such exchange or system is open for a full
day of trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, or any successor statute.
"Trustee" means Wilmington Trust Company, until a successor trustee
shall have become such pursuant to the applicable provisions of the Indenture,
and thereafter "Trustee" shall mean such successor trustee.
"Unrestricted Subsidiary" means (i) any subsidiary of the Company
that at the time of determination shall be an Unrestricted Subsidiary (as
designated by the Board of Directors of the Company, as provided below) and (ii)
any subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all of
the following conditions apply: (a) neither the Company nor any of its
Subsidiaries provides credit support for
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Indebtedness of such subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness), (b) such subsidiary is not liable,
directly or indirectly, with respect to any Indebtedness other than Unrestricted
Subsidiary Indebtedness, (c) any Investment in such subsidiary made as a result
of designating such subsidiary an Unrestricted Subsidiary shall not violate the
provisions of the "--Certain Covenants--Limitation on Unrestricted Subsidiaries"
covenant and such Unrestricted Subsidiary is not party to any agreement,
contract, arrangement or understanding at such time with the Company or any
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company; and (v) such Unrestricted Subsidiary does not own
any Capital Stock in any Subsidiary of the Company which is not simultaneously
being designated an Unrestricted Subsidiary. Any such designation by the Board
of Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a board resolution giving effect to such designation and an officers'
certificate certifying that such designation complies with the foregoing
conditions and shall be deemed a Restricted Payment on the date of designation
in an amount equal to the greater of (1) the net book value of such Investment
or (2) the fair market value of such Investment as determined in good faith by
the Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Subsidiary; provided that (i)
immediately after giving effect to such designation, the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the restrictions under "--Certain Covenants--Limitation on Indebtedness" and
(ii) all Indebtedness of such Subsidiary shall be deemed to be incurred on the
date such Unrestricted Subsidiary becomes a Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted
Subsidiary means Indebtedness of such Unrestricted Subsidiary (i) as to which
neither the Company nor any Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Subsidiary being the primary obligor on,
guarantor of, or otherwise liable in any respect to, such Indebtedness), except
Guaranteed Debt of the Company or any Subsidiary to any Affiliate, in which case
(unless the incurrence of such Guaranteed Debt resulted in a Restricted Payment
at the time of incurrence) the Company shall be deemed to have made a Restricted
Payment equal to the principal amount of any such Indebtedness to the extent
guaranteed at the time such Affiliate is designated an Unrestricted Subsidiary
and (ii) which, upon the occurrence of a default with respect thereto, does not
result in, or permit any holder of any Indebtedness of the Company or any
Subsidiary to declare, a default on such Indebtedness of the Company or any
Subsidiary or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"U.S. Government Securities" means securities that are direct
obligations of the United States of America, the payment of which its full faith
and credit is pledged.
"Voting Stock" means Capital Stock of the class or classes pursuant
to which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of a corporation (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock
of which is owned by the Company or another Wholly Owned Subsidiary. For the
purposes of this definition, any director qualifying shares or investments by
foreign nationals mandated by, or required to maintain its limited liability
status under, applicable law shall be disregarded in determining the ownership
of a Subsidiary.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Initial Notes sold to Qualified Institutional Buyers in the United
States initially were in the form of three registered global book-entry notes
without interest coupons (collectively, the "U.S. Global Notes"). Upon
issuance, the U.S. Global Notes were deposited with the Trustee, as custodian
for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee for credit to the accounts of DTC's
Direct and Indirect Participants (as defined below). The Initial Notes sold in
offshore transactions in reliance on Regulation S initially were in the form of
one registered, global book-entry Note without interest coupons (the "Reg S
Global Notes"). Upon issuance, the Reg S Global Notes were deposited with the
Trustee, as custodian for DTC, in New York, New York and registered in the name
of a nominee of DTC for credit to the accounts of Indirect Participants
participating in DTC through the Euroclear System ("Euroclear") and Cedel
Bank, societe anonyme ("CEDEL"). Beneficial interests in the Reg S Global
Notes may be transferred to a person that takes delivery in the form of an
interest in the U.S. Global Notes. Beneficial interests in the U.S. Global
Notes may be transferred to a person that takes delivery in the
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form of an interest in the Reg S Global Notes, provided, in each case, that the
certification requirements described below are complied with. See "--Transfers
of Interests in One Global Note for Interests in Another Global Note." All
registered global notes are referred to herein collectively as "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes
(as defined below), if any, will be subject to certain restrictions on transfer
and will bear a restrictive legend as described under "Notice to Investors."
In addition, transfer of beneficial interests in any Global Notes will be
subject to the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear and CEDEL), which may
change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust
company created to hold securities for its participating organizations
(collectively, the "Direct Participants") and to facilitate the clearance and
settlement of transactions in those securities between Direct Participants
through electronic book-entry changes in accounts of Direct Participants. The
Direct Participants include securities brokers and dealers (including the
Initial Purchasers), banks, trust companies, clearing corporations and certain
other organizations, including Euroclear and Cedel. Access to DTC's system is
also available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"Indirect Participants").
DTC has also advised the Company that, pursuant to DTC's procedures,
(i) upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes that have been allocated to them by the Initial
Purchasers, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes. The Company expects that payments by Direct
Participants to owners of beneficial interests in such Global Notes held through
such Direct Participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in the name of nominees for such customers. Such payments will be
the responsibility of such Direct Participants.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Global Notes may hold their interests therein directly through Euroclear or
CEDEL or indirectly through organizations that are participants in Euroclear or
CEDEL. Investors may also hold interests in the Reg S Global Notes through
organizations other than Euroclear and CEDEL that are Direct Participants in the
DTC system. Morgan Guaranty Trust Company of New York, Brussels office is the
operator and depository of Euroclear and Citibank, N.A. is the operator and
depository of CEDEL (each a "Nominee" of DTC for the benefit of Euroclear and
CEDEL, respectively). Therefore, they will each be recorded on DTC's records as
the holders of all ownership interests held by them on behalf of Euroclear and
CEDEL, respectively. Euroclear and CEDEL must maintain on their own records the
ownership interests, and transfers of ownership interests by and between, their
own customers' securities accounts. DTC will not maintain such records. All
ownership interests in any Global Notes, including those of customers'
securities accounts held through Euroclear or CEDEL, may be subject to the
procedures and requirements of DTC.
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The laws of some states in the United States require that certain
persons take physical delivery in definitive, certificated form, of securities
that they own. This may limit or curtail the ability to transfer beneficial
interests in a Global Note to such persons. Because DTC can act only on behalf
of Direct Participants, which in turn act on behalf of Indirect Participants and
others, the ability of a person having a beneficial interest in a Global Note to
pledge such interest to persons or entities that are not Direct Participants in
DTC, or to otherwise take actions in respect of such interests, may be affected
by the lack of physical certificates evidencing such interests. For certain
other restrictions on the transferability of the Notes, see "--Reg S Global
Notes" and "--Transfers of Interests in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "--TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES", OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL
NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Notes are registered (including Notes
represented by Global Notes) as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Payments in respect of
the principal, premium, Liquidated Damages, if any, and interest on Global Notes
registered in the name of DTC or its nominee will be payable by the Trustee to
DTC or its nominee as the registered holder under the Indenture. Consequently,
neither the Company, the Trustee nor any agent of the Company or the Trustee has
or will have any responsibility or liability for (i) any aspect of DTC's records
or any Direct Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised the Company that its current payment practice (for
payments of principal, interest and the like) with respect to securities such as
the Notes is to credit the accounts of the relevant Direct Participants with
such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee or the Company. Neither the Company nor the Trustee will be liable for
any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and the Company and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System
and, therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect
Participants who hold an interest in the Notes through Euroclear or CEDEL) who
hold an interest through a Direct Participant will be effected in accordance
with the procedures of such Direct Participant but generally will be settled in
immediately available funds. Transfers between and among Indirect Participants
who hold interests in the Notes through Euroclear and CEDEL will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear's
or CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL; however, delivery of instructions relating to
crossmarket transactions must be made directly to Euroclear or CEDEL, as the
case may be, by the counterparty in accordance with the rules and procedures of
Euroclear or CEDEL and within their established deadlines (Brussels time for
Euroclear and UK time for CEDEL). Indirect Participants who hold interest in
the Notes through Euroclear and CEDEL may not deliver instructions directly to
Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction
meets its settlement requirements, deliver instructions to its respective
Nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in the
relevant Global Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
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<PAGE>
Because of time zone differences, the securities accounts of an
Indirect Participant who holds an interest in the Notes through Euroclear or
CEDEL purchasing an interest in a Global Note from a Direct Participant in DTC
will be credited, and any such crediting will be reported to Euroclear or CEDEL
during the European business day immediately following the settlement date of
DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and CEDEL customers will not have access
to the cash amount credited to their accounts as a result of a sale of an
interest in a Reg S Global Note to a DTC Participant until the European business
day for Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to
be taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the Reg S Global Notes and in
the U.S. Global Notes among Direct Participants, including Euroclear and CEDEL,
they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Company, the Initial Purchasers or the Trustee shall have any responsibility for
the performance by DTC, Euroclear or CEDEL or their respective Direct and
Indirect Participants of their respective obligations under the rules and
procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL
and their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
REG S GLOBAL NOTES
An Indirect Participant who holds an interest in the Reg S Global
Notes through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case
may be, with a certificate in the form required by the Indenture certifying that
such Indirect Participant is either not a U.S. Person (as defined below) or has
purchased such interests in a transaction that is exempt from the registration
requirements under the Securities Act, and Euroclear or CEDEL, as the case may
be, must provide to the Trustee (or the Paying Agent, if other than the Trustee)
a certificate in the form required by the Indenture prior to the payment of
interest or principal with respect to such Indirect Participant's beneficial
interests in such Reg S Global Notes.
"U.S. Person" means (i) any individual resident in the United
States, (ii) any partnership or corporation organized or incorporated under the
laws of the United States, (iii) any estate of which an executor or
administrator is a U.S. Person (other than an estate governed by foreign law and
of which at least one executor or administrator is a non-U.S. Person who has
sole or shared investment discretion with respect to its assets), (iv) any trust
of which any trustee is a U.S. Person (other than a trust of which at least one
trustee is a non-U.S. Person who has sole or shared investment discretion with
respect to its assets and no beneficiary of the trust (and no settlor, if the
trust is revocable) is a U.S. Person), (v) any agency or branch of a foreign
entity located in the United States, (vi) any non-discretionary or similar
account (other than an estate or trust) held by a dealer or other fiduciary for
the benefit or account of a U.S. Person, (vii) any discretionary or similar
account (other than an estate or trust) held by a dealer or other fiduciary
organized, incorporated or (if an individual) resident in the United States
(other than such an account held for the benefit or account of a non-U.S.
Person), (viii) any partnership or corporation organized or incorporated under
the laws of a foreign jurisdiction and formed by a U.S. Person principally for
the purpose of investing in securities not registered under the Securities Act
(unless it is organized or incorporated and owned by "accredited investors"
within the meaning of Rule 501(a) under the Securities Act who are not natural
persons, estates or trusts); provided, however that the term "U.S. Person"
shall not include (A) a branch or agency of a U.S. Person that is located and
operating outside the United States for valid business purposes as a locally
regulated branch or agency engaged in the banking or insurance business, (B) any
employee benefit plan established and administered in accordance with the law,
customary practices and documentation of a foreign country and (C) the
international
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<PAGE>
organizations set forth in Section 902(o)(7) of Regulation S under the
Securities Act and any other similar international organizations, and their
agencies, affiliates and pension plans.
TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
An Indirect Participant who holds an interest in Reg S Global Notes
will be permitted to transfer its interest to a U.S. Person who takes delivery
in the form of an interest in U.S. Global Notes only upon receipt by the Trustee
of a written certification from the transferor to the effect that such transfer
is being made in accordance with the restrictions on transfer set forth under
"--Notice to Investors" and set forth in the legend printed on the Reg S
Global Notes.
A Direct or Indirect Participant who holds an interest in U.S. Global
Notes may transfer its interests to a person who takes delivery in the form of
an interest in Reg S Permanent Global Notes only upon receipt by the Trustee of
a written certification from the transferor to the effect that such transfer is
being made in accordance with Rule 904 of Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S
Global Notes for a beneficial interest in U.S. Global Notes or vice versa will
be effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection
with such transfer, appropriate adjustments will be made to reflect a decrease
in the principal amount at maturity of the one Global Note and a corresponding
increase in the principal amount at maturity of the other Global Note, as
applicable. Any beneficial interest in the one Global Note that is transferred
to a person who takes delivery in the form of the other Global Note will, upon
transfer, cease to be an interest in such first Global Note and become an
interest in such other Global Note and, accordingly, will thereafter be subject
to all transfer restrictions and other procedures applicable to beneficial
interests in such other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in
registered, certificated form without interest coupons ("Certificated Notes")
if (i) DTC (x) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Notes and the Company thereupon fails to appoint a
successor depositary within 90 days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes or
(iii) there shall have occurred and be continuing a Default or an Event of
Default with respect to the Notes. In any such case, the Company will notify
the Trustee in writing that, upon surrender by the Direct and Indirect
Participants of their interest in such Global Note, Certificated Notes will be
issued to each person that such Direct and Indirect Participants and DTC
identify as being the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless the Company
determines otherwise in compliance with applicable law.
Neither the Company nor the Trustee will be liable for any delay by
the holder of any Global Note or DTC in identifying the beneficial owners of
Notes, and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Note or DTC
for all purposes.
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<PAGE>
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, the Company will make all
payments of principal, premium, if any, interest and Liquidated Damages, if any,
by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. The Company expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
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<PAGE>
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to
time, may be used by Participating Broker-Dealers in connection with resales of
Exchange Notes received in exchange for Initial Notes where such Initial Notes
were acquired as a result of market-making activities or other trading
activities. Each Participating Broker-Dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Company has agreed that under certain circumstances, the Company shall use its
best efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended to the extent necessary to ensure that it is
available for sales of Exchange Notes by Participating Broker-Dealers, and to
ensure that the Exchange Offer Registration Statement conforms with the
requirements of the Securities Act and the policies, rules and regulations of
the Commission as announced from time to time, for a period of one year from the
Consummation Deadline or such shorter period as will terminate when all Transfer
Restricted Securities covered by the Exchange Offer Registration Statement have
been sold pursuant thereto.
The Company will not receive any proceeds from any sale of Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that acquired Initial Notes as a result of market making
activities or other trading activities and who resells Exchange Notes that were
received by it pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon
by Nixon, Hargrave, Devans & Doyle LLP, New York, New York, counsel for the
Company. Certain attorneys with Nixon, Hargrave, Devans & Doyle LLP currently
own in the aggregate less than one percent of the Company's common stock.
EXPERTS
The consolidated financial statements of PSINet Inc. as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of iSTAR internet inc. as of May
31, 1997 and 1996, and for each of the two years in the period ended May 31,
1997 included in this Prospectus, have been so included in reliance on the
report of KPMG, independent auditors, given on the authority of said firm as
experts in accounting and auditing.
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<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at its offices at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at Seven World Trade Center, New York, New
York 10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained by
mail from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates, and can also be
obtained electronically through the SEC's Electronic Data Gathering, Analysis
and Retrieval system at the SEC's Web site (http://www.sec.gov). The Company's
common stock is listed on The Nasdaq Stock Market and copies of such reports and
other information can also be inspected at the offices of The Nasdaq Stock
Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the SEC a registration statement on
Form S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations promulgated thereunder, with
respect to the Exchange Notes offered hereby. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto,
as permitted by the rules and regulations of the SEC. For further information
with respect to the Company and the Exchange Notes offered hereby, reference is
made to the Registration Statement, including the exhibits thereto and the
financial statements, notes and schedules filed as a part thereof, which may be
inspected and copied at the public reference facilities of the SEC referred to
above. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the full text of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company furnishes stockholders with annual reports containing
audited financial statements and with proxy material for its annual meetings
complying with the proxy requirements of the Exchange Act.
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<PAGE>
GLOSSARY
ATM Asynchronous Transfer Mode. A communications standard
that provides for information transfer in the form of
fixed-length cells of 53 bytes each. The ATM format can
be used to deliver voice, video and data traffic at
varying rates.
Backbone A centralized high-speed network that interconnects
smaller, independent networks.
Bandwidth The number of bits of information which can move over a
communications medium in a given amount of time; the
capacity of a telecommunications circuit/network to
carry voice, data and video information. Typically
measured in Kbps and Mbps. Bandwidth from public
networks is typically available to business and
residential end-users in increments from 56 Kbps to
T-3.
Broadband A transmission system that multiplexes multiple
independent signals onto one cable.
CLEC Competitive local exchange carrier.
CSU/DSU Channel Service Unit/Data Service Unit. A device used
in digital transmission for connecting data terminal
equipment, such as a router, to a digital transmission
circuit or service.
Dedicated circuits Telecommunications lines dedicated or reserved for use
by particular customers along predetermined routes.
Dial up line Communications circuit that is established by a
switched-circuit connection using the telephone
network.
DNS Domain Name System. Distributed name system used in the
Internet.
Electronic mail
or e-mail An application that allows a user to send or receive
text messages to or from any other user with an
Internet address, commonly termed an e-mail address.
56 Kbps Equivalent to a single high-speed telephone service
line; capable of transmitting one voice call or 56 Kbps
of data. Currently in widespread use by medium and
large businesses primarily for entry level high-speed
data and very low-speed video applications.
Firewall A gateway between two networks that buffers and screens
all information and prevents unauthorized traffic from
passing between such networks.
Frame relay A communications standard that is optimized for
efficient switching of variable-length data packets.
Gbps Gigabits per second. A measure of digital transmission
rates. One gigabit equals 1,000 megabits.
Host A computer with direct access to the Internet.
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<PAGE>
HTML Hypertext Markup Language used to produce Web pages. It
is a method of presenting information where selected
words can be "expanded" to provide other information
about the word.
ILEC Incumbent local exchange carrier.
Internet An open global network of interconnected commercial,
educational and governmental computer networks which
utilize TCP/IP, a common communications protocol.
Internetworking The process of communicating between and among
networks.
Intranet A TCP/IP based network and Web site which is securely
isolated from the Internet and serves the internal
needs of a company or institution.
IP Internet protocol.
IRUs Indefeasible rights of use in network bandwidth
capacity.
ISDN Integrated Services Digital Network. A network that
provides digital voice and data services through a
single medium.
ISP Internet service provider.
Kbps Kilobits per second. A measure of digital information
transmission rates. One kilobit equals 1,000 bits of
digital information. Normally, 10 bits are used for
each alpha-numeric character.
LAN Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a localized
environment.
LEC Local Exchange Carrier. A telecommunications company
that provides telecommunications services in a
geographic area in which calls generally are
transmitted without toll charges.
Mbps Megabits per second. A measure of digital information
transmission rates. One megabit equals 1,000 kilobits.
Modem A device for transmitting information over an analog
communications channel such as a POTS telephone
circuit.
Multiplexing Putting multiple signals on a single channel.
Network A collection of distributed computers which share data
and information through inter-connected lines of
communication.
OC-3 OC-3 SONET high capacity optical telecommunications
line capable of transmitting data at 155.52 Mbps.
OC-12 OC-12 SONET high capacity optical telecommunications
line capable of transmitting data at 622.08 Mbps.
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<PAGE>
OC-48 OC-48 SONET high capacity optical telecommunications
line capable of transmitting data at 2488.32 Mbps.
OC-48 Equivalent One OC-48, four OC-12s, 16 OC-3s or 48
DS-3s.
OC-48 Equivalent Mile One Route Mile of OC-48 capacity, four
Route Miles of OC-12 capacity, 16 Route Miles of OC-3
capacity or 48 Route Miles of DS-3 capacity.
On-line services Commercial information services that offer a computer
user access through a modem to a specified slate of
information, entertainment and communications menus.
These services are generally closed systems, although
many are now offering full Internet access.
Open systems A networking system which is based upon non-proprietary
protocols (i.e., protocols which are in the public
domain).
Peering The commercial practice under which nationwide ISPs
exchange each other's traffic, in most cases, without
the payment of settlement charges.
POPs Points-of-Presence. An interlinked group of modems,
routers and other computer equipment, located in a
particular city or metropolitan area, that allows a
nearby subscriber to access the Internet through a
local telephone call or using a short-distance
permanent data circuit.
POTS Plain Old Telephone Service. Standard analog telephone
service used by many telephone companies throughout the
United States.
PRI Primary Rate Interface. ISDN interface to primary rate
access.
Protocol A formal description of message formats and the rules
two or more machines must follow in order to
communicate.
RBOC Regional Bell Operating Company.
Router A device that receives and transmits data packets
between segments in a network or different networks.
Route Mile One mile of the actual geographic length of the high
capacity telecommunications fiber route.
Server Software that allows a computer to offer a service to
another computer. Other computers contact the server
program by means of matching client software. The term
also refers to the computer on which server software
runs.
SMDS Switched Multimegabit Data Service. A public packet-
switching service offered by telephone companies in
many major metropolitan areas.
SONET Synchronous Optical Network.
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TCP/IP Transmission Control Protocol/Internet Protocol. A
compilation of network and transport-level protocols
that allow computers with different architectures and
operating system software to communicate with other
computers on the Internet.
T-3 or DS-3 A data communications line capable of transmitting data
at 45 Mbps.
UNIX A computer operating system for workstations and
personal computers and noted for its portability and
communications functionality.
WAN Wide Area Network. A network spanning a wide geographic
area.
Web or World Wide Web A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication of
graphics, video and sound.
Web server The computer system that runs Web software, used to
create custom Web sites, Web pages, and home pages.
Web sites or Web pages A site located on the Web, written in the HTML or SGML
language.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PSINet Inc.
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997................................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997.................. F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.................. F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
iSTAR Internet Inc.
<TABLE>
<CAPTION>
Unaudited Financial Statements
<S> <C>
Consolidated Balance Sheets as of August 31, 1997 and 1996 (Unaudited).................................... F-23
Consolidated Statements of Operations and Deficit for the three months ended August 31, 1997 and
1996 (Unaudited)................................................................................... F-24
Consolidated Statements of Changes in Financial Position for the three months ended August 31,
1997 and 1996 (Unaudited).......................................................................... F-25
Notes to Consolidated Financial Statements (Unaudited).................................................... F-26
Audited Financial Statements
Auditors' Report to the Directors......................................................................... F-31
Consolidated Balance Sheets as of May 31, 1997 and 1996................................................... F-32
Consolidated Statements of Operations and Deficit for the years ended May 31, 1997 and 1996............... F-33
Consolidated Statements of Changes in Financial Position for the years ended May 31, 1997 and
1996............................................................................................... F-34
Notes to Consolidated Financial Statements................................................................ F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of PSINet Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholders'
equity (deficit) and of cash flows present fairly, in all material respects, the
financial position of PSINet Inc. and its subsidiaries at December 31, 1996 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Washington, D.C.
February 6, 1998, except as to the first three paragraphs of Note 11, which are
as of February 25, 1998
F-2
<PAGE>
PSINET INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
------------- --------------
<S> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS)
ASSETS
------
Current assets:
Cash and cash equivalents........................................................ $ 51,741 $ 33,322
Restricted cash and short-term investments....................................... 954 20,690
Short-term investments and marketable securities................................. 4,649 --
Accounts receivable, net of allowances of $1,909,000 and $2,101,000.............. 17,421 11,022
Notes receivable................................................................. 747 7,224
Prepaid expenses................................................................. 1,963 1,478
Other current assets............................................................. 4,836 5,162
--------- ---------
Total current assets.......................................................... 82,311 78,898
--------- ---------
Property and equipment, net...................................................... 72,061 95,619
Goodwill and other intangibles, net of accumulated amortization of
$9,778,000 and $2,057,000....................................................... 16,673 4,675
Other assets and deferred charges................................................ 6,067 6,989
--------- ---------
Total assets.................................................................. $ 177,112 $ 186,181
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------
Current liabilities:
Lines of credit.................................................................. $ 2,000 $ 5,648
Current portion of long-term debt................................................ 24,915 33,985
Trade accounts payable........................................................... 19,868 25,031
Accrued payroll and related expenses............................................. 3,098 4,636
Other accounts payable and accrued liabilities................................... 3,632 2,382
Deferred revenue................................................................. 5,612 5,944
--------- ---------
Total current liabilities..................................................... 59,125 77,626
--------- ---------
Long-term debt..................................................................... 26,938 33,820
Deferred income taxes.............................................................. 476 --
Other liabilities.................................................................. 790 1,306
--------- ---------
Total liabilities............................................................. 87,329 112,752
--------- ---------
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Preferred stock, $.01 par value; 29,324,858 shares authorized; no shares
issued and outstanding......................................................... -- --
Convertible preferred stock, $.01 par value; $50.00 stated value;
675,142 shares authorized; 600,000 shares issued and outstanding............... -- 28,135
Common stock, $.01 par value; 100,000,000 shares authorized;
40,212,790 and 40,577,342 shares issued........................................ 402 406
Capital in excess of par value................................................... 208,000 210,162
Retained deficit................................................................. (116,636) (162,649)
Treasury stock, 99,556 shares, at cost........................................... (2,005) (2,005)
Cumulative foreign currency translation adjustment............................... 22 (620)
--------- ---------
Total shareholders' equity.................................................... 89,783 73,429
--------- ---------
Total liabilities and shareholders' equity.................................... $ 177,112 $ 186,181
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
Revenue.......................................................................... $ 38,722 $ 84,351 $121,902
Other income, net................................................................ -- 5,417 --
-------- -------- --------
38,722 89,768 121,902
Operating costs and expenses:
Data communications and operations............................................. 32,124 70,102 94,363
Sales and marketing............................................................ 23,930 27,064 25,831
General and administrative..................................................... 10,569 20,648 22,947
Depreciation and amortization.................................................. 14,778 28,035 28,347
Intangible asset write-down.................................................... 9,938 -- --
-------- -------- --------
Total operating costs and expenses.......................................... 91,339 145,849 171,488
-------- -------- --------
Loss from operations............................................................. (52,617) (56,081) (49,586)
Interest expense................................................................. (1,964) (5,025) (5,362)
Interest income.................................................................. 1,625 3,794 3,059
Other income..................................................................... -- 2,863 110
Gain on sale of subsidiary....................................................... -- -- 5,701
Equity in loss of affiliate...................................................... (204) (807) --
-------- -------- --------
Loss before income taxes......................................................... (53,160) (55,256) (46,078)
Income tax benefit............................................................... -- 159 476
-------- -------- --------
Net loss......................................................................... $(53,160) $(55,097) $(45,602)
======== ======== ========
Return to preferred shareholders................................................. -- -- (411)
-------- -------- --------
Net loss available to common shareholders........................................ $(53,160) $(55,097) $(46,013)
======== ======== ========
Basic loss per share............................................................. $(2.01) $(1.40) $(1.14)
======== ======== ========
Diluted loss per share........................................................... $(2.01) $(1.40) $(1.14)
======== ======== ========
Shares used in computing basic and diluted loss per share (in thousands)......... 26,485 39,378 40,306
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
------------------------------------------------------------------------------------------------------
CAPITAL CUMULATIVE TOTAL
PREFERRED STOCK COMMON STOCK IN FOREIGN SHARE-
------------------ ------------------ EXCESS UNREALIZED CURRENCY HOLDERS'
OUTSTANDING OUTSTANDING PAR OF PAR RETAINED TREASURY GAIN ON TRANSLATION EQUITY
SHARES AMOUNT SHARES VALUE VALUE DEFICIT STOCK INVESTMENT ADJUSTMENT (DEFICIT)
----------- ------ ----------- ----- ----- -------- -------- ---------- ---------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.. -- $ -- 11,202,791 $112 $ -- $ (8,379) $ -- $ -- $ (16) $ (8,283)
Accretion of redeemable
common and convertible
preferred stock........... (1,377) (1,377)
Issuance of common stock
to employees under revenue
bonus plan................ 18,300 77 77
Issuance of common stock
for acquisitions.......... 4,514,304 45 43,509 43,554
Conversion of redeemable
preferred stock into
common stock.............. 10,042,680 100 26,671 26,771
Expiration of redemption
rights on redeemable
common stock.............. 1,838,475 18 402 420
Initial public offering,
net of expenses........... 4,370,000 44 47,229 47,273
Issuance of common stock
pursuant to exercise of
stock warrants............ 1,384,863 14 2,390 (2,005) 399
Issuance of common stock
pursuant to exercise of
stock options............. 493,003 5 759 (49) 715
Public offering, net of
expenses.................. 4,000,000 40 86,599 86,639
Employee stock option loan
program................... (224) (224)
Issuance of common stock in
escrow for acquisition of
World Online.............. 50,516 1 1
Unrealized gain on
investment................ 813 813
Foreign currency
translation adjustment.... (388) (388)
Net loss................... (53,160) (53,160)
------- ------- ---------- ---- -------- --------- -------- ------ ------ -------
BALANCE, DECEMBER 31, 1995.. -- -- 37,914,932 379 206,035 (61,539) (2,054) 813 (404) 143,230
Issuance of common stock
pursuant to exercise of
stock warrants............ 1,362,604 14 (14)
Issuance of common stock
pursuant to exercise of
stock options............. 803,330 9 1,806 1,815
Issuance of common stock in
escrow for acquisition of
World Online.............. 32,368
Repayments under employee
stock option loan
program................... 232 232
Interest under employee
stock option loan
program................... (10) (10)
Retirement of treasury
stock..................... (49) 49
Unrealized gain on
investment................ (813) (813)
Foreign currency
translation adjustment.... 426 426
Net loss................... (55,097) (55,097)
------- ------- ---------- ---- -------- --------- -------- ------ ------ -------
BALANCE, DECEMBER 31, 1996.. -- -- 40,113,234 402 208,000 (116,636) (2,005) -- 22 89,783
Issuance of common stock
pursuant to exercise of
stock warrants............ 164,185 2 3 5
Issuance of common stock
pursuant to exercise of
stock options............. 283,251 3 659 662
Issuance of Series B
convertible preferred
stock, net of expenses.... 600,000 28,064 1,500 29,564
Return to preferred
shareholders.............. 71 (411) (340)
Cancellation of common
stock for acquisition of
World Online.............. (82,884) (1) (1)
Foreign currency
translation adjustment.... (642) (642)
Net loss................... (45,602) (45,602)
------- ------- ---------- ---- -------- -------- -------- ------ ------- -------
BALANCE, DECEMBER 31, 1997.. 600,000 $28,135 40,477,786 $406 $210,162 $(162,649) $(2,005) $ -- $ (620) $73,429
======= ======= ========== ==== ======== ========= ======== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- -----------
(IN THOUSANDS OF U.S. DOLLARS)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss................................................................................. $(53,160) $(55,097) $(45,602)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization......................................................... 14,778 28,035 28,347
Gain on sale of investments........................................................... -- (2,863) (20)
Gain on sale of InterCon.............................................................. -- -- (5,701)
Gain on sale of assets to MindSpring.................................................. -- (5,417) --
Provision for allowances.............................................................. 724 3,130 5,426
Equity in loss of affiliate........................................................... 204 807 --
Intangible asset write-down........................................................... 9,938 -- --
(Increase) decrease in accounts receivable............................................ (2,394) (14,320) 430
Increase in notes receivable.......................................................... -- (56) (5,648)
(Increase) decrease in prepaid expenses and other current assets...................... (5,733) 311 296
Increase in other assets and deferred charges......................................... (779) (509) (258)
Increase in accounts payable and accrued liabilities.................................. 5,640 11,545 6,568
Increase in deferred revenue.......................................................... 71 2,367 635
Decrease in deferred taxes............................................................ (37) (159) (476)
Increase (decrease) in other liabilities.............................................. 655 (317) 546
-------- -------- --------
Net cash used in operating activities.............................................. (30,093) (32,543) (15,457)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net................................................. (16,095) (12,814) (12,613)
Purchases of investments................................................................. -- (17,167) (3,000)
Proceeds from maturity or sale of investments............................................ -- 15,769 7,649
Proceeds from sale of assets to MindSpring............................................... -- 8,451 691
Proceeds from sale of InterCon, net...................................................... -- -- 20,353
Loan to affiliate........................................................................ -- (311) --
Capitalized software costs............................................................... (435) (816) --
Investments in subsidiaries, net of cash acquired........................................ (5,142) -- (2,982)
Investments in certain businesses........................................................ (286) (69) (5,569)
Restricted cash and short-term investments............................................... -- (954) (19,736)
Other.................................................................................... -- 14 (353)
-------- -------- --------
Net cash used in investing activities.............................................. (21,958) (7,897) (15,560)
-------- -------- --------
Cash flows from financing activities:
Net proceeds (payments) on lines of credit............................................... 1,159 (1,012) 3,702
Proceeds from issuance of debt........................................................... 8,250 8,281 6,408
Repayments of debt....................................................................... (1,441) (4,654) (5,670)
Principal payments under capital lease obligations....................................... (4,379) (15,117) (22,071)
Proceeds from issuance of Series B preferred stock....................................... -- -- 29,564
Proceeds from issuance of Series E redeemable preferred stock............................ 12,197 -- --
Proceeds from issuance of common stock................................................... 52 -- --
Proceeds from initial public offering, net............................................... 47,273 -- --
Proceeds from public offering, net....................................................... 87,390 -- --
Proceeds from exercise of common stock warrants.......................................... 400 -- 5
Proceeds from exercise of common stock options........................................... 502 1,815 662
Proceeds from repayment of employee notes receivable..................................... -- 232 --
Other.................................................................................... -- (74) (2)
-------- -------- --------
Net cash provided by (used in) financing activities................................ 151,403 (10,529) 12,598
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....................................... 99,352 (50,969) (18,419)
Cash and cash equivalents, beginning of year............................................... 3,358 102,710 51,741
-------- -------- --------
Cash and cash equivalents, end of year..................................................... $102,710 $ 51,741 $ 33,322
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations--PSINet Inc. (the "Company") was
organized in October 1989. PSINet is a leading global facilities-based provider
of Internet access services and related products to businesses. The Company
provides dedicated and dial-up Internet connectivity in 90 of the 100 largest
metropolitan statistical areas in the U.S. and in nine of the 20 largest
international telecommunications markets. The Company also offers Internet
protocol ("IP")-based value-added services and products to businesses,
including corporate intranets, Web hosting and collocation, remote user access,
multi-currency electronic commerce and security services, that enable businesses
to maximize utilization of their corporate networks and the Internet.
Additionally, the Company provides network backbone services to other
telecommunications carriers and Internet Service Providers ("ISPs") to further
exploit its network capacity.
The Company's operations are subject to certain risks and uncertainties
including, among others, actual and prospective competition by entities with
greater financial and other resources, risks associated with the development of
the Internet market, risks associated with growth and domestic and global
expansion, risks associated with acquisitions, risks associated with limited
experience in the carrier and ISP market, technology and regulatory risks, and
dependence upon sole and limited source suppliers.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition--Revenue and related direct costs from customer
contracts are recognized ratably over the terms of the contracts, which are
generally three to 12 months. Cash received in advance of revenues earned is
recorded as deferred revenue. In 1996 and 1995, when the Company's offerings
included connectivity software products, revenue from the sale of software,
including sales to distributors, resellers and original equipment manufacturers,
was recognized when software products were shipped. Revenue from separate post-
contract customer support agreements was recognized over the contract period.
Advertising and Customer Acquisition Costs--The Company expenses all
advertising and customer acquisition costs in the period incurred.
Cash and Cash Equivalents--All highly liquid investments with an original
maturity of three months or less at the date of acquisition are classified as
cash equivalents.
Restricted Cash and Short-Term Investments--Restricted cash and short-term
investments represent amounts that are restricted as to their use in accordance
with capital lease obligations and other financing arrangements.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash
and cash equivalents, short-term investments and marketable securities and
accounts and notes receivable. The Company's cash and investment policies limit
investments to short-term, investment grade instruments. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base. Concentrations of
credit risk with respect to notes receivable relate primarily to two customers,
which are monitored closely by the Company.
F-7
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment--Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements, including labor and overhead costs of POP
installations, are amortized over the shorter of the term of the related lease
or the estimated useful lives of the assets, which is generally five years.
Equipment Under Capital Lease--The Company finances most of its data
communications equipment and other fixed assets under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lesser of
the present value of aggregate future minimum lease payments, including
estimated bargain purchase options, or the fair value of the assets under lease.
Assets under these capital leases are depreciated over their estimated useful
lives of three to five years, which are generally longer than the terms of the
leases.
Goodwill and Other Intangibles--The Company continually reviews goodwill
and other intangibles to assess recoverability based upon undiscounted cash flow
analysis. Impairments, if any, are recognized in operating results in the period
in which a permanent diminution in value is determined. Goodwill and other
intangibles are amortized over their estimated useful lives of three to ten
years.
Other Assets and Deferred Charges--Other assets and deferred charges are
principally comprised of debt issue costs, long term asset acquisition costs and
notes receivable. Additionally in 1996, the Company held an investment accounted
for under the equity method in which the investment, originally recorded at
cost, was adjusted to recognize the Company's share of the affiliate's net
earnings or losses as they occurred. This investment was sold in 1997 and at
December 31, 1997, the Company had no equity method investments.
Income Taxes--The Company accounts for income taxes under the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and liabilities. The
Company provides a valuation allowance on net deferred tax assets when it is
more likely than not that such assets will not be realized.
Stock Compensation--The Company accounts for its stock option plans under
APB Opinion No. 25, "Accounting for Stock Issued to Employees." In 1996, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," for disclosure purposes.
Foreign Currency--Gains and losses on translation of the accounts of the
Company's foreign operations where the local currency is the functional currency
are accumulated and reported as a separate component of shareholders' equity.
Transaction gains and losses are recorded in the statement of operations.
Loss Per Share--The Company adopted SFAS No. 128, "Earnings per Share,"
in 1997 and accordingly has restated prior year loss per share amounts to
reflect the provisions of this new statement. Basic loss per share is computed
using the weighted average number of shares of common stock outstanding during
the year. Diluted loss per share is computed using the weighted average number
of shares of common stock, adjusted for the dilutive effect of common stock
equivalent shares of common stock options and warrants and contingently issuable
shares of common stock. Common stock equivalent shares are calculated using the
treasury stock method. All stock options and warrants outstanding have been
excluded from the computation of diluted loss per share as their effect would be
antidilutive and accordingly, there is no reconciliation between basic and
diluted loss per share for each of the years presented.
Fair Value of Financial Instruments--The Company discloses the fair value
of its financial instruments for which it is practicable to estimate fair value.
In cases where quoted market prices are not available for identical or
comparable financial instruments, fair values are based on estimates using the
present value of estimated cash flows or other valuation techniques. The
resulting fair values can be significantly affected by the assumptions used,
including the discount rate and estimates as to the amounts and timing of future
cash flows. In this regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, therefore, the fair
values may not represent actual values of the financial instruments that could
have been realized as of year
F-8
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
end or that will be realized in the future. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
for financial instruments:
Cash and cash equivalents. The carrying amount approximates fair
value.
Restricted cash and short-term investments. The carrying amount
approximates fair value.
Short-term investments. The carrying amount approximates fair value.
Notes receivable. The fair value of notes receivable is estimated by
discounting at market interest rates the future cash flows under the notes.
Borrowings. The fair value of borrowings, including capital lease
obligations and other obligations, is estimated by discounting the future
cash flows using estimated borrowing rates at which similar types of
borrowing arrangements with the same remaining maturities could be obtained
by the Company.
Reclassifications in Financial Presentation--Certain prior year information
has been reclassified to conform to the current year presentation.
Nonmonetary Exchanges--The Company exchanges capacity on its network for
capacity on the network of another ISP. The Company records such exchange
agreement at the fair value of either the services provided or received,
whichever is more readily determinable. For the twelve months ended December 31,
1997, the Company recognized $2,400,000 of revenue and data communications and
operations expense relating to such exchange.
Recent Pronouncements--In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which
is effective for the fiscal years beginning after December 15, 1997. The
Statement establishes standards for reporting and displaying comprehensive
income, as defined, and its components. The Company plans to adopt the
Statement's disclosure requirements in 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. The Statement establishes
standards for the way companies report information about operating segments in
annual and interim financial statements. Generally, the Statement requires
financial information to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company plans to adopt the Statement's disclosure requirements in
1998.
NOTE 2--NOTES RECEIVABLE
Under the terms of an agreement with one of its customers, receivables from
the customer may be deferred until July 31, 1998 on amounts of up to $5,000,000
for services provided by the Company. At December 31, 1997, amounts due from
this customer totaling $4,892,000 had been deferred under this agreement and are
reflected as current notes receivable.
On June 28, 1996, the Company entered into an agreement with MindSpring
Enterprises, Inc., ("MindSpring") an ISP, pursuant to which the Company agreed
to transfer to MindSpring substantially all of its individual subscriber
accounts and related tangible and intangible assets and rights in connection
with the consumer dial-up Internet access services operated by the Company in
the United States, for $12,929,000 in cash and non-interest bearing notes
receivable through 1997 and 1998. The gain from this sale of $5,417,000 has been
recorded as other income, net in the Company's consolidated statement of
operations. The balance of the note receivable from MindSpring at December 31,
1997 and 1996 was $2,078,000 and $2,769,000, respectively.
F-9
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1997, other notes receivable consist of an amount due from
a third party, of which $254,000 is scheduled to be repaid in 1998 and $509,000
in 1999. At December 31, 1997 and 1996, notes receivable approximated their
estimated fair value.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
------------- ----------------
<S> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS)
Data communications equipment.............................................. $ 24,095 $ 32,108
Purchased software......................................................... 2,989 3,920
Office and other equipment................................................. 3,108 4,451
Leasehold improvements..................................................... 6,313 9,204
-------- --------
36,505 49,683
Less accumulated depreciation and amortization............................. (12,331) (28,217)
-------- --------
24,174 21,466
-------- --------
Leased data communications equipment....................................... 60,979 96,059
Leased office and other equipment.......................................... 3,241 3,521
-------- --------
64,220 99,580
Less accumulated depreciation.............................................. (16,333) (25,427)
-------- --------
47,887 74,153
-------- --------
Property and equipment, net................................................ $ 72,061 $ 95,619
======== ========
</TABLE>
Total depreciation and leasehold amortization expense in 1997, 1996 and 1995
was $25,099,000, $16,572,000, and $6,462,000, respectively.
NOTE 4--GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS)
Goodwill................................................................... $12,763 $ 5,671
Tradename.................................................................. 4,050 --
Customer relations......................................................... 1,155 --
Software costs............................................................. 6,370 304
Other...................................................................... 2,113 757
------- -------
26,451 6,732
Less accumulated amortization.............................................. (9,778) (2,057)
------- -------
Goodwill and other intangibles, net . $16,673 $ 4,675
======= =======
</TABLE>
Total amortization expense in 1997, 1996 and 1995 was $2,712,000, $11,104,000
and $8,227,000, respectively.
F-10
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As more fully described in Note 11, during 1997 the Company sold its
software subsidiary. Goodwill and other intangibles of $11,080,000 were offset
against the proceeds received from the sale.
In December 1995, a pretax charge of $9,938,000 was recorded related to the
permanent impairment of certain intangible assets which resulted from the
Company's plan, adopted in the first quarter of 1996, to merge the operations of
two of the Company's acquired subsidiaries. As part of the plan, the Company no
longer marketed certain products using an acquired tradename and certain
software products were abandoned. This charge, which had no immediate cash
effect, recognized the permanent impairment in the value of certain intangibles
including a tradename, a non-compete agreement, certain software costs and
goodwill recorded in connection with the acquisitions.
NOTE 5--LINES OF CREDIT
The Company has a secured revolving credit agreement with a bank under
which the Company may borrow up to a maximum principal amount of the lesser of
$5,000,000 less the aggregate face value of all letters of credit outstanding,
or 75% of qualified accounts receivable which secure the loan less 100% of the
maximum outstanding liability under any letters of credit issued, less 20% of
the aggregate principal of certain term credit advances. This revolving line of
credit agreement expires on March 31, 1998. Interest is payable monthly in
arrears at a rate of prime plus 1.5%. The maximum principal amount available to
the Company at December 31, 1997 was $4,013,000, of which $3,900,000 was
outstanding at that date at an interest rate of 10%. Letters of credit issued
and outstanding at December 31, 1997 relating to this credit agreement totaled
$987,000.
The Company also has a secured revolving agreement with a Canadian bank
under which the Company may borrow up to a maximum principal amount of
approximately $1,850,000, of which $1,748,000 was outstanding at December 31,
1997. The line of credit is repayable on demand, generally bears interest at
prime plus 0.5% and is secured by restricted cash on deposit with the bank. The
Company has an overdraft facility with a bank in the United Kingdom for
approximately $413,000. No amounts were outstanding at December 31, 1997.
NOTE 6--LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------- ------------
<S> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS)
Notes payable with a bank, interest at prime plus 2.5%....................... $ 7,966 $ 8,864
Other notes payable at interest rates ranging from 7.50% to 20.00%........... 3,623 2,586
Capital lease obligations at interest rates ranging from 5.66% to 15.84%..... 40,264 56,355
-------- --------
51,853 67,805
Less current portion......................................................... (24,915) (33,985)
-------- --------
Long-term portion............................................................ $ 26,938 $ 33,820
======== ========
</TABLE>
Borrowings under the notes payable with a bank are repayable in 36 monthly
installments from the dates of issue and are secured by a lien on the equipment
purchased with the proceeds. Interest is payable monthly at a rate of prime plus
2.5%; the interest rate was 11.00% at December 31, 1997. The notes payable and
certain capital lease obligations contain certain provisions which, among other
things, require the maintenance of certain financial ratios and restrict the
payment of dividends.
F-11
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has various financing arrangements accounted for as capital
leases for the acquisition of equipment and other fixed assets. During 1997,
1996 and 1995, the Company incurred capital lease obligations under these
arrangements of $37,455,000, $25,576,000 and $29,071,000, respectively, upon the
execution of leases for new data communications equipment and other fixed
assets. The Company's capital lease obligations are generally repayable in 36
monthly installments from the dates of acquisition. At December 31, 1997, the
aggregate unused portion under these arrangements totaled $24,611,000.
Future minimum lease payments under capital leases and annual maturities of
other long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OTHER LONG-
DECEMBER 31, LEASES TERM DEBT
- ----------------- -------------- ------------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
1998................................................................. $31,752 $ 6,665
1999................................................................. 19,743 3,734
2000................................................................. 11,863 993
2001................................................................. -- 58
2002................................................................. -- --
------- -------
63,358 $11,450
=======
Less amount representing interest.................................... (7,003)
-------
Present value of future minimum lease payments....................... $56,355
=======
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, cash paid for
interest was $5,559,000, $5,083,000 and $1,869,000, respectively.
At December 31, 1997 and 1996, the estimated fair value of the capital
lease obligations was approximately $55,565,000 and $40,730,000, respectively,
and other long-term debt was approximately $11,370,000 and $12,189,000,
respectively.
NOTE 7--CAPITAL STOCK
On January 23, 1998, at a Special Meeting of Shareholders, the Company's
shareholders granted the Board of Directors authority to amend the Company's
Certificate of Incorporation to increase the number of the Company's authorized
shares of capital stock from 130,000,000 shares to 280,000,000 shares and to
increase the number of the Company's authorized shares of Common Stock from
100,000,000 shares to 250,000,000 shares. The Board of Directors has authority
to issue up to 30,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof without any
further vote or action by shareholders.
PREFERRED STOCK RIGHTS PLAN
On May 8, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan ("Rights Plan") pursuant to which preferred stock purchase rights
("Rights") were granted as a dividend to shareholders of record at the rate of
one Right for each outstanding share of common stock held of record as of the
close of business on June 5, 1996. The Rights will also be attached to certain
future issuances of common stock. Subject to certain exceptions, each Right,
when exercisable, will entitle the registered holder to buy one one-thousandth
of a share of a newly created Series A Junior Participating Preferred Stock, par
value $.01 per share, of the Company (the "Series A Junior Preferred Stock")
at an exercise price of $75 per Right.
F-12
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subject to certain exceptions, the Rights will become exercisable upon the
occurrence of certain specified events, including an announcement that a person
or group of affiliated or associated persons ("Acquiring Person") has acquired
beneficial ownership of 20% or more of the outstanding common stock. In such
event, each holder of a Right (other than Rights beneficially owned by the
Acquiring Person) will thereafter have the right, subject to certain exceptions,
to receive upon exercise thereof that number of one one-thousandths of a share
of Series A Junior Preferred Stock or, at the discretion of the Company's Board
of Directors, a number of additional shares of common stock as set forth in the
Rights Plan.
For purposes of the Rights Plan, the Company's Board of Directors has
designated 1,000,000 shares of Series A Junior Preferred Stock, which amount may
be increased or decreased by the Board of Directors. All Rights expire on June
5, 2006, unless the Rights are earlier redeemed or exchanged by the Company in
accordance with the Rights Plan or expire earlier upon the consummation of
certain transactions as set forth in the Rights Plan.
CONVERTIBLE PREFERRED STOCK PRIVATE PLACEMENT
On November 10, 1997, the Company completed a private placement of 600,000
shares of its Series B 8% Convertible Preferred Stock ("Series B Preferred
Stock") for proceeds of $29,564,000, net of issuance costs. The Series B
Preferred Stock accrues dividends at an annual rate of 8%, payable quarterly in
cash or, at the Company's option, in Series B Preferred Stock and is non-voting.
The Series B Preferred Stock is convertible into the Company's common stock
at $10 per share during the first year. The conversion price may be reset at the
end of the first and second anniversary dates, under certain circumstances, to
the stock's then current market value. At the third anniversary date, the
conversion price may be reset, under certain circumstances, to 95% of the
stock's then current market value. To reflect the nature of the conversion
rights, preferred stock has been reduced by $1,500,000 with a corresponding
increase to capital in excess of par value. Such amount will be accreted as an
additional return to preferred shareholders over a period of three years. The
Company also has the right to call the Series B Preferred Stock for redemption
under certain circumstances commencing on the third anniversary of original
issuance. The Company is subject to certain restrictions on the redemption,
purchase or acquisition of, and the payment of dividends on common stock while
the Series B Preferred Stock is outstanding. The holders were granted certain
registration rights in connection with the transaction.
NOTE 8--MANDATORILY REDEEMABLE EQUITY SECURITIES
The Company entered into several securities purchase agreements with
investors in prior years. Pursuant to these agreements, the investors purchased
shares of convertible participating preferred stock for cash or in exchange for
shares of mandatorily redeemable common stock.
<TABLE>
<CAPTION>
PAR PURCHASE SHARES
VALUE DATE ISSUED
CLASS ------------ ----------- ----------------
- -----
<S> <C> <C> <C>
Series A............................................................ $.01 1993 2,727,000
Series B............................................................ $.01 1993 1,105,125
Series C............................................................ $.01 1993 1,020,000
Series D............................................................ $.01 1994 2,000,000
Series E............................................................ $.01 1995 3,190,555
----------
10,042,680
==========
</TABLE>
Immediately prior to the completion of the Company's initial public
offering on May 1, 1995, all issued and outstanding shares of redeemable
convertible preferred stock were converted into 10,042,680 shares of common
stock. In addition, all redemption rights of the holders of redeemable common
stock (1,838,475 shares) expired upon the completion of the offering.
F-13
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity with respect to redeemable convertible preferred and common stock
for the year ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE REDEEMABLE
PREFERRED COMMON
STOCK STOCK
--------------- -----------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Balance, December 31, 1994..................................................... $ 13,218 $ 399
Issuance of 3,190,555 shares of redeemable Series E convertible
preferred stock............................................................. 12,197
Accretion of redeemable convertible preferred and common stock............... 1,356 21
Conversion of redeemable convertible preferred stock into common (26,771)
stock.......................................................................
Expiration of redemption rights on redeemable common stock................... (420)
-------- -----
Balance, December 31, 1995..................................................... $ -- $ --
======== =====
</TABLE>
NOTE 9--STOCK COMPENSATION AND RETIREMENT PLANS
EXECUTIVE STOCK INCENTIVE PLAN
The Company's Executive Stock Incentive Plan provides for a maximum of
10,000,000 shares to be available for award thereunder to employees and
consultants of the Company and its subsidiaries. Awards under the plan may be in
the form of incentive stock options, non-qualified stock options, stock
appreciation rights or restricted stock awards. The purchase price of shares
covered by options cannot be less than the fair value on the date of grant. Each
option granted under the plan becomes exercisable based on a schedule determined
by the Compensation Committee at the date of grant. All options expire ten years
after the date of grant. At December 31, 1997, there were 9,795,874 shares
reserved for issuance under the plan and options with respect to 5,952,108 and
1,537,091 shares of common stock were outstanding and exercisable, respectively.
DIRECTORS STOCK INCENTIVE PLAN
The Directors Stock Incentive Plan provides for awards with respect to up
to 100,000 shares in the aggregate to directors of the Company and its
subsidiaries who are not also employees or consultants of the Company and who do
not serve on the Board as a representative of a shareholder. Awards under the
plan are in the form of non-qualified stock options. The purchase price of
shares covered by options cannot be less than the fair value on the date of the
grant. Options granted under the plan when a director is first elected to the
Board become exercisable quarterly over four years. Subsequent options granted
under the plan become exercisable with respect to one half of the subject shares
at each of the first and second anniversaries of the date of grant. All options
expire ten years after the date of grant. At December 31, 1997, there were
100,000 shares reserved for issuance under the plan and options with respect to
24,000 and 7,500 shares of common stock were outstanding and exercisable,
respectively.
STRATEGIC STOCK INCENTIVE PLAN
The Strategic Stock Incentive Plan provides for awards with respect to an
aggregate of 3,500,000 shares of the Company's common stock to employees and
consultants of the Company and its subsidiaries in connection with acquisitions,
mergers, strategic alliances and other business combinations and transactions by
the Company or its subsidiaries. Awards under the plan may be in the form of
incentive stock options, non-qualified stock options, stock appreciation rights
or restricted stock awards. The purchase price of shares covered by options
cannot be less than the fair value on the date of grant. Each option granted
under the plan becomes exercisable based on a schedule determined by the
Compensation Committee at the date of grant. All options expire ten years
F-14
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
after the date of grant. At December 31, 1997, there were 3,500,000 shares
reserved for issuance under the plan and options with respect to 324,141 and
167,155 shares of common stock were outstanding and exercisable, respectively.
EXECUTIVE STOCK OPTION PLAN AND OTHER OPTION PLANS AND GRANTS
Prior to 1994, the Company granted non-qualified stock options to its
employees as directed by the Company's Board of Directors. In March 1994, the
Company established the 1994 Executive Stock Option Plan under which it is
authorized to grant up to 1,250,000 of either incentive stock options or non-
qualified stock options to its employees. The purchase price of shares covered
by options cannot be less than the fair value on the date of grant. Options
become exercisable over one to six years following the date of grant. All
options expire ten years after the date of grant. At December 31, 1997, there
were 1,918,546 shares reserved for issuance under the plan and under ad hoc
grants. Options with respect to 1,891,496 and 968,994 shares of common stock
were outstanding and exercisable, respectively.
In connection with the Company's acquisition of InterCon Systems
Corporation ("InterCon") in June 1995, options outstanding under each of the
InterCon 1992 Incentive Stock Plan and the InterCon 1994 Stock Option Plan
became exercisable (subject to original vesting schedules; generally vesting
over four years) for shares of the Company's common stock pursuant to the terms
of the plans. As of December 31, 1997, the options outstanding under the 1992
plan consist of incentive stock options with respect to 104,569 shares of common
stock and the options outstanding under the 1994 plan consist of non-qualified
stock options with respect to 39,547 shares of common stock. At December 31,
1997, options with respect to 144,116 shares were exercisable. No additional
options in respect of shares will be granted under either plan. In connection
with the sale of InterCon, vesting on options with respect to 112,229 shares was
accelerated and compensation expense of $214,000 was recognized in 1997.
In connection with the Company's acquisition of Software Ventures
Corporation ("Software Ventures") in July 1995, options outstanding under the
Software Ventures 1994 Stock Option Plan became exercisable (subject to original
vesting schedules; generally, one-half vesting after one year and one-half over
four years) for shares of the Company's common stock pursuant to the terms of
such plan. At December 31, 1997, options with respect to 25 shares under the
plan were outstanding and exercisable. No additional options in respect of
shares will be granted under the plan.
STOCK OPTION REPRICING
Effective April 5, 1996, the Company's Board of Directors approved a
repricing of certain employee stock options. Accordingly, options with respect
to 2,520,555 shares of the Company's common stock whose exercise price was
greater than $9.375, the closing market price of the Company's common stock on
that date, were cancelled and new options with respect to the same number of
shares were granted with an exercise price of $9.375. Other terms and conditions
of the options remained the same.
FAIR VALUE OF STOCK OPTIONS
For disclosure purposes under SFAS No. 123, the fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions used for stock
options granted in 1997, 1996 and 1995, respectively: no annual dividends for
any year, expected volatility of 76%, 80% and 80%, risk-free interest rate of
6.36%, 5.98% and 6.85% and expected life of 5.0 years, 5.0 years and 6.5 years.
The weighted-average fair value of the stock options granted in 1997, 1996 and
1995, was $4.88, $4.89 and $6.90, respectively.
F-15
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the above model, the total value of stock options granted in 1997,
1996 and 1995, was $23,616,000, $28,624,000 and $10,572,000, respectively, which
would be amortized on a pro forma basis over the option vesting period. Had the
Company determined compensation cost for these plans in accordance with SFAS No.
123, the Company's pro forma loss and pro forma basic and diluted loss per share
would have been $53,113,000 and $1.32 in 1997, $63,897,000 and $1.62 in 1996 and
$54,760,000 and $2.07 in 1995. The SFAS No. 123 method of accounting does not
apply to options granted prior to January 1, 1995, and accordingly, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
STOCK WARRANTS
The Company has issued warrants to certain investors, a lease provider and
consultants to purchase shares of the Company's common stock. Warrants issued to
certain investors and a lease provider vested immediately and vesting with
respect to warrants issued to consultants was contingent upon the performance of
services. Compensation expense recorded with respect to warrants issued to
consultants was $275,000 and $199,000 in 1996 and 1995, respectively. These
warrants expire at various dates through 2003. At December 31, 1997, there were
224,274 shares reserved for issuance under stock warrant agreements of which
warrants with respect to 224,274 shares of common stock were outstanding and
exercisable.
STOCK OPTION AND WARRANT ACTIVITY
The following table summarizes stock option and warrant activity under all
plans for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK WEIGHTED
-------------------------------------- PRICE AVERAGE
OPTIONS WARRANTS PER SHARE EXERCISE PRICE
------------------ ------------------ ----------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.............. 2,340,950 3,752,400 $.50 -$4.15 $ 1.72
Granted.............................. 1,559,891 833 4.15-25.25 9.16
Assumed.............................. 543,414 -- .01-6.13 4.18
Exercised............................ (494,719) (1,484,419) .50-6.13 1.60
Forfeited............................ (105,868) (184,307) 2.00-25.25 4.50
---------- ----------
Balance, December 31, 1995.............. 3,843,668 2,084,507 .01-25.25 3.42
Granted.............................. 5,853,949 167 4.15-16.75 10.81
Exercised............................ (819,256) (1,659,000) .01-9.38 2.36
Forfeited............................ (1,319,951) -- 1.60-25.25 8.72
Cancelled............................ (2,520,555) -- 9.56-25.25 13.61
---------- ----------
Balance, December 31, 1996.............. 5,037,855 425,674 .05- 13.50 6.24
Granted.............................. 4,846,300 -- 5.38-11.25 7.36
Exercised............................ (288,529) (201,400) .05-8.13 1.83
Forfeited............................ (1,259,740) -- 2.00-13.13 8.33
---------- ----------
Balance, December 31, 1997.............. 8,335,886 224,274 $.05-$13.50 $ 6.81
========== ==========
Exercisable, December 31, 1995.......... 973,625 2,054,507 $.05-$13.88 $ 1.44
========== ==========
Exercisable, December 31, 1996.......... 1,584,068 425,674 $.05-$10.01 $ 3.60
========== ==========
</TABLE>
F-16
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the shares outstanding and
exercisable for options and warrants at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------- ---------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- ------ ----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ .05-$5.88............................ 2,110,114 4.65 $ 2.62 1,295,342 $ 1.81
$6.13-6.88............................. 224,776 9.06 $ 6.46 56,754 $ 6.24
$6.94-7.00............................. 2,460,822 9.11 $ 7.00 446,649 $ 7.00
$7.25-9.38............................. 3,110,449 8.56 $ 8.77 983,074 $ 9.12
$9.56-13.50............................ 653,999 8.62 $10.49 267,336 $10.39
--------- ---------
$.05-$13.50............................ 8,560,160 7.77 $ 6.81 3,049,155 $ 5.76
========= =========
</TABLE>
Under the terms of the Company's Employee Retirement Savings Plan,
participants are eligible to receive discretionary Company matching
contributions each year of 100% of the first $1,000 of employee salary deferral
and 25% of amounts thereafter up to the maximum allowable deferral under IRS
regulations. All contributions to a participant's plan account are 100% vested
after two years of service with the Company. The total contributions made by the
Company under the Plan totalled $525,000, $622,000 and $131,000 during 1997,
1996 and 1995, respectively.
NOTE 10--INCOME TAXES
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997
-------------------- -----------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Gross deferred tax assets:
Net operating losses (domestic)................................................. $ 35,755 $ 50,470
Net operating losses (foreign).................................................. 3,344 7,834
Other........................................................................... 1,866 1,515
-------- --------
40,965 59,819
-------- --------
Gross deferred tax liabilities:
Depreciation/amortization....................................................... (6,741) (8,740)
Acquired intangibles............................................................ (2,377) --
Other........................................................................... -- --
-------- --------
(9,118) (8,740)
-------- --------
Net deferred tax assets.............................................................. 31,847 51,079
Valuation allowance.................................................................. (32,323) (51,079)
-------- --------
$ (476) $ --
======== ========
</TABLE>
The Company has provided a valuation allowance for net deferred tax assets
of its operations since realization of these benefits cannot be reasonably
assured. The change in the valuation allowance for net deferred tax assets was
an increase of $18,756,000, $20,948,000 and $8,936,000 in 1997, 1996 and 1995,
respectively. The changes primarily relate to additional losses in those years.
F-17
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1997, the Company had domestic net operating loss
carryforwards of approximately $123,099,000 for income tax purposes. These net
operating loss carryforwards may be carried forward in varying amounts until
2012 and may be limited in their use in the event of significant changes in the
Company's ownership, and their use is limited to future earnings of the Company.
In addition, at December 31, 1997, the Company had net operating loss
carryforwards for tax purposes in various jurisdictions outside the United
States amounting to approximately $21,464,000. The majority of the foreign loss
carryforwards will expire in varying amounts until 2004. Some of the foreign
loss carryforwards will never expire under local country tax rule.
A capital tax loss of $807,000 resulting from the sale of one of the
Company's investments was incurred in 1997. The loss may be carried forward for
five years. The Company recognized a deferred tax benefit of $476,000 in 1997
and $159,000 in 1996.
No cash was paid for income taxes in 1997, 1996 or 1995.
NOTE 11--STRATEGIC ALLIANCES, ACQUISITIONS AND DISPOSITIONS
AGREEMENTS WITH IXC INTERNET SERVICES, INC.
As part of the Company's ongoing efforts to further expand and enhance its
network, on February 25, 1998, the Company closed its transaction with IXC
Internet Services, Inc. ("IXC"), an indirect subsidiary of IXC Communications,
Inc., to acquire 20-year noncancellable indefeasible rights of use ("IRUs") in
up to 10,000 equivalent route miles of fiber-based OC-48 network bandwidth (the
"PSINet IRUs") in selected portions across the IXC fiber optic
telecommunications network within the United States. The PSINet IRUs were
acquired in exchange for the issuance to IXC of 10,229,789 shares of common
stock of the Company (representing approximately 20% of the issued and
outstanding common stock of the Company after giving effect to such issuance and
having an aggregate market value of $78,641,503 based on the closing market
price per share of the Company's common stock as reported by The Nasdaq Stock
Market on such date of $7.6875) (the "IXC Initial Shares"). If the fair market
value of the IXC Initial Shares (based on a 20 trading day volume-weighted
average share price) is less than $240,000,000 at the earlier of one year
following delivery and acceptance of the total amount of bandwidth corresponding
to the PSINet IRUs or February 25, 2002 (the "Determination Date"), the
Company will be obligated to provide IXC with additional shares of its common
stock, or at the sole option of the Company, cash or a combination thereof equal
to the shortfall (the "Contingent Payment Obligation"). The Company has the
right to accelerate the Contingent Payment Obligation to any date prior to the
Determination Date. In addition, the right of IXC to receive additional shares
of common stock and/or cash pursuant to the Contingent Payment. Obligation will
terminate on such date as the fair market value of the IXC Initial Shares (based
on a 20 trading day volume-weighted average share price) is equal to or greater
than $240,000,000.
The bandwidth will be delivered over a period of two to three years after
the closing. The agreement permits the Company to use the OC-48 bandwidth to
deliver private line or long distance services based on non-Internet
telecommunications transport at a rate of DS-3 or less. In addition, the Company
expects to incur on an annual basis approximately $1,150,000 in operations and
maintenance fees with respect to the PSINet IRUs to be acquired from IXC for
each 1,000 equivalent route miles of OC-48 bandwidth accepted under the
agreement. The Company also signed a long-term non-exclusive joint marketing and
services agreement with IXC under which IXC and its resellers will be able to
bundle the Company's Internet access and value added services with IXC's long
distance and other telephone services to their customers throughout the United
States.
iSTAR INTERNET INC.
Between January 30, 1998 and February 12, 1998, the Company acquired
approximately 23,400,000 (or 79.7%) of the outstanding common shares of iSTAR
internet inc. ("iSTAR"), a Canadian ISP. The excess of the purchase price over
the fair values of the tangible assets acquired and liabilities assumed was
$19,500,000. This acquisition will be accounted for as a purchase business
combination and accordingly the assets and liabilities and
F-18
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
results of operations of iSTAR will be included in the Company's financial
statements from the date of acquisition. At December 31, 1997, the Company has a
note receivable from iSTAR in the amount of $3,526,000 which is recorded in
other assets and deferred charges. Additionally, at December 31, 1997, the
Company had a $15,400,000 letter of credit outstanding with respect to this
transaction which was secured by $17,500,000 in cash. On January 29, 1998, the
Company obtained a $20,000,000 acquisition credit facility from a bank to
finance this transaction and its letter of credit expired. This facility matures
on the earlier of the consummation of a public offering by the Company of its
debt or equity securities or July 31, 1998. The loan provides for interest on
the outstanding balance at an annual rate of prime rate plus 1.375%.
Additionally, the loan has been incorporated into the Company's existing credit
facility with the bank and is secured by substantially all of the Company's
assets, including a pledge of certain of its subsidiaries' stock (including the
acquired capital stock of iSTAR).
CALVACOM AND IPROLINK
In October 1997 and January 1998 a wholly-owned subsidiary of the Company
acquired all of the issued and outstanding shares of common stock of Serveur
Telematique Internet S.A., ("STI") an ISP in France and Internet Prolink S.A.
("Iprolink"), an ISP in Switzerland, for approximately $3,100,000 and
$3,500,000, respectively, in cash. The acquisition of STI included the rights to
use the tradename "CalvaCom." These transactions are or will be accounted for
as purchase business combinations and accordingly, the net assets and results of
operations are included in the Company's financial statements from the
respective dates of acquisition.
EUNET GB LIMITED
On July 21, 1995, the Company purchased from The University of Kent at
Canterbury all of the issued and outstanding ordinary shares of EUnet GB
Limited, an English corporation, for approximately $3,986,000 in cash and 42,011
shares of its common stock. This transaction was accounted for as a purchase
business combination. The fair value of the cash, shares of the Company's common
stock exchanged and liabilities assumed at acquisition was approximately
$7,126,000.
INTERCON SYSTEMS CORPORATION AND SOFTWARE VENTURES CORPORATION
On June 16, 1995 and July 11, 1995, the Company issued approximately
921,612 and 762,208 shares of its common stock in exchange for all of the issued
and outstanding capital stock of InterCon and Software Ventures, respectively.
These transactions were accounted for as purchase business combinations. Both
acquired companies developed and marketed standards-based connectivity software
products. The aggregate fair value of the shares of the Company's common stock
exchanged, options granted and liabilities assumed was approximately
$35,519,000.
In the first quarter of 1996, the Company merged the operations of Software
Ventures and InterCon into one Internet software subsidiary known as InterCon.
On February 1, 1997, the Company sold all of the issued and outstanding capital
stock of InterCon to Ascend Communications, Inc. ("Ascend") in exchange for
$12,000,000 in cash pursuant to a Stock Acquisition Agreement between the
Company and Ascend. In addition, in connection with the sale, the Company
received $8,500,000 in cash from Ascend as repayment of intercompany debt owed
by InterCon to the Company. The Company recognized a gain of $5,700,000 in 1997
in connection with the sale.
PSINET PIPELINE NEW YORK, INC.
On February 7, 1995, the Company issued an aggregate of approximately
2,690,218 shares of its common stock in exchange for all of the outstanding
common stock and preferred stock of PSINet Pipeline New York, Inc. (formerly The
Pipeline Network Inc., "Pipeline"). This transaction was accounted for as a
purchase business combination. The fair value of the shares of the Company's
common stock exchanged and liabilities assumed was approximately $12,129,000. As
further described in Note 2, the Company transferred substantially all of its
individual subscriber accounts and related tangible and intangible assets
relating to the Company's consumer dial-up Internet access services including
those acquired from the acquisition of Pipeline to MindSpring in the second and
third quarters of 1996.
F-19
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has guaranteed monthly usage levels of data and voice
communications with certain of its telecommunications vendors. In addition, the
Company leases certain of its facilities under non-cancelable operating leases
expiring in various years through 2006. The operating lease on one of the office
facilities includes scheduled base rent increases over the term of the lease.
The total amount of base rent is being charged to expense on the straight-line
method over the term of the lease. Total rent expense for all operating leases
amounted to $4,968,000, $3,601,000 and $2,077,000 in 1997, 1996 and 1995,
respectively.
At December 31, 1997 commitments to telecommunications vendors and future
minimum lease payments under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, TELECOMMUNICATIONS OPERATING LEASES
- ------------ ------------------- ----------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
1998..................................................................... $10,218 $ 4,368
1999..................................................................... 7,987 4,160
2000..................................................................... 5,942 3,877
2001..................................................................... 4,360 3,425
2002..................................................................... 2,667 3,407
Thereafter............................................................... -- 2,913
------- -------
$31,174 $22,150
======= =======
</TABLE>
Under the terms of an agreement with one of its customers, the Company is
obligated to provide the customer with a rental facility of up to $5,000,000 for
telecommunications equipment owned or leased by the Company and deployed in the
customer's network. As of December 31, 1997, the Company had provided $1,426,000
of equipment to the customer under three year operating leases.
CONTINGENCIES
The Company is subject to certain claims and legal proceedings that arose
in the ordinary course of its business activities. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
may be decided unfavorably to the Company. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition or results of
operations of the Company.
On September 19, 1996, the Company and Chatterjee Management Company
("Chatterjee") signed an agreement pursuant to which the Company and an
investment group led by Chatterjee would establish a joint venture for the
purpose of building an Internet network across Europe and provide Internet-
related services in Europe. Such investment group was to invest up to $41
million in a joint venture. No monies were invested by Chatterjee or the
investment group pursuant to the joint venture agreement nor were any other
actions undertaken to implement it. Following the signing of the agreement, the
parties acknowledged structural difficulties associated with the joint venture
as originally contemplated, which prevented its implementation. Instead, they
sought for several months to negotiate a direct investment in the Company by
Chatterjee in lieu of the initial agreement. Those negotiations were not
successful.
On November 25, 1997, Chatterjee initiated arbitration proceedings against
the Company before the International Chamber of Commerce, Court of Arbitration,
in London, England, with respect to the joint venture agreement previously
entered into by Chatterjee and the Company.
In the arbitration proceeding, Chatterjee has now alleged that the Company
breached the joint venture agreement by repudiating its obligations under the
agreement and by breaching a covenant not to compete. In the arbitration,
Chatterjee requests an award declaring that the agreement is still valid and
binding upon the parties
F-20
<PAGE>
PSNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and that the Company stands in breach of the agreement, directing the Company to
specifically perform its obligations under the agreement or, in the alternative,
awarding Chatterjee compensatory damages in an amount not less than $25 million,
awarding Chatterjee profits that the Company has earned or stands to earn in
Europe, and awarding Chatterjee the costs of arbitration, including attorney's
fees and interest on the award of damages. The Company believes that
Chatterjee's claims are without merit and intends to vigorously defend itself in
the arbitration.
NOTE 13--INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
The Company operates in one principal industry segment, as a provider of
Internet solutions, and markets its services internationally through foreign
subsidiaries. The Company's services are provided primarily to corporate
customers.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS)
Revenue:
United States...................................................... $ 38,029 $ 78,132 $104,254
International...................................................... 2,470 6,781 17,950
Eliminations....................................................... (1,777) (562) (302)
-------- -------- --------
Consolidated....................................................... $ 38,722 $ 84,351 $121,902
======== ======== ========
Loss from Operations:
United States...................................................... $(50,153) $(47,035) $(38,472)
International...................................................... (1,317) (8,861) (11,285)
Eliminations....................................................... (1,147) (185) 171
-------- -------- --------
Consolidated....................................................... $(52,617) $(56,081) $(49,586)
======== ======== ========
Identifiable Assets:
United States...................................................... $195,920 $169,082 $156,474
International...................................................... 9,307 11,314 29,770
Eliminations....................................................... (3,397) (3,284) (63)
-------- -------- --------
Consolidated....................................................... $201,830 $177,112 $186,181
======== ======== ========
</TABLE>
Intersegment sales and transfers are not material. Revenue is based on the
location of the entity providing services. Loss from operations represents total
revenue less operating costs and expenses, and does not include interest
(expense)/income, other (expense)/income or income taxes. Identifiable assets of
geographic areas are those tangible and intangible assets used in the Company's
operations in each area.
F-21
<PAGE>
Consolidated Financial Statements of
iSTAR internet inc.
Three Months Ended August 31, 1997 and 1996
F-22
<PAGE>
iSTAR INTERNET INC.
Consolidated Balance Sheets
(Unaudited)
August 31, 1997 and 1996
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and marketable securities........................................................ $ 1,383 $ 8,492
Accounts receivable................................................................... 10,067 7,934
Inventory............................................................................. 472 291
Prepaid expenses and other assets..................................................... 1,423 655
Funds held in escrow.................................................................. 8,210 --
-------- --------
21,555 17,372
Property and equipment.................................................................. 14,539 11,782
Customer lists and goodwill............................................................. -- 16,090
-------- --------
$ 36,094 $ 45,244
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loan payable.......................................................................... $ 2,000 $ --
Accounts payable and accrued liabilities.............................................. 13,352 9,007
Deferred revenue...................................................................... 1,500 1,567
Current portion of capital lease obligations.......................................... 3,406 1,702
-------- --------
20,258 12,276
Capital lease obligations............................................................... 3,404 1,501
Deferred leasehold inducements.......................................................... 694 334
Shareholders' equity:
Share capital......................................................................... 83,020 55,656
Share purchase warrants............................................................... 213 2,013
Special warrants...................................................................... 8,210 --
Contributed surplus................................................................... 2,871 2,871
Deficit............................................................................... (82,576) (29,407)
-------- --------
11,738 31,133
-------- --------
$ 36,094 $ 45,244
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
iSTAR INTERNET INC.
Consolidated Statements of Operations and Deficit
(Unaudited)
Three months ended August 31, 1997 and 1996
(In thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales......................................................................................... $10,558 $ 7,347
Cost of sales................................................................................. 8,283 6,495
------- -------
Gross margin.................................................................................. 2,275 852
Selling, general and administration expenses.................................................. 6,945 7,181
------- -------
Operating loss before undernoted items........................................................ (4,670) (6,329)
Depreciation and amortization................................................................. 2,441 1,797
Interest and bank charges, net................................................................ 432 3
------- -------
Net loss...................................................................................... $(7,543) $(8,129)
------- -------
Net loss per share............................................................................ $ (0.31) $ (0.43)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
iSTAR INTERNET INC.
Consolidated Statements of Changes in Financial Position
(Unaudited)
Three months ended August 31, 1997 and 1996
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
1997 1996
---- ----
Cash provided by (used in):
Operations:
<S> <C> <C>
Net loss............................................................................. $(7,543) $(8,129)
Depreciation and amortization........................................................ 2,441 1,797
Non-cash operating working capital................................................... (2,581) (850)
------- -------
(7,683) (7,182)
Financing:
Capital lease obligations, net....................................................... (870) (526)
Special warrants issued.............................................................. 8,210 --
------- -------
7,340 (526)
Investing:
Purchase of property and equipment................................................... (637) (533)
Funds held in escrow................................................................. (8,210) --
------- -------
(8,847) (533)
------- -------
Decrease in cash position.............................................................. (9,190) (8,241)
Cash position, beginning of period..................................................... 8,573 16,733
------- -------
Cash position, end of period........................................................... $ (617) $ 8,492
======= =======
</TABLE>
Cash position is defined as cash and marketable securities less loan payable.
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three months ended August 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
iSTAR internet inc. provides advanced Internet services for businesses,
institutions, and individuals. The Company provides customers with a range of
networking expertise and Web-based products and services including business
solutions with high-speed connection to the Internet through a national backbone
network.
1. BASIS OF PRESENTATION:
(a) These financial statements for the three months ended August 31, 1997
and the related footnote information are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements of iSTAR internet inc. (the "Company") as of May 31, 1997
appearing elsewhere in this proxy statement. These financial statements
should be read in conjunction with the audited financial statements and
the related notes to financial statements of the Company as of May 31,
1997 included elsewhere in this Proxy Statement. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) which
management considers necessary to present fairly the financial position
of the Company at August 31, 1997 and the results of operations and the
changes in its financial position for the three month periods ended
August 31, 1997 and 1996. The results of operations for the three month
period ended August 31, 1997 may not be indicative of the results
expected for any succeeding period.
(b) These consolidated financial statements have been revised from those
previously released on October 9, 1997 by including $8,210,000 in funds
held in escrow and the equivalent amount in special warrants. This
revision relates to the recognition of the net proceeds held in escrow
for 4,500,000 special warrants. The proceeds from the issuance of these
special warrants were held in escrow until a receipt was issued by the
appropriate Canadian securities regulatory authorities for a final
prospectus qualifying the issue of the underlying common shares. The
receipt was issued on September 10, 1997 and the proceeds released from
escrow on September 16, 1997. The warrants were converted into common
shares on September 18, 1997.
2. EVENTS SUBSEQUENT TO ISSUANCE ON OCTOBER 9, 1997 OF THE FIRST QUARTER FISCAL
1998 CONSOLIDATED FINANCIAL STATEMENTS--NETWORK PROVISIONING AGREEMENT,
PROPOSED SALE OF BUSINESS AND THE GOING CONCERN ASSUMPTION:
On August 29, 1997, the Company signed a network provisioning agreement
(NPA) with Bell Sygma Inc. (Bell) to supply the Company with
telecommunications facilities and services over five years. The fees for
certain services performed by Bell between July 1, 1997 and June 30, 1999, up
to $20,000,000, do not have to be paid prior to July 1, 1999 and are interest
free. After this date, Bell has the right to demand repayment of the deferred
fees on an interest free basis over the next three years in equal monthly
installments.
The Company is obligated to pay Fonorola Inc. an amount which has not been
finally determined but which is anticipated by the Company to be no more than
$1,800,000, resulting from the early termination of the Company's supply
agreement with Fonorola Inc. Under the NPA, Bell Sygma Inc. has agreed to pay
50% of this amount, which it will include in invoices to the Company in equal
monthly amounts over the next five years.
F-26
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 2
(Unaudited)
Three months ended August 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
2. EVENTS SUBSEQUENT TO ISSUANCE ON OCTOBER 9, 1997 OF THE FIRST QUARTER FISCAL
1998 CONSOLIDATED FINANCIAL STATEMENTS--NETWORK PROVISIONING AGREEMENT,
PROPOSED SALE OF BUSINESS AND THE GOING CONCERN ASSUMPTION (CONTINUED):
The implementation schedule of the NPA contemplated that Bell and the
Company would complete the migration of the Company's network to Bell's
network over a period of time ending on December 31, 1997. During the course
of the migration, the Company expected it would realize increasing levels of
deferral of its telecommunication costs with the full benefit of the NPA being
achieved once the migration was completed.
In mid-October, the Company learned that there were significant delays in
the migration of the Company's network to the Bell system. This impacted the
anticipated cash benefits of the NPA during the first six months of the 1998
fiscal year and into the third quarter. At that time the Company continued to
focus on maintaining adequate capital resources until the full financial
benefit of the NPA could be realized. As a result of the significant delays in
the migration, the Company has used its cash resources to fund operating
losses through the second quarter of fiscal 1998 and into the third quarter.
The Company anticipates it will continue to generate operating losses over the
next several quarters and will require additional amounts of capital to fund
these operating losses.
As a result of the demand on cash, the Company explored various options
including seeking a purchaser. In late October 1997 the Company entered into
discussions with PSINet Inc. (PSINet) and on November 10, 1997, PSINet, a
United States internet service provider and iSTAR internet inc. announced that
PSINet plans to acquire the Company and to merge it with its privately held
Canadian subsidiary, PSINet Limited.
On December 24, 1997, the Company and PSINet Inc. ("PSINet"), a United
States Internet service provider announced an amendment to the terms of their
November 10, 1997 announcement whereby PSINet planned to acquire the Company
and to merge it with its privately held Canadian subsidiary, PSINet Limited.
The new terms provide that PSINet will offer Cdn $.75 cash for each of the
outstanding common shares of iSTAR by way of a take-over bid to be mailed to
shareholders of the Company on or before January 7, 1998. Subsequently, PSINet
extended the expiry of the offer and between January 30, 1998 and February 12,
1998, PSINet acquired approximately 23,900,000 (or 81.4%) of the outstanding
common shares of iSTAR.
The agreement also included the immediate credit facility of $5,000,000
working capital from PSINet Limited to the Company.
These consolidated financial statements have been prepared on a going
concern basis in accordance with generally accepted accounting principles. The
going concern basis of presentation assumes the Company will continue its
operation for the foreseeable future and be able to realize its assets and
discharge its liabilities in the normal course of business. These consolidated
financial statements do not give effect to the adjustments to the carrying
value of assets and liabilities and to the reported revenues and expenses, and
the balance sheet classifications used that would be necessary should the
Company be unable to find new sources of financing to operate in the ordinary
course of business.
F-27
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 4
Three Months ended August 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
3. UNITED STATES ACCOUNTING PRINCIPLES:
This financial statement note has been prepared because the consolidated
financial statements of the Company will be included in a proxy statement to
be issued to the shareholders of PSINet Inc.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP) which in
the case of the Company differ in the following material respects from those
generally accepted in the United States (U.S. GAAP).
(a) Statements of operations:
If U.S. GAAP were employed, the net loss and loss per share would be
adjusted as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss under Canadian GAAP............................................................. $ 7,543 $ 8,129
Adjustments:
Compensation element of: stock options issued to employees and;
contingent consideration paid to acquire companies and businesses................... -- 911
Customer lists and goodwill amortization and write-off................................ -- 16
------- -------
Net loss under U.S. GAAP................................................................. $ 7,543 $ 9,056
======= =======
Net loss per share under U.S. GAAP....................................................... $ (0.31) $ (0.48)
======= =======
(b) Balance sheets:
The cumulative effect of the adjustments on the consolidated assets and shareholders' equity are
as follows:
1997 1996
------- -------
Total assets under Canadian GAAP......................................................... $36,094 $45,244
Adjustments:
Restricted cash....................................................................... -- 455
Customer lists and goodwill........................................................... -- 766
------- -------
Total assets under U.S. GAAP............................................................. $36,094 $46,465
======= =======
</TABLE>
F-28
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 5
Three months ended August 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
3. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED):
(b) Balance sheets (continued):
The cumulative effect of the adjustments on the consolidated assets and
shareholders' equity is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Total shareholders' equity under Canadian GAAP....................................... $11,738 $ 31,133
Adjustments:
Issue of stock options and common shares; to acquire companies
and businesses.................................................................. -- 11,965
Selling, general and administrative expenses...................................... -- (10,727)
Customer lists and goodwill amortization and write-off............................ -- (17)
------- --------
Total shareholders' equity under U.S. GAAP........................................... $11,738 $ 32,354
======= ========
</TABLE>
(c) Statements of changes in financial position:
Under U.S. GAAP, financing and investing activities not involving a
receipt or outlay of cash are excluded from the consolidated statements of
changes in financial position. Accordingly, the following investing and
financing activities would not be presented in the consolidated statement of
changes in financial position for the years ended May 31, 1997 and 1996 but
would be shown supplementally:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Financial activities under Canadian GAAP.......................................... $ 7,340 $(526)
Adjustment:
Additional capital lease obligations on acquisition of property and
equipment.................................................................... (492) (118)
Increase in loans payable...................................................... 2,000 --
------- -----
Financing activities under U.S. GAAP.............................................. $ 8,848 $(644)
======= =====
Investing activities under Canadian GAAP.......................................... $(8,847) $(533)
Adjustment:
Property and equipment purchases financed through capital leases............... 492 118
------- -----
Investing activities under U.S. GAAP.............................................. $(8,355) $(415)
======= =====
</TABLE>
F-29
<PAGE>
Consolidated Financial Statements of
iSTAR internet inc.
Year ended May 31, 1997 and 1996
F-30
<PAGE>
LOGO
KPMG
Chartered Accountants
Suite 1000 45 O'Connor Street Telephone (613) 560-0011
Ottawa Ontario K1P 1A4 Canada Telefax (613) 560-2896
http://www/kpmg.ca
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of iSTAR internet inc. as at
May 31, 1997 and 1996 and the consolidated statements of operations and deficit
and changes in financial position for the years ended May 31, 1997 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at May 31, 1997 and
1996 and the results of its operations and the changes in its financial position
for the years then ended in accordance with Canadian generally accepted
accounting principles.
Significant differences between Canadian and United States generally accepted
accounting principles are quantified and explained in Note 20 to the financial
statements.
KPMG
Chartered Accountants
Ottawa, Canada
July 10, 1997, except for notes 12, 18, 19 and 20 which are as at December 5,
1997
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 19 to the financial statements which is as at December 5, 1997. Canadian
reporting standards do not permit a reference to such events and conditions in
the auditor's report when these are adequately disclosed in the financial
statements.
KPMG
Chartered Accountants
Ottawa, Canada
December 5, 1997
LOGO
F-31
<PAGE>
iSTAR INTERNET INC.
Consolidated Balance Sheets
May 31, 1997 and 1996
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and marketable securities (note 3)...................................... $ 12,073 $ 16,733
Accounts receivable (note 4)................................................. 10,027 8,595
Inventory.................................................................... 371 284
Other assets (note 5)........................................................ 606 731
-------- --------
23,077 26,343
Property and equipment (note 6)................................................ 16,343 12,640
Customer lists and goodwill (notes 2 and 7).................................... -- 16,497
-------- --------
$ 39,420 $ 55,480
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 8)................................................... $ 3,500 $ --
Accounts payable and accrued liabilities..................................... 14,829 10,310
Deferred revenue............................................................. 1,630 1,858
Current portion of capital lease obligations................................. 3,139 1,999
-------- --------
23,098 14,167
Capital lease obligations (note 9)............................................. 4,540 1,730
Deferred leasehold inducements................................................. 710 321
Shareholders' equity:
Share capital (note 10)...................................................... 83,015 55,656
Share purchase warrants (note 10(d))......................................... 218 2,013
Contributed surplus (note 10(e))............................................. 2,871 2,871
Deficit...................................................................... (75,032) (21,278)
-------- --------
11,072 39,262
-------- --------
Commitments (note 11)..........................................................
Contingencies (note 12)........................................................
-------- --------
$ 39,420 $ 55,480
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
iSTAR INTERNET INC.
Consolidated Statements of Operations and Deficit
Years ended May 31, 1997 and 1996
(In thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales........................................................................ $ 34,043 $ 19,405
Cost of sales................................................................ 30,558 13,596
-------- --------
Gross margin................................................................. 3,485 5,809
Selling, general and administration expenses................................. 32,624 22,147
-------- --------
Operating loss before undernoted items....................................... (29,139) (16,338)
Depreciation and amortization................................................ 6,519 2,947
Interest and bank charges, net (note 9)...................................... 113 (546)
-------- --------
Operating loss before non-recurring charges (35,771) (18,739)
Integration costs............................................................ 585 1,699
Write-off of customer lists and goodwill (note 7)............................ 17,398 --
-------- --------
Net loss..................................................................... $(53,754) $(20,438)
Deficit, beginning of year................................................... (21,278) (840)
-------- --------
Deficit, end of year......................................................... $(75,032) $(21,278)
======== ========
Net loss per share (note 14)................................................. $ (2.42) $ (1.70)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
iSTAR INTERNET INC.
Consolidated Statements of Changes in Financial Position
Years ended May 31, 1997 and 1996
(In thousands of Canadian dollars)
<TABLE>
<CAPTION>
1997 1996
---- ----
Cash provided by (used in):
Operations:
<S> <C> <C>
Net loss....................................................................... $(53,754) $(20,438)
Add non-cash items:
Depreciation and amortization............................................... 6,519 2,947
Write-off of customer lists and goodwill.................................... 17,398 --
Non-cash operating working capital............................................. (3,286) (381)
-------- --------
(26,551) (17,872)
Financing:
Common shares and warrants issued, net of issue costs.......................... 25,564 57,245
Capital lease obligations, net................................................. 3,950 3,457
Due from related parties....................................................... -- (373)
Payments on long-term debt, net................................................ -- (578)
Contributed surplus............................................................ -- 2,871
-------- --------
29,514 62,622
Investing:
Purchase of property and equipment............................................. (8,635) (10,158)
Acquisition of companies and businesses........................................ (2,488) (17,921)
-------- --------
(11,123) (28,079)
-------- --------
Increase (decrease) in cash position............................................. (8,160) 16,671
Cash position, beginning of year................................................. 16,733 62
-------- --------
Cash position, end of year....................................................... $ 8,573 $ 16,733
======== ========
</TABLE>
Cash position is defined as cash and marketable securities less bank
indebtedness.
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
iSTAR internet inc. provides advanced Internet services for businesses,
institutions, and individuals. The Company provides customers with a range of
networking expertise and Web-based products and services including business
solutions with high-speed connection to the Internet through a national backbone
network.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated on consolidation.
(b) Marketable securities:
Marketable securities are stated at cost, which approximates market
value.
(c) Inventory:
Inventory is stated at the lower of cost and net realizable value.
(d) Property and equipment:
Property and equipment is stated at cost. Depreciation and amortization
are provided on the straight-line basis using the following annual rates:
<TABLE>
<CAPTION>
ASSET TYPE RATE
- ---------- ----
<S> <C>
Computer and network equipment................................................................. 33%
Computer software.............................................................................. 50%
Furniture and equipment........................................................................ 20%
Leasehold improvements......................................................................... 16.67%
Trade show equipment........................................................................... 50%
</TABLE>
(e) Customer lists and goodwill:
Customer lists and goodwill represent the excess of the purchase price of
acquired companies and businesses over the fair value assigned to the
identifiable net assets acquired. Customer lists and goodwill are being
amortized on a straight-line basis over a 12 year period. On an ongoing basis,
management reviews the valuation and amortization of customer lists and
goodwill, taking into consideration any events and circumstances which might
have impaired fair value. The amount of customer lists or goodwill impairment,
if any, is measured based on management's estimate of fair value.
F-35
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 2
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Leases:
Leases are classified as either capital or operating in nature. Capital
leases are those which substantially transfer the benefits and risks of
ownership to the lessee. Assets acquired under capital leases are
depreciated at the same rates as those described in note 1 (d). Obligations
recorded under capital leases are reduced by rental payments net of imputed
interest.
(g) Deferred leasehold inducements:
The Company amortizes deferred leasehold inducements on a straight-line
basis over the terms of the respective leases.
(h) Revenue recognition:
Revenues from dial-up access, direct connect, consulting and training
services are recognized at the time services are rendered. Billings in
advance of services are recorded as deferred revenue and recognized at the
time services are rendered. Revenue from the sale of software, including
sales to distributors and resellers, is recognized when the products are
installed.
2. ACQUISITIONS OF COMPANIES AND BUSINESSES:
On August 10, 1995, the Company amalgamated with NSTN Incorporated
(NSTN), an Internet service provider operating primarily in Eastern Canada.
This transaction has been accounted for by the purchase method with the
results of operations of NSTN included in the Company's financial statements
from the date of amalgamation.
During fiscal 1996, the Company acquired eight other companies and
businesses engaged in providing Internet services. These acquisitions have
been accounted for by the purchase method and the results of operations have
been included from the respective dates of acquisition.
F-36
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 3
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
2. ACQUISITIONS OF COMPANIES AND BUSINESSES (CONTINUED):
The total consideration provided by the Company in exchange for all the
issued and outstanding shares of the companies and business assets acquired
is as follows:
<TABLE>
<CAPTION>
MAY 31,
1966
-------
Net identifiable assets acquired:
<S> <C>
Non-cash current assets..................................................................... $ 2,001
Property, plant & equipment................................................................. 3,241
Bank indebtedness........................................................................... (295)
Due to related parties...................................................................... (373)
Current liabilities......................................................................... (3,789)
Long term debt.............................................................................. (613)
-------
172
Customer lists and goodwill.................................................................... 17,454
-------
$17,626
=======
Consideration provided:
Cash........................................................................................ $ 8,094
Common shares (3,507,976.5 shares).......................................................... 4,648
Contributed surplus......................................................................... 2,871
Performance warrants........................................................................ 2,013
-------
$17,626
=======
</TABLE>
During 1997, additional common shares and share warrants in the amount of
$2,089,606 were recorded for these acquisitions. At May 31, 1996, this
consideration was contingent on certain events that were resolved during
1997. The additional consideration was recorded as an increase to customer
lists and goodwill.
3. CASH AND MARKETABLE SECURITIES:
Cash and marketable securities includes marketable securities of
$6,281,663 (1996--$14,676,792). The marketable securities mature within 30
days and bear interest at rates ranging from 2.75% to 3.05% (1996--4.75% to
5.05%).
F-37
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 4
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
4. ACCOUNTS RECEIVABLE:
Included in accounts receivable is an allowance for doubtful accounts of
$1,902,251 (1996--$1,139,095).
5. OTHER ASSETS:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Prepaid expenses.................................................................... $ 495 $ 520
Employee loans...................................................................... 111 211
----- -----
$ 606 $ 731
===== =====
</TABLE>
6. Property and equipment:
<TABLE>
<CAPTION>
ACCUMULATED 1997 1996
DEPRECIATION NET BOOK NET BOOK
COST AND AMORTIZATION VALUE VALUE
------ ------------------ ------------- ------------
Property under capital leases:
<S> <C> <C> <C> <C>
Computer equipment............................... $10,510 $2,359 $ 8,151 $ 3,597
Furniture and equipment.......................... 536 107 429 536
Computer and network equipment...................... 8,908 3,894 5,014 6,497
Computer software................................... 1,862 649 1,213 445
Furniture and equipment............................. 1,170 342 828 757
Leasehold improvements.............................. 803 167 636 634
Trade show equipment................................ 204 132 72 174
------- ------ ------- -------
$23,993 $7,650 $16,343 $12,640
======= ====== ======= =======
</TABLE>
Cost and accumulated depreciation and amortization at May 31, 1996
amounted to $15,398,828 and $2,759,034, respectively.
7. CUSTOMER LISTS AND GOODWILL:
Management has evaluated that there has been a permanent impairment in
the fair value of customer lists and goodwill in that the future benefit is
unlikely. This is due to many factors including the evolution of the Company
from a provider of primarily access-related products to a provider of
business solutions products and services. Therefore, the entire balance of
$17,398,250 has been written off.
F-38
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 5
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
8. BANK INDEBTEDNESS:
Bank indebtedness comprises an operating loan in the amount of $3,500,000
that was repaid in June 1997 (see note 18(b)).
9. CAPITAL LEASE OBLIGATIONS:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
1997......................................................................... $ -- $2,294
1998......................................................................... 3,676 1,485
1999......................................................................... 3,345 200
2000......................................................................... 1,757 145
2001......................................................................... 67 83
------ ------
Total minimum lease payments................................................. 8,845 4,207
Less amount representing interest at an average rate of 9.3%................. 1,166 478
------ ------
Present value of minimum lease payments...................................... 7,679 3,729
Current portion of obligations under capital leases.......................... 3,139 1,999
------ ------
$4,540 $1,730
====== ======
</TABLE>
Included in interest and bank charges is interest on capital lease
obligations of $276,254 (1996--$202,119).
10. SHARE CAPITAL:
The number of shares and amounts per share in these financial statements
have been retroactively adjusted to give effect to a 2.5 for 1 share split,
pursuant to articles of amendment filed on November 9, 1995.
(a) Authorized:
The Company has an unlimited number of authorized common shares.
F-39
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 6
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
10. SHARE CAPITAL (CONTINUED):
(b) Issued:
The Company's common share transactions are as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES AMOUNT
------------ --------
<S> <C> <C>
Issued for cash ............................................................. 1,818,787.5 $ 424
------------ -------
Balance, May 31, 1995 ....................................................... 1,818,787.5 424
Issued:
For cash in initial public offering, net of issue costs .................. 3,275,980.0 35,508
On conversion of special warrants, net of issue costs .................... 6,000,000.0 11,078
For acquisitions ......................................................... 3,507,976.5 4,648
For cash ................................................................. 2,661,212.5 3,156
On conversion of options ................................................. 300,000.0 600
To employees, directors .................................................. 1,295,814.0 242
------------ -------
Balance, May 31, 1996 ....................................................... 18,859,770.5 55,656
Issued:
For cash in public and private offerings, net of issue costs ............. 5,290,918.0 23,720
On conversion of share purchase warrants ................................. 289,853.5 2,008
On conversion of performance and litigation warrants ..................... 174,437.0 1,631
------------ -------
Balance, May 31, 1997 ....................................................... 24,614,979.0 $83,015
============ =======
</TABLE>
On May 29, 1997, the Company issued 2,220,869 common shares in exchange for
all of the outstanding shares of a corporation in which two of the Company's
directors were shareholders. The only asset of this corporation is 2,220,869
iSTAR internet inc. common shares issued in previous periods. As a result of
this transaction the Company indirectly holds iSTAR internet inc. shares. These
shares have been removed from the transaction summary provided above.
(c) Stock options:
At May 31, 1997, 2,070,537 options exercisable between $2.20 and $12.00
were outstanding. These options may be exercised between one month and 5 years
from the date of grant.
F-40
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 7
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
10. SHARE CAPITAL (CONTINUED):
(d) Warrants:
On September 24, 1996, the Company issued 366,750 warrants in
connection with a private offering. At May 31, 1997, 48,107 warrants
are outstanding and exercisable at a price of $4.10 per warrant until
September 28, 1998.
On October 29, 1996, the Company issued 1,450,000 warrants in
connection with the public offering. At May 31, 1997, these warrants
are outstanding and exercisable at a price of $6.75 until November 12,
1997.
At May 31, 1997, the Company has warrants outstanding and exercisable
into 46,940 common shares relating to 1996 acquisitions.
(e) Contributed surplus:
The statutory amalgamation on August 10, 1995 of the Company and NSTN
Incorporated resulted in contributed surplus of $2,871,199.
11. COMMITMENTS:
The Company is committed to payments under operating leases for office
space and office equipment. Annual payments are: 1998--$923,478; 1999--
$929,662; 2000--$932,802; 2001--$865,675; 2002--$655,186; and $2,138,236
thereafter.
The Company is also committed to payments under operating leases for
computer and network equipment. Annual payments are: 1998--$3,420,247;
1999--$3,230,011; and 2000--$2,383,576.
12. CONTINGENCIES:
(a) The Company is the defendant and counter-claimant in a claim arising
from the normal course of business. Since this claim is in its early
stages, legal counsel cannot determine what the outcome will be.
However, management expects that the financial impact arising from
this claim will not be material.
On November 26, 1997, the plaintiff accepted a settlement offer from
the Company, which will be recorded in the financial statements of the
Company for the second quarter ended November 30, 1997.
(b) The Company has $2,875,000 of letters of credit outstanding in favour
of three of its major suppliers.
During the second quarter of fiscal 1998 all letters of credit were
released by suppliers in exchange for renegotiated equipment leasing
arrangements that included accelerated lease payments.
13. INCOME TAXES:
The Company has income tax losses of approximately $58,600,000 (1996--
$21,400,000) which include tax losses acquired on the acquisition of
certain subsidiaries. These losses are generally available to reduce future
taxable income up to 2004. The benefit of these losses has not been
recognized in these financial statements.
F-41
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 8
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
14. NET LOSS PER SHARE:
The net loss per share figures are calculated based on the weighted
average number of common shares outstanding of 22,224,230 shares (1996--
12,053,453 shares).
The potential exercise of stock options and warrants would not have a
dilutive impact on the net loss per common share.
15. RELATED PARTY TRANSACTIONS:
During the year ended May 31, 1997, the Company purchased $1,003,740
(1996--$1,814,829) of software, hardware and management services from a
corporation in which a Company director is a shareholder.
The Company paid consulting fees of $244,549 (1996--$517,904) to a
corporation in which two of the Company's directors are shareholders.
During the year, the Company purchased $982,374 (1996--$618,278) of
software and hardware from a corporation in which one of the corporation's
shareholders is a director of the Company.
During the year, the Company purchased $63,036 (1996--$Nil) of
financial services from a corporation that is a shareholder and holds a seat
on the board of directors of the Company. The Company also sold $252,688
(1996--$Nil) of services to this same corporation.
Included in accounts receivable as at May 31, 1997 are amounts due from
related parties of $168,465 (1996--$81,456). Included in accounts payable and
accrued liabilities as at May 31, 1997 are amounts due to related parties of
$473,198 (1996--$828,705).
16. SEGMENTED INFORMATION:
Management has determined that the Company operates in one dominant
industry segment, being commercially-focused Internet products, and in one
dominant geographic segment, being Canada.
17. FINANCIAL INSTRUMENTS:
The carrying values of cash and marketable securities, accounts
receivable, bank indebtedness, accounts payable and accrued liabilities and
capital lease obligations approximate their fair values.
18. SUBSEQUENT EVENTS:
(a) Special warrants:
On July 31, 1997, the Company issued 4,500,000 special warrants at a
price of $2.00 each for proceeds of $9,000,000. Each special warrant
was convertible without further payment into common shares of the
Company on a one-for-one basis. The proceeds from the issuance of the
special warrants were held in escrow until a receipt was issued by the
appropriate Canadian securities regulatory authorities for a final
prospectus qualifying the issue of the underlying common shares. The
receipt was issued on September 10, 1997 and the proceeds released
from escrow on September 16, 1997. The warrants were converted into
common shares on September 18, 1997.
F-42
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 9
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
18. SUBSEQUENT EVENTS (CONTINUED):
(b) Credit facility:
On August 1, 1997, the Company entered into a loan agreement with The
Bank of Nova Scotia, Jefferson Partners Capital Limited and Jefferson
Partners Holdco Inc. for up to $4,000,000. As at August 8, 1997,
$2,000,000 was advanced and another $2,000,000 was advanced upon
execution of the Network Provisioning Agreement (note 19). The
principal portion of the fees payable to the lenders for this facility
was 200,000 warrants convertible into common shares for no additional
consideration. This credit facility is secured by existing security in
favour of The Bank of Nova Scotia and by a general assignment of book
debts in favour of Jefferson Partners Capital Limited. The proceeds of
the Special Warrants (note 18(a)) was used to repay the amount
outstanding under this facility and the warrants were converted into
common shares on September 18, 1997.
19. NETWORK PROVISIONING AGREEMENT, PROPOSED SALE OF BUSINESS AND THE GOING
CONCERN ASSUMPTION:
On August 29, 1997, the Company signed a network provisioning
agreement (NPA) with Bell Sygma Inc. (Bell) to supply the Company with
telecommunications facilities and services over five years. The fees for
certain services performed by Bell between July 1, 1997 and June 30, 1999,
up to $20,000,000, do not have to be paid prior to July 1, 1999 and are
interest free. After this date, Bell has the right to demand repayment of
the deferred fees on an interest free basis over the next three years in
equal monthly installments.
The Company is obligated to pay Fonorola Inc. an amount which has not
been finally determined but which is anticipated by the Company to be no
more than $1,800,000, resulting from the early termination of the Company's
supply agreement with Fonorola Inc. Under the NPA, Bell Sygma Inc. has
agreed to pay 50% of this amount, which it will include in invoices to the
Company in equal monthly amounts over the next five years.
The implementation schedule of the NPA contemplated that Bell and the
Company would complete the migration of the Company's network to Bell's
network over a period of time ending on December 31, 1997. During the
course of the migration, the Company expected it would realize increasing
levels of deferral of its telecommunication costs with the full benefit of
the NPA being achieved once the migration was completed.
In mid-October, the Company learned that there were significant delays
in the migration of the Company's network to the Bell system. This impacted
the anticipated cash benefits of the NPA during the first six months of the
1998 fiscal year and into the third quarter. At that time the Company
continued to focus on maintaining adequate capital resources until the full
financial benefit of the NPA could be realized. As a result of the
significant delays in the migration, the Company has used its cash
resources to fund operating losses through the second quarter of fiscal
1998 and into the third quarter. The Company anticipates it will continue
to generate operating losses over the next several quarters and will
require additional amounts of capital to fund these operating losses.
As a result of the demand on cash, the Company explored various
options including seeking a purchaser. In late October 1997 the Company
entered into discussions with PSINet Inc. (PSINet) and on November 10,
1997, PSINet, a United States internet service provider and iSTAR internet
inc. announced that PSINet plans to acquire the Company and to merge it
with its privately held Canadian subsidiary, PSINet Limited.
F-43
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 11
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
19. NETWORK PROVISIONING AGREEMENT, PROPOSED SALE OF BUSINESS AND THE GOING
CONCERN ASSUMPTION (CONTINUED):
Under the merger arrangement, the Company's shareholders will be
entitled to receive, for each common share of the Company, one $1.206, 8%
exchangeable redeemable preference share (an "Amalco Non-voting
Exchangeable Share") in the company ("Amalco") continuing from the
amalgamation of iSTAR with PSINet Limited. Dividends will accrue daily and
will compound quarterly on the Amalco Non-voting Exchangeable Shares. Each
Amalco Non-voting Exchangeable Share is exchangeable at certain times into
US$0.86 of PSINet Common Stock valued at the ten day weighted average
market price of PSINet Common Stock at the time of exchange plus a cash
payment equal to all accrued and unpaid dividends. Up to 33 1/3% of the
aggregate number of Amalco Non-voting Exchangeable Shares issued may be
exchanged at the holder's option on April 1, 1998. Up to 66 2/3% of the
aggregate number of Amalco Non-voting Exchangeable Shares issued (less any
shares exchanged on April 1, 1998) may be exchanged at the holder's option
on July 1, 1998. Any Amalco Non-voting Exchangeable Shares which remain
outstanding on January 1, 1999 may be exchanged, at the holders' option, on
or after that date. The shares will be automatically exchanged into shares
of PSINet Common Stock in certain circumstances.
The agreement also includes the immediate credit facility of
$5,000,000 working capital from PSINet Limited to the Company. The
transaction is expected to be completed by January 31, 1998. The offer is
subject to certain closing conditions including government and regulatory
approvals. The offer is also conditional upon a satisfactory arrangement
with Bell, regarding the Network Provisioning Agreement.
The Company expects the purchase by PSINet to be completed by January
31, 1998. If this sale is not completed the Company will be obligated to
repay to PSINet any amounts borrowed however, the Company currently does
not have any other available sources of financing.
These consolidated financial statements have been prepared on a going
concern basis in accordance with generally accepted accounting principles.
The going concern basis of presentation assumes the Company will continue
its operation for the foreseeable future and be able to realize its assets
and discharge its liabilities in the normal course of business. These
consolidated financial statements do not give effect to the adjustments to
the carrying value of assets and liabilities and to the reported revenues
and expenses, and the balance sheet classifications used that would be
necessary should the Company be unable to find new sources of financing to
operate in the ordinary course of business.
20. UNITED STATES ACCOUNTING PRINCIPLES:
This financial statement note has been prepared because the
consolidated financial statements of the Company will be included in a
proxy statement to be issued to the shareholders of PSINet Inc.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP)
which in the case of the Company differ in the following material respects
from those generally accepted in the United States (U.S. GAAP).
F-44
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 12
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
20. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED):
(a) Statements of Operations:
If U.S. GAAP were employed, the net loss and loss per share would be
adjusted as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss under Canadian GAAP.................................................... $ 53,754 $ 20,438
Adjustments:
Compensation element of: stock options issued to employees and;
contingent consideration paid to acquire companies and businesses.......... 2,062 10,727
Customer lists and goodwill amortization and write-off....................... (67) 97
-------- --------
Net loss under U.S. GAAP........................................................ $ 55,749 $ 31,262
======== ========
Net loss per share under U.S. GAAP.............................................. $ (2.51) $ (2.59)
======== ========
(b) Balance sheets:
The cumulative effect of the adjustments on the consolidated assets, liabilities and shareholders' equity
is as follows:
1997 1996
-------- --------
Total assets under Canadian GAAP................................................ $ 39,420 $ 55,480
Adjustments:
Restricted cash.............................................................. -- 455
Customer lists and goodwill.................................................. -- 686
-------- --------
Total assets under U.S. GAAP.................................................... $ 39,420 $ 56,621
======== ========
1997 1996
-------- --------
Total shareholders' equity under Canadian GAAP.................................. $ 11,072 $ 39,262
Adjustments:
Issue of common shares and stock options to acquire companies
and businesses............................................................. 12,819 11,965
Selling, general and administration expenses................................. (12,789) (10,727)
Customer lists and goodwill amortization and write-off....................... (30) (97)
-------- --------
Total shareholders' equity under U.S. GAAP...................................... $ 11,072 $ 40,403
======== ========
</TABLE>
F-45
<PAGE>
iSTAR INTERNET INC.
Notes to Consolidated Financial Statements, page 13
Years ended May 31, 1997 and 1996
(All tabular amounts in thousands of Canadian dollars)
20. UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED):
(c) Statements of changes in financial position:
Under U.S. GAAP, financing and investing activities not involving a
receipt or outlay of cash are excluded from the consolidated statements of
changes in financial position. Accordingly, the following investing and
financing activities would not be presented in the consolidated statement
of changes in financial position for the years ended May 31, 1997 and 1996
but would be shown supplementally:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Financing activities under Canadian GAAP.......................................... $ 29,514 $ 62,622
Adjustments:
Common shares and warrants issued and contributed surplus established
on acquisition of companies and businesses................................... (1,844) (9,531)
Additional capital lease obligations on acquisition of property and
equipment.................................................................... (5,566) (4,757)
Increase in bank indebtedness.................................................. 3,500 --
-------- --------
Financing activities under U.S. GAAP.............................................. $ 25,604 $ 48,334
======== ========
Investing activities under Canadian GAAP.......................................... $(11,123) $(28,079)
Adjustments:
Acquisition of companies and businesses through the issue of shares and
warrants..................................................................... 1,844 9,531
Property and equipment purchases financed through capital leases............... 5,566 4,757
-------- --------
Investing activities under U.S. GAAP.............................................. $ (3,713) $(13,791)
======== ========
</TABLE>
21. SALE OF BUSINESS (UNAUDITED)
On December 24, 1997, the Company and PSINet Inc. ("PSINet"), a United
States Internet service provider, announced an amendment to the terms of
their November 10, 1998 announcement whereby PSINet planned to acquire the
Company and to merge it with its privately held Canadian subsidiary, PSINet
Limited. The new terms provide that PSINet will offer Cdn $.75 cash for
each of the outstanding common shares of iSTAR by way of a take-over bid to
be mailed to shareholders of the Company on or before January 7, 1998.
Subsequently, PSINet extended the expiry of the offer and between January
30, 1998 and February 12, 1998, PSINet acquired approximately 23,900,000
(or 81.4%) of the outstanding common shares of iSTAR.
F-46
<PAGE>
ANNEX A
Letter of Transmittal
PSINET INC.
Offer To Exchange Its
New 10% Senior Notes Due 2005, Series B
Which Have Been Registered Under The Securities Act of 1933
For Any And All Of Its Outstanding
10% Senior Notes Due 2005, Series A
Pursuant To The Prospectus
Dated , 1998
- -------------------------------------------------------------------------------
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON , 1998,
UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- ------------------------------------------------------------------------------
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
WILMINGTON TRUST COMPANY, as Exchange Agent
By Registered or Certified Mail or By Hand
Overnight Courier:
Wilmington Trust Company Wilmington Trust Company
Attn: Kristin Long Attn: Corporate Trust Operations
Corporate Trust Operations c/o Harris Trust Co. of New York as Agent
1100 North Market Street 88 Pine Street, 19th Floor
Rodney Square North Wall Street Plaza
Wilmington, DE 19890-0001 New York, New York 10005
By Facsimile:
(For Eligible Institutions Only)
Wilmington Trust Company
(302) 651-1079
Confirm by telephone:
(302) 651-1562
Kristin Long
Delivery of this Letter of Transmittal to an address other than as set
forth above or transmission of this Letter of Transmittal via facsimile to a
number other than as set forth above does not constitute a valid delivery.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
<PAGE>
This Letter of Transmittal is to be completed by holders of Initial Notes
(as defined below) either if Initial Notes are to be forwarded herewith or if
tenders of Initial Notes are to be made by book-entry transfer to an account
maintained by Wilmington Trust Company (the "Exchange Agent") at The Depository
Trust Company ("DTC") pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Initial Notes" in the Prospectus and an "Agent's
Message" (as defined below) is not delivered. Tenders by book-entry transfer
may also be made by delivering an Agent's Message in lieu of this Letter.
Holders of Initial Notes whose certificates (the "Certificates") for such
Initial Notes are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent on or prior
to the Expiration Date (as defined in the Prospectus) or who cannot complete the
procedures for book-entry transfer on a timely basis, must tender their Initial
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Initial Notes" in the Prospectus. See
Instruction 1 hereto. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT.
Ladies and Gentlemen:
The undersigned hereby tenders to PSINet Inc., a New York corporation (the
"Company"), the aggregate principal amount of the Company's outstanding 10%
Senior Notes due 2005, Series A (the "Initial Notes") described in Box 1 below,
in exchange for a like aggregate principal amount of the Company's new 10%
Senior Notes due 2005, Series B (the "Exchange Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
upon the terms and subject to the conditions set forth in the Prospectus dated
________, 1998 (as the same may be amended or supplemented from time to time,
the "Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitutes the "Exchange
Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Initial Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Initial Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
Wilmington Trust Company as the Exchange Agent (the "Exchange Agent") as its
agent and attorney-in-fact (with full knowledge that the Exchange Agent is also
acting as agent of the Company in connection with the Exchange Offer) with
respect to the tendered Initial Notes, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), subject only to the right of withdrawal described in the Prospectus,
to (i) deliver Certificates for Initial Notes to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent, of
the Exchange Notes to be issued in exchange for such Initial Notes, (ii) present
Certificates for such Initial Notes for transfer, and to transfer the Initial
Notes on the books of the Company, and (iii) receive for the account of the
Company all benefits and otherwise exercise all rights of beneficial ownership
of such Initial Notes, all in accordance with the terms and conditions of the
Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, sell, assign and transfer the
Initial Notes tendered hereby and that, when the same are accepted for exchange,
the Company will acquire good, marketable and unencumbered title thereto, free
and clear of all liens, restrictions, charges and encumbrances, and that the
Initial Notes tendered hereby are not subject to any adverse claims or proxies.
The undersigned will, upon request, execute and deliver any additional documents
deemed by the Company or the Exchange Agent to be necessary or desirable to
complete the exchange, assignment and transfer of the Initial Notes tendered
hereby, and the undersigned
A-2
<PAGE>
will comply with its obligations under the Registration Rights Agreement. The
undersigned has read and agrees to all of the terms of the Exchange Offer.
The name(s) and address(es) of the registered holder(s) of the Initial
Notes tendered hereby should be printed in Box 1 below, if they are not already
set forth therein, as they appear on the Certificates representing such Initial
Notes. The Certificate number(s) and the Initial Notes that the undersigned
wishes to tender should also be indicated in Box 1 below.
If any tendered Initial Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Initial Notes
than are tendered or accepted for exchange, Certificates for such nonexchanged
or nontendered Initial Notes will be returned (or, in the case of Initial Notes
tendered by book-entry transfer, such Initial Notes will be credited to an
account maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Initial Notes pursuant to any
one of the procedures described under "The Exchange Offer--Procedures for
Tendering Initial Notes" in the Prospectus and in the instructions hereto will,
upon the Company's acceptance for exchange of such tendered Initial Notes,
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer. The undersigned
recognizes that, under certain circumstances set forth in the Prospectus, the
Company may not be required to accept for exchange any of the Initial Notes
tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the Exchange
Notes be issued in the name(s) of the undersigned or, in the case of a book-
entry transfer of Initial Notes, that such Exchange Notes be credited to the
account indicated below maintained at DTC. If applicable, substitute
Certificates representing Initial Notes not exchanged or not accepted for
exchange will be issued to the undersigned or, in the case of a book-entry
transfer of Initial Notes, will be credited to the account indicated below
maintained at DTC. Similarly, unless otherwise indicated herein in the box
entitled "Special Delivery Instructions" below (Box 8), the undersigned hereby
directs that the Exchange Notes be delivered to the undersigned at the address
shown below the undersigned's signature.
By tendering Initial Notes and executing this Letter of Transmittal, the
undersigned hereby represents and agrees that (i) the undersigned is not an
"affiliate" of the Company, (ii) any Exchange Notes to be received by the
undersigned are being acquired in the ordinary course of its business, (iii) the
undersigned has no arrangement or understanding with any person to participate
in a distribution (within the meaning of the Securities Act) of Exchange Notes
to be received in the Exchange Offer, and (iv) if the undersigned is not a
broker-dealer, the undersigned is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such Exchange
Notes. By tendering Initial Notes pursuant to the Exchange Offer and executing
this Letter of Transmittal, a holder of Initial Notes which is a broker-dealer
represents and agrees, consistent with certain interpretive letters issued by
the staff of the Division of Corporation Finance of the Securities and Exchange
Commission to third parties described under "The Exchange Offer--Registration
Rights" in the Prospectus, that such Initial Notes were acquired by such broker-
dealer for its own account as a result of market-making activities or other
trading activities (such a broker-dealer which is tendering Initial Notes is
herein referred to as a "Participating Broker-Dealer") and it will deliver the
Prospectus (as amended or supplemented from time to time) meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes (provided that, by so acknowledging and by delivering a
Prospectus, such Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act).
A-3
<PAGE>
The Company has agreed that, subject to the provisions of the Registration
Rights Agreement, the Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of Exchange Notes received in exchange for Initial Notes, where such Initial
Notes were acquired by such Participating Broker-Dealer for its own account as a
result of market-making activities or other trading activities, for a period
ending one year after the Expiration Date or, if earlier, when all such Exchange
Notes have been disposed of by such Participating Broker-Dealer. In that
regard, each Participating Broker-Dealer, by tendering such Initial Notes and
executing this Letter of Transmittal, agrees that, upon receipt of notice from
the Company of the occurrence of any event or the discovery of any fact which
makes any statement contained or incorporated by reference in the Prospectus
untrue in any material respect or which causes the Prospectus to omit to state a
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which they were made, not misleading or of the
occurrence of certain other events specified in the Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of Exchange
Notes pursuant to the Prospectus until the Company has amended or supplemented
the Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to the Participating Broker-Dealer or
the Company has given notice that the sale of the Exchange Notes may be resumed,
as the case may be.
Each Exchange Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Initial Note surrendered in
exchange for such Exchange Note or, if no such interest has been paid or duly
provided for on such Initial Note, from April 13, 1998. Holders of the Initial
Notes whose Initial Notes are accepted for exchange will not receive accrued
interest on such Initial Notes for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such
Initial Notes prior to the original issue date of the Exchange Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Initial Notes, and will be deemed to have waived the right to
receive any interest on such Initial Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after April 13, 1998.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 11 HEREOF.
A-4
<PAGE>
All Tendering Holders Complete This Box 1:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF INITIAL NOTES TENDERED
(SEE INSTRUCTIONS 3 AND 4 BELOW)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
If Blank, Please Print Certificate Number(s) of Aggregate Principal Aggregate Principal
Name And Address(es) Of Initial Notes Amount Represented By Amount of Initial Notes
Registered Holder(s), Certificates* Being Tendered**
Exactly As Name(s)
Appear(s) On Initial Note
Certificate(s)
- ---------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Total
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** The minimum permitted tender is $1,000 in principal amount. All
tenders must be in integral multiples of $1,000 in principal amount. The
aggregate principal amount of all Initial Notes Certificates identified in this
Box 1, or delivered to the Exchange Agent herewith, shall be deemed tendered
unless a lesser number is specified in this column. See Instruction 4.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
BOX 2
BOOK-ENTRY TRANSFER
(See Instruction 1 Below)
<S> <C>
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution--------------------------------------
DTC Account Number-------------------------------------------------
Transaction Code Number--------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
By crediting the Initial Notes to the Exchange Agent's account at the Book-
Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's
Automated Tender Offer Program ("ATOP") and by complying with applicable ATOP
procedures with respect to the Exchange Offer, including transmitting to the
Exchange Agent a computer-generated message (an "Agent's Message") in which the
holder of the
A-5
<PAGE>
Initial Notes acknowledges and agrees to be bound by the terms of,
and makes the representations and warranties contained in, this Letter of
Transmittal, the participant in the Book-Entry Transfer Facility ("Participant")
confirms on behalf of itself and the beneficial owners of such Initial Notes all
provisions of this Letter of Transmittal (including any representations and
warranties) applicable to it and such beneficial owner as fully as if it had
completed the information required herein and executed and transmitted this
Letter of Transmittal to the Exchange Agent.
A-6
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
BOX 3
NOTICE OF GUARANTEED DELIVERY
(See Instruction 1 Below)
<S> <C>
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name of Registered Holders(s)----------------------------------------
Window Ticket Number (if any)----------------------------------------
Date of Execution of Notice of Guaranteed Delivery-------------------
Name of Institution which Guaranteed Delivery------------------------
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution----------------------------------------
DTC Account Number---------------------------------------------------
Transaction Code Number----------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
BOX 4
RETURN OF NON-EXCHANGED INITIAL NOTES
TENDERED BY BOOK-ENTRY TRANSFER
(See Instructions 4 and 6 Below)
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON--EXCHANGED INITIAL
NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
- ------------------------------------------------------------------------------
A-7
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
BOX 5
PARTICIPATING BROKER-DEALER
<S> <C>
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE INITIAL NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES
(A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN ADDITIONAL COPIES OF
THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:--------------------------------------
Address:-----------------------------------
- -------------------------------------------------------------------------------
BOX 6
TENDERING HOLDER SIGNATURE
(SEE INSTRUCTIONS 1 AND 5)
IN ADDITION, COMPLETE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
X --------------------
X --------------------
(Signature of registered holder(s) or Authorized
Signatory)
Note: The above lines must be signed by the registered
holder(s) of Initial Notes as their name(s) appear(s)
on the Initial Notes or by person(s) authorized to
become registered holder(s) (evidence of which
authorization must be transmitted with this Letter of
Transmittal). If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer, or
other person acting in a fiduciary or representative
capacity, such person must set forth his or her full
title below. See Instruction 5.
Name(s):------------------------
------------------------
------------------------
Capacity:-----------------------
Street Address:-----------------
----------------------
-----------------------
(include Zip Code)
Area Code and Telephone Number:
-------------------------------
Tax Identification or Social Security Number:
- --------------------------------------------
Signature Guarantee
(If required by
Instruction 5)
Authorized Signature
(If required by Instruction 5)
Authorized Signature
X ---------------------------
Name:------------------------
(please print)
Title:-----------------------
Name of Firm:----------------
(Must be an Eligible
Institution as defined
in Instruction 2)
Address:--------------------
--------------------
--------------------
(include Zip Code)
Area Code and Telephone Number:
-----------------------
Dated:-----------------------
- -------------------------------------------------------------------------------
</TABLE>
A-8
<PAGE>
- ----------------------------------------------------
BOX 7
SPECIAL EXCHANGE INSTRUCTIONS
(See Instructions 1, 5 and 6 Below)
To be completed ONLY if Certificates for the Initial
Notes not exchanged and/or Certificates for the
Exchange Notes are to be issued in the name of
someone other than the registered holder of the
Initial Notes whose name(s) appear(s) above.
Name:-------------------------------------
(Please Print)
Address:----------------------------------
----------------------------------
(Include Zip Code)
- ----------------------------------------------
(Tax Identification or Special Security Number)
- ---------------------------------------------------
- ---------------------------------------------------
BOX 8
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5 and 6 Below)
Too be completed ONLY if Certificates for the Initial
Notes not exchanged and/or Certificates for the
Exchange Notes are to be sent to someone other than the
registered holder of the Initial Notes whose name(s)
Appear(s)(s) above, or to such registered holder(s) at an
address other than that shown above.
Name:--------------------------------------------
(Please Print)
Address:----------------------------------------
(Include Zip Code)
- ------------------------------------------------
(Tax Identification or Social Security Number)
- ------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
BOX 9
- ----------------------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: WILMINGTON TRUST COMPANY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SUBSTITUTE Name (if joint names, list first and circle the name of the person or entity whose number you
enter in Part 1 below. See instructions if your name has changed)
----------------------------------------------
Form W-9 Address
----------------------------------------------
City, State and Zip Code
----------------------------------------------
Department of the Treasury List account number(s) here (optional)
Internal Revenue Service
-------------------------------------------------------------------------------------------------
Part 1 -- PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER Social Security Number or
("TIN") IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING TIN
BELOW.
--------------------------------------------------------------------------------------------------
Part 2 -- Check the box if you are NOT subject to backup withholding under the provisions of
section 3406(a)(1)(C) of the Internal Revenue Code because (1) you have not been notified that
you are subject to backup withholding as a result of failure to report all interest or dividends
or (2) the Internal Revenue Service has notified you that you are no longer subject to backup
withholding.
Not subject to withholding [ ]
-------------------------------------------------------------------------------------------------
Payor's Request for TIN CERTIFICATION -- UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE Part 3 --
INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT, AND COMPLETE.
Signature: ___________________________ Date: ___________ Awaiting TIN [ ]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-10
<PAGE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W - 9" FOR ADDITIONAL DETAILS.
A-11
<PAGE>
- -----------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the Exchange Notes shall be retained
until I provide a taxpayer identification number to the Exchange Agent and that,
if I do not provide my taxpayer identification number within 60 days, such
retained amounts shall be remitted to the Internal Revenue Service as backup
withholding and 31% of all reportable payments made to me thereafter will be
withheld and remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature:-------------------------------
Date:------------------------------------
- ------------------------------------------------------------------------------
A-12
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Initial Notes directly to the Company.
Your Initial Note Certificates, together with your signed and completed Letter
of Transmittal and any required supporting documents should be mailed in the
enclosed addressed envelope, or otherwise delivered, to the Exchange Agent, at
either of the addresses indicated on the first page hereof. THE METHOD OF
DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed by holders of Initial Notes
(which term, for purposes of the Exchange Offer, includes any participant in the
Book-Entry Transfer Facility System whose name appears on a security position
listing as the holder of such Initial Notes) if either (a) Certificates for such
Initial Notes are to be forwarded herewith or (b) tenders are to be made
pursuant to the procedures for tender by book-entry transfer set forth in "The
Exchange Offer--Procedures for Tendering Initial Notes" in the Prospectus, and
an Agent's Message is not delivered. Tenders by book-entry transfer may also be
made by delivering an Agent's Message in lieu of this Letter. The term "Agent's
Message" means a message, transmitted by the Book-Entry Transfer Facility to and
received by the Exchange Agent and forming a part of a Book-Entry confirmation,
which states that the Book-Entry Transfer Facility has received an express
acknowledgement from the tendering Participant, which acknowledgement states
that such Participant has received and agrees to be bound by, and makes the
representations and warranties contained in, this Letter of Transmittal and that
the Company may enforce this Letter of Transmittal against such Participant.
Certificates representing the tendered Initial Notes, or timely confirmation of
a book-entry transfer of such Initial Notes into the Exchange Agent's account at
DTC, as well as a properly completed and duly executed copy of this Letter of
Transmittal, or a facsimile hereof (or, in the case of a book-entry transfer, an
Agent's Message), a substitute Form W-9, and any other documents required by
this Letter of Transmittal, must be received by the Exchange Agent at its
address set forth herein on or prior to 5:00 p.m., New York City time, on the
Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures set forth below. Initial Notes may be tendered in whole or
in part in the principal amount of $1,000 and integral multiples of $1,000.
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available or (ii) who cannot deliver their Initial Notes,
this Letter of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who cannot complete the
procedures for delivery by book-entry transfer on a timely basis, may tender
their Initial Notes by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for Tendering Initial Notes" in the Prospectus
and by completing Box 3 hereof. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution (as defined below); (ii) a
properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, must be received by the
Exchange Agent on or prior to the Expiration Date; and (iii) the Certificates
(or a book-entry confirmation (as defined
A-13
<PAGE>
in the Prospectus)) representing all tendered Initial Notes, in proper form for
transfer, together with a Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees (or, in the
case of a book-entry transfer an Agent's Message) and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
within three New York Stock Exchange trading days after the date of execution of
such Notice of Guaranteed Delivery, all as provided in "The Exchange Offer--
Procedures for Tendering Initial Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Initial Notes to
be properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein, "Eligible Institution" means a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as "an eligible guarantor
institution," including (as such terms are defined therein) (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association, that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC whose
name appears on a security position listing as the owner of the Initial Notes)
of Initial Notes tendered herewith, unless such holder(s) has completed either
the box entitled "Special Exchange Instructions" (Box 7) or the box entitled
"Special Delivery Instructions" (Box 8) above, or
(ii) such Initial Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
in Box 6 on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Initial Notes"
is inadequate, the Certificate number(s) and/or the principal amount of Initial
Notes and any other required information should be listed on a separate signed
schedule which should be attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Initial Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all the Initial Notes
evidenced by any Certificate submitted are to be tendered, fill in the principal
amount of Initial Notes which are to be tendered in Box 1 under the column
"Aggregate Principal Amount of Initial Notes Being Tendered." In such case, new
Certificate(s) for the remainder of the Initial Notes that were evidenced by the
Initial Notes Certificate(s) will be sent to the holder of the Initial
A-14
<PAGE>
Notes, promptly after the Expiration Date. All Initial Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at its address set forth above on or prior to the Expiration
Date. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Initial Notes to be withdrawn (the "Depositor"), (ii)
identify the Initial Notes to be withdrawn (including the Certificate number(s)
and principal amount of such Initial Notes, or, in the case of Initial Notes
transferred by book-entry transfer, the name and number of the account at DTC to
be credited), (iii) be signed by the Initial Holder in the same manner as the
original signature on the Letter of Transmittal by which such Initial Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Initial Notes into the name of the person withdrawing the tender and (iv)
specify the name in which any such Initial Notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form
and eligibility (including time or receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
If Initial Notes have been tendered pursuant to the procedures for book-entry
transfer set forth in the Prospectus under "The Exchange Offer--Procedures for
Tendering Initial Notes," the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Initial
Notes, in which case a notice of withdrawal will be effective if delivered to
the Exchange Agent by written or facsimile transmission. Withdrawals of tenders
of Initial Notes may not be rescinded. Initial Notes properly withdrawn will not
be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described in the Prospectus under "The Exchange
Offer--Procedures for Tendering Initial Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give such notification. Any Initial Notes which have been tendered
but which are withdrawn will be returned to the holder thereof without cost to
such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Initial Notes tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Initial Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Initial Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company,
A-15
<PAGE>
must submit proper evidence satisfactory to the Company, in its sole discretion,
of such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Initial Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless Exchange Notes are to be issued in
the name of a person other than the registered holder(s). However, if Exchange
Notes are to be issued in the name of a person other than the registered
holder(s), signature(s) on such Certificate(s) or bond power(s) must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Initial Notes listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also must
be accompanied by such opinions of counsel, certifications and other information
as the Company or the Trustee for the Initial Notes may require in accordance
with the restrictions on transfer applicable to the Initial Notes. Signatures on
such Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If Exchange Notes are to be issued in the name of a person other than the
signer of this Letter of Transmittal, or if Exchange Notes are to be sent to
someone other than the signer of this Letter of Transmittal or to an address
other than that shown above, the appropriate boxes on this Letter of Transmittal
should be completed (Box 7 and 8). Certificates for Initial Notes not exchanged
will be returned by mail or, if tendered by book-entry transfer, by crediting
the account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Initial Notes, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any and all tenders determined by it not to be in proper form or
the acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under "The Exchange Offer--Conditions" or any conditions or
irregularity in any tender of Initial Notes of any particular holder whether or
not similar conditions or irregularities are waived in the case of other
holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Initial Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliates or assigns of the Company,
the Exchange Agent, nor any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent.
A-16
<PAGE>
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter of
Transmittal (Box 9) and certify, under penalties of perjury, that such number is
correct and that he or she is not subject to backup withholding. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Initial Notes exchanged
pursuant to the Exchange Offer, or with respect to Exchange Notes following the
Exchange Offer, may be subject to 31% backup withholding.
The box in Part 3 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 3 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below Substitute Form W-9 in order to avoid backup
withholding. Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Initial Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Initial Notes. If the Initial Notes are registered in
more than one name or are not in the name of the actual owner, consult the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which number to report.
If the tendering holder is a nonresident alien or foreign entity not
subject to backup withholding, such holder must give the Company a completed
Form W-8, Certificate of Foreign Status. A copy of the Form W-8 may be obtained
from the Exchange Agent. Please consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Initial Notes have been lost, destroyed
or stolen, the holder should promptly notify the Exchange Agent. The holder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Initial Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Initial Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Initial Notes in connection
with the Exchange Offer, then the amount of any such transfer tax (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not
A-17
<PAGE>
submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
A-18
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their social
security number. Refer to the following chart to determine the appropriate
number:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY OR EMPLOYER
IDENTIFICATION NUMBER OF--
- ----------------------------------------------------------------------------------------------------------
1. Individual The individual
2. Two or more individuals The actual owner of the account or, if combined
(joint account) funds, the first individual on the account (1)
3. Custodian account of a minor (Uniform The minor(2)
Gift to Minors Act)
4. a. The usual revocable savings trust The grantor-trustee(1)
(grantor is also trustee)
b. So-called trust account that is not a The actual owner(1)
legal or valid trust under State law
5. Sole proprietorship The owner(3)
6. A valid trust, estate or pension trust Legal entity(4)
7. Corporate The corporation
8. Association, club, religious, charitable, The organization
educational or other tax exempt organization
9. Partnership The partnership
10. A broker or registered nominee The broker or nominee
11. Account with the Department of Agriculture The public entity
- --------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
B. EXEMPT PAYEES--The following lists exempt payees. If you are exempt, you must
nonetheless complete the form and provide your TIN in order to establish that
you are exempt. Check the box in Part 3 of the form, sign and date the form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) The United States
or any of its agencies or instrumentalities; (4) A state, the District of
Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) A foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) An international
organization or any of its agencies or instrumentalities; (7) A foreign central
bank of issue; (8) A dealer in securities or commodities required to register in
the U.S. or a possession of the U.S.; (9) A real estate investment trust; (10)
An entity or person registered at all times during the tax year under the
Investment
A-19
<PAGE>
Company Act of 1940; (11) A common trust fund operated by a bank
under section 584(a); (12) A financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form SS-
4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be given the numbers whether or not payees are required to file
tax returns. Payers must generally withhold 31% of taxable interest, dividend,
and certain other payments to a payee who does not furnish a taxpayer
identification number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail
to include any portion of an includable payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
A-20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Sections 721 through 725 of the Business Corporation Law of the State
of New York (the "BCL"), the Registrant has broad powers to indemnify its
directors, officers and other employees. These sections (i) provide that the
statutory indemnification and advancement of expenses provision of the BCL are
not exclusive, provided that no indemnification may be made to or on behalf of
any director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action os adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled, (ii) establish
procedures for indemnification and advancement of expenses that may be contained
in the certificate of incorporation or by-laws, or, when authorized by either of
the foregoing, set forth in a resolution of the shareholders or directors of an
agreement providing for indemnification and advancement of expenses, (iii) apply
a single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful and (iv) permit the advancement
of litigation expenses upon receipt of an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification or to the extent the expenses advanced exceed the
indemnification to which the director or officer is entitled. Section 726 of
the BCL permits the purchase of insurance to indemnify a corporation or its
officers and directors to the extent permitted.
As permitted by Section 721 of the BCL, the Registrant's By-laws provide
that the Registrant shall indemnify its officers and directors, as such, to the
fullest extent permitted by applicable law, and that expenses reasonably
incurred by any such officer or director in connection with a threatened or
actual action or proceeding shall be advanced or promptly reimbursed by the
Registrant in advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if and to the extent that it is ultimately determined that such
officer or director is not entitled to indemnification.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that no director of the Registrant shall be held personally liable to the
Registrant or its shareholders for damages for any breach of duty in his
capacity as a director occurring after authorization of such Article EIGHTH by
the shareholders unless a judgment or other final adjudication adverse to him
establishes that (1) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, or (2) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled, or (3) his acts violated section 719 of the BCL. The Registrant has
entered into Indemnity Agreements with its directors and certain key officers
pursuant to which the Registrant generally is obligated to indemnify its
directors and such officers to the full extent permitted by the BCL as described
above. The Company also has purchased directors' and officers' liability
insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all exhibits filed as part of this Registration
Statement.
3.1 Certificate of Incorporation, as amended.
3.2 Certificate of Amendment of Certificate of Incorporation dated April
25, 1995.
3.3 Certificate of Amendment of Certificate of Incorporation, dated May 5,
1995.
3.4 Certificate of Amendment of Certificate of Incorporation, dated
November 11, 1995.
II-1
<PAGE>
3.5 Certificate of Amendment of Certificate of Incorporation dated May 18,
1996.
3.6 Certificate of Amendment of Certificate of Incorporation dated as of
November 6, 1997.
3.7 Certificate of Amendment of Certificate of Incorporation dated
February 5, 1998.
3.8 Amended and Restated By-laws of the Company.
4.1 Form of 10% Senior Notes due 2005.
4.2 Escrow Agreement, dated as of April 13, 1998, between Wilmington Trust
Company (as escrow agent and trustee) and the Company.
4.3 Indenture dated as of April 13, 1998 between the Company and
Wilmington Trust Company.
4.4 Registration Rights Agreement dated as of April 13, 1998 among the
Company and Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Chase
Securities Inc. (collectively, the "Initial Purchasers").
5 Opinion of Nixon, Hargrave, Devans & Doyle LLP.
7 Opinion of Nixon, Hargrave, Devans & Doyle LLP regarding tax matters
(contained in Exhibit 5.1).
10.1 Lease Agreement dated July 1, 1990 between the Company and Rensselaer
Polytechnic Institute, amended by Lease, Renewal Agreement dated as of
July 1, 1993, Letter Agreement, dated November 14, 1994 and Letter
Agreement dated February 1, 1995.
10.2 Lease Agreement dated February 8, 1995 between the Company and
Rensselaer Polytechnic Institute.
10.3 Amendment to Lease Agreement dated July 1, 1995 between the Company
and Rensselaer Polytechnic Institute.
10.4 Lease Agreement dated as of April 30, 1993 by and between Vingarden
Limited Partnership and the Company.
10.5 Lease Agreement dated April 1995 by and between Brit Limited
Limited Partnership.
10.6 Sublease dated September 20, 1995 by and between The
Medical Sciences Research Institute and the Company
and Lease Agreement dated October 6, 1993 by and
between Vingarden Associates Limited Partnership and
The Medical Sciences Research Institute.
10.7 Lease Agreement dated October 31, 1995 between Oakfern Properties
Limited and the Company.
II-2
<PAGE>
10.8 Amendment to Deed of 460 Spring Park Technology Center dated as of
June 12, 1997 between JBG/Spring Park Limited Partnership and
the Company.
10.9 Sublease Agreement dated as of June 2, 1997 between Lucas
Industries, Inc. and the Company and Office Lease Agreement
between 3B Limited Partnership and Lucas Industries Inc. dated
as of September 12, 1989.
10.10 Sublease Agreement dated January 22, 1998 between the Company and
Unisys Corporation, as amended.
10.11 Lease Agreement dated February 20, 1998 between the Company and
CarrAmerica Realty Corporation.
10.12 Lease Agreement dated October 1994 between the Company and
Cascade Communications, Inc.
10.13 Master Lease Agreement dated July 19, 1994 between the Company
and Technology Credit Corporation.
10.14 Lease Agreement dated as of July 9, 1993 between
Applied Telecommunications Technologies, Inc. and the Company.
10.15 Lease Agreement dated as of February 10, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.16 Lease Agreement dated as of March 14, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.17 Lease Agreement dated as of June 9, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.18 Lease Agreement dated as of September 21, 1994 between Applied
Telecommunications Technologies, Inc. and the Company.
10.19 Master Equipment Lease Agreement dated as of June 23,
1995 between the Company and Forsythe/McArthur Associates, Inc.
("FMA").
10.20 Master Lease Line Commitment Agreement dated as of June 23, 1995
between the Company and FMA.
10.21 Amendment Agreement dated as of August 1, 1995 between the Company
and Technology Credit Corporation.
10.22 Master Equipment Lease Agreement No. 620-0004602-000 dated November
1995 between the Company and Siemens Credit Corporation.
10.23 Amendment to Master Lease Agreement No. 1753 dated January 26, 1996
between the Company and Technology Credit Corporation.
10.24 Master Equipment Lease Agreement dated December 15, 1995 between
the Company and Financing for Science International, Inc.
10.25 Security Agreement dated as of March 20, 1996 between the Company
and USL Capital Corporation.
II-3
<PAGE>
10.26 Master Software/Equipment Lease Agreement dated as of September 20,
1996 between the Company and LPI Software Funding Group, Inc.
10.27 Master Lease Agreement dated as of January 27, 1997 between Cascade
Communications Corp. and the Company.
10.28 Master Equipment/Software Rental Agreement dated as of September
11, 1997 between PSINet and Earthlink Network, Inc. and Change
Order Amendment Master Equipment dated as of September 22, 1997.
10.29 Equipment lease dated as of June 30, 1997 between Royal Bank of
Canada and PSINet Limited.
10.30 Master Lease Agreement dated as of October 10, 1997 between Cisco
Systems Capital Corporation and the Company.
10.31 Master Lease Agreement No. A212 dated as of October 30, 1997
between 3Com Credit Corporation and the Company, as amended.
10.32 Master Lease of Personal Property No. 3402, dated December 12, 1997
between the Company and Charter Financial, Inc., as amended.
*10.33 Executive Stock Option Plan of the Company.
*10.34 Executive Stock Incentive Plan of the Company, as amended.
*10.35 Directors Stock Incentive Plan of the Company, as amended.
*10.36 Strategic Stock Incentive Plan of the Company.
*10.37 1996 Performance Bonus Plan of the Company.
*10.38 InterCon Systems Corporation 1992 Incentive Stock Plan.
*10.39 InterCon Systems Corporation 1994 Stock Option Plan.
*10.40 Software Ventures Corporation 1994 Stock Option Plan.
*10.41 Employment Agreement dated June 21, 1995 between the Company and
David N. Kunkel.
*10.42 Employment Agreement dated February 9, 1996 between the Company and
Mary-Ann Carolan.
*10.43 Employment Agreement dated February 13, 1996 between the Company
and Mitchell Levinn.
*10.44 Employment Agreement dated April 3, 1996 between the Company and
Harold S. Wills.
*10.45 Employment Agreement dated October 1, 1996 between the Company and
Edward D. Postal.
*10.46 Employment Agreement dated October 9, 1996 between the Company and
Richard R. Frizalone.
II-4
<PAGE>
*10.47 Employment Agreement dated February 12, 1997 between the Company
and David L. Hudson.
*10.48 Employment Agreement dated July 1, 1997 between the Company and
Michael Malesardi.
*10.49 Employment Agreement dated August 2, 1997 between the Company and
Anthony Aveta.
*10.50 Employment Agreement dated August 4, 1997 between the Company and
Harry Hobbs.
*10.51 Employment Agreement dated November 17, 1997 between the Company
and John J. Chidester.
*10.52 Employment Agreement dated January 8, 1998 between the Company and
William Cripe.
*10.53 Employment Agreement dated January 18, 1998 between the Company and
Kathleen B. Horne.
*10.54 Employment Agreement dated February 16, 1998 between the Company
and John Muleta.
10.55 Form of Indemnification Agreement.
10.56 Amended and Restated Registration Rights Agreement dated as of
January 17, 1995 by and among the Company and the several parties
signatory thereto.
10.57 Registration Rights Agreement dated as of February 8, 1995 by and
among the Company and the several parties signatory thereto.
10.58 Registration Rights Agreement dated as of June 16, 1995 among the
Company and Stockholders of InterCon Systems Corporation.
10.59 Registration Rights Agreement dated as of July 11, 1995 among the
Company and Stockholders of Software Ventures Corporation.
10.60 Registration Rights Agreement made as of September 19, 1996 by and
between the Company and The Chatterjee Management Company.
10.61 Registration Rights Agreement dated as of November 11, 1997 between
the Company and the purchasers of Series B 8% Convertible Preferred
Stock.
10.62 Registration Rights Agreement dated as of February 25, 1998 between
the Company and IXC Internet Services, Inc.
10.63 Amended and Restated Credit Agreement dated as of November 10, 1995
between the Company, Software Ventures Corporation, InterCon
Systems Corporation and Fleet Bank of Massachusetts, N.A.
("Fleet").
10.64 Revolving Credit Note as amended and restated as of November 10,
1995 of the Company payable to the order of Fleet.
II-5
<PAGE>
10.65 Amended and Restated Security Agreement dated as of November 10,
1995 by and between the Company and Fleet.
10.66 Amended and Restated Security Agreement dated as of November 10,
1995 by and between PSINet Pipeline New York, Inc. ("Pipeline") and
Fleet.
10.67 Amended and Restated Guaranty Agreement dated as of November 10,
1995 between Pipeline and Fleet.
10.68 Pledge Agreement dated as of November 10, 1995 between the Company
and Fleet.
10.69 First Amendment dated as of August 13, 1996 to the Amended and
Restated Credit Agreement between the Company and Fleet Bank of
Massachusetts, N.A.
10.70 Pledge Agreement dated as of October 1, 1996 between the Company and
Fleet.
10.71 Amendment No. 1 to Pledge Agreement dated as of November 18, 1996
between the Company and Fleet.
10.72 Second Amendment to Amended and Restated Credit Agreement dated
February 1, 1997 between the Company, and Fleet.
10.73 Letter agreement dated September 10, 1997 between the Company and
Fleet National Bank.
10.74 Third Amendment dated January 29, 1998 to Amended and Restated
Credit Agreement dated as of November 30, 1994 between the Company
and Fleet National Bank.
10.75 Deposit Pledge Agreement dated as of December 31, 1997, between the
Company and Fleet National Bank.
10.76 Warrant to purchase 174,274 shares of the Series B Preferred of the
Company, at an exercise price of $1.60 per share, registered in the
name of Applied Telecommunications Technologies, Inc. ("ATTI").
10.77 Warrant to purchase up to 25,000 shares of the Series B Preferred of
the Company, at an exercise price of $1.60 per share, registered in
the name of William H. Baumer.
10.78 Warrant to purchase up to 25,000 shares of the Series B Preferred of
the Company, at an exercise price of $1.60 per share, registered in
the name of William H. Baumer.
10.79 Joint Venture Agreement dated as of September 19, 1996 between the
Company and Chatterjee Management Company.
10.80 Stock Acquisition Agreement, dated as of February 1, 1997, between
Ascend Communications, Inc., a Delaware corporation, and the
Company, a New York corporation, with respect to all outstanding
capital stock of InterCon Systems Corporation, a Delaware
corporation and a wholly-owned subsidiary of the Company.
II-6
<PAGE>
10.81 Asset Purchase Agreement dated as of June 28, 1996 between the
Company and MindSpring Enterprises, Inc.
10.82 Amendment No. 1 to Asset Purchase Agreement and Network Services
Agreement entered into as of June 28, 1996 by and between the
Company and MindSpring Enterprises, Inc.
10.83 Convertible Note dated as of June 28, 1996 between the Company and
MindSpring Enterprises, Inc.
10.84 Amendment No. 2 to Asset Purchase Agreement entered into as of
September 1, 1996 by and between the Company and MindSpring
Enterprises, Inc.
10.85 Amendment No. 3 to Asset Purchase Agreement and Amendment
No. 1 to Convertible Note entered into as of January 24, 1997
by and between the Company and MindSpring Enterprises, Inc.
10.86 Amendment No. 2 to Network Services Agreement entered into as of
January 1, 1997 by and between the Company and MindSpring
Enterprises, Inc.
10.87 Convertible Note of MindSpring Enterprises, Inc. in the principal
amount of $3,078,324 due December 31, 1998.
10.88 IRU and Stock Purchase Agreement dated as of July 22, 1997 between
IXC Internet Services, Inc. and the Company.
10.89 First Amendment to IRU and Stock Purchase Agreement dated as of
July 22, 1997 between IXC Internet Services, Inc. and the Company.
10.90 Second Amendment to IRU and Stock Purchase Agreement dated as of
July 22, 1997 between IXC Internet Services, Inc. and the Company.
10.91 Joint Marketing and Service Agreement dated as of July 22, 1997
between IXC Internet Services Inc. and the Company.
10.92 Stock Purchase Agreement dated as of November 11, 1997 between
the Company and the Purchasers of Series B 8% Convertible
Preferred Stock.
10.93 Agreement dated as of November 10, 1997 between iSTAR internet inc.
and the Company.
10.94 Pre-Acquisition Agreement between the Company and iSTAR internet
inc., dated December 23, 1997.
10.95 Security Agreement and Assignment dated as of February 25, 1998
between the Company and IXC Internet Services, Inc.
10.96 Collocation and Interconnection Agreement between the Company and
IXC Internet Services, Inc.
11.1 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares for the Year Ended December 31, 1997.
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<PAGE>
11.2 Calculation of Basic and Diluted Share and Weighted Average
Shares for the Year Ended December 31, 1996.
11.3 Calculation of Basic and Diluted Loss Per Share and Weighted Average
Shares for the Year Ended December 31, 1995.
12 Statements re Computation of Ratios.
21 Subsidiaries of the Company.
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP.
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of KPMG.
24 Power of Attorney.
25 Statement of Eligibility on Form T-1 of Wilmington Trust Company.
**27 Financial Data Schedule.
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 14(a)(3).
** Not deemed filed for purposes of Section 11 of the Securities Act of 1933,
Section 18 of the Securities and 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 to which such
exhibit relates.
FINANCIAL STATEMENTS AND SCHEDULE:
Financial Statements:
Financial Statements filed as a part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
Financial Statement Schedules:
II--Valuation and Qualifying Accounts for each of the three years in the
period ended December 31, 1997.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes that:
(a) The undersigned hereby undertakes to deliver or cause to be delivered
with the prospectus, to each person to whom the prospectus is sent or given, the
latest annual report to security holders that is incorporated by reference in
the prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Securities and Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
regulation S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to
II-8
<PAGE>
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
information.
(b) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Herndon, Commonwealth of Virginia on April 29, 1998.
PSINET INC.
By: /s/ William L. Schrader
------------------------------------------
William L. Schrader, Chairman
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints David N. Kunkel, Edward D. Postal,
Michael J. Malesardi and Kathleen B. Horne, and each or any of them, his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective documents
in connection therewith), with the Securities and Exchange Commission, granting
unto each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or either of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William L. Schrader Chairman, President, Chief April 29, 1998
- ------------------------------------- Executive Officer and Director
William L. Schrader (Principal Executive Officer)
/s/ Harold S. Wills Executive Vice President, Chief April 29, 1998
- ------------------------------------- Operating Officer and Director
Harold S. Wills
/s/ David N. Kunkel Senior Vice President, General April 29, 1998
- ------------------------------------- Counsel, Secretary and Director
David N. Kunkel
/s/ Edward D. Postal Senior Vice President and Chief April 29, 1998
- ------------------------------------- Financial Officer (Principal
Edward D. Postal Financial Officer)
/s/ Michael J. Malesardi Vice President and Controller April 29, 1998
- ------------------------------------- (Principal Accounting Officer)
Michael J. Malesardi
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ William H. Baumer Director April 29, 1998
- -------------------------------------
William H. Baumer
/s/ Ralph J. Swett Director April 29, 1998
- -------------------------------------
Ralph J. Swett
/s/ Ian P. Sharp Director April 29, 1998
- -------------------------------------
Ian P. Sharp
/s/ William A. Wilson Director April 29, 1998
- -------------------------------------
William A. Wilson
</TABLE>
<PAGE>
SCHEDULE II-VALUATION ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------------
BALANCE AT CHARGED TO BALANCES BALANCE AT
BEGINNING COSTS AND OF ACQUIRED AT END OF
OF PERIOD EXPENSES SUBSIDIARIES DEDUCTIONS PERIOD
---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS)
Year ended December 31, 1995
Allowances for doubtful accounts and returns.......... $ 127 $ 724 $252 $ (228) $ 875
Deferred tax valuation allowance...................... 2,439 8,936 -- -- 11,375
Year ended December 31, 1996
Allowances for doubtful accounts and returns.......... 875 3,130 -- (2,096) 1,909
Deferred tax valuation allowance...................... 11,375 20,948 -- -- 32,323
Year ended December 31, 1997
Allowances for doubtful accounts and returns.......... 1,909 5,424 16 (5,248) 2,101
Deferred tax valuation allowance...................... 32,323 18,756 -- -- 51,079
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation, Incorporated by reference
as amended from Exhibit 3.1 to the Company's
Registration Statement on Form
S-1 declared effective on May 1,
1995 located under Securities and
Exchange Commission File No. 33-
90154 ("May 1995 Registration
Statement")
3.2 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.1 to the Company's
dated April 25, 1995 Quarterly Report on Form 10-Q
for the quarter ended June 30,
1995 located under Securities
Exchange Commission File No.
0-25812 ("June 1995 10-Q")
3.3 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.2 to the June 1995 10-Q
Dated May 5, 1995
3.4 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.1 to the Company's
Dated November 11, 1995 Quarterly Report on Form 10-Q
for the quarter ended September 30,
1995 located under Securities
Exchange Commission File No.
0-25812 ("September 1995 10-Q")
3.5 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation, Exhibit 3 to the Company's
dated May 18, 1996 Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996
located under Securities Exchange
Commission File No. 0-25812
("June 1996 10-Q")
3.6 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.1 to the Company's
dated as of November 6, 1997 Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997
located under the Securities
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
and Exchange Commission File No. 0-25812
("September 1997 10-Q")
3.7 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.7 to the Company's
dated February 5, 1998 Annual Report on Form 10-K
for the fiscal year ended
December 31, 1997 located under
Securities Exchange Commission
File No. 0-25812 ("1997 Form
10-K")
3.8 Amended and Restated By-laws Incorporated by reference from
of the Company Exhibit 3.5 to the September 1995
10-Q
4.1 Form of 10% Senior Notes due 2005, Filed herewith
Series B
4.2 Indenture dated as of April 13, 1998 Incorporated by reference from
between the Company and Wilmington Exhibit 4.1 to the Company's
Trust Company Current Report on Form 8-K dated
April 22, 1998 located under
Securities Exchange Commission File
No. 0-25812 ("April 22, 1998 8-K")
5 Opinion of Nixon, Hargrave, Devans Filed herewith
& Doyle LLP.
7 Opinion of Nixon, Hargrave, Devans Set forth in Exhibit 5 filed
& Doyle LLP regarding tax matters herewith
10.1 Lease Agreement dated July 1, 1990 Incorporated by reference from
between the Company and Rensselaer Exhibit 10.1 to the May 1995
Polytechnic Institute, amended by Registration Statement
Lease, Renewal Agreement dated as
of July 1, 1993, Letter Agreement,
dated November 14, 1994 and Letter
Agreement dated February 1, 1995
10.2 Lease Agreement dated February 8, Incorporated by reference from
1995 between the Company and Exhibit 10.2 to the May 1995
Rensselaer Polytechnic Institute Registration Statement
10.3 Amendment to Lease Agreement Incorporated by reference from
dated July 1, 1995 between the Exhibit 10.2A to the Company's
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Company and Rensselaer Polytechnic Registration Statement on
Institute Form S-1 declared effective on
December 14, 1995 located under
Securities and Exchange
Commission File No. 33-99610
("December 1995 Registration
Statement")
10.4 Lease Agreement dated as of Incorporated by reference from
April 30, 1993 by and between Exhibit 10.3 to the May 1995
Vingarden Limited Partnership and Registration Statement
the Company
10.5 Lease Agreement dated April 1995 Incorporated by reference from
by and between Brit Limited Exhibit 10.3A to the December
Partnership and the Company 1995 Registration Statement
10.6 Sublease dated September 20, 1995 Incorporated by reference from
by and between The Medical Exhibit 10.3B to the December
Sciences Research Institute and the 1995 Registration Statement
Company and Lease Agreement
dated October 6, 1993 by and between
Vingarden Associates Limited Partnership
and The Medical Sciences Research Institute
10.7 Lease Agreement dated October 31, Incorporated by reference from
1995 between Oakfern Properties Exhibit 10.4A to the December
Limited and the Company 1995 Registration Statement
10.8 Amendment to Deed of 460 Spring Incorporated by reference from
Park Technology Center dated as Exhibit 10.1 to the September
of June 12, 1997 between JBG/ 1997 Form 10-Q
Spring Park Limited Partnership
and the Company
10.9 Sublease Agreement dated as of Incorporated by reference from
June 2, 1997 between Lucas Exhibit 10.2 to the September
Industries, Inc. and the Company 1997 10-Q
and Office Lease Agreement
between 3B Limited Partnership
and Lucas Industries Inc. dated as
of September 12, 1989
10.10 Sublease Agreement dated Incorporated by reference from
January 22, 1998 between the Exhibit 10.9 to the 1997 Form 10-K
Company and Unisys Corporation,
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
as amended
10.11 Lease Agreement dated February Incorporated by reference from
20, 1998 between the Company and Exhibit 10.11 to the 1997
CarrAmerica Realty Corporation Form 10-K
10.12 Lease Agreement dated October Incorporated by reference from
1994 between the Company and Exhibit 10.4 to the May 1995
Cascade Communications, Inc. Registration Statement
10.13 Master Lease Agreement dated July Incorporated by reference from
19, 1994 between the Company and Exhibit 10.5 to the May 1995
Technology Credit Corporation Registration Statement
10.14 Lease Agreement dated as of July Incorporated by reference from
9, 1993 between Applied Exhibit 10.6 to the May 1995
Telecommunications Technologies, Registration Statement
Inc. and the Company
10.15 Lease Agreement dated as of Incorporated by reference from
February 10, 1994 between Applied Exhibit 10.7F to the December
Telecommunications Technologies, 1995 Registration Statement
Inc. and the Company
10.16 Lease Agreement dated as of March Incorporated by reference
14, 1994 between Applied from Exhibit 10.7G to the
Telecommunications Technologies, December 1995 Registration
Inc. and the Company Statement
10.17 Lease Agreement dated as of June Incorporated by reference from
9, 1994 between Applied Exhibit 10.7H to the December
Telecommunications Technologies, 1995 Registration Statement
Inc. and the Company
10.18 Lease Agreement dated as of Incorporated by reference from
September 21, 1994 between Exhibit 10.7 to the May 1995
Applied Telecommunications Registration Statement
Technologies, Inc. and the
Company
10.19 Master Equipment Lease Agreement Incorporated by reference from
dated as of June 23, 1995 between Exhibit 10.1 to the September
the Company and Forsythe/McArthur 1995 10-Q
Associates, Inc. ("FMA")
10.20 Master Lease Line Commitment Incorporated by reference from
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Agreement dated as of June 23, Exhibit 10.2 to the September
1995 between the Company and FMA 1995 10-Q
10.21 Amendment Agreement dated as of Incorporated by reference from
August 1, 1995 between the Company Exhibit 10.8 to the September
and Technology Credit 1995 10-Q
Corporation
10.22 Master Equipment Lease Incorporated by reference from
Agreement No. 620-0004602-000 Exhibit 10.44A to the
dated November 1995 between the December 1995 Registration
Company and Siemens Credit Statement
Corporation
10.23 Amendment to Master Lease Incorporated by reference from
Agreement No. 1753 dated Exhibit 10.77 to the Company's
January 26, 1996 between the Annual Report on Form 10-K for
Company and Technology Credit the fiscal year ended December 31,
Corporation 1995 located under the Securities
Exchange Commission File No.
0-25812 ("1995 Form 10-K")
10.24 Master Equipment Lease Agreement Incorporated by reference from
dated December 15, 1995 between Exhibit 10.78 to the 1995 Form
the Company and Financing for 10-K
Science International, Inc.
10.25 Security Agreement dated as of Incorporated by reference from
March 20, 1996 between the Exhibit 10.79 to the 1995 Form
Company and USL Capital 10-K
Corporation
10.26 Master Software/Equipment Lease Incorporated by reference from
Agreement dated as of September Exhibit 10.4 to the Company's
20, 1996 between the Company Quarterly Report on Form 10-Q
and LPI Software Funding Group, for the quarter ended September 30,
Inc. 1996 located under Securities
Exchange Commission File
No. 0-25812 ("September 1996
10-Q")
10.27 Master Lease Agreement dated as Incorporated by reference from
of January 27, 1997 between Exhibit 10.77 to the Company's
Cascade Communications Corp. Annual Report on Form 10-K for the
and the Company fiscal year ended December 31, 1996
located under Securities and
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exchange Commission File No.
O-25812 ("1996 Form 10-K")
10.28 Master Equipment/Software Incorporated by reference from
Rental Agreement dated as of Exhibit 10.3 to the September 1997
September 11, 1997 between 10-Q
PSINet and Earthlink Network,
Inc. and Change Order Amendment
Master Equipment dated as of
September 22, 1997
10.29 Equipment lease dated as of Incorporated by reference from
June 30, 1997 between Royal Exhibit 10.4 to the September 1997
Bank of Canada and PSINet 10-Q
Limited
10.30 Master Lease Agreement dated as Incorporated by reference from
of October 10, 1997 between Exhibit 10.30 to the 1997
Cisco Systems Capital Form 10-K
Corporation and the Company
10.31 Master Lease Agreement No. A212 Incorporated by reference from
dated as of October 30, 1997 Exhibit 10.31 to the 1997 Form 10-K
between 3Com Credit Corporation
and the Company, as amended
10.32 Master Lease of Personal Incorporated by reference from
Property No. 3402, dated Exhibit 10.32 to the 1997 Form 10-K
December 12, 1997 between the
Company and Charter Financial,
Inc., as amended
*10.33 Executive Stock Option Plan of Incorporated by reference from
the Company Exhibit 10.10 to the May 1995
Registration Statement
*10.34 Executive Stock Incentive Plan Incorporated by reference from
of the Company, as amended Exhibit 10.12 to the December 1995
Registration Statement
*10.35 Directors Stock Incentive Plan Incorporated by reference from
of the Company, as amended Exhibit 10.13 to the December 1995
Registration Statement
*10.36 Strategic Stock Incentive Plan Incorporated by reference from
of the Company Exhibit 10 to the June 1995 10-Q
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*10.37 1996 Performance Bonus Plan of Incorporated by reference from
the Company Exhibit 10.25 to the 1996 Form
10- K
*10.38 InterCon Systems Corporation Incorporated by reference from
1992 Incentive Stock Plan Exhibit 99.1 to the Company's
Registration Statement on Form S-8
which became effective on October
18, 1995 located under Securities
Exchange Commission File No. 33-
98316 ("S-8 No. 16")
*10.39 InterCon Systems Corporation Incorporated by reference from
1994 Stock Option Plan Exhibit 99.2 to the S-8 No. 16
*10.40 Software Ventures Corporation Incorporated by reference from
1994 Stock Option Plan Exhibit 99 to the Company's
Registration Statement on Form S-8
which became effective on October
18, 1995 located under Securities
Exchange Commission File No. 33-
98314 ("S-8 No. 14")
*10.41 Employment Agreement dated June Incorporated by reference from
21, 1995 between the Company Exhibit 10.26 to the December 1995
and David N. Kunkel Registration Statement
*10.42 Employment Agreement dated Incorporated by reference from
February 9, 1996 between the Exhibit 10.42 to the 1995
Company and Mary-Ann Carolan Form 10-K
*10.43 Employment Agreement dated Incorporated by reference from
February 13, 1996 between the Exhibit 10.19 to the 1995
Company and Mitchell Levinn 10-K.
*10.44 Employment Agreement dated Incorporated by reference from
April 3, 1996 between the Exhibit 10.2 to the June 1996
Company and Harold S. Wills 10-Q.
*10.45 Employment Agreement dated Incorporated by reference from
October 1, 1996 between the Exhibit 10.2 to the September 1996
Company and Edward D. Postal 10-Q
*10.46 Employment Agreement dated Incorporated by reference from
October 9, 1996 between the Exhibit 10.3 to the September 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Company and Richard R. 10-Q
Frizalone
*10.47 Employment Agreement dated Incorporated by reference from
February 12, 1997 between the Exhibit 10.78 to the 1996 Form
Company and David L. Hudson 10-K
*10.48 Employment Agreement dated July Incorporated by reference from
1, 1997 between the Company and Exhibit 10.5 to the September 1997
Michael Malesardi 10-Q
*10.49 Employment Agreement dated Incorporated by reference from
August 2, 1997 between the Exhibit 10.6 to the September 1997
Company and Anthony Aveta 10-Q
*10.50 Employment Agreement dated Incorporated by reference from
August 4, 1997 between the Exhibit 10.7 to the September 1997
Company and Harry Hobbs 10-Q
*10.51 Employment Agreement dated Incorporated by reference from
November 17, 1997 between the Exhibit 10.51 to the 1997
Company and John J. Chidester Form 10-K
*10.52 Employment Agreement dated Incorporated by reference from
January 8, 1998 between the Exhibit 10.52 to the 1997
Company and William Cripe Form 10-K
*10.53 Employment Agreement dated Incorporated by reference from
January 18, 1998 between the Exhibit 10.53 to the 1997
Company and Kathleen B. Horne Form 10-K
*10.54 Employment Agreement dated Incorporated by reference from
February 16, 1998 between the Exhibit 10.54 to the 1997
Company and John Muleta Form 10-K
10.55 Form of Indemnification Incorporated by reference from
Agreement Exhibit 10.21 to the May 1995
Registration Statement
10.56 Amended and Restated Incorporated by reference from
Registration Rights Agreement Exhibit 10.29 to the May 1995
dated as January 17, 1995 by and Registration Statement
among the Company and the
several parties signatory
thereto
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.57 Registration Rights Agreement Incorporated by reference from
dated as of February 8, 1995 by Exhibit 10.30 to the May 1995
and among the Company and the Registration Statement
several parties signatory thereto
10.58 Registration Rights Agreement Incorporated by reference from
dated as of June 16, 1995 among Exhibit 10.39 to the December 1995
the Company and Stockholders of Registration Statement
InterCon Systems Corporation
10.59 Registration Rights Agreement Incorporated by reference from
dated as of July 11, 1995 among Exhibit 10.40 to the December 1995
the Company and Stockholders of Registration Statement
Software Ventures Corporation
10.60 Registration Rights Agreement Incorporated by reference from
made as of September 19, 1996 by Exhibit 10.1 to the September 1996
and between the Company and The 10-Q
Chatterjee Management Company
10.61 Registration Rights Agreement Incorporated by reference from
dated as of November 11, 1997 Exhibit 10.10 to the September 1997
between the Company and the 10-Q
purchasers of Series B 8%
Convertible Preferred Stock
10.62 Registration Rights Agreement Incorporated by reference from
dated as of February 25, 1998 Exhibit 10.62 to the 1997
between the Company and IXC Form 10-K
Internet Services, Inc.
10.63 Amended and Restated Credit Incorporated by reference from
Agreement dated as of November Exhibit 10.41 to the December 1995
10, 1995 between the Company, Registration Statement
Software Ventures Corporation,
InterCon Systems Corporation and
Fleet Bank of Massachusetts,
N.A. ("Fleet")
10.64 Revolving Credit Note as amended Incorporated by reference from
and restated as of November 10, Exhibit 10.41A to the December
1995 of the Company payable to 1995 Registration Statement
the order of Fleet
10.65 Amended and Restated Security Incorporated by reference from
Agreement dated as of November Exhibit 10.41B to the December
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1995 by and between the 1995 Registration Statement
Company and Fleet
10.66 Amended and Restated Security Incorporated by reference from
Agreement dated as of November Exhibit 10.41C to the December
1995 by and between PSINet 1995 Registration Statement
Pipeline New York, Inc.
("Pipeline") and Fleet
10.67 Amended and Restated Guaranty Incorporated by reference from
Agreement dated as of November Exhibit 10.41F to the December
10, 1995 between Pipeline and 1995 Registration Statement
Fleet
10.68 Pledge Agreement dated as of Incorporated by reference from
November 10, 1995 between the Exhibit 10.41I to the December
Company and Fleet 1995 Registration Statement
10.69 First Amendment dated as of Incorporated by reference from
August 13, 1996 to the Amended Exhibit 10.3 to the June 1996 10-Q
and Restated Credit Agreement
between the Company and Fleet
Bank of Massachusetts, N.A.
10.70 Pledge Agreement dated as of Incorporated by reference from
October 1, 1996 between the Exhibit 10.72 to the 1996
Company and Fleet Form 10-K
10.71 Amendment No. 1 to Pledge Incorporated by reference from
Agreement dated as of November Exhibit 10.73 to the 1996
18, 1996 between the Company and Form 10-K
Fleet
10.72 Second Amendment to Amended and Incorporated by reference from
Restated Credit Agreement dated Exhibit 10.79 to the 1996
February 1, 1997 between the Form 10-K
Company and Fleet
10.73 Letter agreement dated September Incorporated by reference from
10, 1997 between the Company and Exhibit 10.8 to the September 1997
Fleet National Bank 10-Q
10.74 Third Amendment dated January Incorporated by reference from
29, 1998 to Amended and Restated Exhibit 10.74 to the 1997 Form
Credit Agreement dated as of 10-K
November 30, 1994 between the
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Company and Fleet National Bank
10.75 Deposit Pledge Agreement dated Incorporated by reference from
as of December 31, 1997, between Exhibit 10.75 to the 1997 Form
the Company and Fleet National 10-K
Bank
10.76 Warrant to purchase 174,274 Incorporated by reference from
shares of the Series B Preferred Exhibit 10.37 to the May 1995
of the Company, at an exercise Registration Statement
price of $1.60 per share,
registered in the name of
Applied Telecommunications
Technologies, Inc. ("ATTI")
10.77 Warrant to purchase up to 25,000 Incorporated by reference from
shares of the Series B Preferred Exhibit 10.39 to the May 1995
of the Company, at an exercise Registration Statement
price of $1.60 per share,
registered in the name of
William H. Baumer
10.78 Warrant to purchase up to 25,000 Incorporated by reference from
shares of the Series B Preferred Exhibit 10.40 to the May 1995
of the Company, at an exercise Registration Statement
price of $1.60 per share,
registered in the name of
William H. Baumer
10.79 Joint Venture Agreement dated as Incorporated by reference from
of September 19, 1996 between Exhibit 2 to Amendment No. 1
the Company and Chatterjee to the Company's Quarterly Report
Management Company on Form 10-Q for the quarter ended
September 30, 1996 located under
Securities Exchange Commission
File No. 0-25812 ("September 1996
10-Q/A1")
10.80 Stock Acquisition Agreement, Incorporated by reference from
dated as of February 1, 1997, Exhibit 2 to the Company's
between Ascend Communications, Current Report on Form 8-K dated
Inc., a Delaware corporation, and February 14, 1997 located under
the Company, a New York Securities Exchange Commission
corporation, with respect to all File No. 0-25812
outstanding capital stock of
InterCon Systems Corporation, a
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware corporation and a
wholly-owned subsidiary of the
Company
10.81 Asset Purchase Agreement dated as Incorporated by reference from
of June 28, 1996 between the Exhibit 2 to the June 1996 10-Q
Company and MindSpring
Enterprises, Inc.
10.82 Amendment No. 1 to Asset Purchase Incorporated by reference from
Agreement and Network Services Exhibit 2 to the September 1996
Agreement entered into as of June 10-Q
28, 1996 by and between the
Company and MindSpring
Enterprises, Inc.
10.83 Convertible Note dated as of June Incorporated by reference from
28, 1996 between the Company and Exhibit 10.4 to the June 1996 10-Q
MindSpring Enterprises, Inc.
10.84 Amendment No. 2 to Asset Purchase Incorporated by reference from
Agreement entered into as of Exhibit 10.8 to the September 1996
September 1, 1996 by and between 10-Q
the Company and MindSpring
Enterprises, Inc.
10.85 Amendment No. 3 to Asset Purchase Incorporated by reference from
Agreement and Amendment No. 1 to Exhibit 10.74 to the 1996
Convertible Note entered into as Form 10-K
of January 24, 1997 by and
between the Company and
MindSpring Enterprises, Inc.
10.86 Amendment No. 2 to Network Incorporated by reference from
Services Agreement entered into Exhibit 10.75 to the 1996
as of January 1, 1997 by and Form 10-K
between the Company and
MindSpring Enterprises, Inc.
10.87 Convertible Note of MindSpring Incorporated by reference from
Enterprises, Inc. in the Exhibit 10.76 to the 1996
principal amount of $3,078,324 Form 10-K
due December 31, 1998
10.88 IRU and Stock Purchase Agreement Incorporated by reference from
dated as of July 22, 1997 between Exhibit 2.1 to Amendment No. 2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
IXC Internet Services, Inc. and to the Company's Quarterly Report
the Company on Form 10-Q for the quarter ended
June 30, 1997 located under
Securities Exchange Commission
File No. 0-25812 ("June 1997
10-Q/A2")
10.89 First Amendment to IRU and Stock Incorporated by reference from
Purchase Agreement dated as of Exhibit A to the Company's
July 22, 1997 between IXC Proxy Statement on Schedule 14A
Internet Services, Inc. and the dated December 19, 1997 located
Company under Securities Exchange
Commission File No. 0-25812
("December 1997 Proxy Statement")
10.90 Second Amendment to IRU and Stock Incorporated by reference from
Purchase Agreement dated as of Exhibit A to the December 1997
July 22, 1997 between IXC Proxy Statement
Internet Services, Inc. and the
Company
10.91 Joint Marketing and Services Incorporated by reference from
Agreement dated as of July 22, Exhibit 10.1 to the June 1997
1997 between IXC Internet 10-Q/A1
Services Inc. and the Company
10.92 Stock Purchase Agreement dated as Incorporated by reference from
of November 11, 1997 between the Exhibit 10.9 to the September 1997
Company and the Purchasers of 10-Q
Series B 8% Convertible Preferred
Stock
10.93 Agreement dated as of November Incorporated by reference from
10, 1997 between iSTAR internet Exhibit 2 to the September 1997
inc. and the Company 10-Q
10.94 Pre-Acquisition Agreement between Incorporated by reference from
the Company and iSTAR internet inc., Exhibit 10.1 to the Company's
dated December 23, 1997 Current Report on Form 8-K dated
January 7, 1998 located under
Securities Exchange Commission
File No. 0-25812 ("January 7,
1998 8-K")
10.95 Security Agreement and Assignment Incorporated by reference from
dated as of February 25, 1998 between Exhibit 10.95 to the 1997 Form 10-K
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
the Company and IXC Internet Services,
Inc.
10.96 Collocation and Interconnection Incorporated by reference from
Agreement between the Company Exhibit 10.96 to the 1997 Form 10-K
and IXC Internet Services, Inc.
10.97 Escrow Agreement, dated as of Incorporated by reference from
April 13, 1998, among Wilmington Exhibit 10-2 to the April 22, 1998
Trust Company (as escrow agent and 8-K
trustee) and the Company.
10.98 Registration Rights Agreement Incorporated by reference from
dated as of April 13, 1998 among Exhibit 10.1 to the April 22, 1998
the Company and Donaldson, 8-K
Lufkin & Jenrette Securities
Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, and
Chase Securities, Inc.
11.1 Calculation of Basic and Diluted Incorporated by reference from
Loss Per Share and Weighted Exhibit 11.1 to the 1997 Form 10-K
Average Shares for the Year Ended
December 31, 1997
11.2 Calculation of Basic and Diluted Incorporated by reference from
Share and Weighted Average Shares Exhibit 11.2 to the 1997 Form 10-K
for the Year Ended December 31, 1996
11.3 Calculation of Basic and Diluted Incorporated by reference from
Loss Per Share and Weighted Average Exhibit 11.3 to the 1997 Form 10-K
Shares for the Year Ended December 31,
1995
12 Statements re Computation of Ratios Filed herewith
21 Subsidiaries of the Company Incorporated by reference from
Exhibit 21 to the 1997 Form 10-K
23.1 Consent of Nixon, Hargrave, Devans Set forth in Exhibit 5 filed herewith
& Doyle LLP
23.2 Consent of Price Waterhouse LLP Filed herewith
23.3 Consent of KPMG Filed herewith
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
24 Power of Attorney Included in Signature Pages
to the Registration Statement
25 Statement of Eligibility on Form T-1 Filed herewith
of Wilmington Trust Company
27 Financial Data Schedule **
</TABLE>
______________
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(a)(3).
** Not deemed filed for purposes of Section 11 of the Securities Act of 1933,
Section 18 of the Securities and 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 to which
such exhibit relates.
<PAGE>
EXHIBIT 4.1
SERIES B GLOBAL NOTE
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A
DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL 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 DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
<PAGE>
PSINET INC.
-----------------
10% SENIOR NOTE DUE 2005, SERIES B
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 February 15, 2005, at the office or agency of the Company referred to
below, and to pay interest thereon from April 13, 1998, or from the most
recent Interest Payment Date to which interest has been paid or duly
provided for, semiannually on August l5 and February l5 in each year,
commencing August 15, 1998 at the rate of 10% per annum, in United States
dollars, until the principal hereof is paid or duly provided for; provided
that to the extent interest has not been paid or duly provided for with
respect to the Series A Note exchanged for this Series B Note, interest on
this Series B Note shall accrue from the most recent Interest Payment Date
to which interest on the Series A Note which was exchanged for this Series B
Note has been paid or duly provided for. Interest shall be computed on the
basis of a 360-day year comprised of twelve 30-day months.
This Series B Note was issued pursuant to the Exchange Offer pursuant to
which the 10% Senior Notes due 2005, Series A (herein called the "Series A
Notes") in like principal amount were exchanged for the Series B Notes. The
Series B Notes rank pari passu in right of payment with the Series A Notes.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in the Indenture hereinafter
referred to, be paid to the Person in whose name this Note (or any
Predecessor Notes) is registered at the close of business on the Regular
Record Date for such interest, which shall be the August 1 or February 1
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Any such interest not so punctually paid, or duly
provided for, and interest on such defaulted interest at the interest rate
borne by the Series B Notes, to the extent lawful, shall forthwith cease to
be payable to the Holder on such Regular Record Date, and may either be paid
to the Person in whose name this Note (or any Predecessor Notes) is
registered at the close of business on a Special Record Date for the payment
of such defaulted interest to be fixed by the Trustee, notice whereof shall
be given to Holders of Notes not less than 10 days prior to such Special
Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in this Indenture.
Payment of the principal of, premium, if any, and interest on, this Note,
and exchange or transfer of the Note, will be made at the office or agency
of the Company in the City of New York maintained for such purpose (which
initially will be the Trustee c/o Harris Trust Company of New York, 77 Water
Street, New York, NY 10005), or at such other office or agency as may be
maintained for such purpose,
- 2 -
<PAGE>
or, at the option of the Company, payment of interest may be made by check
mailed to the address of the Person entitled thereto as such address shall
appear on the Note Register, and provided, that payment by wire transfer of
immediately available funds will be required with respect to principal of
and interest on all Global Notes and all other Notes the Holders of which
shall have provided wire transfer instructions to the Company or the Paying
Agent. Such payment shall be in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public
and private debts.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have
the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed by
the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Note shall not be entitled to any benefit under the Indenture,
or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers and
its corporate seal to be affixed or reproduced hereon.
PSINET INC.
[Seal] By: ___________________________
Title: ________________________
Attest:
_________________________
Authorized Officer
- 3 -
<PAGE>
(Back of Note)
PSINET INC.
10% Senior Note due 2005, Series B
This Note is one of a duly authorized issue of Notes of the Company
designated as its 10% Senior Notes due 2005, Series B (herein called the
"Notes"), limited (except as otherwise provided in the Indenture referred to
below) in aggregate principal amount to $600,000,000, issued under, entitled
to the benefits of and subject to the terms of an indenture (herein called
the "Indenture") dated as of April 13, 1998, 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 February 15,
2002, 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 February 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002 105.0%
2003 102.5%
2004 100.0%
</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).
In addition, at any time on or prior to February 15, 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 110.0% 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.
- 4 -
<PAGE>
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any
other method the Trustee shall deem fair and reasonable.
Upon the occurrence of a Change of Control, subject to the terms of the
Indenture, each Holder may require the Company to purchase such Holder's
Notes in whole or in part in integral multiples of $1,000, at a purchase
price in cash in an amount equal to 101% of the principal amount thereof,
plus accrued and unpaid interest if any, to the date of purchase, pursuant
to Change of Control Offer and in accordance with the procedures set forth
in the Indenture.
Under certain circumstances, 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.
In the event of redemption of this Note in accordance with the Indenture
in part only, a new Note or Notes for the unredeemed portion hereof shall be
issued in the name of the Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal amount
of all the Notes may be declared due and payable in the manner and with the
effect provided in the Indenture.
The Indenture permits, with certain exceptions (including certain
amendments permitted without the consent of any Holders and certain
amendments which required the consent of all of the Holders) as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and any Guarantors and the rights of the Holders
under the Indenture and the Notes and any Guarantees at any time by the
Company and the Trustee with the consent of the Holders of at least a
majority in aggregate principal amount of the Notes at the time Outstanding.
The Indenture also contains provisions permitting the Holders of at least a
majority in aggregate principal amount of the Notes ( 100% of the Holders in
certain circumstances) at the time Outstanding, on behalf of the Holders of
all the Notes, to waive compliance by the Company and any Guarantors with
certain provisions of the Indenture and the Notes and any Guarantees and
certain past Defaults under the Indenture and the Notes and any Guarantees
and their consequences. Any such consent or waiver by or on behalf of the
Holder of this Note shall be conclusive and binding upon such Holder and
upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof
whether or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Notes (in the event such Guarantor or
such other obligor is obligated to make payments in respect of the Notes),
which is absolute and unconditional, to pay the principal of, and premium,
if any, and interest on, this Note at the times, place, and rate, and in the
coin or currency, herein prescribed.
- 5 -
<PAGE>
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Note is registrable in the Note Register,
upon surrender of this Note for registration of transfer at the office or
agency of the Company in the Borough of Manhattan, The City of New York,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Registrar duly executed by, the
Holder hereof or its attorney duly authorized in writing, and thereupon one
or more new Notes, of authorized denominations and for the same aggregate.
Certificated securities shall be transferred to all beneficial holders in
exchange for their beneficial interests in the Series B Global Notes if (x)
the Depositary notifies the Company that it is unwilling or unable to
continue as depository for such Global Note and a successor depository is
not appointed by the Company within 90 days or (y) there shall have occurred
and be continuing an Event of Default and the Note Registrar has received a
request from the Depositary. Upon any such issuance, the Trustee is required
to register such certificated Series B Notes in the name of, and cause the
same to be delivered to, such Person or Persons (or the nominee of any
thereof).
Series B Notes in certificated form are issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple
thereof. As provided in the Indenture and subject to certain limitations
therein set forth, the Series B Notes are exchangeable for a like aggregate
principal amount of Notes of a differing authorized denomination, as
requested by the Holder surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection
therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, any Guarantor, the Trustee and any agent of the Company, any
Guarantor or the Trustee may treat the Person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note is
overdue, and neither the Company, any Guarantor, the Trustee nor any such
agent shall be affected by notice to the contrary.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES
THEREOF.
All terms used in this Note which are defined in the Indenture and not
otherwise defined herein shall have the meanings assigned to them in the
Indenture.
- 6 -
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 10% Senior Notes due 2005, Series B referred to in the
within-mentioned Indenture.
WILMINGTON TRUST COMPANY
as Trustee
By: _______________________________
Authorized Signer
Dated:
- 7 -
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to Section
10.12 or Section 10.14, as applicable, of the Indenture, check the Box: [ ].
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.12 or Section 10.14 as applicable, of the Indenture,
state the amount (in original principal amount):
$ ____________ .
Date: _________________ Your Signature: _________________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: _________________________
- 8 -
<PAGE>
FORM OF TRANSFEREE CERTIFICATE
I or we assign and transfer this Note to:
Please insert social security or other identifying number of assignee
______________________________________________________
Print or type name, address and zip code of assignee
______________________________________________________
and irrevocably appoint ___________________________________ [Agent], to
transfer this Note on the books of the Company. The Agent may substitute
another to act for him.
Dated ____________________
Signed ___________________
(Sign exactly as name appears on the other side of this Note) [Signature must
be guaranteed by an eligible Guarantor Institution (banks, stock brokers,
savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17 Ad-15.]
- 9 -
<PAGE>
EXHIBIT 5
NIXON, HARGRAVE, DEVANS & DOYLE LLP
437 Madison Avenue
New York, New York 10022
April 30, 1998
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Ladies and Gentlemen:
We have acted as counsel to PSINet Inc., a New York corporation (the
"Company"), in connection with the preparation of a Registration Statement on
Form S-4 (the "Registration Statement") to be filed by the Company on or about
April 30, 1998 with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), relating to the offer
by the Company of $600,000,000 aggregate principal amount of the Company's new
10% Senior Notes Due 2005, Series B (the "Exchange Notes") to be issued under
the Indenture dated as of April 13, 1998 (the "Indenture") by and between the
Company and Wilmington Trust Company, as trustee (the "Trustee"), in exchange
for a like principal amount of the Company's outstanding 10% Senior Notes Due
2005, Series A (the "Initial Notes" and, together with the Exchange Notes, the
"Notes"), as contemplated by the Registration Rights Agreement dated as of April
13, 1998 (the "Registration Rights Agreement") by and among the Company,
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Chase Securities Inc.
In connection with the foregoing, we have examined the Registration
Statement and the preliminary prospectus contained in the Registration Statement
(the "Preliminary Prospectus"), the Indenture, the Registration Rights Agreement
and the form of Exchange Notes set forth in the Indenture and the form of
Statement of Eligibility and Qualification on Form T-1 of the Trustee filed as
an exhibit to the Registration Statement. We have also examined originals or
copies, certified or otherwise identified to our satisfaction, of such corporate
records, certificates and other documents and have made such investigations of
law as we have deemed necessary or appropriate as a basis for the opinions
expressed below.
As to questions of fact material to our opinions expressed herein, we have,
when relevant facts were not independently established, relied upon certificates
of, and information received from, the Company, the Trustee and/or
representatives of the Company and/or the Trustee. We have made no independent
investigation of the facts stated in such certificates or as to any information
received from the Company, the Trustee and/or representatives of the Company
and/or the Trustee and do not opine as to the accuracy of such factual matters.
We also have
<PAGE>
PSINet Inc.
April 30, 1998
Page 2
relied, without investigation, upon certificates and other documents from, and
conversations with, public officials.
In rendering the following opinions, we have assumed, without
investigation, the authenticity of any document or other instrument submitted to
us as an original, the conformity to the originals of any document or other
instrument submitted to us as a copy, the genuineness of all signatures on such
originals or copies, and the legal capacity of natural persons who executed any
such document or instrument at the time of execution thereof. We assume also
that the Exchange Notes have been or will be duly and validly authenticated.
Additionally, we have assumed, but not independently verified, that the factual
matters set forth in the statements made in the Registration Statement,
including, without limitation, those matters set forth and statements made in
the Prospectus under the caption "Certain Federal Income Tax Considerations",
are true and correct and we have relied upon such factual matters and statements
in rendering the opinion expressed herein.
Members of our firm involved in the preparation of this opinion are
licensed to practice law in the State of New York and we do not purport to be
experts on, or to express any opinion herein concerning, the laws of any other
jurisdiction other than the law of the State of New York and the federal law of
the United States of America.
Based upon and subject to the foregoing and the other qualifications and
limitations contained herein, we are of the opinion that:
1. After (a) the Commission shall have entered an appropriate order
declaring effective the Registration Statement, as amended, and (b) the Exchange
Notes have, if required, been duly qualified or registered, as the case may be,
for sale under applicable state securities laws, and duly issued, executed,
authenticated and delivered by each of the Company and the Trustee upon
consummation of the Exchange Offer against receipt of the Initial Notes
surrendered in exchange therefor in accordance with the terms of the Exchange
Offer and the Indenture, the Exchange Notes will be valid and binding
obligations of, and enforceable against, the Company in accordance with their
terms, except as limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, liquidation and other similar laws relating to or
affecting creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law), including, without limitation, principles of commercial
reasonableness and materiality and an implied covenant of good faith and fair
dealing.
2. The opinions referred to as the opinions of counsel in the Preliminary
Prospectus under the caption "Certain Federal Income Tax Considerations", are
our opinions, insofar as they are statements of United States federal income tax
law or conclusions with respect to United States federal income tax law. Our
opinions are based upon existing United States federal income tax law and
present interpretations thereof. We can give no assurance that such opinions
will continue to be our opinions if existing United States federal income tax
laws, or the interpretations thereof, are changed or modified hereafter.
<PAGE>
PSINet Inc.
April 30, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
captions "Certain Federal Income Tax Considerations" and "Legal Matters" in the
Preliminary Prospectus.
We wish to advise you that certain attorneys with Nixon, Hargrave, Devans &
Doyle LLP own certain shares of the Company's Common Stock and that we represent
the Trustee from time to time on certain matters.
Very truly yours,
Nixon, Hargrave, Devans & Doyle LLP
<PAGE>
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1997
--------------------------------
Pro Forma,
1993 1994 1995 1996 Actual Pro Forma As Adjusted
---- ---- ---- ---- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before income taxes $(2,159) $(5,342) $(53,160) $(55,256) $(46,078) $(91,136) $(151,911)
Equity in loss of affiliate 35 204 807
Interest expense 311 731 1,964 5,025 5,362 8,356 69,131
Interest portion of rental
expense 136 230 692 1,200 1,656 1,656 1,656
------- ------- -------- -------- -------- -------- ---------
Earnings/(loss) $(1,712) $(4,346) $(50,300) $(48,224) $(39,060) $(81,124) $ (81,124)
======= ======= ======== ========= ======== ======== =========
Interest expense 311 731 1,964 5,025 5,362 8,356 69,131
Interest portion of rental
expense 136 230 692 1,200 1,656 1,656 1,656
------- ------- -------- -------- -------- -------- ---------
Fixed charges $ 447 $ 961 2,656 $ 6,225 7,018 $ 10,012 $ 70,787
======= ======= ======== ========= ======== ======== =========
Ratio of earnings to fixed
charges - - - - - - -
======= ======= ======== ========= ======== ======== =========
Deficiency of earnings to cover
fixed charges $ 2,159 $ 5,307 $ 52,956 $ 54,449 $ 46,078 $ 91,136 $ 151,911
======= ======= ======== ========= ======== ======== =========
</TABLE>
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of PSINet Inc. of our report dated February
6, 1998, except as to the first three paragraphs of Note 11, which are as of
February 25, 1998, relating to the consolidated financial statements of PSINet
Inc., which appears in such Prospectus. We also consent to the application of
such report to the Financial Statement Schedule for each of the three years in
the period ended December 31, 1997 listed under Item 21 of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audits referred to in such report also
included this schedule. We also consent to the references to us under the
headings "Experts" and "Selected Financial Data" in such Prospectus. However, it
should be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."
PRICE WATERHOUSE LLP
Washington D.C.
April 30, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated July 10, 1997, except for
notes 12, 18, 19 and 20 which are as at December 5, 1997, relating to the
consolidated financial statements of iSTAR internet inc. as of May 31, 1997 and
1996 and for each of the two years in the period ended May 31, 1997. We also
consent to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG
Chartered Accountants
Ottawa, Canada
April 29, 1998
<PAGE>
EXHIBIT 25
Registration No.
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2) ____
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
PSINET INC.
(Exact name of obligor as specified in its charter)
New York 16-1353600
(State of incorporation) (I.R.S. employer identification no.)
510 Huntmar Park Drive
Herndon, Virginia 20170
(Address of principal executive offices) (Zip Code)
10% Senior Notes Due 2005, Series B
(Title of the indenture securities)
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is Subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each affiliation:
Based upon an examination of the books and records of the trustee and upon
information furnished by the obligor, the obligor is not an affiliate of
the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of Eligibility and
Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes the
certificate of authority of Wilmington Trust Company to commence
business and the authorization of Wilmington Trust Company to exercise
corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b) of
Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 24th day
of April, 1998.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Donald G. MacKelcan By: /s/ Emmett R. Harmon
----------------------------- --------------------
Assistant Secretary Name: Emmett R. Harmon
Title: Vice President
2
<PAGE>
EXHIBIT A
AMENDED CHARTER
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON MAY 9, 1987
<PAGE>
AMENDED CHARTER
OR
ACT OF INCORPORATION
OF
WILMINGTON TRUST COMPANY
WILMINGTON TRUST COMPANY, originally incorporated by an Act of the General
Assembly of the State of Delaware, entitled "An Act to Incorporate the Delaware
Guarantee and Trust Company", approved March 2, A.D. 1901, and the name of which
company was changed to "WILMINGTON TRUST COMPANY" by an amendment filed in the
Office of the Secretary of State on March 18, A.D. 1903, and the Charter or Act
of Incorporation of which company has been from time to time amended and changed
by merger agreements pursuant to the corporation law for state banks and trust
companies of the State of Delaware, does hereby alter and amend its Charter or
Act of Incorporation so that the same as so altered and amended shall in its
entirety read as follows:
FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY.
SECOND: - The location of its principal office in the State of Delaware is
at Rodney Square North, in the City of Wilmington, County of New Castle;
the name of its resident agent is WILMINGTON TRUST COMPANY whose address is
Rodney Square North, in said City. In addition to such principal office,
the said corporation maintains and operates branch offices in the City of
Newark, New Castle County, Delaware, the Town of Newport, New Castle
County, Delaware, at Claymont, New Castle County, Delaware, at Greenville,
New Castle County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate branch
offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market
Street, and 3605 Market Street, all in the City of Wilmington, New Castle
County, Delaware, and such other branch offices or places of business as
may be authorized from time to time by the agency or agencies of the
government of the State of Delaware empowered to confer such authority.
THIRD: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation are
to do any or all of the things herein mentioned as fully and to the same
extent as natural persons might or could do and in any part of the world,
viz.:
(1) To sue and be sued, complain and defend in any Court of law or
equity and to make and use a common seal, and alter the seal at
pleasure, to hold, purchase, convey, mortgage or otherwise deal in
real and personal estate and property, and to appoint such officers
and agents as the business of the Corporation shall require, to make
by-laws not inconsistent with the Constitution or laws of the United
States or of this State, to discount bills, notes or other evidences
of debt, to receive deposits of money, or securities for money, to buy
gold and silver bullion
<PAGE>
and foreign coins, to buy and sell bills of exchange, and generally to
use, exercise and enjoy all the powers, rights, privileges and
franchises incident to a corporation which are proper or necessary for
the transaction of the business of the Corporation hereby created.
(2) To insure titles to real and personal property, or any estate or
interests therein, and to guarantee the holder of such property, real
or personal, against any claim or claims, adverse to his interest
therein, and to prepare and give certificates of title for any lands
or premises in the State of Delaware, or elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all
descriptions, and to prepare and execute all papers which may be
necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every description,
and to carry on the business of conveyancing in all its branches.
(5) To receive upon deposit for safekeeping money, jewelry, plate,
deeds, bonds and any and all other personal property of every sort and
kind, from executors, administrators, guardians, public officers,
courts, receivers, assignees, trustees, and from all fiduciaries, and
from all other persons and individuals, and from all corporations
whether state, municipal, corporate or private, and to rent boxes,
safes, vaults and other receptacles for such property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or underwriting
the stock, bonds or other obligations of any corporation, association,
state or municipality, and may receive and manage any sinking fund
therefor on such terms as may be agreed upon between the two parties,
and in like manner may act as Treasurer of any corporation or
municipality.
(7) To act as Trustee under any deed of trust, mortgage, bond or
other instrument issued by any state, municipality, body politic,
corporation, association or person, either alone or in conjunction
with any other person or persons, corporation or corporations.
(8) To guarantee the validity, performance or effect of any contract
or agreement, and the fidelity of persons holding places of
responsibility or trust; to become surety for any person, or persons,
for the faithful performance of any trust, office, duty, contract or
agreement, either by itself or in conjunction with any other person,
or persons, corporation, or corporations, or in like manner become
surety upon any bond, recognizance, obligation, judgment, suit, order,
or decree to be entered in any court of record within the State of
Delaware or elsewhere, or which may now or hereafter be required by
any law, judge, officer or court in the State of Delaware or
elsewhere.
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(9) To act by any and every method of appointment as trustee, trustee
in bankruptcy, receiver, assignee, assignee in bankruptcy, executor,
administrator, guardian, bailee, or in any other trust capacity in the
receiving, holding, managing, and disposing of any and all estates and
property, real, personal or mixed, and to be appointed as such
trustee, trustee in bankruptcy, receiver, assignee, assignee in
bankruptcy, executor, administrator, guardian or bailee by any
persons, corporations, court, officer, or authority, in the State of
Delaware or elsewhere; and whenever this Corporation is so appointed
by any person, corporation, court, officer or authority such trustee,
trustee in bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian, bailee, or in any other trust
capacity, it shall not be required to give bond with surety, but its
capital stock shall be taken and held as security for the performance
of the duties devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise of
any of its powers hereby given, or for the performance of any of the
duties which it may undertake or be called upon to perform, or for the
assumption of any responsibility the said Corporation may be entitled
to receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages, debentures,
shares of capital stock, and other securities, obligations, contracts
and evidences of indebtedness, of any private, public or municipal
corporation within and without the State of Delaware, or of the
Government of the United States, or of any state, territory, colony,
or possession thereof, or of any foreign government or country; to
receive, collect, receipt for, and dispose of interest, dividends and
income upon and from any of the bonds, mortgages, debentures, notes,
shares of capital stock, securities, obligations, contracts, evidences
of indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages, debentures, notes,
shares of capital stock, securities, obligations, contracts, evidences
of indebtedness and other property, any and all the rights, powers and
privileges of individual owners thereof, including the right to vote
thereon; to invest and deal in and with any of the moneys of the
Corporation upon such securities and in such manner as it may think
fit and proper, and from time to time to vary or realize such
investments; to issue bonds and secure the same by pledges or deeds of
trust or mortgages of or upon the whole or any part of the property
held or owned by the Corporation, and to sell and pledge such bonds,
as and when the Board of Directors shall determine, and in the
promotion of its said corporate business of investment and to the
extent authorized by law, to lease, purchase, hold, sell, assign,
transfer, pledge, mortgage and convey real and personal property of
any name and nature and any estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred by
the laws of the State of Delaware, it is hereby expressly provided that the
said Corporation shall also have the following powers:
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(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of the
world.
(2) To acquire the good will, rights, property and franchises and to
undertake the whole or any part of the assets and liabilities of any
person, firm, association or corporation, and to pay for the same in
cash, stock of this Corporation, bonds or otherwise; to hold or in any
manner to dispose of the whole or any part of the property so
purchased; to conduct in any lawful manner the whole or any part of
any business so acquired, and to exercise all the powers necessary or
convenient in and about the conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and to
lease, sell, exchange, transfer, or in any manner whatever dispose of
property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of every
kind with any person, firm, association or corporation, and, without
limit as to amount, to draw, make, accept, endorse, discount, execute
and issue promissory notes, drafts, bills of exchange, warrants,
bonds, debentures, and other negotiable or transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same extent as
natural persons might or could do, to purchase or otherwise acquire,
to hold, own, to mortgage, sell, convey or otherwise dispose of, real
and personal property, of every class and description, in any State,
District, Territory or Colony of the United States, and in any foreign
country or place.
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except where
otherwise expressed in said paragraph) be nowise limited or restricted
by reference to or inference from the terms of any other clause of
this or any other paragraph in this charter, but that the objects,
purposes and powers specified in each of the clauses of this paragraph
shall be regarded as independent objects, purposes and powers.
FOURTH: - (a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is forty-one million (41,000,000)
shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock"); and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one or
more series as may from time to time be determined by the Board of
Directors each of said series to be distinctly designated. All shares of
any one series of Preferred Stock shall be alike in every particular,
except that there may be different dates from which dividends, if any,
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thereon shall be cumulative, if made cumulative. The voting powers and the
preferences and relative, participating, optional and other special rights
of each such series, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other series at any
time outstanding; and, subject to the provisions of subparagraph 1 of
Paragraph (c) of this Article FOURTH, the Board of Directors of the
Corporation is hereby expressly granted authority to fix by resolution or
resolutions adopted prior to the issuance of any shares of a particular
series of Preferred Stock, the voting powers and the designations,
preferences and relative, optional and other special rights, and the
qualifications, limitations and restrictions of such series, including, but
without limiting the generality of the foregoing, the following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number may
be increased (except where otherwise provided by the Board of
Directors) or decreased (but not below the number of shares thereof
then outstanding) from time to time by like action of the Board of
Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series shall be
paid, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes, or
series of the same or other class of stock and whether such dividends
shall be cumulative or non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares of
any other class or classes or of any series of the same or any other
class or classes of stock of the Corporation and the terms and
conditions of such conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be subject to
redemption, and the redemption price or prices and the time or times
at which, and the terms and conditions on which, Preferred Stock of
such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of such
series upon the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or winding-
up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase account,
if any, to be provided for the Preferred Stock of such series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of the
foregoing include the right, voting as a series or by itself or
together with other series of Preferred Stock or all series of
Preferred Stock as a class, to elect one or more directors of the
Corporation if there shall have been a default in the payment of
dividends on any one or more series of Preferred Stock or under such
circumstances and on such conditions as the Board of Directors may
determine.
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(c) (1) After the requirements with respect to preferential dividends on
the Preferred Stock (fixed in accordance with the provisions of section (b)
of this Article FOURTH), if any, shall have been met and after the
Corporation shall have complied with all the requirements, if any, with
respect to the setting aside of sums as sinking funds or redemption or
purchase accounts (fixed in accordance with the provisions of section (b)
of this Article FOURTH), and subject further to any conditions which may be
fixed in accordance with the provisions of section (b) of this Article
FOURTH, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to time by
the Board of Directors.
(2) After distribution in full of the preferential amount, if any,
(fixed in accordance with the provisions of section (b) of this
Article FOURTH), to be distributed to the holders of Preferred Stock
in the event of voluntary or involuntary liquidation, distribution or
sale of assets, dissolution or winding-up, of the Corporation, the
holders of the Common Stock shall be entitled to receive all of the
remaining assets of the Corporation, tangible and intangible, of
whatever kind available for distribution to stockholders ratably in
proportion to the number of shares of Common Stock held by them
respectively.
(3) Except as may otherwise be required by law or by the provisions
of such resolution or resolutions as may be adopted by the Board of
Directors pursuant to section (b) of this Article FOURTH, each holder
of Common Stock shall have one vote in respect of each share of Common
Stock held on all matters voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series
of stock or of other securities of the Corporation shall have any
preemptive right to purchase or subscribe for any unissued stock of any
class or series or any additional shares of any class or series to be
issued by reason of any increase of the authorized capital stock of the
Corporation of any class or series, or bonds, certificates of indebtedness,
debentures or other securities convertible into or exchangeable for stock
of the Corporation of any class or series, or carrying any right to
purchase stock of any class or series, but any such unissued stock,
additional authorized issue of shares of any class or series of stock or
securities convertible into or exchangeable for stock, or carrying any
right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms, corporations
or associations, whether such holders or others, and upon such terms as may
be deemed advisable by the Board of Directors in the exercise of its sole
discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and rights
of each other series of Preferred Stock shall, in each case, be as fixed
from time to time by the Board of Directors in the resolution or
resolutions adopted pursuant to authority granted in section (b) of this
Article FOURTH and the consent, by class or series vote or otherwise, of
the holders of such of the series of Preferred Stock as are from time to
time outstanding shall not be required for the issuance by the Board of
Directors of any other series of Preferred Stock whether or not the powers,
preferences and rights of such other series shall be fixed by
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the Board of Directors as senior to, or on a parity with, the powers,
preferences and rights of such outstanding series, or any of them;
provided, however, that the Board of Directors may provide in the
resolution or resolutions as to any series of Preferred Stock adopted
pursuant to section (b) of this Article FOURTH that the consent of the
holders of a majority (or such greater proportion as shall be therein
fixed) of the outstanding shares of such series voting thereon shall be
required for the issuance of any or all other series of Preferred Stock.
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of Directors
of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(h) The authorized amount of shares of Common Stock and of Preferred Stock
may, without a class or series vote, be increased or decreased from time to
time by the affirmative vote of the holders of a majority of the stock of
the Corporation entitled to vote thereon.
FIFTH: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more than
twenty-five as fixed from time to time by vote of a majority of the whole
Board, provided, however, that the number of directors shall not be reduced
so as to shorten the term of any director at the time in office, and
provided further, that the number of directors constituting the whole Board
shall be twenty-four until otherwise fixed by a majority of the whole
Board.
(b) The Board of Directors shall be divided into three classes, as nearly
equal in number as the then total number of directors constituting the
whole Board permits, with the term of office of one class expiring each
year. At the annual meeting of stockholders in 1982, directors of the
first class shall be elected to hold office for a term expiring at the next
succeeding annual meeting, directors of the second class shall be elected
to hold office for a term expiring at the second succeeding annual meeting
and directors of the third class shall be elected to hold office for a term
expiring at the third succeeding annual meeting. Any vacancies in the
Board of Directors for any reason, and any newly created directorships
resulting from any increase in the directors, may be filled by the Board of
Directors, acting by a majority of the directors then in office, although
less than a quorum, and any directors so chosen shall hold office until the
next annual election of directors. At such election, the stockholders
shall elect a successor to such director to hold office until the next
election of the class for which such director shall have been chosen and
until his successor shall be elected and qualified. No decrease in the
number of directors shall shorten the term of any incumbent director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding the
fact that some lesser percentage
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may be specified by law, this Charter or Act of Incorporation or the By-
Laws of the Corporation), any director or the entire Board of Directors of
the Corporation may be removed at any time without cause, but only by the
affirmative vote of the holders of two-thirds or more of the outstanding
shares of capital stock of the Corporation entitled to vote generally in
the election of directors (considered for this purpose as one class) cast
at a meeting of the stockholders called for that purpose.
(d) Nominations for the election of directors may be made by the Board of
Directors or by any stockholder entitled to vote for the election of
directors. Such nominations shall be made by notice in writing, delivered
or mailed by first class United States mail, postage prepaid, to the
Secretary of the Corporation not less than 14 days nor more than 50 days
prior to any meeting of the stockholders called for the election of
directors; provided, however, that if less than 21 days' notice of the
meeting is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later than
the close of the seventh day following the day on which notice of the
meeting was mailed to stockholders. Notice of nominations which are
proposed by the Board of Directors shall be given by the Chairman on behalf
of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed
in such notice, (ii) the principal occupation or employment of such nominee
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with
the foregoing procedure, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a
meeting, to the taking of any action is specifically denied.
SIXTH: - The Directors shall choose such officers, agent and servants as
may be provided in the By-Laws as they may from time to time find necessary
or proper.
SEVENTH: - The Corporation hereby created is hereby given the same powers,
rights and privileges as may be conferred upon corporations organized under
the Act entitled "An Act Providing a General Corporation Law", approved
March 10, 1899, as from time to time amended.
EIGHTH: - This Act shall be deemed and taken to be a private Act.
NINTH: - This Corporation is to have perpetual existence.
TENTH: - The Board of Directors, by resolution passed by a majority of the
whole Board, may designate any of their number to constitute an Executive
Committee, which
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Committee, to the extent provided in said resolution, or in the By-Laws of
the Company, shall have and may exercise all of the powers of the Board of
Directors in the management of the business and affairs of the Corporation,
and shall have power to authorize the seal of the Corporation to be affixed
to all papers which may require it.
ELEVENTH: - The private property of the stockholders shall not be liable
for the payment of corporate debts to any extent whatever.
TWELFTH: - The Corporation may transact business in any part of the world.
THIRTEENTH: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by a
vote of the majority of the entire Board. The stockholders may make, alter
or repeal any By-Law whether or not adopted by them, provided however, that
any such additional By-Laws, alterations or repeal may be adopted only by
the affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class).
FOURTEENTH: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be from time
to time designated by them.
FIFTEENTH: - (a) In addition to any affirmative vote required by law, and
except as otherwise expressly provided in sections (b) and (c) of this
Article FIFTEENTH:
(A) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with or into (i) any Interested Stockholder
(as hereinafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder), which, after such merger or
consolidation, would be an Affiliate (as hereinafter defined) of an
Interested Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of related transactions)
to or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate fair market value of $1,000,000 or
more, or
(C) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of related transactions) of any securities
of the Corporation or any Subsidiary to any Interested Stockholder or
any Affiliate of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate fair market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
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(E) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
similar transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder, or any Affiliate of any Interested
Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote shall
be required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this Article
FIFTEENTH shall mean any transaction which is referred to any one
or more of clauses (A) through (E) of paragraph 1 of the section
(a).
(b) The provisions of section (a) of this Article FIFTEENTH shall not
be applicable to any particular business combination and such business
combination shall require only such affirmative vote as is required by
law and any other provisions of the Charter or Act of Incorporation of
By-Laws if such business combination has been approved by a majority
of the whole Board.
(c) For the purposes of this Article FIFTEENTH:
(1) A "person" shall mean any individual firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary) who
or which as of the record date for the determination of stockholders
entitled to notice of and to vote on such business combination, or
immediately prior to the consummation of any such transaction:
(A) is the beneficial owner, directly or indirectly, of more than 10%
of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within two
years prior thereto was the beneficial owner, directly or indirectly,
of not less than 10% of the then outstanding voting Shares, or
(C) is an assignee of or has otherwise succeeded in any share of
capital stock of the Corporation which were at any time within two
years prior thereto beneficially owned by any Interested Stockholder,
and such assignment or succession shall have occurred in the course of
a transaction or series of transactions not involving a public
offering within the meaning of the Securities Act of 1933.
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(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates (as
hereafter defined) beneficially own, directly or indirectly, or
(B) which such person or any of its Affiliates or Associates has (i)
the right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (ii)
the right to vote pursuant to any agreement, arrangement or
understanding, or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any other
Voting Shares which may be issuable pursuant to any agreement, or upon
exercise of conversion rights, warrants or options or otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings given
those terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as in effect on December 31, 1981.
(6) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security (as defined in Rule 3a11-1 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as in effect in
December 31, 1981) is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Investment
Stockholder set forth in paragraph (2) of this section (c), the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
(d) majority of the directors shall have the power and duty to
determine for the purposes of this Article FIFTEENTH on the basis of
information known to them, (1) the number of Voting Shares
beneficially owned by any person (2) whether a person is an Affiliate
or Associate of another, (3) whether a person has an agreement,
arrangement or understanding with another as to the matters referred
to in paragraph (3) of section (c), or (4) whether the assets subject
to any business combination or the consideration received for the
issuance or transfer of securities by the Corporation, or any
Subsidiary has an aggregate fair market value of $1,000,000 or more.
(e) Nothing contained in this Article FIFTEENTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
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SIXTEENTH: Notwithstanding any other provision of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and in addition to any
other vote that may be required by law, this Charter or Act of
Incorporation by the By-Laws), the affirmative vote of the holders of at
least two-thirds of the outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) shall be required to amend,
alter or repeal any provision of Articles FIFTH, THIRTEENTH, FIFTEENTH or
SIXTEENTH of this Charter or Act of Incorporation.
SEVENTEENTH: (a) a Director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except to the extent such exemption from
liability or limitation thereof is not permitted under the Delaware General
Corporation Laws as the same exists or may hereafter be amended.
(b) Any repeal or modification of the foregoing paragraph shall not
adversely affect any right or protection of a Director of the
Corporation existing hereunder with respect to any act or omission
occurring prior to the time of such repeal or modification."
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EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
As existing on January 16, 1997
<PAGE>
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
STOCKHOLDERS' MEETINGS
Section 1. The Annual Meeting of Stockholders shall be held on the third
Thursday in April each year at the principal office at the Company or at such
other date, time, or place as may be designated by resolution by the Board of
Directors.
Section 2. Special meetings of all stockholders may be called at any time
by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given by
mailing to each stockholder at least ten (10) days before said meeting, at his
last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the Company
issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
DIRECTORS
Section 1. The number and classification of the Board of Directors shall be
as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72) years
shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for three
years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed and
conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office of the
Company or elsewhere in its discretion at such times to be determined by a
majority of its members, or at the call of the Chairman of the Board of
Directors or the President.
<PAGE>
Section 6. Special meetings of the Board of Directors may be called at any
time by the Chairman of the Board of Directors or by the President, and shall be
called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of any
special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability to
act, or disqualification of any director, the Board of Directors, although less
than a quorum, shall have the right to elect the successor who shall hold office
for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its election
by the stockholders shall appoint an Executive Committee, a Trust Committee, an
Audit Committee and a Compensation Committee, and shall elect from its own
members a Chairman of the Board of Directors and a President who may be the same
person. The Board of Directors shall also elect at such meeting a Secretary and
a Treasurer, who may be the same person, may appoint at any time such other
committees and elect or appoint such other officers as it may deem advisable.
The Board of Directors may also elect at such meeting one or more Associate
Directors.
Section 11. The Board of Directors may at any time remove, with or without
cause, any member of any Committee appointed by it or any associate director or
officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in charge
of such of the departments or division of the Company as it may deem advisable.
ARTICLE III
COMMITTEES
Section 1. Executive Committee
(A) The Executive Committee shall be composed of not more than nine
members who shall be selected by the Board of Directors from its own members and
who shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the Board of
Directors when it is not in session to transact all business for and in behalf
of the Company that may be brought before it.
2
<PAGE>
(C) The Executive Committee shall meet at the principal office of the
Company or elsewhere in its discretion at such times to be determined by a
majority of its members, or at the call of the Chairman of the Executive
Committee or at the call of the Chairman of the Board of Directors. The
majority of its members shall be necessary to constitute a quorum for the
transaction of business. Special meetings of the Executive Committee may be
held at any time when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall be kept
and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient severity to
prevent the conduct and management of the affairs and business of the Company by
its directors and officers as contemplated by these By-Laws any two available
members of the Executive Committee as constituted immediately prior to such
disaster shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Company in accordance with the
provisions of Article III of these By-Laws; and if less than three members of
the Trust Committee is constituted immediately prior to such disaster shall be
available for the transaction of its business, such Executive Committee shall
also be empowered to exercise all of the powers reserved to the Trust Committee
under Article III Section 2 hereof. In the event of the unavailability, at such
time, of a minimum of two members of such Executive Committee, any three
available directors shall constitute the Executive Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the foregoing provisions of this Section. This By-Law shall be subject to
implementation by Resolutions of the Board of Directors presently existing or
hereafter passed from time to time for that purpose, and any provisions of these
By-Laws (other than this Section) and any resolutions which are contrary to the
provisions of this Section or to the provisions of any such implementary
Resolutions shall be suspended during such a disaster period until it shall be
determined by any interim Executive Committee acting under this section that it
shall be to the advantage of the Company to resume the conduct and management of
its affairs and business under all of the other provisions of these By-Laws.
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than thirteen
members who shall be selected by the Board of Directors, a majority of whom
shall be members of the Board of Directors and who shall hold office during the
pleasure of the Board.
(B) The Trust Committee shall have general supervision over the Trust
Department and the investment of trust funds, in all matters, however, being
subject to the approval of the Board of Directors.
3
<PAGE>
(C) The Trust Committee shall meet at the principal office of the
Company or elsewhere in its discretion at such times to be determined by a
majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint Committees
and/or designate officers or employees of the Company to whom supervision over
the investment of trust funds may be delegated when the Trust Committee is not
in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members who shall
be selected by the Board of Directors from its own members, none of whom shall
be an officer of the Company, and shall hold office at the pleasure of the
Board.
(B) The Audit Committee shall have general supervision over the Audit
Division in all matters however subject to the approval of the Board of
Directors; it shall consider all matters brought to its attention by the officer
in charge of the Audit Division, review all reports of examination of the
Company made by any governmental agency or such independent auditor employed for
that purpose, and make such recommendations to the Board of Directors with
respect thereto or with respect to any other matters pertaining to auditing the
Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and wherever the majority
of its members shall deem it to be proper for the transaction of its business,
and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more than
five (5) members who shall be selected by the Board of Directors from its own
members who are not officers of the Company and who shall hold office during the
pleasure of the Board.
(B) The Compensation Committee shall in general advise upon all
matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at any time
by the Chairman of the Compensation Committee, the Chairman of the Board of
Directors, or the President of the Company.
4
<PAGE>
Section 5. Associate Directors
(A) Any person who has served as a director may be elected by the
Board of Directors as an associate director, to serve during the pleasure of the
Board.
(B) An associate director shall be entitled to attend all directors
meetings and participate in the discussion of all matters brought to the Board,
with the exception that he would have no right to vote. An associate director
will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any Committee
created under Article III of the By-Laws of this Company, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absence or
disqualified member.
ARTICLE IV
OFFICERS
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the Board
------------------------------
of Directors shall preside at all meetings of the Board of Directors at which
the Chairman of the Board shall not be present and shall have such further
authority and powers and shall perform such duties as the Board of Directors or
the Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining to the
office of the President conferred or imposed upon him by statute or assigned to
him by the Board of Directors in the absence of the Chairman of the Board the
President shall have the powers and duties of the Chairman of the Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however denominated by
the Board of Directors, who may at any time perform all the duties of the
Chairman of the Board of Directors and/or the President and such other powers
and duties as may from time to time be
5
<PAGE>
assigned to them by the Board of Directors, the Executive Committee, the
Chairman of the Board or the President and by the officer in charge of the
department or division to which they are assigned.
Section 6. The Secretary shall attend to the giving of notice of meetings
of the stockholders and the Board of Directors, as well as the Committees
thereof, to the keeping of accurate minutes of all such meetings and to
recording the same in the minute books of the Company. In addition to the other
notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all assets and
liabilities of the Company. He shall be custodian of and responsible for all
monies, funds and valuables of the Company and for the keeping of proper records
of the evidence of property or indebtedness and of all the transactions of the
Company. He shall have general supervision of the expenditures of the Company
and shall report to the Board of Directors at each regular meeting of the
condition of the Company, and perform such other duties as may be assigned to
him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general supervision
over the internal operations of the Company, including accounting, and shall
render to the Board of Directors at appropriate times a report relating to the
general condition and internal operations of the Company.
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in charge
of the Audit Division of the Company with such title as the Board of Directors
shall prescribe, shall report to and be directly responsible only to the Board
of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to all
Vice Presidents with such functional titles as shall be determined from time to
time by the Board of Directors, who shall ex officio hold the office Assistant
Secretary of this Company and who may perform such duties as may be prescribed
by the officer in charge of the department or division to whom they are
assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President and the officer in charge of the department
or division to which they are assigned.
6
<PAGE>
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
Section 2. Certificate of stock shall bear the signature of the President
or any Vice President, however denominated by the Board of Directors and
countersigned by the Secretary or Treasurer or an Assistant Secretary, and the
seal of the corporation shall be engraved thereon. Each certificate shall recite
that the stock represented thereby is transferrable only upon the books of the
Company by the holder thereof or his attorney, upon surrender of the certificate
properly endorsed. Any certificate of stock surrendered to the Company shall be
cancelled at the time of transfer, and before a new certificate or certificates
shall be issued in lieu thereof. Duplicate certificates of stock shall be issued
only upon giving such security as may be satisfactory to the Board of Directors
or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix in
advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of any dividend, or to any allotment or
rights, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, or in connection with obtaining the consent of
stockholders for any purpose, which record date shall not be more than 60 nor
less than 10 days proceeding the date of any meeting of stockholders or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, or a date in connection with obtaining such consent.
ARTICLE VI
SEAL
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words
"Wilmington Trust Company" within the inner
circle the words "Wilmington, Delaware."
ARTICLE VII
FISCAL YEAR
Section 1. The fiscal year of the Company shall be the calendar year.
ARTICLE VIII
EXECUTION OF INSTRUMENTS OF THE COMPANY
Section 1. The Chairman of the Board, the President or any Vice President,
however denominated by the Board of Directors, shall have full power and
authority to enter into, make, sign, execute, acknowledge and/or deliver and the
Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all
7
<PAGE>
deeds, conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
ARTICLE IX
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Section 1. Directors and associate directors of the Company, other than
salaried officers of the Company, shall be paid such reasonable honoraria or
fees for attending meetings of the Board of Directors as the Board of Directors
may from time to time determine. Directors and associate directors who serve as
members of committees, other than salaried employees of the Company, shall be
paid such reasonable honoraria or fees for services as members of committees as
the Board of Directors shall from time to time determine and directors and
associate directors may be employed by the Company for such special services as
the Board of Directors may from time to time determine and shall be paid for
such special services so performed reasonable compensation as may be determined
by the Board of Directors.
ARTICLE X
INDEMNIFICATION
Section 1. (A) The Corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person who was or is made or is threatened to be made
a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding") by reason of
the fact that he, or a person for whom he is the legal representative, is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
-----------------
that the payment of expenses incurred by a Director officer in his capacity as a
Director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Director or officer to repay
all amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
8
<PAGE>
(C) If a claim for indemnification or payment of expenses, under this
Article X is not paid in full within ninety days after a written claim therefor
has been received by the Corporation the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the Corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification of payment of expenses under
applicable law.
(D) The rights conferred on any person by this Article X shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the Charter or Act of Incorporation, these By-
Laws, agreement, vote of stockholders or disinterested Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions of this
Article X shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification.
ARTICLE XI
AMENDMENTS TO THE BY-LAWS
Section 1. These By-Laws may be altered, amended or repealed, in whole or
in part, and any new By-Law or By-Laws adopted at any regular or special meeting
of the Board of Directors by a vote of the majority of all the members of the
Board of Directors then in office.
9
<PAGE>
EXHIBIT C
SECTION 321(B) CONSENT
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: April 24, 1998 By: /s/ Emmett R. Harmon
------------------------
Name: Emmett R. Harmon
Title: Vice President
<PAGE>
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and savings
banks with state publication requirements. It has not been approved
by any state banking authorities. Refer to your appropriate state
banking authorities for your state publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- ------------------------------------- -----------------
Name of Bank City
in the State of DELAWARE , at the close of business on December 31, 1997.
-------------
ASSETS
Thousands of dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and
coins.......................................... 236,646
Interest-bearing balances....................... 0
Held-to-maturity securities.......................... 331,880
Available-for-sale securities........................ 1,258,661
Federal funds sold and securities purchased under
agreements to resell................................ 91,500
Loans and lease financing receivables:
Loans and leases, net of unearned income..... 3,822,320
LESS: Allowance for loan and lease losses... 59,373
LESS: Allocated transfer risk reserve....... 0
Loans and leases, net of unearned income,
allowance, and reserve......................... 3,762,947
Assets held in trading accounts...................... 0
Premises and fixed assets (including capitalized
leases)............................................. 129,740
Other real estate owned.............................. 2,106
Investments in unconsolidated subsidiaries and
associated companies................................ 22
Customers' liability to this bank on acceptances
outstanding......................................... 0
Intangible assets.................................... 4,905
Other assets......................................... 100,799
Total assets......................................... 5,919,206
<PAGE>
LIABILITIES
Deposits:
In domestic offices.................................. 4,034,633
Noninterest-bearing........... 839,928
Interest-bearing.............. 3,194,705
Federal funds purchased and Securities sold under
agreements to repurchase............................. 575,827
Demand notes issued to the U.S. Treasury............. 61,290
Trading liabilities (from Schedule RC-D)............. 0
Other borrowed money:................................ ///////
With original maturity of one year or less...... 673,000
With original maturity of more than one year.... 43,000
Bank's liability on acceptances executed and
outstanding.......................................... 0
Subordinated notes and debentures.................... 0
Other liabilities (from Schedule RC-G)............... 76,458
Total liabilities.................................... 5,464,208
EQUITY CAPITAL
Perpetual preferred stock and related surplus........ 0
Common Stock......................................... 500
Surplus (exclude all surplus related to preferred
stock)............................................... 62,118
Undivided profits and capital reserves............... 385,018
Net unrealized holding gains (losses) on
available-for-sale securities........................ 7,362
Total equity capital................................. 454,998
Total liabilities, limited-life preferred stock, and equity capital.. 5,919,206
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 54,012
<SECURITIES> 0
<RECEIVABLES> 13,123
<ALLOWANCES> 2,101
<INVENTORY> 0
<CURRENT-ASSETS> 78,898
<PP&E> 149,263
<DEPRECIATION> 53,644
<TOTAL-ASSETS> 186,181
<CURRENT-LIABILITIES> 77,626
<BONDS> 33,820
0
28,135
<COMMON> 406
<OTHER-SE> 44,888
<TOTAL-LIABILITY-AND-EQUITY> 186,181
<SALES> 121,902
<TOTAL-REVENUES> 121,902
<CGS> 94,363
<TOTAL-COSTS> 94,363
<OTHER-EXPENSES> 77,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,362
<INCOME-PRETAX> (46,078)
<INCOME-TAX> 476
<INCOME-CONTINUING> (45,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,602)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
