SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_|Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a- 12
PSINET, INC
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials:
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-1l(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 17, 1999
The Annual Meeting of Shareholders of PSINET INC. (the "Company") will
be held at the Hyatt Regency Reston, 1800 Presidents Street, Reston, Virginia
20190 on Monday, May 17, 1999, at 9:00 A.M. for the purpose of considering and
acting upon the following matters:
(1) The election of three directors for terms expiring at the
Company's 2001 Annual Meeting of Shareholders.
(2) The approval of amendments to the Company's Executive Stock
Incentive Plan and Strategic Stock Incentive Plan.
(3) The ratification or disapproval of the appointment by the Board of
Directors of PricewaterhouseCoopers LLP as independent accountants for the
year ending December 31, 1999.
(4) The transaction of such other business as may properly come before
the meeting and any adjournments thereof.
Pursuant to the provisions of the By-Laws of the Company, the Board of
Directors has fixed the close of business on March 21, 1999 as the record date
for determining the shareholders of the Company entitled to notice of and to
vote at the meeting and any adjournments thereof.
Please note that you may have the choice of voting over the Internet
or by telephone. Follow the instructions on your proxy card or, if your shares
are held in the name of a bank or broker, follow the instructions on the form
you receive from your bank or broker.
ALL SHAREHOLDERS ARE URGED TO CAST THEIR VOTE ON THE INTERNET OR BY
PHONE, OR TO COMPLETE, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY TO THE
COMPANY IN THE ACCOMPANYING POSTAGE PAID ENVELOPE.
By Order Of The Board Of Directors,
/s/Teresa Zajonczkoski
Teresa Zajonczkoski
CORPORATE SECRETARY
April 6, 1999
Herndon, Virginia
<PAGE>
PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
________________________________
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 17, 1999
SOLICITATION
This Proxy Statement is being mailed to shareholders on or about April 6,
1999 in connection with the solicitation of proxies by the Board of Directors of
PSINET INC., a New York corporation ("PSINet" or the "Company"), to be used at
the Annual Meeting of Shareholders of the Company (the "Annual Meeting"), to be
held on May 17, 1999. Accompanying this Proxy Statement is a Notice of Annual
Meeting of Shareholders and a form of proxy for such meeting. A copy of the 1998
Annual Report to Shareholders of the Company, which contains financial
statements and related data, also accompanies this Proxy Statement.
All proxies which are properly completed, signed and returned to the
Company, or cast electronically or by telephone in accordance with instructions
provided, in a timely manner will be voted in accordance with the instructions
thereon. Proxies may be revoked by any shareholder through written notice to the
Secretary of the Company prior to the exercise thereof or by voting by telephone
or Internet at a later time, and shareholders who are present at the Annual
Meeting may withdraw their proxies and vote in person if they so desire.
The expense of preparing, assembling, printing and mailing the form of
proxy and the material used in the solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
to solicit proxies personally and by telephone and telegraph. The Company has
requested banks, brokers and other custodians, nominees and fiduciaries to
forward copies of the proxy materials to their principals and to request
authority for the execution of proxies and will reimburse such persons for their
services in doing so. The cost of such additional solicitation incurred
otherwise than by use of the mails is estimated not to exceed $5,000. In
addition, the Company has engaged the firm of MacKenzie Partners, Inc.
("MacKenzie") as its proxy solicitor in connection with the Annual Meeting for
an amount not to exceed $4,000 plus reimbursement of reasonable costs incurred
by MacKenzie.
The Board of Directors has fixed the close of business on March 21, 1999,
as the record date for the determination of shareholders who are entitled to
notice of and to vote at the Annual Meeting and any adjournments thereof. As of
the record date, the Company had outstanding approximately 56,238,444 shares of
its common stock, $.01 par value (the "Common Stock"). Holders of the Company's
Common Stock are entitled to one vote per whole share. Holders of fractional
shares are entitled to exercise voting rights in proportion to their fractional
holdings. A majority of the outstanding shares of the Company's Common Stock
entitled to vote at the Annual Meeting is required to establish a quorum at the
Annual Meeting. A plurality of the votes cast by the holders of the shares of
the Company's Common Stock entitled to vote at the Annual Meeting is required
for the election of directors. The affirmative vote of the holders of a majority
of the shares of the Company's Common Stock present in person or by proxy and
entitled to vote at the Annual Meeting is required for the approval of the
amendments to the Company's Executive Stock Incentive Plan and Strategic Stock
Incentive Plan. A majority of the votes cast by the holders of the Company's
Common Stock entitled to vote at the Annual Meeting is required for the
ratification of the appointment of independent accountants.
With regard to the election of directors, votes may be cast in favor or
withheld. Votes withheld from any director will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting, but will not affect the outcome of the voting in such
election. With regard to other proposals, abstentions may be specified. The
Company believes that abstentions are shares present and entitled to vote, but
do not constitute votes cast in respect of a particular matter. The Company,
therefore, intends to count abstentions and votes withheld in respect of the
proposal to ratify the appointment of independent accountants for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting but not as votes having been cast in respect of such
proposal. Accordingly, such abstentions and votes withheld will
<PAGE>
not affect the outcome of the voting on that proposal. Abstentions in respect of
the proposal to approve the amendments to the Company's Executive Stock
Incentive Plan and Strategic Stock Incentive Plan will be counted for purposes
of determining both the presence or absence of a quorum for the transaction of
business and the total number of shares present with respect to such proposal.
Accordingly, such abstentions or votes withheld in respect of this proposal will
have the same effect as votes against this proposal. Broker non-votes (that is,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons entitled to vote shares
on a particular matter as to which the brokers or nominees do not have
discretionary power) may be counted as present or represented for purposes of
determining the presence or absence of a quorum for the transaction of business,
but not for purposes of determining the voting power present with respect to
proposals in respect of which brokers do not have discretion (non-discretionary
proposals). The Company believes that all proposals being presented to
shareholders at the Annual Meeting are discretionary proposals and intends to
treat broker non-votes in respect of these proposals as stated above. Unless one
or more beneficial owners of the Common Stock have withheld discretionary
authority from their brokers or nominees in respect of these proposals, the
Company does not anticipate that there will be any broker non-votes in respect
of such proposals. If there are any broker non-votes in respect of these
proposals, however, the Company intends to treat such broker non-votes as stated
above.
PRINCIPAL SHAREHOLDERS
COMMON STOCK
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of March 21, 1999, 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 elsewhere herein; and (iv) all directors and
executive officers of the Company as a group.
AMOUNT PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
IXC Internet Services, Inc........... 10,229,789 (2) 18.2 %
William L. Schrader.................. 5,710,477 (3) 10.2
T. Rowe Price Associates, Inc........ 5,168,600 (4) 9.2
Harold S. Wills...................... 378,485 (5) *
David N. Kunkel...................... 349,814 (6) *
Edward D. Postal..................... 166,834 (7) *
William H. Baumer.................... 91,988 (8) *
Harry G. Hobbs....................... 76,044 (9) *
Ralph J. Swett....................... 13,125 (10) *
Ian P. Sharp......................... 6,875 (11) *
Executive officers and directors
as a group(12 persons)............... 6,886,558 (12) 12.2
_________________________________
* 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.
(footnotes continue on next page)
2
<PAGE>
(footnotes continued from previous page)
(2) These shares could be deemed to be beneficially owned by the members of the
Board of Directors of IXC Internet Services, Inc. ("IXC"), consisting of
James F. Guthrie, Jeffrey C. Smith and Stuart K. Coppens, as well as by the
members of the Board of Directors of IXC Communications, the parent company
of IXC, consisting of Wolfe (Bill) H. Bragin, Joe C. Culp, Richard D.
Irwin, Carl W. McKinzie, Benjamin L. Scott, Ralph J. Swett and Phillip L.
Williams. IXC's address is City View Center, 1122 Capitol of Texas Highway
South, Austin, Texas 78746. See "Certain Relationships and
Transactions--Strategic Alliance with IXC."
(3) Includes 5,556,477 shares which are pledged with NationsBank in respect of
two lines of credit providing Mr. Schrader with up to $17.3 million on an
aggregate basis, of which approximately $7.4 million (including principal
and interest) was outstanding as of March 19, 1999, at an interest rate
equal to the 30 day LIBOR rate plus 1.65% per annum. Includes 1,000 shares
held by Mr. Schrader and his wife as joint tenants with rights of
survivorship. Also includes 150,000 shares held by a limited liability
company of which Mr. Schrader and his wife have shared voting and
dispositive power. Does not include 1,062,612 shares beneficially owned by
Mr. Schrader's wife, nor 111,882 shares held by two trusts (of which Mr.
Schrader's wife is trustee) for the benefit of two minor children of Mr.
Schrader's. Mr. Schrader disclaims beneficial ownership of the shares
beneficially owned by his wife and held in trust for his minor children.
Mr. Schrader's address is c/o PSINet Inc., 510 Huntmar Park Drive, Herndon,
Virginia, 20170.
(4) In a Schedule 13G dated February 12, 1999, T. Rowe Price Associates, Inc.
claimed sole voting power over 385,000 shares, sole dispositive power over
5,168,600 shares and no shared voting or shared dispositive power over any
shares. T.Rowe Price and Associates, Inc.'s address is 100 East Pratt
Street, Baltimore, Maryland 21202.
(5) Includes 372,394 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
352,606 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(6) Includes 347,285 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
203,908 shares issuable upon the exercise of options which are not deemed
to be presently exercisable or 29,571 shares beneficially owned by Mr.
Kunkel's wife. Mr. Kunkel disclaims beneficial ownership of the shares
beneficially owned by his wife.
(7) Includes 152,034 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
222,966 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(8) Includes 50,000 shares issuable upon the exercise of outstanding warrants
and 2,000 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable. Does not include 5,000 shares
issuable upon the exercise of options which are not deemed to be presently
exercisable.
(9) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 223,956 shares issuable upon the exercise of options which
are not deemed to be presently exercisable.
(10) Includes 3,125 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
6,875 shares issuable upon the exercise of options which are not deemed to
be presently exercisable, and does not include 10,229,789 shares
beneficially owned by IXC, of which Mr. Swett is a director and was the
chairman of the board. Mr. Swett disclaims beneficial ownership of the
shares beneficially owned by IXC. See "Certain Relationships and
Transactions--Strategic Alliance With IXC."
(11) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 8,125 shares issuable upon the exercise of options which are
not deemed to be presently exercisable.
(12) See notes (3) and (5) through (11) above. Includes also approximately
91,916 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable granted to 4 executive
officers. Does not include approximately 272,584 shares issuable upon the
exercise of outstanding options granted to 4 executive officers which are
not deemed to be presently exercisable.
3
<PAGE>
PROPOSAL 1 - ELECTION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors will be
divided into two classes consisting of at least three directors each and as
nearly equal in number as possible, and that directors will be elected for terms
of two years on a staggered basis. The Board of Directors is currently composed
of six directors, three whose terms expire in 1999 and three whose terms expire
in 2000. Unless authority to vote for the election of a director is specifically
withheld by appropriate designation (either electronically or on the face of the
proxy), it is the intention of the persons named in the accompanying form of
proxy to vote such proxy for the election at the Annual Meeting of David N.
Kunkel, William L. Schrader and Ian P. Sharp as directors to serve until the
2001 Annual Meeting of Shareholders and until their respective successors shall
have been elected and qualified.
All nominees presently are members of the Company's Board of Directors. The
proxies cannot be voted for a greater number of persons than three. Management
has no reason to believe that the named nominees will be unable or unwilling to
serve if elected to office. In such case, however, it is intended that the
individuals named in the enclosed proxy will vote for the election of such
substituted nominees as the Company's Board of Directors may recommend.
Certain information concerning the nominees and directors continuing in
office is set forth in the following table.
PRINCIPAL OCCUPATION, BUSINESS
NAME AGE EXPERIENCE AND DIRECTORSHIPS
- ---- --- ------------------------------
NOMINEES FOR TERMS
EXPIRING IN 2001
David N. Kunkel 56 Executive Vice President and General
Counsel of the Company since October 1998
and June 1995, respectively. Mr. Kunkel
has served in a variety of senior
executive positions with the Company since
July 1995. Senior Counsel to Nixon,
Hargrave, Devans & Doyle LLP, outside
counsel for the Company, from July 1995
through December 1995. Partner of Nixon,
Hargrave, Devans & Doyle LLP from January
1979 until July 1995. Outside counsel to
NYSERNet Inc. ("NYSERNet"), a provider of
data networking services in New York
State, from 1986 until 1989 and to the
Company from its inception until July
1995. Director of the Company since 1995.
William L. Schrader 47 Founder of the Company. Chairman of the
Board of Directors and Chief Executive
Officer of the Company since inception.
President of the Company from its
inception to September 1998. President and
Chief Executive Officer of NYSERNet from
January 1986 to December 1989. Co-founder
and Executive Director of Cornell Theory
Center, a supercomputer center, from May
1984 until February 1987. Director of the
Company since inception.
Ian P. Sharp 67 Retired. President and founder of I. P.
Sharp Associates, a software development
company, from December 1964 through July
1989. Director of the Company since
September 1996.
(table continues on next page)
4
<PAGE>
(table continued from previous page)
DIRECTORS WHOSE
TERMS EXPIRE IN 2000
William H. Baumer 66 Professor of Philosophy at the University
at Buffalo since 1971. Acting Chairman of
the Department of Economics at the
University at Buffalo from June 1992 until
June 1995. Treasurer and Vice President of
NYSERNet from January 1986 to December
1990 and from December 1989 to December
1990, respectively. Director of the
Company since 1993.
Ralph J. Swett 64 Retired. Currently a director of IXC
Communications, Inc., the indirect parent
company of IXC ("IXC Communications").
Chairman of IXC Communications from its
formation in July 1992 through April 1998,
and served as Chief Executive Officer and
President of IXC Communications from July
1992 to October 1997. Prior thereto,
served as Chairman of the Board and Chief
Executive Officer of Communications
Transmission, Inc. ("CTI"), a predecessor
entity to IXC Communications, from 1986 to
1992. From 1969 to 1986, served in
increasingly senior positions (Vice
President,President and Chairman)of Times
Mirror Cable Television, a subsidiary of
Times Mirror and a previous owner of IXC
Carrier,Inc., the direct parent company of
IXC ("IXC Carrier"), and as a Vice
President of Times Mirror from 1981 to
1986. 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. Director of the Company
since February 25, 1998, effective upon
the closing of the Company's transaction
with IXC as described herein under
"Certain Relationships and
Transactions--Strategic Alliance with
IXC."
Harold S. Wills 57 President and Chief Operating Officer of
the Company since September 1998 and April
1996, respectively. Executive Vice
President of the Company from April 1996
to September 1998. Acting Chief Financial
Officer of the Company from April 1996 to
October 1996. Chief Operating Officer of
Hospitality Information Networks, Inc., a
provider of information services for the
hospitality industry, from July 1995
through January 1996. Served in various
capacities 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. Director of the Company
since April 1996.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors met 14 times during the year ended December 31,
1998. Each of the directors except for Mr. Swett attended 75% or more of the
meetings held by the Board of Directors and any Committees of the Board of
Directors on which such person served during the last fiscal year.
The Company's Board of Directors has three standing committees: the Audit
Committee, the Compensation Committee and the Financing Committee. The Board
does not have a standing nominating committee. The Audit Committee met five
times during the year ended December 31, 1998. The Audit Committee, among other
things, recommends the firm to be appointed as independent accountants to audit
the Company's financial statements,
5
<PAGE>
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 Swett.
The Compensation Committee met eight times during the year ended December
31, 1998. 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 did not meet during the year ended December 31,
1998, although certain matters within the purview of such committee, including
debt issuances were approved by the full Board of Directors. The Financing
Committee may authorize and approve financings of debt securities by the
Company, lease financings and equity financings subject to certain limitations.
The current members of the Financing Committee are Messrs. Baumer, Schrader and
Sharp.
COMPENSATION OF DIRECTORS
Directors, other than those who also are employees or consultants of the
Company or are serving on the Board of Directors as representatives of a
shareholder, receive annual fees of $15,000, with Committee Chairmen receiving
an additional amount of $3,000 each per year, 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 Company's Board of Directors and, thereafter, for
annual grants of options to purchase 5,000 shares of Common Stock to be made to
each eligible director who has served on the Company's Board of Directors for at
least 12 months. Options are exercisable for 10 years after the date of grant.
The exercise price for any option under the plan shall be equal to the fair
market value of the Common Stock at the time such option is granted. The plan
provides that Initial Grants thereunder vest over a four-year period in respect
of the exercise of one-sixteenth of the shares subject thereto on the last day
of each calendar quarter following such grant, and that annual option awards
vest over a two-year period in respect of one-half of the shares subject thereto
on each of the first and second anniversaries of the grant date. Each of Messrs.
Sharp and Swett received Initial Grants upon their election to the Company's
Board of Directors 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 Board and Committee meetings, $200 per day for Board and Committee
conference calls and $1,250 per day for on-site consultations not in conjunction
with a Board of Directors meeting. Committee Chairmen receive an additional $250
for each Committee meeting attended and $50 for each Committee conference call
attended. 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 through 1996. Mr. Baumer
also holds warrants to purchase an additional 25,000 shares in return for
consulting services previously 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 Board of
Directors receives any fees or other compensation for serving in such capacity.
6
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company.
NAME AGE TITLE
- ---- --- -----
William L. Schrader 47 Chairman of the Board of Directors
and Chief Executive Officer (Founder)
Harold S. Wills 57 President, Chief Operating Officer and Director
David N. Kunkel 56 Executive Vice President, General Counsel and
Director
Edward D. Postal 43 Senior Vice President and Chief Financial
Officer
E.A. Davis 52 Senior Vice President and President,
PSINetworks Company
Nadir Desai 34 Senior Vice President and President, PSINet
Canada and Latin America
Harry G. Hobbs 45 Senior Vice President and President, PSINet
Europe
Chi H. Kwan 47 Senior Vice President and President, PSINet
Asia/Pacific
Michael J. Malesardi 38 Vice President and Controller
WILLIAM L. SCHRADER is the founder of the Company and has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
since its inception and as President of the Company from its inception to
September 1998. Prior to forming the Company, Mr. Schrader served as President
and Chief Executive Officer of 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.
HAROLD S. WILLS has served as President of the Company since September 1998
and as a director and Chief Operating Officer of the Company since April 1996,
and as Executive Vice President of the Company from April 1996 to September
1998. Mr. Wills also served 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.
DAVID N. KUNKEL has served as Executive Vice President of the Company since
October 1998, as Senior Vice President of the Company from September 1996 to
October 1998, as Vice President of the Company from July 1995 to September 1996,
and as General Counsel of the Company since June 1995. Mr. Kunkel has served as
a director of the Company since September 1995 and as Secretary of the Company
from September 1995 to October 1998. 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.
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 ("Watson Wyatt")), 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 Communications Corp. ("MCI")
in 1985, and, prior thereto, held various positions at Touche Ross & Co.
(currently Deloitte & Touche LLP).
7
<PAGE>
E.A. "TED" DAVIS has served as Senior Vice President and President,
PSINetworks Company of the Company since October 1998. Prior to joining the
Company, Mr. Davis served as Vice President of Customer Technical Support for
Lucent Technologies (formerly the network services division of AT&T), from
January 1995 to April 1998. Prior thereto, Mr. Davis served in various technical
and management positions with AT&T since beginning his career there in June
1968.
NADIR DESAI has served as Senior Vice President and President, PSINet
Canada and Latin America of the Company since March 1999, and served as
President and Chief Executive Officer of PSINet Limited (Canada) from January
1996 to March 1999. Prior to joining the Company in 1996, Mr. Desai served as
President and Founder of NICNAD Enterprises, a clothing organization engaged in
wholesale, manufacturing, import/export and retail activities from 1991 to
December 1995.
HARRY G. HOBBS has served as Senior Vice President and President, PSINet
Europe of the Company since September 1998 and served as Vice President,
Customer Administration of the Company from September 1997 to September 1998.
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.
CHI H. KWAN has served as Senior Vice President and President, PSINet
Asia/Pacific of the Company since October 1998. Prior to joining the Company,
Mr. Kwan served as Vice Chairman and Representative Director of Montblanc Japan
K.K., a maker of luxury branded products, from May 1997 to September 1998. Prior
thereto, Mr. Kwan served in several executive management positions with Pitney
Bowes Corporation and its affiliates, including Vice Chairman and Director and
Vice President Market Development, Asia Pacific, from October 1995 to April
1997, and President and Representative Director of Dodwell Pitney Bowes
Corporation from April 1992 to September 1995. From 1975 to April 1992, Mr. Kwan
held various senior management positions with Nicolet Japan, K.K. (a
manufacturer and seller of spectroscopy products), Finnegan-Mat Instruments Inc.
(a developer of analytical instruments) and H.B. Fuller Japan Inc. (a worldwide
manufacturer and marketer of specialty chemicals).
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 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 (currently PricewaterhouseCoopers LLP), the latest as Senior
Audit Manager.
Each of the Company's executive officers serves at the pleasure of the
Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules promulgated thereunder require the
Company's officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC") and
to furnish to the Company copies of all such filings. The Company has
determined, based solely upon a review of those reports and amendments thereto
furnished to the Company during and with respect to the year ended December 31,
1998 and written representations from certain reporting persons, that Mr. Swett
was inadvertently late in filing a Form 4 reporting a purchase of 10,000 shares
of the Company's Common Stock on June 4, 1998. In addition, Sandra L. Blaisdell
and James A. Haid, who were at that time classified by the Company as executive
officers and thus were subject to Section 16(a) filing requirements, were
inadvertently late in filing Forms 3, each of which was due October 1, 1998 and
filed October 16, 1998.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. 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, 1998 for services rendered to the Company
in all capacities.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1)($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
- ------------------ ---- ------- ------------ ---------------- ----------- ----------------
(1)($)
------
William L. Schrader 1998 $ 314,519 $ 200,000 $ 5,905(2) -- $ 1,195 (3)
Chairman and 1997 248,519 150,000 7,457(2) -- 3,135 (3)
Chief Executive 1996 194,471 2,438 2,015(2) -- 3,135 (3)
Officer
Harold S. Wills (4) 1998 $ 360,500 $ 150,000 $ 9,354(5) 225,000(6) $ 3,250(7)
President and 1997 252,654 100,000 9,929(5) 250,000(6) 3,125(7)
Chief Operating 1996 146,154 77,500 30,825(5) 250,000(6) --
Officer
David N. Kunkel 1998 $ 334,192 $ 150,000 $ 4,288(8) 200,000(9) $ 3,250(7)
Executive Vice 1997 299,327 100,000 6,550(8) 100,000(9) 3,125(7)
President 1996 272,596 103,438 88,474(8) 251,193(9) --
and General Counsel
Edward D. Postal (10) 1998 $ 252,288 $ 115,000 $ 5,590(11) 200,000(12) $ 3,250(7)
Senior Vice President 1997 204,077 75,000 6,880(11) 75,000(12) 3,125(7)
and Chief Financial 1996 34,865 60,872 -- 100,000(12) --
Officer
Harry G. Hobbs (13) 1998 $ 197,847 $ 112,500 $ 23,143(14) 250,000(15) $ 3,250 (7)
Senior Vice President 1997 5,385 25,000 -- 50,000(15) --
and President,
PSINet Europe
</TABLE>
_______________________________
(1) Amounts reported in respect of a particular fiscal year reflect amounts
earned for services rendered in that fiscal year regardless of when paid.
(2) Consists of (i) $1,034 and $5,107 paid to Mr. Schrader with respect to
installation of a security system at Mr. Schrader's home in 1998 and 1997,
respectively, (ii) a car allowance of $3,290, $2,350 and $2,015 in 1998,
1997 and 1996, respectively, and (iii) a $1,581 taxable trip provided by
the Company to Mr. Schrader in 1998.
(3) Consists of: (i) insurance premiums in the amount of $2,135 paid by the
Company in each of 1997 and 1996 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 $1,195 in 1998 and
in the amount of $1,000 in each of 1997 and 1996.
(4) 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.
(footnotes continue on next page)
9
<PAGE>
(footnotes continued from previous page)
(5) Consists of (i) $473 and $6,051 paid to Mr. Wills for installation of a
security system at his home in 1998 and 1997, respectively, (ii) car
allowances of $3,173, $3,878 and $256 paid to Mr. Wills in 1998, 1997 and
1996, respectively, (iii) a $5,708 taxable trip provided by the Company to
Mr. Wills in 1998, and (iv) payments made to Mr. Wills in 1996 in
connection with his relocation as follows: $15,271 for certain closing
costs on his new home and $15,298 for moving expenses.
(6) Consists of (i) 125,000 options issued under the Company's Strategic Stock
Incentive Plan in 1998, (ii) 125,000, 50,000 and 250,000 options issued
under the Company's Executive Stock Incentive Plan in 1998, 1997 and 1996,
respectively, and (iii) 200,000 options issued under the Company's
Executive Stock Option Plan in 1997. 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 a failure to satisfy certain
vesting conditions.
(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 (i) car allowances of $4,288 and $3,544 paid to Mr. Kunkel in
1998 and 1997, respectively, (ii) payments made to Mr. Kunkel in connection
with his relocation as follows: $830 for certain closing costs on the sale
of his primary residence paid to Mr. Kunkel in 1997, $2,176 and $36,299 for
certain carrying costs for his residence pending such sale paid to Mr.
Kunkel in 1997 and 1996, respectively, and (iii) $52,175 paid to Mr. Kunkel
in 1996 pursuant to an agreement to guarantee Mr. Kunkel a minimum price on
the sale of his primary residence.
(9) Consists of (i) 100,000 options issued under the Company's Strategic Stock
Incentive Plan in 1998, (ii) 100,000 options issued under the Company's
Executive Stock Incentive Plan in 1998, (iii) 100,000 options issued
pursuant to the Company's Executive Stock Option Plan in 1997, and (iv)
options issued in connection with a company-wide repricing of certain
previously granted options in 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 a failure to satisfy certain vesting
conditions. 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.
(10) 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.
(11) Represents a car allowance to Mr. Postal.
(12) Consists of (i) 100,000 options issued under the Company's Strategic Stock
Incentive Plan in 1998, (ii) 100,000, 36,050 and 100,000 options issued
under the Company's Executive Stock Incentive Plan in 1998, 1997 and 1996,
respectively, and (iii) 38,950 options issued under the Company's Executive
Stock Option Plan in 1997.
(13) Mr. Hobbs joined the Company as Vice President, Customer Administration in
August 1997. Accordingly, no information is provided for periods prior
thereto with respect to Mr. Hobbs. Mr. Hobbs was promoted to Senior Vice
President of the Company and President of PSINet Europe in October 1998.
(14) Consists of (i) a payment of $21,562 made to Mr. Hobbs pursuant to his
employment agreement in connection with his relocation to Switzerland,
which amount is equal to one-month of Mr. Hobbs' salary ($18,750) plus a
15% Cost of Living Adjustment ($2,812) , and (ii) a $1,581 taxable trip
provided by the Company to Mr. Hobbs.
(15) Consists of (i) 100,000 options issued in 1998 under the Company's
Strategic Stock Incentive Plan and (ii) 150,000 and 50,000 options issued
in 1998 and 1997, respectively, under the Company's Executive Stock
Incentive Plan.
10
<PAGE>
OPTION GRANTS. The following table sets forth certain information, as of
December 31, 1998, concerning individual grants of stock options made during the
fiscal year ended December 31, 1998 to each of the persons named in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS
_____________________________________________________________________
NUMBER OF POTENTIAL REALIZABLE
SECURITIES PERCENT OF TOTAL EXERCISE VALUE AT ASSUMED ANNUAL
UNDERLYING OPTIONS GRANTED OR BASE RATES OF STOCK PRICE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION APPRECIATION
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE FOR OPTION TERM
- ---- ---------- -------------- ------ ---- ----------------
5% ($) 10% ($)
------ -------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader 0 0 $0 -- $0 $0
Harold S. Wills 100,000 (2) 1.54 % $7.6250 02/20/08 $479,532 $1,215,229
125,000 (3) 1.93 10.6875 06/10/08 840,164 2,129,140
David N. Kunkel 100,000 (2) 1.54 % $7.6250 02/20/08 $479,532 $1,215,229
100,000 (3) 1.54 10.6875 06/10/08 672,131 1,703,312
Edward D. Postal 100,000 (2) 1.54 % $7.6250 02/20/08 $479,532 $1,215,229
100,000 (3) 1.54 10.6875 06/10/08 672,131 1,703,312
Harry G. Hobbs 50,000 (2) 0.77 % $7.7188 02/27/08 $242,716 $615,089
100,000 (3) 1.54 10.6875 06/10/08 672,131 1,703,312
100,000 (2) 1.54 10.5000 08/31/08 660,339 1,673,430
</TABLE>
___________________________
(1) Based upon total grants of options in respect of 6,483,804 shares of Common
Stock made during 1998.
(2) Granted under the Company's Executive Stock Incentive Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to continued
employment by the Company on each of such dates.
(3) Granted under the Company's Strategic Stock Incentive Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to the continued
employment by the Company on each of such dates. Under each of the
Company's Executive Stock Incentive Plan, Executive Stock Option Plan,
Directors Stock Incentive Plan and Strategic Stock Incentive Plan, upon the
acquisition of beneficial ownership of 30% or more of the Company's
outstanding Common Stock by any person other than a wholly-owned subsidiary
of the Company or the occurrence of certain other change in control events
specified in such plans, including certain mergers, consolidations and
transfers of all or substantially all of the Company's assets, all options
and stock appreciation rights will become fully exercisable and all
restricted stock awards will become immediately vested.
11
<PAGE>
AGGREGATE YEAR-END OPTION VALUES. The following table provides information
concerning the number of unexercised options held by each of the individuals
named in the Summary Compensation Table as of December 31, 1998. Also reported
are the values for "in the money" options, which represent the positive spread
between the exercise price and the fair market value of the Company's Common
Stock as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998 (#) AT DECEMBER 31, 1998 ($)(1)
------------------------- ---------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- ------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader -- -- 427,000 0 $8,090,425 --
Harold S. Wills -- -- 301,041 423,959 $3,744,327 $5,191,610
David N. Kunkel -- -- 296,414 254,779 $3,532,722 $3,087,248
Edward D. Postal -- -- 115,055 259,945 $1,361,632 $3,065,180
Harry G.Hobbs -- -- 47,917 252,083 $560,222 $2,781,963
</TABLE>
_______________
(1) Based upon a closing price of $20.875 on December 31, 1998, as reported on
The Nasdaq Stock Market.
EMPLOYMENT AGREEMENTS. The Company has employment agreements with each of
Messrs. Wills, Kunkel, Postal and Hobbs. The Company also has employment
agreements with most of its other officers other than Mr. Schrader pursuant to
which they serve in their respective capacities.
Mr. Wills's employment agreement provides for a four-year term ending
October 2002 and a current annual base salary of $425,000, and also provides for
a performance bonus of $150,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chairman.
Mr. Kunkel's employment agreement provides for a four-year term ending in
October 2002 and a current annual base salary of $350,000, and also provides for
a performance bonus of $150,000 in 1998 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 four-year term ending
October 2002 and a current annual base salary of $265,000, and also provides for
a performance bonus of $115,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chairman.
Mr. Hobbs's employment agreement provides for a 27-month term ending
December 2000 and a current annual base salary of $225,000, and also provides
for a performance bonus of up to $112,500 in 1998 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chief Operating Officer. Mr. Hobbs's employment
agreement also provides for certain payments relating to Mr. Hobbs's relocation
to the Company's European office in Switzerland, including housing and
automobile expenses and a Cost of Living Adjustment to Mr. Hobbs's monthly
salary not to exceed 15% of such salary.
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,
12
<PAGE>
to receive their then current base salary and all benefits being provided to
them at the time of termination. Each of these employment agreements (other than
that of Mr. Hobbs) provides that options awarded pursuant thereto are subject to
immediate vesting upon the occurrence of certain change in control events.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee currently is composed of Messrs. Baumer and
Swett, each a non-employee director of the Company, and Mr. Schrader. The
Compensation Committee is responsible, subject to the approval of the Board of
Directors, for establishing the Company's compensation program.
COMPENSATION PHILOSOPHY AND POLICY
The Company's compensation program generally is designed to motivate and
reward the Company's executive officers and other personnel responsible for
attaining financial, operational and strategic objectives that will contribute
to the overall goal of enhancing shareholder value. In administering the plan,
the Compensation Committee assesses the performance of individuals and the
Company relative to those objectives. The Company's compensation program
generally provides incentives to achieve annual and longer term objectives. The
principal elements of the compensation plan include base salary, cash bonus
awards and stock awards in the form of grants of stock options and restricted
Common Stock. These elements generally are blended in order to provide
compensation packages which provide competitive pay, reward the achievement of
financial, operational and strategic objectives and align the interests of the
Company's executive officers and other high level personnel with those of the
Company's shareholders.
BASE SALARY. During 1998, the Company had employment agreements with each
of Messrs. Wills, Kunkel, Postal and Hobbs, as well as with most of the other
individuals who served as officers during such period, other than Mr. Schrader.
Mr. Schrader's compensation was determined based upon his leadership of the
Company in setting and pursuing its financial, operational and strategic
objectives. Mr. Schrader did not participate as a member of the Compensation
Committee in determining his compensation.
The Company considers the experience of the individual, the scope and
complexity of the position and the size and growth rate of the Company, the
salary payable to Mr. Schrader as well as the compensation paid by the Company's
competitors are setting base salaries for officers and employees. Due to the
increasingly competitive nature of the Company's industry segment, compensation
amounts paid by the Company's competitors are expected to continue to grow in
importance to the Company as it assesses its compensation structure in the
future in order to ensure its ability to continue to attract and retain highly
qualified executives.
BONUSES. All full-time employees of the Company, including executive
officers to the extent they are not already entitled to receive a bonus pursuant
to the terms of their respective employment agreements, are eligible to receive
bonuses from the Company subject to satisfaction of specified performance
criteria. For 1998, Messrs. Wills, Kunkel, Postal and Hobbs received bonuses
pursuant to the terms of their respective employment agreements. See "Executive
Compensation--Employment Agreements." In determining the level of bonus paid to
Mr. Schrader in 1998, the Compensation Committee, in addition to consideration
of Mr. Schrader's individual performance, took particular note of the Company's
overall increased revenues and successful debt offerings during 1998, as well as
the Company's continued expansion through the successful completion of the
acquisition of 18 Internet Service Providers in the U.S., Canada, Asia and
Europe during the fifteen months ended December 31, 1998.
STOCK AWARDS. To promote the Company's long-term objectives, stock awards
are made to directors, officers and employees who are in a position to make a
significant contribution to the Company's long-term success. The stock awards
are made to officers and employees pursuant to the Company's Executive Stock
Option Plan, in the form of incentive stock options and non-qualified stock
options, pursuant to the Company's Executive Stock Incentive Plan, in the form
of incentive stock options, non-qualified stock options, stock appreciation
rights and restricted stock awards, and to directors pursuant to the Company's
Directors Stock Incentive Plan, in the form of non-qualified stock options. The
Company also makes awards in the form of incentive stock options, non-qualified
stock options, stock appreciation rights and restricted stock grants to key
personnel in connection with acquisitions, mergers, strategic alliances and
other business combinations pursuant to its Strategic Stock Incentive Plan.
Stock options represent rights to purchase shares of the Company's Common
Stock in varying amounts pursuant to a vesting schedule determined by the
Compensation Committee at a price per share specified on the date
13
<PAGE>
of grant of the option (which may not be less than the fair market value on the
date of the grant). Stock options expire at the conclusion of a fixed term
(generally 10 years).
Stock appreciation rights may be granted in tandem with options and, upon
exercise, entitle the holder to receive cash, Common Stock or a combination
thereof (at the discretion of the Compensation Committee) having a value equal
to the excess of fair market value per share of the Common Stock on the exercise
date multiplied by the number of shares with respect to which the right is
exercised over the option exercise price for such number of shares.
Restricted stock awards consist of a specified number of shares of the
Company's Common Stock with an appropriate restrictive legend affixed thereto.
Shares of restricted stock may not be sold or otherwise transferred until
ownership vests in the recipient, at the time and in the manner specified by the
Compensation Committee at the time of the award.
Since the stock options, stock appreciation rights and restricted stock
awards vest and may grow in value over time, these components of the Company's
compensation plan are designed to reward performance over a sustained period and
to enhance shareholder value through the achievement of corporate objectives.
The Company intends that these awards will strengthen the focus of its
directors, officers and employees on managing the Company from the perspective
of a person with an equity stake in the Company.
In selecting recipients and the size of grants, the Compensation Committee
considers various factors such as the potential of the recipient, the salary of
the recipient and competitive factors affecting the Company's ability to attract
and retain employees, prior grants, a comparison of awards made to officers in
comparable positions at similar companies and Company performance.
No stock awards were made during 1998 to Mr. Schrader. During 1998, Messrs.
Wills, Kunkel and Postal were each awarded options to purchase 100,000 shares of
the Company's Common Stock under the Company's Executive Stock Incentive Plan,
and Mr. Hobbs was awarded options to purchase 150,000 shares of the Company's
Common Stock under such plan. In addition, during 1998, Messrs. Kunkel, Postal
and Hobbs were awarded options to purchase 100,000 shares of the Company's
Common Stock under the Company's Strategic Stock Incentive Plan, and Mr. Wills
was awarded options to purchase 125,000 shares of the Company's Common Stock
under such plan. Awards made to other executive officers during 1998 consisted
of options to purchase an aggregate of 268,500 shares under the Company's
Executive Stock Incentive Plan and 16,000 shares under the Company's Strategic
Stock Incentive Plan. Total option awards under the Company's Executive Stock
Option Plan and the Company's Executive Stock Incentive Plan were made during
1998 with respect to 23,500 and 4,444,760 shares of Common Stock, respectively.
Options to purchase 1,990,544 shares of Common Stock were awarded under the
Company's Strategic Stock Incentive Plan during 1998. Awards made to directors
during 1998 consisted of options with respect to 25,000 shares of Common Stock
under the Company's Directors Stock Incentive Plan.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code"), imposes
limitations upon the federal income tax deductibility of compensation paid to
the Company's chief executive officer and to each of the other four most highly
compensated executive officers of the Company. Under these limitations, the
Company may deduct such compensation only to the extent that during any fiscal
year the compensation paid to any such officer does not exceed $1,000,000 or
meets certain specified conditions (such as certain performance-based
compensation that has been approved by the Company's shareholders). Based on the
Company's current compensation plans and policies and proposed regulations
interpreting the Internal Revenue Code, the Company and the Compensation
Committee believe that, for the near future, there is not a significant risk
that the Company will lose any significant tax deduction for executive
compensation. The Company's compensation plans and policies will be modified to
ensure full deductibility of executive compensation if the Company and the
Compensation Committee determine that such an action is in the best interests of
the Company.
COMPENSATION COMMITTEE
William H. Baumer, Chairman
William L. Schrader
Ralph J. Swett
14
<PAGE>
PROPOSAL 2 - APPROVAL OF AMENDMENTS TO THE EXECUTIVE STOCK INCENTIVE PLAN
AND THE STRATEGIC STOCK INCENTIVE PLAN
EXECUTIVE STOCK INCENTIVE PLAN
The Board of Directors has unanimously adopted and recommends that the
shareholders approve an amendment to the Company's Executive Stock Incentive
Plan to increase the number of shares of the Company's Common Stock available
for issuance thereunder from a maximum of 10 million shares (subject to
adjustment in the event of any stock dividend, stock split, recapitalization or
similar event) to a maximum of 11,800,000 shares (subject to adjustment in the
event of any stock dividend, stock split, recapitalization or similar event).
The effective date of the proposed amendment will be the date on which such
amendment is approved by the shareholders.
REQUIRED VOTE
Approval of the adoption of the amendment to the Executive Stock Incentive
Plan requires the affirmative vote of the holders of a majority of shares of the
Company's Common Stock present in person or by proxy and entitled to vote at the
Annual Meeting. Abstentions and broker non-votes will be counted as present for
purposes of determining whether a quorum is present, and broker non-votes will
not be treated as entitled to vote on this matter at the Annual Meeting.
PLAN ACTIVITY
As of March 21, 1999, options to purchase an aggregate of 8,604,485 shares
of the Company's Common Stock were outstanding under the Executive Stock
Incentive Plan and, without taking into account the proposed amendments to the
plan, 221,423 shares remained available for future grants under the plan.
The table under the caption "Option Grants in 1998" provides information
with respect to the grant of options under the Executive Stock Incentive Plan
during fiscal year 1998 to the executive officers of the Company appearing in
the Summary Compensation Table. The following table sets forth additional
information with respect to options granted under the Executive Stock Incentive
Plan during fiscal year 1998 to certain groups:
WEIGHTED AVERAGE
IDENTITY OF EXERCISE PRICE OPTIONS
GROUP ($/SH) GRANTED(#)
----------- ----------------- ----------
All executive officers as a group $9.01 718,500
(9 persons)
Non-executive directors as a group $0.00 0
(3 persons)
Non-executive officer employees as a group $9.08 3,726,260
(approximately 830 persons)
GENERAL
The purpose of the Executive Stock Incentive Plan is to enable the Company
to attract and retain employees and consultants and provide them with an
incentive to maintain and enhance the Company's long-term performance record. In
the view of the Board of Directors, the plan as well as predecessor plans have
been successful in achieving these objectives. In light of the Company's recent
expansion and strategy for continued growth, the Board of Directors believes
that the proposed amendments to the plan are necessary to ensure that an
adequate number of shares are available for awards so that the plan can continue
to make a significant contribution to the morale and motivation of the Company's
and its subsidiaries' employees and consultants in the future.
The Company's Executive Stock Incentive Plan was adopted by the Company's
Board of Directors on March 1, 1995 and approved by the shareholders of the
Company on April 8, 1995. The plan was amended to increase the number of shares
of the Company's Common Stock eligible for issuance thereunder by the Company's
Board of Directors on September 25, 1995, and approved by the Company's
shareholders on November 11, 1995. The plan presently provides that up to 10
million shares of the Company's Common Stock (subject to adjustment in the event
of any stock dividend, stock split, recapitalization or similar event) will be
available for awards under the plan. As noted above, the proposed amendment
would increase the maximum number of shares available for awards under the plan
to 11,800,000 (subject to adjustment in the event of any stock dividend, stock
split, recapitalization or
15
<PAGE>
similar event). Awards under the plan will be made to persons who have the
capability of making a substantial contribution to the success of the Company
and may be in the form of incentive stock options, non-qualified stock options,
stock appreciation rights or restricted stock awards. Employees may be awarded
any type of award under the plan. Consultants may be awarded any type of award
except incentive stock options.
STRATEGIC STOCK INCENTIVE PLAN
The Board of Directors has unanimously adopted and recommends that the
shareholders approve an amendment to the Company's Strategic Stock Incentive
Plan to increase the number of shares of the Company's Common Stock available
for issuance thereunder from a maximum of 3,500,000 shares (subject to
adjustment in the event of any stock dividend, stock split, recapitalization or
similar event) to a maximum of 4,500,000 shares (subject to adjustment in the
event of any stock dividend, stock split, recapitalization or similar event).
The effective date of the proposed amendment will be the date on which such
amendment is approved by the shareholders.
REQUIRED VOTE
Approval of the adoption of the amendment to the Strategic Stock Incentive
Plan requires the affirmative vote of the holders of a majority of shares of the
Company's Common Stock present in person or by proxy and entitled to vote at the
Annual Meeting. Abstentions and broker non-votes will be counted as present for
purposes of determining whether a quorum is present, and broker non-votes will
not be treated as entitled to vote on this matter at the Annual Meeting.
PLAN ACTIVITY
As of March 21, 1999, options to purchase an aggregate of 1,927,175 shares
of the Company's Common Stock were outstanding under the Strategic Stock
Incentive Plan and, without taking into account the proposed amendments to the
plan, 1,433,324 shares remained available for future grants under the plan.
The table under the caption "Option Grants in 1998" provides information
with respect to the grant of options under the Strategic Stock Incentive Plan
during fiscal year 1998 to the executive officers of the Company appearing in
the Summary Compensation Table. The following table sets forth additional
information with respect to options granted under the Strategic Stock Incentive
Plan during fiscal year 1998 to certain groups:
WEIGHTED AVERAGE
IDENTITY OF EXERCISE PRICE OPTIONS
GROUP ($/SH) GRANTED(#)
----------- ----------------- ----------
All executive officers as a group $10.72 441,000
(9 persons)
Non-executive directors as a group $ 0.00 0
(3 persons)
Non-executive officer employees as a group $11.72 1,549,544
(approximately 834 persons)
GENERAL
The purpose of the Strategic Stock Incentive Plan is to enable the
Company and its subsidiaries in connection with acquisitions, mergers, strategic
alliances, joint ventures and other business combination transactions, to
attract and retain employees and consultants and provide them with an incentive
to maintain and enhance the Company's and its subsidiaries' long-term
performance record by creating a long-term mutuality of interests among the
employees and consultants and the shareholders of the Company. The plan provides
for the issuance to persons who have the capability of making a substantial
contribution to the success of the Company or any one or more of its
subsidiaries of incentive stock options, non-qualified stock options, stock
appreciation rights and restricted stock grants in connection with acquisitions,
mergers, strategic alliances and other business combinations and transactions
effected by the Company and/or one or more of its subsidiaries. In light of the
Company's recent expansion, especially through mergers and acquisitions, and
strategy for continued growth, the Board of Directors believes that the proposed
amendments to the plan are necessary to ensure that an adequate number of shares
are available for awards so that the plan can continue to make a significant
contribution to the morale and motivation of the Company's and its subsidiaries'
employees and consultants in the future.
16
<PAGE>
The Company's Strategic Stock Incentive Plan was adopted by the Company's
Board of Directors on June 5, 1995 and approved by the shareholders of the
Company on November 11, 1995. Currently, awards under the plan may be made in
respect of up to 3,500,000 shares of the Company's Common Stock (subject to
adjustment in the event of any stock dividend, stock split, recapitalization or
similar event). As noted above, the proposed amendment would increase the
maximum number of shares available for awards under the plan to 4,500,000
(subject to adjustment in the event of any stock dividend, stock split,
recapitalization or similar event). The total number of shares with respect to
which restricted stock awards may be granted to any one participant shall not
exceed 10,000 per calendar year (subject to substitution or adjustment in the
event to any stock dividend, stock split, recapitalization or similar event).
Employees may be awarded any type of award offered under the plan. Consultants
may be awarded any type of award except incentive stock options. No awards may
be made under the plan after the tenth anniversary thereof.
SUMMARY OF PLAN FEATURES
The following is a summary of certain features common to both the Executive
Stock Incentive Plan and the Strategic Stock Incentive Plan (together, the
"Plans"). The summary is qualified in its entirety by reference to the Plans,
copies of each of which are together annexed hereto as Exhibit A.
ADMINISTRATION. The Plans are administered by the Compensation Committee of
the Board of Directors, none of the members of which, during the one-year period
prior to commencement of service thereon or during such service, has been or
will be granted any awards pursuant to either of the Plans, subject to certain
permitted exceptions.
The Compensation Committee has the power to determine the persons to whom,
and the time or times at which, awards shall be granted, the type of award to be
granted and the number of shares to be subject to each award, to interpret the
Plans and to prescribe rules, regulations and procedures in connection with the
operation of the Plans. All questions of interpretation and application of the
Plans, or as to awards granted under the Plans, are subject to the determination
of the Compensation Committee, which will be conclusive and binding.
AWARDS. Awards granted under the Plans are evidenced by agreements between
the individual employee or consultant and the Company. Incentive stock options
within the meaning of Section 422 of the Internal Revenue Code as well as
options which do not meet the requirements of that section may be granted alone
or in tandem with stock appreciation rights. All options will expire not more
than 10 years after the date of grant except for incentive stock options granted
to holders of more than 10% of the voting power of the Company, which will
expire not more than five years after the date of grant. The exercise price for
any option issued under the Plans shall be equal to the fair market value of the
Company's Common Stock at the time such option is granted provided that, in the
case of incentive stock options granted to holders of more than 10% of the
voting power of the Company, the exercise price shall equal at least 110% of
fair market value. Payment of an option's exercise price may be made in cash, by
check or, in certain circumstances, by delivery of shares of Common Stock
assigned to the Company, or by a combination of the foregoing. The Company may
loan employees amounts in respect of the exercise of options under the Plans
provided that such loans are evidenced by interest bearing promissory notes and
secured by a pledge of the Company's Common Stock having an aggregate purchase
price on the date of exercise at least equal to the principal amount of the
note. Options are not transferable other than by will or by the laws of descent
and distribution, pursuant to a qualified domestic relations order or, to the
extent permitted under the option agreement or under interpretation of the
Compensation Committee under Rule 16b-3 of the Exchange Act, by gift to family
members or other permitted transferees. Options may be exercised only by the
optionee, his or her guardian, his or her legal representative or his or her
permitted transferee.
Stock appreciation rights may be granted in tandem with options granted
under the Plans. Upon exercise of a stock appreciation right, the grantee will
receive from the Company cash, Common Stock or a combination thereof (at the
discretion of the Compensation Committee) having a value equal to the excess of
the fair market value per share of the Company's Common Stock on the exercise
date multiplied by the number of shares with respect to which the right is being
exercised over the option exercise price for such number of shares.
Restricted stock also may be granted under the Plans provided that any one
participant may not receive awards in respect to more than 10,000 shares per
year. The Compensation Committee will determine the restrictions that apply to
each such grant. During the restricted period, the grantee may not sell or
otherwise transfer the restricted stock, but will have the right to vote the
restricted stock and to receive dividends, if any.
17
<PAGE>
Upon the acquisition of beneficial ownership of 30% or more of the
Company's Common Stock by any person other than a wholly-owned subsidiary of the
Company or the occurrence of certain other change of control events specified in
the Plans, including certain mergers and consolidations and transfers of all or
substantially all of the Company's assets, all options and stock appreciation
rights shall become fully exercisable and all restricted stock awards shall
become immediately vested.
AMENDMENTS. The Plans may be amended by the Compensation Committee or the
shareholders, provided that the Compensation Committee may not, without
shareholder approval, materially increase the benefits accruing to participants
under the Plans, materially increase the maximum number of shares as to which
awards may be granted under the Plans, increase the number of restricted stock
grants per year per participant or change the basis of making performance-based
awards for participants whose compensation is subject to Section 162(m) of the
Internal Revenue Code, change the minimum exercise price of options or stock
appreciation rights, change the class of eligible persons, extend the period for
which awards may be granted or exercised or withdraw the authority to administer
one or both of the Plans from the Compensation Committee.
CERTAIN INCOME TAX CONSEQUENCES. A participant who is awarded a stock
option will not realize any income, nor will the Company be entitled to any
deduction, at the time of grant. If a participant who is not an "insider"
subject to Section 16(b) of the Exchange Act exercises a non-qualified option,
he or she will realize ordinary income equal to the difference between the
option price and the fair market value of the shares on the date of exercise and
the holding period for capital gain and loss purposes will begin on the date of
exercise. In the case of a participant who is a Section 16(b) insider, upon
exercise of an option, he or she will realize ordinary income on the first day
on which a sale of shares at a profit would not expose the participant to
Section 16(b) liability (the "date of taxation"). The amount of income
recognized will be equal to the excess of the fair market value of the shares on
the date of taxation over the option price and the holding period for capital
gains and losses will begin on the date of taxation. An insider may elect to be
taxed according to the rules applicable to non-insiders by filing an election
with the Internal Revenue Service under Section 83(b) of the Internal Revenue
Code within 30 days from the date of exercise.
If the exercise price of a non-qualified option is paid by surrendering
stock of the Company, the participant will recognize no gain or loss on the
shares that he or she surrenders to pay the option price (the "surrendered
shares"). The number of shares that the participant receives upon exercise of
the option in excess of the surrendered shares are considered "additional
shares." The participant will recognize ordinary income upon exercise equal to
the fair market value of the additional shares on the date of exercise, less any
cash paid towards the exercise price. The basis of the additional shares will be
equal to their fair market value on the date of exercise, and their holding
period will begin on that date. The shares that the participant receives upon
exercise equal to the surrendered shares will have a basis and holding period
equal to that of the surrendered shares.
If a participant exercises an incentive stock option, he or she will not
recognize any income at that time (although the difference between the option
price and the fair market value of shares may be subject to the alternative
minimum tax) and the Company will not be entitled to any tax deduction. If the
option price of an incentive stock option is paid by surrendering stock of the
Company, the Internal Revenue Service treats such an exchange as if there were
two transactions. The first transaction is treated as a non-taxable exchange of
the previously acquired shares for an equal number of new shares, both having
the same market value. The basis of the new shares will be the same as that of
the shares surrendered and the holding period will include the holding period of
the shares surrendered. The second transaction concerns the additional shares
that a participant will receive pursuant to the exercise. This exchange also
results in no gain or loss being recognized at the time of the exchange. The
basis of these additional shares, however will equal zero (i.e., the participant
is treated as having paid nothing for these shares). The holding period for the
additional shares begins on the date of the exchange.
The Company will be entitled to a deduction for federal tax purposes at the
same time and in the same amount as the participant is considered to have
realized ordinary income with respect to any option. When a participant disposes
of Common Stock acquired through the exercise of a non-qualified option, any
amount received in excess of the fair market value of the shares on the date of
exercise will be subject to taxation as long-term or short-term capital gains,
depending on the holding period of the shares. If the amount received is less
than such fair market value of the shares, the difference will be treated as a
capital loss for tax purposes. When a participant ultimately sells Common Stock
acquired through exercise of an incentive stock option, he or she will recognize
long-term capital gain or loss on the difference between the amount received
upon disposition and the option price of the shares on the date of exercise
provided that the requisite holding periods are satisfied.
18
<PAGE>
Under current federal tax laws, no income will be recognized by a
participant at the time a stock appreciation right is granted to the
participant. Ordinary income will be recognized by the participant upon exercise
of a stock appreciation right equal to the amount of cash received plus the fair
market value, on the date of exercise, of any shares issued. The Company will be
entitled to a deduction equal to the amount the participant recognizes as
ordinary income and at the time the participant recognizes income.
The basis of a share acquired pursuant to the exercise of a stock
appreciation right will be the amount included in income due to receipt of the
share. When the participant disposes of shares acquired pursuant to the exercise
of a stock appreciation right, any amount realized in excess of the basis of the
shares will be treated as long-term or short-term capital gain, depending on the
holding period of the shares. If the amount realized is less than the basis of
the shares, the loss will be treated as long-term or short-term capital loss,
depending on the holding period of the shares.
Unless the participant otherwise elects, receipt of a grant of restricted
shares of Common Stock will not result in the recognition of income by the
participant. At the time of vesting of ownership of any such shares, the
participant will recognize ordinary income equal to the fair market value of
such shares. At that time, the Company will be entitled to a deduction. The
deduction will be equal to the amount which is taxable to the participant as
ordinary income.
The participant may elect to recognize ordinary income at the time of
grant. Any such election must be made within 30 days of grant pursuant to
regulations issued under Section 83(b) of the Internal Revenue Code. The amount
of such income will be equal to the fair market value of the shares of stock
without regard to the restrictions. In such a case, the Company would be
entitled to a deduction equal to the amount which is taxable to the participant
as ordinary income.
The basis of a share acquired under a restricted stock grant will be the
amount included in ordinary income due to receipt of the share. When the
participant disposes of shares acquired under a restricted stock grant, any
amount realized in excess of the basis of the shares will be treated as
long-term or short-term capital gain, depending on the holding period of the
shares (measured from the time the participant recognized ordinary income from
the receipt of such shares). If the amount realized is less than the basis of
the shares, the loss will be treated as long-term or short-term loss, depending
on the holding period of the shares.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE ADOPTION BY THE BOARD OF DIRECTORS OF THE AMENDMENTS TO EACH OF THE
EXECUTIVE STOCK INCENTIVE PLAN AND THE STRATEGIC STOCK INCENTIVE PLAN.
19
<PAGE>
STOCK PRICE PERFORMANCE
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock, based upon the market price of the
Company's Common Stock as reported by The Nasdaq Stock Market, with the
cumulative total return of companies in the Nasdaq Composite Index and the
Nasdaq Telecommunications Index for the period from May 1, 1995 through December
31, 1998. Prior to May 1, 1995, the Company's Common Stock was not publicly
traded.
A GRAPH APPEARS HERE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5/2/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
------ ------- ------- -------- ------- ------- ------- --------
PSINet, Inc. 100.00 99.61 140.98 150.00 63.52 75.41 71.31 71.31
NASDAQ Composite Index 100.00 110.97 124.04 125.10 131.64 142.38 147.45 154.70
NASDAQ Telecom Index 100.00 109.80 123.74 125.66 132.17 136.32 128.23 128.45
3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
------ ------- ------- -------- ------- ------- ------- --------
PSINet, Inc. 48.36 49.18 52.87 33.61 72.95 85.25 91.40 136.89
NASDAQ Composite Index 146.38 173.21 202.51 189.92 221.83 228.25 206.64 266.51
NASDAQ Telecom Index 119.43 149.92 174.03 189.80 240.75 256.98 228.53 310.58
</TABLE>
20
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1998, the members of the Compensation
Committee of the Company's Board of Directors consisted initially of Messrs.
Baumer and Schrader and Mr. William Wilson, who resigned from the Company's
Board of Directors effective as of February 25, 1998. Effective as of February
25, 1998, Mr. Wilson was replaced on the Compensation Committee by Mr. Swett.
Mr. Schrader is the Chairman of the Company's Board of Directors and Chief
Executive Officer of the Company. None of such persons other than Mr. Schrader
is an executive officer or employee of the Company.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
STRATEGIC ALLIANCE WITH IXC
GENERAL TERMS. In February 1998, the Company acquired from IXC 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 system within
the United States. The PSINet IRUs were acquired in exchange for the issuance to
IXC of 10,229,789 shares of 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 Shares") and a Contingent Payment
Obligation (as defined below) pursuant to an IRU and Stock Purchase Agreement,
dated as of July 22, 1997, between the Company and IXC, as amended (the "IRU
Purchase Agreement"). The IRU Purchase Agreement provides that, if the fair
market value of the IXC 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 Company would be obligated to provide IXC with
additional shares of Common Stock or, at the sole option of the Company, cash or
a combination thereof equal to the shortfall (the "Contingent Payment
Obligation"). The IRU Purchase Agreement also provides, however, that the right
of IXC to receive additional shares and/or cash pursuant to the Contingent
Payment Obligation would have terminated on such date as the fair market value
of the IXC Initial Shares (as determined above) were equal to or greater than
$240 million. After the close of trading on The Nasdaq Stock Market on January
13, 1999, the fair market value of the IXC Shares (as determined above) exceeded
$240 million and, as a result, the Contingent Payment Obligation terminated as
of such date without the payment of any additional amounts or the issuance of
any additional shares of Common Stock to IXC.
IXC has been granted certain demand and "piggyback" registration rights
with respect to the IXC Shares pursuant to a registration rights agreement
between IXC and the Company. Pursuant to the IRU Purchase Agreement, Ralph J.
Swett, the former chairman of IXC Communications, was elected, effective as of
the closing of the transaction, to the Company's Board of Directors. 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 Shares. In the event IXC proposes to
sell or otherwise dispose of any of the IXC 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. 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 Shares are not
subject to any transfer restrictions or to any voting restrictions or other
agreements.
PSINET IRUS. As of January 1, 1999, approximately 6,000 route miles of
OC-12 (equivalent to approximately 1,500 route miles of OC-48) bandwidth have
been placed into operation on the PSINet network and approximately 6,800
additional route miles of OC-12 (equivalent to approximately 1,700 route mile of
OC-48) bandwidth are expected to be placed into operation early in the second
quarter of 1999. The Company expects delivery of the remaining bandwidth from
IXC over the next 18 to 24 months. 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 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. IXC is
obligated to provide customary operation and maintenance services with respect
to the bandwidth delivered to the Company at
21
<PAGE>
specified prices and terms, the total cost of which to the Company on an annual
basis is expected to be approximately $1.2 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.
CERTAIN RESTRICTIONS ON USE AND TRANSFER OF BANDWIDTH. The Company 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. 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, the Company and IXC also entered into a Joint Marketing and
Services Agreement (the "Marketing Agreement") pursuant to which each party is
entitled to market the products and services of the other under its own brand.
Pursuant to the Marketing Agreement, the Company has agreed to 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.
OTHER TRANSACTIONS. In addition to the transactions described above, the
Company and IXC Communications or its affiliates are parties to transactions in
the ordinary course of business which the Company believes are on terms no more
favorable than could be obtained on an arms' length basis with independent third
parties.
PROPOSAL 3 - RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors, on the recommendation of the Audit Committee of the
Board, has appointed the firm of PricewaterhouseCoopers LLP, independent
accountants, to audit and report on the financial statements of the Company for
the year ending December 31, 1999. PricewaterhouseCoopers LLP, or its
predecessor entity, Price Waterhouse LLP, has been employed by the Company as
its independent accountants since 1990.
It is expected that a representative of PricewaterhouseCoopers LLP will be
present at the Annual Meeting to answer questions of shareholders and will have
the opportunity, if desired, to make a statement.
REQUIRED VOTE
The ratification of the appointment of PricewaterhouseCoopers LLP
requires a majority of the votes cast by holders of the Company's Common Stock
entitled to vote at the Annual Meeting. Abstentions and broker non-votes will be
counted as present for purposes of determining whether a quorum is present, and
broker non-votes will not be treated as entitled to vote on this matter at the
Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION
OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP.
SHAREHOLDER PROPOSALS
The Company's Certificate of Incorporation and By-laws require any
shareholder who wishes to bring any proposal before a meeting of shareholders or
to nominate a person to serve as a director to give written notice thereof and
certain related information to the Company at least 60 days prior to the date
one year from the date of the immediately preceding annual meeting, if such
proposal or nomination is to be submitted at an annual meeting, and within ten
days of the giving of notice to the shareholders, if such proposal or nomination
is to be submitted at a special meeting. The written notice must set forth with
particularity (i) the name and business address of the shareholder submitting
such proposal and all persons acting in concert with such shareholder; (ii) the
name and address of the persons identified in clause (i), as they appear on the
Company's books (if they so appear); (iii) the class and number of shares of the
Company's stock beneficially owned by the persons identified in clause (i); (iv)
a
22
<PAGE>
description of the proposal containing all material information relating
thereto, including, without limitation, the reasons for submitting such
proposal; and (v) such other information as the Board of Directors reasonably
determines is necessary or appropriate to enable the Board of Directors and
shareholders of the Company to consider such proposal.
Management does not know of any matters which are likely to be brought
before the Annual Meeting other than those referred to in this Proxy Statement.
However, in the event that any other matters properly come before the Annual
Meeting, the persons named in the enclosed proxy will vote in accordance with
their judgment on such matters.
The presiding officer at the Annual Meeting may determine that any
shareholder proposal was not permissible under or was not made in accordance
with the foregoing procedures or is otherwise not in accordance with law and, if
he so determines, he may refuse to allow the shareholder proposal or nomination
to be considered at the Annual Meeting.
Under the rules of the SEC, shareholder proposals intended to be presented
at the next annual meeting (to be held in 2000) must be received by the Company
on or before December 7, 1999 in order to be included in the proxy statement and
proxy for that meeting. Proposals should be directed to the Corporate Secretary,
PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia 20170.
A copy of the Company's Annual Report to Shareholders, which includes
financial statements and related data, accompanies this Proxy Statement.
According to SEC rules, the information presented in this Proxy Statement
under the captions "Compensation Committee Report on Executive Compensation" and
"Stock Price Performance" shall not be deemed to be "soliciting material" or to
be filed with the SEC under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and nothing contained in any previous filings made by the
Company under such Acts shall be interpreted as incorporating by reference the
information presented under the specified captions.
By Order Of The Board Of Directors,
/s/David N. Kunkel
David N. Kunkel
EXECUTIVE VICE PRESIDENT & GENERAL COUNSEL
Dated: April 6, 1999
Herndon, Virginia
23
<PAGE>
EXHIBIT A
PSINET INC.
EXECUTIVE STOCK INCENTIVE PLAN
(As Amended on May 17, 1999)
1. BACKGROUND AND PURPOSE
PSINet Inc. (the "Company") hereby establishes the PSINet Inc.
Executive Stock Incentive Plan (the "Plan"). The purpose of this Plan is to
enable the Company to attract and retain employees and consultants and provide
them with an incentive to maintain and enhance the Company's long-term
performance record. It is intended that this purpose will best be achieved by
granting eligible employees incentive stock options ("ISO's"), non-qualified
stock options ("NQSO's"), stock appreciation rights ("SAR's") and restricted
stock grants, individually or in combination, under this Plan pursuant to the
rules set forth in Sections 83, 162(m), 421 and 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
2. ADMINISTRATION
The Plan shall be administered by a Committee of the Company's Board
of Directors (the "Committee"). This Committee shall consist of at least three
members of the Company's Board of Directors each of whom shall, unless the Board
determines otherwise, be "outside directors" as this term is defined in Code
Section 162(m) and regulations thereunder and none of whom during the one-year
period prior to commencement of service on the Committee, or during such
service, has been granted or awarded any equity security or derivative security
of the Company pursuant to the Plan or, except as permitted by Rule 16b-3
(c)(2)(i), or any successor provision, promulgated pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), any other plan of the
Company or any of its affiliates. Subject to the provisions of the Plan, the
Committee shall possess the authority, in its discretion, (a) to determine the
employees of the Company to whom, and the time or times at which, ISO's and/or
NQSO's (ISO's and NQSO's are collectively referred to as "options"), SARs and
restricted stock grants (all four types of grants are collectively referred to
as "awards") shall be granted; (b) to determine at the time of grant whether an
award will be an ISO, a NQSO, a restricted stock grant or a combination of these
awards and the number of shares to be subject to each award; (c) if options are
granted to a participant, whether SARs related to such options shall be granted
to such participant; (d) to prescribe the form of the award agreements and any
appropriate terms and conditions applicable to the awards and to make any
amendments to such agreements or awards; (e) to interpret the Plan; (f) to make
and amend rules and regulations relating to the Plan; and (g) to make all other
determinations necessary or advisable for the administration of the Plan. The
Committee's determinations shall be conclusive and binding. No member of the
Committee shall be liable for any action taken or decision made in good faith
relating to the Plan or any award granted hereunder.
3. ELIGIBLE EMPLOYEES
Awards may be granted under the Plan only to employees and consultants
of the Company and its subsidiaries (which shall include all corporations of
which at least fifty percent of the voting stock is owned by the Company
directly or through one or more corporations at least fifty percent of the
voting stock of which is so owned) who have the capability of making a
substantial contribution to the success of the Company. Employees may be awarded
any type of award offered under the Plan. Consultants may be awarded any type of
award except ISOs.
4. SHARES AVAILABLE
The total number of shares of the Company's Common Stock (par value of
$0.01 per share) available in the aggregate for awards under this Plan is
11,800,000. Shares to be granted may be authorized and unissued shares or may be
treasury shares.
The total number of shares with respect to which restricted stock
awards may be granted to any one participant shall not exceed 10,000 per
calendar year (subject to substitution or adjustment as provided in Section 11).
If an award expires, terminates or is cancelled without being
exercised or becoming vested, new awards may thereafter be granted under the
Plan covering such shares unless Rule 16b-3 provides otherwise. No award may be
granted more than 10 years after the effective date of the Plan.
<PAGE>
5. TERMS AND CONDITIONS OF ISO'S
Each ISO granted under the Plan shall be evidenced by an ISO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform with this Plan and contain the following terms and
conditions:
(a) Exercise Price. The exercise price under each option shall equal
the fair market value of the Common Stock at the time such option is
granted. If an option is granted to an officer or employee who at the time
of grant owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company (a "10-percent
Shareholder"), the purchase price shall be at least 110 percent of the fair
market value of the stock subject to the option.
(b) Duration of Option. Each option by its terms shall not be
exercisable after the expiration of ten years from the date such option is
granted. In the case of an option granted to a 10-percent Shareholder, the
option by its terms shall not be exercisable after the expiration of five
years from the date such option is granted.
(c) Options Nontransferable. Each option by its terms shall not be
transferable by the participant otherwise than (i) by will or the laws of
descent and distribution, (ii) pursuant to a qualified domestic relations
order, or (iii) to the extent permitted under the option agreement or
interpretation of the Committee and under Rule 16b-3 promulgated under the
Exchange Act, by gift to family members or entities beneficially owned by
family members or other permitted transferees under Rule 16b-3 promulgated
under the Exchange Act, and shall be exercisable, during the participant's
lifetime, only by the participant, the participant's guardian or the
participant's legal representative, the participant's transferee under a
qualified domestic relations order or other permitted transferee under this
section. To the extent required for the option grant and/or exercise to be
exempt under Rule 16b-3, options (or the shares of Common Stock underlying
the options) must be held by the participant for at least six months
following the date of grant.
(d) Exercise Terms. Each option granted under the Plan shall become
exercisable on a schedule to be determined by the Committee at the time of
grant, which schedule may vary from one grant to another. Options may be
partially exercised from time to time during the period extending from the
time they first become exercisable until the tenth anniversary (fifth
anniversary for a 10-percent Shareholder) of the date of grant.
No outstanding option may be exercised by any person if the
employee to whom the option is granted is, or at any time after the date of
grant has been, in competition with the Company. The Committee has the sole
discretion to determine whether an employee's actions constitute
competition with the Company or an affiliated company. The Committee may
impose such other terms and conditions on the exercise of options as it
deems appropriate to serve the purposes for which this Plan has been
established.
(e) Maximum Value of ISO Shares. No ISO shall be granted to an
employee under this Plan or any other ISO plan of the Company or its
subsidiaries to purchase shares as to which the aggregate fair market value
(determined as of the date of grant) of the Common Stock which first become
exercisable by the employee in any calendar year exceeds $100,000.
(f) Payment of Exercise Price. An option shall be exercised upon
written notice to the Company accompanied by payment in full for the shares
being acquired. The payment shall be made in cash, by check or, if the
option agreement so permits, by delivery of shares of Common Stock of the
Company beneficially owned by the participant, duly assigned to the Company
with the assignment guaranteed by a bank, trust company or member firm of
the New York Stock Exchange, or by a combination of the foregoing. Any such
shares so delivered shall be deemed to have a value per share equal to the
fair market value of the shares on such date. For this purpose, fair market
value shall equal the closing price of the Company's Common Stock on the
Nasdaq National Market System on the date the option is exercised, or, if
there was no trading in such stock on the date of such exercise, the
closing price on the last preceding day on which there was such trading.
Subject to the approval of the Board of Directors upon
recommendation by the Committee, in respect of the exercise of options, the
Company may loan to the employee a sum equal to an amount which is not in
excess of 100% of the purchase price of the shares so purchased upon
exercise, such loan to be evidenced by the execution and delivery of a
promissory note. Interest shall be paid on the unpaid balance of the
2
<PAGE>
promissory note at such times and at such rate as shall be determined by
the Board of Directors. Such promissory note shall be secured by the pledge
to the Company of shares having an aggregate purchase price on the date of
exercise equal to or greater than the principal amount of such note. An
optionee shall have, as to such pledged shares, all rights of ownership,
including the right to vote such shares and to receive dividends paid on
such shares, subject to the security interest of the Company. Such shares
shall not be released by the Company from the pledge unless the
proportionate amount of the note secured thereby has been repaid to the
Company. All notes executed hereunder shall be payable at such times and in
such amounts and shall contain such other terms as shall be specified by
the Board of Directors, provided, however, that such terms shall conform to
requirements contained in any applicable regulations which are issued by
any governmental authority.
6. TERMS AND CONDITIONS FOR NQSO'S
Each NQSO granted under the Plan shall be evidenced by a NQSO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform to this Plan and contain the same terms and conditions
as the ISO option agreement except that the 10-percent Shareholder restrictions
in Sections 5(a) and 5(b) and the maximum value of share rules of Section 5(e)
shall not apply to NQSO grants. To the extent an option initially designated as
an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and
shall otherwise remain in full force and effect.
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
To the extent permitted under Rule 16b-3 promulgated under the
Exchange Act, the Committee may, in its discretion, award stock appreciation
rights to any eligible employee of the Company who is subject to Section 16(b)
of the Exchange Act in conjunction with incentive stock options or nonqualified
stock options then being granted to him, or to be attached to one or more such
options theretofore granted and at the time held unexercised by such employee
which shall entitle the employee to receive payment from the Company in
accordance with the following provisions and such other terms and conditions as
the Committee shall determine from time to time:
(a) An SAR granted hereunder may be made part of an option
at the time of grant of the option or at any time
thereafter up to six months prior to the expiration of
the option.
(b) Such SAR will entitle the holder to elect to receive,
in lieu of exercising the option to which it relates,
an amount (in cash or in Common Stock, or a combination
thereof, all in the sole discretion of the Committee)
equal to 100% of the excess of:
(1) the fair market value per share of the
Company's Common Stock on the date of exercise
of such right, multiplied by the number of
shares with respect to which the right is being
exercised, over
(2) the aggregate option exercise price for such number
of shares.
(c) Such SAR will be exercisable only to the extent that it
has a positive value and the option to which it relates
is exercisable, except that no SAR shall be exercisable
during the first six (6) months after the date of its
grant.
(d) Upon exercise of an SAR, the option (or portion
thereof) with respect to which such right is exercised
shall be surrendered and shall not thereafter be
exercisable.
(e) The exercise of an SAR will reduce the number of shares
purchasable pursuant to the related option and
available under the Plan to the extent of the number of
shares with respect to which the right is exercised.
8. TERMS AND CONDITIONS OF RESTRICTED STOCK GRANTS
The Committee may, evidenced by such written agreement as the
Committee shall from time to time prescribe, grant to an eligible employee a
specified number of shares of the Company's Common Stock which shall vest only
after the attainment of the relevant restrictions described below ("restricted
stock"). Such restricted stock shall have an appropriate restrictive legend
affixed thereto. A restricted stock grant shall be neither an option nor a sale,
but shall be subject to the following conditions and restrictions:
3
<PAGE>
(a) Restricted stock may not be sold or otherwise transferred by
the participant until ownership vests, provided however, to
the extent required for the restricted stock grant to be
exempt under Rule 16b-3, the restricted stock must be held
by the participant for at least six months following the
date of vesting.
(b) Ownership shall vest only following satisfaction of one or
more of the following criteria as the Committee may
prescribe:
(1) the passage of three years, or such longer period
of time as the Committee in its discretion may
provide, from the date of grant.
(2) the attainment of performance-based goals
established by the Committee as of the date of
grant. If the participant's compensation is subject
to the $1 million cap of Code Section 162(m), the
Committee may establish such performance goals
based on one or more of the following targets:
o total shareholder return
o earnings per share growth
o cash flow growth
o return on equity and/or
If the participant's compensation is not subject to
the $1 million cap of Code Section 162(m), the
Committee may establish the performance goal on the
basis of the preceding four targets or any other
target it may from time to time deem appropriate in
its discretion.
(3) any other conditions the Committee may prescribe,
including a non-compete requirement.
(c) Unless the Committee shall determine otherwise with respect
to participants whose compensation is not governed by Code
Section 162(m), the Committee shall grant and administer
all performance-based awards under (b)(2) above with the
intent of meeting the criteria of Code Section 162(m) for
performance-based compensation. To this end, the outcome of
all targeted goals shall be substantially uncertain on the
date of grant; the goals shall be established no later than
90 days following the commencement of service to which the
goals relate; the minimum period for attaining each
performance goal shall be one year; and the Committee shall
certify at the conclusion of the performance period whether
the performance-based goals have been attained. Such
certification may be made by noting the attainment of the
goals in the minutes of the Committee's meetings.
(d) Except as otherwise determined by the Committee, all rights
and title to restricted stock granted to a participant
under the Plan shall terminate and be forfeited to the
Company upon failure to fulfill all conditions and
restrictions applicable to such restricted stock.
(e) Except for the restrictions set forth in this Plan and those
specified by the Committee in any restricted stock
agreement, a holder of restricted stock shall possess all
the rights of a holder of the Company's Common Stock
(including voting and dividend rights); provided, however,
that prior to vesting the certificates representing such
shares of restricted stock (and the amount of any dividends
issued with respect thereto) shall be held by the Company
for the benefit of the participant and the participant
shall deliver to the Company a stock power executed in
blank covering such shares. As the shares vest,
certificates representing such shares shall be released to
the participant.
(f) All other provisions of the Plan not inconsistent with this
section shall apply to restricted stock or the holder
thereof, as appropriate, unless otherwise determined by the
Committee.
4
<PAGE>
9. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any certificate upon the
grant, vesting or exercise of any award or option until it has been furnished
with such opinion, representation or other document as it may reasonably deem
necessary to ensure compliance with any law or regulation of the Securities and
Exchange Commission or any other governmental authority having jurisdiction
under this Plan. Certificates delivered upon such grant, vesting or exercise may
bear a legend restricting transfer absent such compliance. Each award shall be
subject to the requirement that, if at any time the Committee shall determine,
in its discretion, that the listing, registration or qualification of the shares
subject to such award upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such awards or the issue or purchase of shares thereunder, such awards may not
vest or be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee in the exercise of its reasonable
judgment.
10. IMPACT OF TERMINATION OF EMPLOYMENT
(a) Options
If the employment of a participant terminates by reason of death or
disability (as determined by the Committee), any option may be exercised by the
participant or, in the event of the participant's death, by the participant's
personal representative any time prior to the earlier of the expiration date of
the option or the expiration of one year after the date of termination, but only
if, and to the extent that, the participant was entitled to exercise the option
at the date of such termination. Upon termination of the participant's
employment for any reason other than death or disability, any vested option that
was exercisable immediately preceding termination may be exercised at any time
prior to the earlier of the expiration date of the option or the expiration of
three months after the date of such termination. In the event of retirement, the
three month period specified in the preceding sentence shall be extended to one
year in the case of NQSOs. Notwithstanding the foregoing, an option may not be
exercised after termination of employment if the Committee reasonably determines
that the termination of employment of such participant resulted from willful
acts or failure to act by the participant detrimental to the Company or any of
its subsidiaries.
(b) Restricted Stock Grants
(i) Passage of Time Vesting. If a participant has been awarded
restricted stock whose vesting is conditioned solely on the passage of time, any
termination of employment for any reason, shall result in the forfeiture of all
restricted stock awards that were not vested prior to the termination of
employment except as otherwise provided by the Committee.
(ii) Performance-Based Vesting. If a participant has been awarded
restricted stock whose vesting is based solely on the attainment of
performance-based goals or partly on the attainment of performance-based goals
and partly on the passage of time, any termination of employment except death,
disability or retirement shall result in the forfeiture of all restricted stock
awards that were not vested prior to the termination of employment. A
participant who terminates employment on account of death, disability or
retirement may, if the performance-based criteria are eventually attained, be
awarded (or, in the event of death, the participant's designated beneficiary or
personal representative if there is no designated beneficiary shall be awarded)
up to a pro rata portion of the restricted shares based on the participant's
length of service as of his or her termination of employment over the length of
the award period ending on the date the performance-based criteria are satisfied
(or the passage of time would have been satisfied, if later, for an award based
in part on performance goals and in part on the passage of time). The Committee
shall have the discretion whether to grant a full pro rata portion of the
restricted shares, a lesser portion or no shares at all under this subsection
(b)(ii).
(c) SARs
If a participant terminates employment while holding an unexercised
SAR, the participant, or his designated beneficiary (or legal representative if
there is no designated beneficiary) in the event of his death, may exercise the
SAR to the same extent as the option to which it is related may be exercised
following termination of employment.
5
<PAGE>
(d) Miscellaneous Termination Provisions
Unless otherwise determined by the Committee, an authorized leave of
absence shall not constitute a termination of employment for purposes of this
Plan.
For purposes of this section, retirement means that a participant
terminates employment at or after the date on which the participant reaches any
normal retirement age specified in any policy adopted by the Board or, in the
absence of such policy, age 65.
If the employment of a participant terminates for any reason other
than disability, retirement or death, any unpaid balance on any promissory note
used in the purchase of stock shall become due and payable upon not less than
three months' notice from the Company, which notice may be given at any time
after such termination; provided, however, that such unpaid balance on such
promissory note shall become due and payable five years from the date of such
termination, unless the note has an earlier due date. In the case of termination
due to death, any unpaid balance remaining on such note on the date of death
shall become due and payable one year from such date.
11. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by
reason of any stock dividend, stock split, recapitalization, reorganization,
merger, consolidation, split-up, combination, or exchange of shares, or of any
similar change affecting the Common Stock, the number and kind of shares
authorized under Section 4, the number and kind of shares which thereafter are
subject to an award under the Plan and the number and kind of unexercised
options and unvested shares set forth in awards under outstanding agreements and
the price per share shall be adjusted automatically consistent with such change
to prevent substantial dilution or enlargement of the rights granted to, or
available for, participants in the Plan.
12. WITHHOLDING TAXES
All cash payable to a participant under the terms of this Plan shall
be subject to such federal, state and local income and employment tax
withholdings as payments of this type are normally subject. Whenever the Company
proposes or is required to issue or transfer shares of Common Stock under the
Plan, or whenever restricted stock vests, the Company shall have the right to
require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state and/or local income and employment withholding tax
requirements prior to the delivery of any certificate or certificates for such
shares or to take any other appropriate action to satisfy such withholding
requirements. Notwithstanding the foregoing, subject to such rules as the
Committee may promulgate and compliance with any requirements under Rule 16b-3,
the recipient may satisfy such obligation in whole or in part by electing to
have the Company withhold shares of Common Stock from the shares to which the
recipient is otherwise entitled.
13. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall not confer upon
any participant any right with respect to continuance as an employee of the
Company or any subsidiary, nor shall they interfere in any way with the right of
the Company or any subsidiary to terminate the participant's position as an
employee at any time.
14. RIGHTS AS A SHAREHOLDER
The recipient of any option under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for the
underlying shares of Common Stock are issued to the recipient. The recipient of
a restricted stock grant shall have all rights of a shareholder except as
otherwise limited by the terms of this Plan.
15. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the Committee or
by the shareholders of the Company, except that the Committee may not, without
approval of a majority of the shareholders present in person or by proxy,
materially increase the benefits accruing to participants under the Plan,
materially increase the maximum number of shares as to which awards may be
granted under the Plan, increase the number of restricted stock grants per year
per participant or change the basis for making performance-based awards for
participants whose compensation is subject to Code Section 162(m), change the
minimum exercise price of options or SARs,
6
<PAGE>
change the class of eligible persons, extend the period for which awards may be
granted or exercised, or withdraw the authority to administer the Plan from the
Committee or a committee of the Committee consisting solely of outside directors
unless the Board determines that inside directors may serve on the Committee.
Notwithstanding the foregoing, to the extent permitted by law, the Committee may
amend the Plan without the approval of shareholders, to the extent it deems
necessary to cause the Plan to comply with Securities and Exchange Commission
Rule 16b-3 or any successor rule, as it may be amended from time to time or as
otherwise permitted under Rule 16b-3 promulgated under the Exchange Act and the
Code. Except as required by law, no amendment, modification, or termination of
the Plan may, without the written consent of a participant to whom any award
shall theretofore have been granted, adversely affect the rights of such
participant under such award.
16. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a
change in control of the Company (as defined in subsection (c) below), all of a
participant's restricted stock awards shall become immediately vested to the
same extent as if all restrictions had been satisfied and all options and SARs
shall become immediately vested and exercisable, unless directed otherwise by a
resolution of the Committee adopted prior to and specifically relating to the
occurrence of such change in control.
(b) In the event of a change in control each participant holding an
exercisable option (i) shall have the right at any time thereafter during the
term of such option to exercise the option in full notwithstanding any
limitation or restriction in any option agreement or in the Plan, and (ii) if no
related SAR has been granted with respect to an option, may, subject to
Committee approval and after written notice to the Company within 60 days after
the change in control, or, if the participant is an officer subject to Section
16 of the Exchange Act and to the extent required to exempt the transaction
under Rule 16b-3, during the period beginning on the third business day and
ending on the twelfth business day following the first release for publication
by the Company after such change of control of a quarterly or annual summary
statement of earnings, which release occurs at least six months following grant
of the option, whichever period is longer, receive, in exchange for the
surrender of the option or any portion thereof to the extent the option is then
exercisable in accordance with clause (i), an amount of cash equal to the
difference between the fair market value (as determined by the Committee) on the
date of surrender of the Common Stock covered by the option or portion thereof
which is so surrendered and the option price of such Common Stock under the
option.
(c) For purposes of this section, "change in control" means:
1) there shall be consummated
i. any consolidation or merger of the Company in which
the Company is not the continuing or surviving
corporation or pursuant to which any shares of the
Company's common stock are to be converted into cash,
securities or other property, provided that the
consolidation or merger is not with a corporation
which was a wholly-owned subsidiary of the Company
immediately before the consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of
all, or substantially all, of the assets of the
Company (other than to one or more directly or
indirectly wholly-owned subsidiaries of the Company);
or
2) the shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
3) any person (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of 30% or more of the Company's then outstanding
common stock, provided that such person shall not be a
wholly-owned subsidiary of the Company immediately before it
becomes such 30% beneficial owner; or
4) individuals who constitute the Company's Board of Directors on
the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's
shareholders, was approved by a vote of at least three quarters
of the directors comprising the Incumbent Board (either by a
specific vote or by approval of the proxy statement of
7
<PAGE>
the Company in which such person is named as a nominee for
director, without objection to such nomination) shall be, for
purposes of this clause (d), considered as though such person
were a member of the Incumbent Board.
17. EFFECTIVE DATE
The effective date of the Plan is March 1, 1995 provided that within
12 months of this date the Plan is approved by the affirmative vote of the
owners of a majority of the Company's outstanding shares of Common Stock.
18. DEFINITIONS
Any terms or provisions used herein which are defined in Sections 83,
162(m), 421, or 422 of the Internal Revenue Code as amended, or the regulations
thereunder or corresponding provisions of subsequent laws and regulations in
effect at the time awards are made hereunder, shall have the meanings as therein
defined.
19. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal
Revenue Code that relate to awards, this Plan and any award agreement adopted
pursuant to it shall be construed under the laws of the State of New York.
Amended as of May 17, 1999
PSINET INC.
By:/s/ William L. Schrader
Chairman and CEO
Date of Shareholder Approval: May 17, 1999
8
<PAGE>
PSINET INC.
STRATEGIC STOCK INCENTIVE PLAN
(Aa Amended on May 17, 1999)
1. BACKGROUND AND PURPOSE
PSINet Inc. (the "Company") hereby establishes the PSINet Inc.
Strategic Stock Incentive Plan (the "Plan"). The purpose of this Plan is to
enable the Company and its subsidiaries, in connection with acquisitions,
mergers, strategic alliances, joint ventures and other business combinations and
transactions, to attract and retain employees and consultants and provide them
with an incentive to maintain and enhance the Company's and its subsidiaries'
long-term performance record. It is intended that this purpose will best be
achieved by granting eligible employees and, subject to the terms of this Plan,
consultants incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights ("SARs") and restricted stock grants,
individually or in combination, under this Plan pursuant to the rules set forth
in Sections 83, 162(m), 421 and 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). It is intended that ISOs, SARs, NQSOs and restricted stock
grants will be awarded under this Plan in connection with acquisitions, mergers,
strategic alliances and other business combinations and transactions effected or
to be effected by the Company and/or one or more of its subsidiaries.
2. ADMINISTRATION
The Plan shall be administered by a Committee of the Company's Board
of Directors (the "Committee"). This Committee shall consist of at least three
members of the Company's Board of Directors each of whom shall, unless the Board
determines otherwise, be "outside directors" as this term is defined in Code
Section 162(m) and regulations thereunder and none of whom during the one-year
period prior to commencement of service on the Committee, or during such
service, has been granted or awarded any equity security or derivative security
of the Company pursuant to the Plan or, except as permitted by Rule 16b-3
(c)(2)(i), or any successor provision, promulgated pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), any other plan of the
Company or any of its affiliates. Subject to the provisions of the Plan, the
Committee shall possess the authority, in its discretion, (a) to determine the
employees or consultants of the Company or a subsidiary to whom, and the time or
times at which, ISOs and/or NQSOs (ISOs and NQSOs are collectively referred to
as "options"), SARs and restricted stock grants (all four types of grants are
collectively referred to as "awards") shall be granted; (b) to determine at the
time of grant whether an award will be an ISO, a NQSO, a restricted stock grant
or a combination of these awards and the number of shares to be subject to each
award; (c) if options are granted to a participant, whether SARs related to such
options shall be granted to such participant; (d) to prescribe the form of the
award agreements and any appropriate terms and conditions applicable to the
awards and to make any amendments to such agreements or awards; (e) to interpret
the Plan; (f) to make and amend rules and regulations relating to the Plan; and
(g) to make all other determinations necessary or advisable for the
administration of the Plan. The Committee's determinations shall be conclusive
and binding. No member of the Committee shall be liable for any action taken or
decision made in good faith relating to the Plan or any award granted hereunder.
3. ELIGIBLE EMPLOYEES
Awards may be granted under the Plan only to employees and consultants
of the Company and its subsidiaries (which shall include all corporations of
which at least fifty percent of the voting stock is owned by the Company
directly or through one or more corporations at least fifty percent of the
voting stock of which is so owned) who have the capability of making a
substantial contribution to the success of the Company or any or more of its
subsidiaries. Employees may be awarded any type of award offered under the Plan.
Consultants may be awarded any type of award except ISOs.
4. SHARES AVAILABLE
The total number of shares of the Company's Common Stock (par value of
$0.01 per share) available in the aggregate for awards under this Plan shall not
exceed four million five hundred thousand (4,500,000) shares. Shares to be
granted may be authorized and unissued shares or may be treasury shares.
The total number of shares with respect to which restricted stock
awards may be granted to any one participant shall not exceed 10,000 per
calendar year (subject to substitution or adjustment as provided in Section 11).
<PAGE>
If an award expires, terminates or is cancelled without being
exercised or becoming vested, new awards may thereafter be granted under the
Plan covering such shares unless Rule 16b-3 provides otherwise. No award may be
granted more than 10 years after the effective date of the Plan.
5. TERMS AND CONDITIONS OF ISOS
Each ISO granted under the Plan shall be evidenced by an ISO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform with this Plan and contain the following terms and
conditions:
(a) Exercise Price. The exercise price under each option shall equal
the fair market value of the Common Stock at the time such option is
granted. If an option is granted to an officer or employee who at the time
of grant owns stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company (a "10-percent
Shareholder"), the purchase price shall be at least 110 percent (110%) of
the fair market value of the stock subject to the option.
(b) Duration of Option. Each option by its terms shall not be
exercisable after the expiration of ten years from the date such option is
granted. In the case of an option granted to a 10-percent Shareholder, the
option by its terms shall not be exercisable after the expiration of five
years from the date such option is granted.
(c) Options Nontransferable. Each option by its terms shall not be
transferable by the participant otherwise than (i) by will or the laws of
descent and distribution, (ii) pursuant to a qualified domestic relations
order, or (iii) to the extent permitted under the option agreement or
interpretation of the Committee and under Rule 16b-3 promulgated under the
Exchange Act, by gift to family members or entities beneficially owned by
family members or other permitted transferees under Rule 16b-3 promulgated
under the Exchange Act, and shall be exercisable, during the participant's
lifetime, only by the participant, the participant's guardian or the
participant's legal representative, the participant's transferee under a
qualified domestic relations order or other permitted transferee under this
section. To the extent required for the option grant and/or exercise to be
exempt under Rule 16b-3, options (or the shares of Common Stock underlying
the options) must be held by the participant for at least six months
following the date of grant.
(d) Exercise Terms. Each option granted under the Plan shall become
exercisable on a schedule to be determined by the Committee at the time of
grant, which schedule may vary from one grant to another. Options may be
partially exercised from time to time during the period extending from the
time they first become exercisable until the tenth anniversary (fifth
anniversary for a 10-percent Shareholder) of the date of grant.
No outstanding option may be exercised by any person if the
employee to whom the option is granted is, or at any time after the date of
grant has been, in competition with the Company. The Committee has the sole
discretion to determine whether an employee's actions constitute
competition with the Company or an affiliated company. The Committee may
impose such other terms and conditions on the exercise of options as it
deems appropriate to serve the purposes for which this Plan has been
established.
(e) Maximum Value of ISO Shares. No ISO shall be granted to an
employee under this Plan or any other ISO plan of the Company or its
subsidiaries to purchase shares as to which the aggregate fair market value
(determined as of the date of grant) of the Common Stock which first become
exercisable by the employee in any calendar year exceeds $100,000.
(f) Payment of Exercise Price. An option shall be exercised upon
written notice to the Company accompanied by payment in full for the shares
being acquired. The payment shall be made in cash, by check or, if the
option agreement so permits, by delivery of shares of Common Stock of the
Company beneficially owned by the participant, duly assigned to the Company
with the assignment guaranteed by a bank, trust company or member firm of
the New York Stock Exchange, or by a combination of the foregoing. Any such
shares so delivered shall be deemed to have a value per share equal to the
fair market value of the shares on such date. For this purpose, fair market
value shall equal the closing price of the Company's Common Stock on the
Nasdaq National Market System on the date the option is exercised, or, if
there was no trading in such stock on the date of such exercise, the
closing price on the last preceding day on which there was such trading.
-2-
<PAGE>
Subject to the approval of the Board of Directors upon
recommendation by the Committee, in respect of the exercise of options, the
Company may loan to the employee a sum equal to an amount which is not in
excess of 100% of the purchase price of the shares so purchased upon
exercise, such loan to be evidenced by the execution and delivery of a
promissory note. Interest shall be paid on the unpaid balance of the
promissory note at such times and at such rate as shall be determined by
the Board of Directors. Such promissory note shall be secured by the pledge
to the Company of shares having an aggregate purchase price on the date of
exercise equal to or greater than the principal amount of such note. An
optionee shall have, as to such pledged shares, all rights of ownership,
including the right to vote such shares and to receive dividends paid on
such shares, subject to the security interest of the Company. Such shares
shall not be released by the Company from the pledge unless the
proportionate amount of the note secured thereby has been repaid to the
Company. All notes executed hereunder shall be payable at such times and in
such amounts and shall contain such other terms as shall be specified by
the Board of Directors, provided, however, that such terms shall conform to
requirements contained in any applicable regulations which are issued by
any governmental authority.
6. TERMS AND CONDITIONS FOR NQSOS
Each NQSO granted under the Plan shall be evidenced by a NQSO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform to this Plan and contain the same terms and conditions
as the ISO option agreement except that the 10-percent Shareholder restrictions
in Sections 5(a) and 5(b) and the maximum value of share rules of Section 5(e)
shall not apply to NQSO grants. To the extent an option initially designated as
an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and
shall otherwise remain in full force and effect.
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
To the extent permitted under Rule 16b-3 promulgated under the
Exchange Act, the Committee may, in its discretion, award stock appreciation
rights to any eligible employee of the Company who is subject to Section 16(b)
of the Exchange Act in conjunction with incentive stock options or nonqualified
stock options then being granted to him, or to be attached to one or more such
options theretofore granted and at the time held unexercised by such employee
which shall entitle the employee to receive payment from the Company in
accordance with the following provisions and such other terms and conditions as
the Committee shall determine from time to time:
(a) An SAR granted hereunder may be made part of an option
at the time of grant of the option or at any time
thereafter up to six months prior to the expiration of
the option.
(b) Such SAR will entitle the holder to elect to receive,
in lieu of exercising the option to which it relates,
an amount (in cash or in Common Stock, or a combination
thereof, all in the sole discretion of the Committee)
equal to 100% of the excess of:
(1) the fair market value per share of the
Company's Common Stock on the date of exercise
of such right, multiplied by the number of
shares with respect to which the right is being
exercised, over
(2) the aggregate option exercise price for such number
of shares.
(c) Such SAR will be exercisable only to the extent that it
has a positive value and the option to which it relates
is exercisable, except that no SAR shall be exercisable
during the first six (6) months after the date of its
grant.
(d) Upon exercise of an SAR, the option (or portion
thereof) with respect to which such right is exercised
shall be surrendered and shall not thereafter be
exercisable.
(e) The exercise of an SAR will reduce the number of shares
purchasable pursuant to the related option and
available under the Plan to the extent of the number of
shares with respect to which the right is exercised.
-3-
<PAGE>
8. TERMS AND CONDITIONS OF RESTRICTED STOCK GRANTS
The Committee may, evidenced by such written agreement as the
Committee shall from time to time prescribe, grant to an eligible employee a
specified number of shares of the Company's Common Stock which shall vest only
after the attainment of the relevant restrictions described below ("restricted
stock"). Such restricted stock shall have an appropriate restrictive legend
affixed thereto. A restricted stock grant shall be neither an option nor a sale,
but shall be subject to the following conditions and restrictions:
(a) Restricted stock may not be sold or otherwise transferred by
the participant until ownership vests, provided however, to
the extent required for the restricted stock grant to be
exempt under Rule 16b-3, the restricted stock must be held
by the participant for at least six months following the
date of vesting.
(b) Ownership shall vest only following satisfaction of one or
more of the following criteria as the Committee may
prescribe:
(1) the passage of three years, or such longer period
of time as the Committee in its discretion may
provide, from the date of grant.
(2) the attainment of performance-based goals
established by the Committee as of the date of
grant. If the participant's compensation is subject
to the $1 million cap of Code Section 162(m), the
Committee may establish such performance goals
based on one or more of the following targets:
o total shareholder return
o earnings per share growth
o cash flow growth
o return on equity and/or
If the participant's compensation is not subject to
the $1 million cap of Code Section 162(m), the
Committee may establish the performance goal on the
basis of the preceding four targets or any other
target it may from time to time deem appropriate in
its discretion.
(3) any other conditions the Committee may prescribe,
including a non-compete requirement.
(c) Unless the Committee shall determine otherwise with respect
to participants whose compensation is not governed by Code
Section 162(m), the Committee shall grant and administer
all performance-based awards under (b)(2) above with the
intent of meeting the criteria of Code Section 162(m) for
performance-based compensation. To this end, the outcome of
all targeted goals shall be substantially uncertain on the
date of grant; the goals shall be established no later than
90 days following the commencement of service to which the
goals relate; the minimum period for attaining each
performance goal shall be one year; and the Committee shall
certify at the conclusion of the performance period whether
the performance-based goals have been attained. Such
certification may be made by noting the attainment of the
goals in the minutes of the Committee's meetings.
(d) Except as otherwise determined by the Committee, all rights
and title to restricted stock granted to a participant
under the Plan shall terminate and be forfeited to the
Company upon failure to fulfill all conditions and
restrictions applicable to such restricted stock.
(e) Except for the restrictions set forth in this Plan and
those specified by the Committee in any restricted stock
agreement, a holder of restricted stock shall possess all
the rights of a holder of the Company's Common Stock
(including voting and dividend rights); provided, however,
that prior to vesting the certificates representing such
shares of restricted stock (and the amount of any dividends
issued with respect thereto) shall be held by the Company
for the benefit of the
-4-
<PAGE>
participant and the participant shall deliver to the
Company a stock power executed in blank covering such
shares. As the shares vest, certificates representing such
shares shall be released to the participant.
(f) All other provisions of the Plan not inconsistent with this
section shall apply to restricted stock or the holder
thereof, as appropriate, unless otherwise determined by the
Committee.
9. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any certificate upon the
grant, vesting or exercise of any award or option until it has been furnished
with such opinion, representation or other document as it may reasonably deem
necessary to ensure compliance with any law or regulation of the Securities and
Exchange Commission or any other governmental authority having jurisdiction
under this Plan. Certificates delivered upon such grant, vesting or exercise may
bear a legend restricting transfer absent such compliance. Each award shall be
subject to the requirement that, if at any time the Committee shall determine,
in its discretion, that the listing, registration or qualification of the shares
subject to such award upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such awards or the issue or purchase of shares thereunder, such awards may not
vest or be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee in the exercise of its reasonable
judgment.
10. IMPACT OF TERMINATION OF EMPLOYMENT
(a) Options
If the employment of an participant terminates by reason of
death or disability (as determined by the Committee), any option may be
exercised by the participant or, in the event of the participant's death, by the
participant's personal representative any time prior to the earlier of the
expiration date of the option or the expiration of one year after the date of
termination, but only if, and to the extent that, the participant was entitled
to exercise the option at the date of such termination. Upon termination of the
participant's employment for any reason other than death or disability, any
vested option that was exercisable immediately preceding termination may be
exercised at any time prior to the earlier of the expiration date of the option
or the expiration of three months after the date of such termination. In the
event of retirement, the three month period specified in the preceding sentence
shall be extended to one year in the case of NQSOs. Notwithstanding the
foregoing, an option may not be exercised after termination of employment if the
Committee reasonably determines that the termination of employment of such
participant resulted from willful acts or failure to act by the participant
detrimental to the Company or any of its subsidiaries.
(b) Restricted Stock Grants
(i) Passage of Time Vesting. If a participant has been
awarded restricted stock whose vesting is conditioned solely on the passage of
time, any termination of employment for any reason, shall result in the
forfeiture of all restricted stock awards that were not vested prior to the
termination of employment except as otherwise provided by the Committee.
(ii) Performance-Based Vesting. If a participant has been
awarded restricted stock whose vesting is based solely on the attainment of
performance-based goals or partly on the attainment of performance-based goals
and partly on the passage of time, any termination of employment except death,
disability or retirement shall result in the forfeiture of all restricted stock
awards that were not vested prior to the termination of employment. A
participant who terminates employment on account of death, disability or
retirement may, if the performance-based criteria are eventually attained, be
awarded (or, in the event of death, the participant's designated beneficiary or
personal representative if there is no designated beneficiary shall be awarded)
up to a pro rata portion of the restricted shares based on the participant's
length of service as of his or her termination of employment over the length of
the award period ending on the date the performance-based criteria are satisfied
(or the passage of time would have been satisfied, if later, for an award based
in part on performance goals and in part on the passage of time). The Committee
shall have the discretion whether to grant a full pro rata portion of the
restricted shares, a lesser portion or no shares at all under this subsection
(b)(ii).
-5-
<PAGE>
(c) SARs
If a participant terminates employment while holding an unexercised
SAR, the participant, or his designated beneficiary (or legal representative if
there is no designated beneficiary) in the event of his death, may exercise the
SAR to the same extent as the option to which it is related may be exercised
following termination of employment.
(d) Miscellaneous Termination Provisions
Unless otherwise determined by the Committee, an authorized leave of
absence shall not constitute a termination of employment for purposes of this
Plan.
For purposes of this section, retirement means that a participant
terminates employment at or after the date on which the participant reaches any
normal retirement age specified in any policy adopted by the Board or, in the
absence of such policy, age 65.
If the employment of a participant terminates for any reason other
than disability, retirement or death, any unpaid balance on any promissory note
used in the purchase of stock shall become due and payable upon not less than
three months' notice from the Company, which notice may be given at any time
after such termination; provided, however, that such unpaid balance on such
promissory note shall become due and payable five years from the date of such
termination, unless the note has an earlier due date. In the case of termination
due to death, any unpaid balance remaining on such note on the date of death
shall become due and payable one year from such date.
11. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by
reason of any stock dividend, stock split, recapitalization, reorganization,
merger, consolidation, split-up, combination, or exchange of shares, or of any
similar change affecting the Common Stock, the number and kind of shares
authorized under Section 4, the number and kind of shares which thereafter are
subject to an award under the Plan and the number and kind of unexercised
options and unvested shares set forth in awards under outstanding agreements and
the price per share shall be adjusted automatically consistent with such change
to prevent substantial dilution or enlargement of the rights granted to, or
available for, participants in the Plan.
12. WITHHOLDING TAXES
All cash payable to a participant under the terms of this Plan shall
be subject to such federal, state and local income and employment tax
withholdings as payments of this type are normally subject. Whenever the Company
proposes or is required to issue or transfer shares of Common Stock under the
Plan, or whenever restricted stock vests, the Company shall have the right to
require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state and/or local income and employment withholding tax
requirements prior to the delivery of any certificate or certificates for such
shares or to take any other appropriate action to satisfy such withholding
requirements. Notwithstanding the foregoing, subject to such rules as the
Committee may promulgate and compliance with any requirements under Rule 16b-3,
the recipient may satisfy such obligation in whole or in part by electing to
have the Company withhold shares of Common Stock from the shares to which the
recipient is otherwise entitled.
13. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall not confer upon
any participant any right with respect to continuance as an employee of the
Company or any subsidiary, nor shall they interfere in any way with the right of
the Company or any subsidiary to terminate the participant's position as an
employee at any time.
14. RIGHTS AS A SHAREHOLDER
The recipient of any option under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for the
underlying shares of Common Stock are issued to the recipient. The recipient of
a restricted stock grant shall have all rights of a shareholder except as
otherwise limited by the terms of this Plan.
-6-
<PAGE>
15. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the Committee or
by the shareholders of the Company, except that the Committee may not, without
approval of a majority of the shareholders present in person or by proxy,
materially increase the benefits accruing to participants under the Plan,
materially increase the maximum number of shares as to which awards may be
granted under the Plan, increase the number of restricted stock grants per year
per participant or change the basis for making performance-based awards for
participants whose compensation is subject to Code Section 162(m), change the
minimum exercise price of options or SARs, change the class of eligible persons,
extend the period for which awards may be granted or exercised, or withdraw the
authority to administer the Plan from the Committee or a committee of the
Committee consisting solely of outside directors unless the Board determines
that inside directors may serve on the Committee. Notwithstanding the foregoing,
to the extent permitted by law, the Committee may amend the Plan without the
approval of shareholders, to the extent it deems necessary to cause the Plan to
comply with Securities and Exchange Commission Rule 16b-3 or any successor rule,
as it may be amended from time to time or as otherwise permitted under Rule
16b-3 promulgated under the Exchange Act and the Code. Except as required by law
or as provided in Section 17 hereof, no amendment, modification, or termination
of the Plan may, without the written consent of a participant to whom any award
shall theretofore have been granted, adversely affect the rights of such
participant under such award.
16. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a
change in control of the Company (as defined in subsection (c) below), all of a
participant's restricted stock awards shall become immediately vested to the
same extent as if all restrictions had been satisfied and all options and SARs
shall become immediately vested and exercisable, unless directed otherwise by a
resolution of the Committee adopted prior to and specifically relating to the
occurrence of such change in control.
(b) In the event of a change in control each participant holding an
exercisable option (i) shall have the right at any time thereafter during the
term of such option to exercise the option in full notwithstanding any
limitation or restriction in any option agreement or in the Plan, and (ii) if no
related SAR has been granted with respect to an option, may, subject to
Committee approval and after written notice to the Company within 60 days after
the change in control, or, if the participant is an officer subject to Section
16 of the Exchange Act and to the extent required to exempt the transaction
under Rule 16b-3, during the period beginning on the third business day and
ending on the twelfth business day following the first release for publication
by the Company after such change of control of a quarterly or annual summary
statement of earnings, which release occurs at least six months following grant
of the option, whichever period is longer, receive, in exchange for the
surrender of the option or any portion thereof to the extent the option is then
exercisable in accordance with clause (i), an amount of cash equal to the
difference between the fair market value (as determined by the Committee) on the
date of surrender of the Common Stock covered by the option or portion thereof
which is so surrendered and the option price of such Common Stock under the
option.
(c) For purposes of this section, "change in control" means:
1) there shall be consummated
i. any consolidation or merger of the Company in which
the Company is not the continuing or surviving
corporation or pursuant to which any shares of the
Company's common stock are to be converted into cash,
securities or other property, provided that the
consolidation or merger is not with a corporation
which was a wholly-owned subsidiary of the Company
immediately before the consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of
all, or substantially all, of the assets of the
Company (other than to one or more directly or
indirectly wholly-owned subsidiaries of the Company);
or
2) the shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
3) any person (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of 30% or more of the Company's then outstanding
common stock, provided that such person shall
-7-
<PAGE>
not be a wholly-owned subsidiary of the Company immediately
before it becomes such 30% beneficial owner; or
4) individuals who constitute the Company's Board of Directors on
the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election,
or nomination for election by the Company's shareholders, was
approved by a vote of at least three quarters of the directors
comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such
person is named as a nominee for director, without objection to
such nomination) shall be, for purposes of this clause (d),
considered as though such person were a member of the Incumbent
Board.
17. EFFECTIVE DATE
The effective date of the Plan is June 5, 1995 provided that within 12
months of this date the Plan is approved by the affirmative vote of the owners
of a majority of the Company's outstanding shares of Common Stock. In the event
that such approval is not given within such 12-month period, all ISOs granted
under this Plan shall be deemed to be NQSOs and this Plan and all awards made
hereunder shall otherwise continue to be in full force and effect.
18. DEFINITIONS
Any terms or provisions used herein which are defined in Sections 83,
162(m), 421, or 422 of the Internal Revenue Code as amended, or the regulations
thereunder or corresponding provisions of subsequent laws and regulations in
effect at the time awards are made hereunder, shall have the meanings as therein
defined.
19. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal
Revenue Code that relate to awards, this Plan and any award agreement adopted
pursuant to it shall be construed under the laws of the State of New York.
Amended as of May 17, 1999 PSINET INC.
By: /s/ William L. Schrader
Chairman and CEO
Date of Shareholder Approval: May 17, 1999
-8-
<PAGE>
(Front Side of Proxy)
PROXY
PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
ON MAY 17, 1999
The undersigned hereby appoints as Proxies, Harold S. Wills and Edward
D. Postal, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all shares of Common Stock
of PSINet Inc. (the "Company") held of record by the undersigned on March 21,
1999 at the Annual Meeting of Shareholders to be held on May 17, 1999 and any
adjournments thereof.
ELECTION OF DIRECTORS:
For terms expiring in 2001:
01 David N. Kunkel
02 William L. Schrader
03 Ian P. Sharp
(SEE REVERSE SIDE)
- --------------------------------------------------------------------------------
[FOLD AND DETACH HERE]
You may also vote the shares held in this account by telephone or electronically
through the Internet. Voting by telephone via the Internet will eliminate the
need to mail voted proxy card(s) representing shares held in this account. To
vote by telephone or electronically please follow the steps below:
o Have your proxy card and social security number available.
o Be ready to enter the PIN number idndicated on the reverse side of the
card just below the perforation.
To vote using the telephone:
o Using a touch-tone telephone, dial 1-800-OK-VOTE (1-800-652-8683) 24
hours a day 7 days a week.
To Vote using the Internet:
o Log on to the Internet and go to the website http://www.vote-by-net.com.
Both voting systems preserve the confidentiality of your vote and will confirm
your voting instructions with you. You may also change your selections on any or
all of the proposals to be voted.
YOUR VOTE IS IMPORTANT TO US. THANK YOU FOR VOTING
<PAGE>
(Back Side of Proxy)
/X/ Please mark your
votes as in this example.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS
GIVEN WITH RESPECT TO A PARTICULAR PROPOSAL (OTHER THAN PROPOSAL 4), THIS PROXY
WILL BE VOTED FOR SUCH PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3
FOR WITHHELD
1. ELECTION OF DIRECTORS (SEE REVERSE) / / / /
Instruction: to withhold authority to vote for any individual nominee(s),
write that nominee(s) name in the space provided below.
- -------------------------------------------------------------
2. APPROVAL OF AMENDMENTS TO THE FOR AGAINST ABSTAIN
COMPANY'S EXECUTIVE STOCK INCENTIVE / / / / / /
PLAN AND STRATEGIC STOCK INCENTIVE PLAN.
3. RATIFICATION OF FOR AGAINST ABSTAIN
PRICEWATERHOUSECOOPERS LLP AS / / / / / /
INDEPENDENT ACCOUNTANTS
4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE
UPON ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE
THE MEETING.
I PLAN TO ATTEND THE ANNUAL MEETING / /
If shares are registered in more than one name, the signatures of all such
persons are required. A corporation should sign in its full corporate name by a
duly authorized officer stating his title. Trustees, guardians, executors and
other fiduciaries should sign in their official capacity giving their full title
as such. If a partnership, please sign in the partnership name by authorized
persons. NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON.
-------------------------------------------
-------------------------------------------
SIGNATURE(S) DATE
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE, NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES OF AMERICA.
- --------------------------------------------------------------------------------
[FOLD AND DETACH HERE]
<PAGE>
PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VA 20170
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of PSINet
Inc., which will be held at the Hyatt Regency Reston, 1800 Presidents Street,
Reston, Virginia, at 9:00 a.m., on Monday, May 17, 1999.
The accompanying Notice of Annual Meeting of Shareholders and Proxy Statement
describe the items to be considered and acted upon by the Shareholders. Please
mark the boxes on the proxy card to indicate how your shares are to be voted.
Alternatively, you may vote your shares by telephone or electronically through
the Internet. Please see reverse.
Whether or not you plan to attend this meeting, please sign, date and return
your proxy form above (or vote via telephone or the Internet) as soon as
possible so that your shares can be voted at the meeting in accordance with your
instructions. If you attend the meeting, you may revoke your proxy, if you wish,
and vote in person. It is very important that your shares be represented.
Sincerely,
PSINet Inc.
