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As filed with the Securities and Exchange Commission on February 12, 1999
Registration No. 333-68385
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
PSINet Inc.
(Exact name of registrant as specified in its charter)
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New York 4813 16-1353600
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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510 Huntmar Park Drive, Herndon, Virginia 20170
(703) 904-4100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
David N. Kunkel, Esq.
Executive Vice President and General Counsel
PSINet Inc.
510 Huntmar Park Drive, Herndon, Virginia 20170
Telephone No.: (703) 904-4100/Facsimile No.: (703) 904-9527
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_____________
Copies To:
Nixon, Hargrave, Devans & Doyle LLP
437 Madison Avenue, New York, New York 10022
Attention: Richard F. Langan, Jr., Esq.
Bruce E. Rosenthal, Esq.
Telephone No.: (212) 940-3140/Facsimile No.: (212) 940-3111
_____________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS
WILL BE AMENDED OR COMPLETED; DATED
FEBRUARY 12, 1999
_____________
PSINet Inc.
Exchange Offer for
$350,000,000
11 1/2% Senior Notes Due 2008
Investment in the notes to be issued in the exchange offer involves risk.
See "Risk Factors" beginning on page 15.
The Company:
. We are a leading provider of Internet access services and related products to
businesses.
. PSINet Inc.
510 Hutmar Park Drive
Herndon, Virginia 20170
(703) 904-4100
[email protected]
The Exchange Offer:
. Expires at 5:00 p.m, New York City time, on _____, 1999, unless extended.
. The exchange offer is subject to certain customary conditions which we may
waive.
. All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
. Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the exchange offer.
. The exchange of notes should not be a taxable exchange for U.S. federal
income tax purposes.
. We will not receive any proceeds from the exchange offer.
. The terms of the notes to be issued are substantially identical to the
outstanding notes, except for certain transfer restrictions and registration
rights relating to the outstanding notes.
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TABLE OF CONTENTS
Page
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 30
The Exchange Offer........................................................ 31
Certain Federal Income Tax Considerations................................. 42
Capitalization............................................................ 47
Selected Consolidated Financial and Operating Data........................ 48
Unaudited Pro Forma Consolidated Financial Information.................... 50
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 60
Business.................................................................. 77
Management................................................................ 98
Certain Transactions...................................................... 102
Stock Ownership of Certain Beneficial Owners and Management............... 104
Description of Notes...................................................... 106
Description of Certain Indebtedness....................................... 145
Plan of Distribution...................................................... 148
Documents Incorporated by Reference....................................... 148
Legal Matters............................................................. 149
Experts................................................................... 149
Available Information..................................................... 150
Glossary.................................................................. 151
Index to Consolidated Financial Statements................................ F-1
Annex A: Form of Letter of Transmittal.................................... A-1
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PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because
this is a summary, it may not contain all of the information that may be
important to you. To understand this exchange offer fully, you should read the
entire prospectus, including the Risk Factors and the financial statements.
Certain technical terms used in this prospectus, such as Internet Protocol,
intranet, backbone, OC-48, indefeasible rights of use and peering, are defined
in the glossary which begins on page 15 of this prospectus.
THE EXCHANGE OFFER
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Initial Notes.................................. 11 1/2% Senior Notes due 2008, Series A, which were issued in
November 1998.
Exchange Notes................................. 11 1/2% Senior Notes due 2008, Series B that we are offering
hereby. The initial notes and the exchange notes are referred
to collectively as the notes.
The Exchange Offer............................. We are offering to exchange $1,000 principal amount of exchange
notes for each $1,000 principal amount of initial notes. As of
the date of this prospectus, there are $350,000,000 aggregate
principal amount of initial notes outstanding.
Resales........................................ Based on an interpretation by the Securities and Exchange
Commission set forth in no-action letters issued to third
parties, we believe that you may resell or otherwise transfer
exchange notes issued pursuant to the exchange offer in
exchange for initial notes. However, there are exceptions to
this general statement. You may not freely transfer the
exchange notes if:
. you are an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act of 1933,
. you are a broker-dealer who acquired the initial notes directly
from us without compliance with the registration and prospectus
delivery provisions of the Securities Act of 1933,
. you did not acquire the exchange notes in the ordinary course of
your business, or
. you have engaged in, intend to engage in, or have
an arrangement or understanding with any person to participate
in the distribution of the exchange notes.
Any holder subject to any of the exceptions above and each participating
broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer in exchange for initial notes
that were acquired as a result of market-making, must comply
with the registration and prospectus delivery requirements of
the Securities Act of 1933 in connection with the resale of the
exchange notes.
Expiration Date................................ 5:00 p.m., New York City time, on , 1999 (20
business days after effectiveness of the registration statement
of which this prospectus is a part), unless we extend the
exchange offer in which case the term "expiration date" means
the latest date and time to which the exchange offer is
extended.
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Interest on the Exchange Notes and the
Initial Notes.................................. Each exchange note will bear interest from November 3, 1998.
If your initial notes are accepted for exchange, you will not
receive accrued interest on the initial notes, and will be
deemed to have waived the right to receive any interest on the
initial notes from and after November 3, 1998.
Conditions to the Exchange Offer............... The exchange offer is subject to certain customary conditions,
which we may waive. See "The Exchange Offer--Conditions."
Procedures for Tendering Initial Notes......... If you wish to accept the exchange offer, you must complete,
sign and date the accompanying letter of transmittal in
accordance with its instructions and deliver the letter of
transmittal, together with the initial notes and any other
required documentation, to the exchange agent at the address
set forth in the letter of transmittal.If you hold initial
notes through the Depository Trust Company and wish to accept
the exchange offer, you must do so pursuant to the Depository
Trust Company's Automated Tender Offer Program, by which you
will agree to be bound by the letter of transmittal.
Special Procedures for Beneficial Owners....... If you are a beneficial owner whose initial notes are
registered in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to tender in the
exchange offer, you should contact the person in whose name
your initial notes are registered promptly and instruct the
person to tender on your behalf. If you wish to tender in the
exchange offer on your own behalf, you must, prior to
completing and executing the letter of transmittal and
delivering your initial notes, either make appropriate
arrangements to register ownership of the initial notes in your
name or obtain a properly completed bond power from the person
in whose name your initial notes are registered. The transfer
of registered ownership may take considerable time.
Guaranteed Delivery Procedures................. If you wish to tender your initial notes in the exchange offer
and your initial notes are not immediately available or you
cannot deliver your initial notes, the letter of transmittal or
any other required documents (or comply with the procedures for
book-entry transfer) prior to the expiration date, you may
tender your initial notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights.............................. Tenders may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the expiration date pursuant to the
procedures described under "The Exchange Offer--Withdrawals of
Tenders."
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Acceptance of Initial Notes and We will accept for exchange any and all initial notes that are
Delivery of Exchange Notes..................... properly tendered in the exchange offer prior to the expiration
date. The exchange notes issued pursuant to the exchange offer
will be delivered promptly after the expiration date. See "The
Exchange Offer--Terms of the Exchange Offer."
Certain Federal Income Tax Consequences........ The exchange of initial notes for exchange notes in the
exchange offer should not have U.S. federal income tax
consequences. In addition, there are certain U.S. federal
income tax consequences associated with purchasing, holding and
disposing of the notes. See "Certain Federal Income Tax
Consequences."
Registration Rights Agreements................. In connection with the sale of the initial notes, we entered
into registration rights agreements with the initial purchasers
of the initial notes which grant the holders of the initial
notes certain exchange and registration rights. As a result of
the making of this exchange offer, we will have fulfilled
certain of our obligations under these registration rights
agreements. If you do not tender your initial notes in the
exchange offer, you will not have any further registration
rights under the registration rights agreements or otherwise
(unless you were not eligible to participate in the exchange
offer). See "The Exchange Offer--Registration Rights." In such
event, you will continue to hold the untendered initial notes
and will be entitled to all the rights and subject to all the
limitations applicable to the initial notes under the indenture
governing the notes, except to the extent such rights or
limitations, by their terms, terminate or cease to have further
effectiveness as a result of the exchange offer. All
untendered initial notes will continue to be subject to certain
restrictions on transfer.
Exchange Agent................................. Wilmington Trust Company is serving as our exchange agent in
connection with the exchange offer.
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SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the exchange notes will be substantially the same as
the form and terms of the initial notes except that:
(1) the exchange notes have been registered under the Securities Act of
1933 and, therefore, will not bear legends restricting the transfer
thereof; and
(2) the holders of the exchange notes, except for limited instances, will
not be entitled to further registration rights under the registration
rights agreements.
The exchange notes will evidence the same debt as the initial notes and
will be entitled to the benefits of the indenture under which the initial notes
were issued.
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Notes Offered.................................. $350,000,000 aggregate principal amount of 11 1/2% Senior
Notes due 2008.
Maturity Date.................................. November 1, 2008.
Interest Payment Date.......................... Interest will accrue at the rate of 11 1/2% per annum and will
be payable in cash semi-annually on May 1 and November 1 of
each year, commencing May 1, 1999. Proceeds from the
offerings of the initial notes were not placed in escrow in
order to fund when due interest payments on the notes.
Ranking........................................ The notes are senior unsecured obligations ranking equal in
right of payment to all our existing and future unsecured and
unsubordinated indebtedness and senior in right of payment to
all our existing and future subordinated indebtedness. The
notes are effectively subordinated to all our secured
indebtedness to the extent of the value of the assets securing
such indebtedness and to the claims of creditors and the
holders of preferred stock, if any, of our subsidiaries. If
our September 30, 1998 balance sheet were restated to give
effect to the offerings of the initial notes (and the
application of those net proceeds) and our acquisition of
Tokyo Internet Corporation, we would have had approximately
$1.178 billion of total indebtedness, of which approximately
$231.5 million would have been secured indebtedness. The
total liabilities of our subsidiaries (including trade
payables and accrued liabilities) as of that same balance
sheet date would have been approximately $123.5 million.
Therefore, there would have been an aggregate of $355.0
million of indebtedness and other liabilities ranking senior
to the notes in terms of collateral security provided or to
which holders of the notes would have been structurally
subordinated as of that date. See ``Description of
Notes--General."
Sinking Fund................................... None.
Optional Redemption............................ We will be able to redeem the notes, at our option, on or
after November 1, 2003, at specified redemption prices
described in this prospectus, plus accrued and unpaid
interest. On or prior to November 1, 2001, we will also be
able to redeem up to 35% of the original aggregate principal
amount of the notes at a redemption price of 111.5% of the
principal amount
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thereof, plus accrued and unpaid interest,
with the net cash proceeds of public equity offerings or the
sale of capital stock to one or more strategic investors. See
"Description of Notes--Optional Redemption."
Change of Control.............................. In the event of a change of control (as defined in the
indenture governing the notes), we will be required to make an
offer to purchase all of the notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued and
unpaid interest. We may not have sufficient funds or the
financial resources necessary to satisfy our obligations to
repurchase the notes and other debt that may become repayable
upon a change of control. See "Risk Factors--We may not have
the ability to raise the funds necessary to finance the change
of control offer which may be required by the indenture "and
"Description of Notes--Change of Control."
Certain Covenants.............................. The indenture governing the notes will restrict our ability,
among other things, to:
. incur indebtedness;
. make restricted payments;
. engage in transactions with affiliates;
. permit liens to exist;
. sell assets;
. issue guarantees;
. engage in sale and leaseback transactions;
. issue and sell subsidiary capital stock;
. impose limitations on our subsidiaries' ability to pay
dividends to us;
. designate or create unrestricted subsidiaries; and
. change our business.
We will also have to comply with certain affirmative covenants,
including the provision of financial statements.
General
Federal Income Tax Consequences................ There are certain federal income tax consequences associated
with purchasing, holding and disposing of the notes. You are
urged to consult your tax advisor regarding the tax
consequences of acquiring, holding or disposing of the notes.
See "Certain Federal Income Tax Considerations."
Exchange Offer; Registration Rights............ To remove the transferability restrictions on the initial
notes, we have agreed: to file the registration statement of
which this prospectus is a part with the Securities and
Exchange Commission to exchange the initial notes for the
exchange notes by January 18, 1999,
. to use our best efforts to cause the registration statement
to be declared effective by the Securities and Exchange Commission
by April 2, 1999, and
. to keep the exchange offer open for not less than 20 business
days and cause the exchange offer to be consummated no later
than the 30th business day after the registration statement is
declared effective.
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If the exchange offer is not permitted by
applicable law or Securities and Exchange Commission policy,
or a holder is not otherwise able to exchange its initial
notes for certain reasons, we will file with the Securities
and Exchange Commission, subject to our receipt of certain
information, a shelf registration statement to register
restricted initial notes for public resale. We will seek to
have any shelf registration statement declared effective by
the Securities and Exchange Commission on or before the 60th
day after its filing. If we default on any of these
registration obligations, we will pay certain liquidated
damages to each holder of restricted initial notes. See "The
Exchange Offer--Registration Defaults; Liquidated Damages."
Use of Proceeds................................ We will not receive any cash proceeds from the exchange offer.
See "Use of Proceeds."
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THE COMPANY
We are a leading global provider of Internet access services and related
products to businesses. We provide dedicated and dial-up Internet connections to
businesses in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 12 of the 20 largest global telecommunications markets. We also offer, in
addition to Internet connectivity services, Internet protocol-based value-added
services and products to businesses. Some of these services include corporate
intranets, Web hosting, remote user access, multi-currency electronic commerce,
security and voice-over- Internet (as opposed to standard telephone) services.
These services enable businesses to maximize utilization of their corporate
networks and the Internet. We also own and operate a technologically advanced,
high-speed network that is one of the primary backbones that comprise the
Internet. In addition to being an Internet service provider and operating our
network, we also provide network connectivity and related services to other
telecommunications carriers and Internet service providers to further utilize
our network capacity.
Our mission is to build a premier Internet protocol-based communications
company. We have grown by using multiple sales channels, including direct sales
and resellers, and by acquiring other Internet service providers and related
businesses in key markets. We have increased revenues by providing services and
products that enhance our customers' business processes by helping them to
effectively use the Internet and related tools.
We have increased our revenues from $8.7 million in 1993 to $121.9 million
in 1997, representing a 94% compounded annual growth rate. Over the fifteen
month period ending December 31, 1998, we have experienced rapid growth through
the acquisition of 18 Internet service providers in eight of the 20 largest
global telecommunications markets. If our results of operations were restated
to give effect to these recent acquisitions as of January 1, 1998, that is, if
our results of operations were presented on a pro forma basis, our pro forma
revenues for the nine months ended September 30, 1998 would have been $231.3
million. Although we have experienced significant revenue growth, we have also
incurred significant indebtedness, growing net losses and negative cash flow
from operations. As of September 30, 1998 and for the nine months ended
September 30, 1998, after giving pro forma effect to the initial offerings of
the notes and our acquisition of Tokyo Internet Corporation, we had
approximately $1.178 billion of indebtedness, net losses available to common
shareholders of $219.4 million, and negative EBITDA (as defined) of $38.9
million.
We serve, as of October 1, 1998, approximately 53,000 business accounts,
including 141 Internet service providers. Our technologically advanced network
is connected to over 500 points-of-presence in 12 countries and is connected
with other large Internet service providers at 27 public and private data
communications interchange points. We believe that our Internet protocol-
optimized network, in combination with our highly trained, around-the-clock
customer care team, enables us to deliver superior performance and reliability.
The following table provides a brief overview of our domestic and
international operations, based upon the location from which service is
provided.
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Pro Forma Points-of- Business Wholesale Planned
Revenues Presence Accounts And Backbone Commencement
For Nine (at 10/1/98) (at 10/1/98) Consumer Bandwidth of Operations
Months ----------- ----------- Accounts --------- -------------
Ended 9/30/98 (at 10/1/98)
(Millions) -----------
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U.S. $115.1 245 22,800 483,700 2,400Mbps 1989
Canada 25.0 42 6,500 86,200 155 1996
Europe 28.2 151 9,600 23,700 155 1995
Asia 63.0 62 14,400 81,200 270+ 1994
$231.3 500 53,300 674,800
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RECENT DEVELOPMENTS
Acquisitions. As part of our growth strategy, we have, over the fifteen
month period ending December 31, 1998, completed the acquisition of 18 Internet
service providers in eight of the 20 largest global telecommunications markets
for an aggregate cash purchase price and related payments of approximately
$289.8 million, resulting in the addition of approximately 21,700 new business
and Web services accounts, over 211,000 new consumer dial-up customers and over
150 new points-of-presence. We are also currently evaluating additional
acquisitions as well. However, there can be no assurance that we will
successfully complete any such acquisitions currently being contemplated.
Expansion of Network. As part of our strategy to control strategic assets
and further expand and enhance our network to reduce operating costs, we have
recently acquired or agreed to acquire substantial amounts of global fiber-
based telecommunications bandwidth, including indefeasible rights of use or
other rights . See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Commitments, Capital Expenditures and
Future Financing Requirements" and "Business--PSINet's Network."
10% Senior Notes. In April 1998, we completed an offering of $600.0
million aggregate principal amount of 10% Senior Notes due 2005. The net
proceeds of the offering, after giving effect to discounts, commissions and
expenses and the establishment of a $138.7 million escrow arrangement to fund
when due the first five interest payments on the 10% senior notes, were $442.3
million.
New Credit Facility. In September 1998, we entered into a new three year
senior secured revolving credit facility with The Chase Manhattan Bank, as
administrative agent, to replace our existing bank credit arrangements in the
United States. The credit facility consists of a revolving credit facility in
the aggregate principal amount of $110.0 million, of which $108.5 million was
drawn upon to finance a portion of the purchase price for our acquisition of
Tokyo Internet Corporation. Prior to the closing of the initial offering of 11
1/2% senior notes described below, we repaid the $108.5 million outstanding
under the credit facility with other cash on hand. See "--Acquisitions" and
"Use of Proceeds."
11 1/2% Senior Notes. In November 1998, we completed offerings of $350.0
million aggregate principal amount of our 11 1/2% Senior Notes due 2008, Series
A. The aggregate net proceeds of these offerings, after giving effect to
discounts, commissions and estimated expenses, were approximately $342.8
million.
Termination of Contingent Payment Obligation to IXC. On January 13, 1999,
our contingent payment obligation to IXC under the agreement relating to our
purchase of OC-48 bandwidth from IXC was terminated. Pursuant to this
agreement, we had agreed that, if the fair market value (based upon a 20-day
volume-weighted average closing market price per share computation) of the
approximately 20% equity stake we issued to IXC in exchange for such bandwidth
is less than $240 million at the earlier of one year following complete delivery
of the bandwidth or four years from the closing, we would deliver to IXC
additional shares of our common stock and/or cash, at our option, equal to the
shortfall. Our agreement with IXC also provides that, if the fair market value
of the shares we issued to IXC were to exceed this $240 million threshold as of
any earlier date (based upon a 20-day volume-weighted average closing market
price per share computation), then our obligation to IXC would terminate
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as of that earlier date. After the close of trading on The Nasdaq Stock Market
on January 13, 1999, the fair market value of the shares we issued to IXC
exceeded this threshold and, as a result, our obligation to IXC was terminated.
Strategic Commercial Partnership with Baltimore Ravens. On January 26,
1999, we announced our entry into a 20-year strategic partnership with the
Baltimore Ravens of the National Football League pursuant to which we acquired,
among other things, the rights to name the Ravens' NFL stadium "PSINet Stadium"
as well as rights for sponsorship and promotion of team events and related
advertising and marketing rights. In addition, we have the right to develop a
Baltimore Ravens' web site and provide related Internet services to subscribing
fan members which, along with other commercial aspects of the transaction, are
expected to bring revenues to both organizations through service and membership
fees, e-commerce and promotional ventures.
Our principal executive offices are located at 510 Huntmar Park Drive,
Herndon, Virginia 20170. Our telephone number is (703) 904-4100 and, for further
information, we may be contacted by e-mail at [email protected].
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RISK FACTORS
Certain of the matters discussed in this prospectus, including documents
incorporated by reference, may constitute forward-looking statements for
purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934.
These forward-looking statements may involve risks, uncertainties and other
factors that may cause our actual results and performance to be materially
different from the future results or performance expressed or implied by such
statements. Cautionary statements regarding the risks, uncertainties and other
factors associated with these forward-looking statements are discussed under
"Risk Factors" beginning on page 15 of this prospectus. You are urged to
carefully consider these factors.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated financial and operating data as of and
for the years ended December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998 have been derived from our Consolidated Financial
Statements. The summary pro forma consolidated statement of operations data and
balance sheet data for the year ended December 31, 1997 and as of and for the
nine months ended September 30, 1998 have been derived from the Unaudited Pro
Forma Consolidated Financial Information included elsewhere in this prospectus.
The results of operations for the nine month period ended September 30, 1998 may
not be indicative of the results for the entire year ending December 31, 1998.
The unaudited pro forma consolidated statement of operations data give
effect to the acquisitions of iSTAR internet inc., ioNET Internetworking
Services, LinkAge Online Limited, Interactive Networx GmbH, Rimnet Corporation,
Internet Prolink S.A., Inet, Inc., Interlog Internet Services Inc., Serveur
Telematique Internet S.A. (doing business as "CalvaCom") and Tokyo Internet
Corporation, to the issuance by us of both 10,229,789 shares of our common stock
to IXC and $600.0 million principal amount of our 10% senior notes and our
borrowing of $108.5 million under our credit facility, as if each of the
transactions had occurred on January 1, 1997. The unaudited pro forma
consolidated balance sheet data give effect to the acquisition of Tokyo Internet
as if this transaction had been consummated on September 30, 1998. The unaudited
pro forma, as adjusted, balance sheet data and statement of operations data
further adjusts the unaudited pro forma amounts to give effect to the offerings
of the initial notes and the application of the net proceeds therefrom as of
September 30, 1998 and January 1, 1997, respectively. The pro forma financial
information does not include the financial position or results of operations of
ITL, CalvaPro, TWICS, HKIGS, IXE/USN, Spider Net, AsiaNet or Huge Net due to the
immaterial nature of their financial position and results of operations to our
consolidated financial position and consolidated results of operations. In the
opinion of management, the pro forma financial information includes all
adjustments necessary for a fair statement of the information set forth therein.
The information contained in this table should be read in conjunction with
"Selected Consolidated Financial and Operating Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Use of
Proceeds," our Consolidated Financial Statements and notes thereto, Tokyo
Internet's financial statements and notes thereto, iSTAR's consolidated
financial statements and notes thereto, and "Unaudited Pro Forma Consolidated
Financial Information" included elsewhere in this prospectus.
EBITDA is used in the Internet services industry as one measure of a
company's operating performance and historical ability to service debt. EBITDA
is not determined in accordance with GAAP, is not indicative of cash used by
operating activities and should not be considered in isolation or as an
alternative to, or more meaningful than, measures of performance determined in
accordance with GAAP. We define EBITDA as losses before interest expense and
interest income, taxes, depreciation and amortization, other income and expense,
gain on sale of investments, equity in loss of affiliate, and charges for
intangible asset write-down and acquired in-process research and development.
Our definition of EBITDA may not be comparable to similarly titled measures used
by other companies.
For the purposes of computing the ratio of earnings to fixed charges,
earnings consist of losses before income taxes, equity in loss of affiliate and
fixed charges. Fixed charges consist of interest on all indebtedness,
amortization of debt financing costs and that portion of rental expense which we
believe to be representative of interest (deemed to be one-third of rental
expense). The deficiency for purposes of calculating the ratio of earnings to
fixed charges was $192,116,000, $233,087,000, $181,918,000 and $212,646,000 for
the years ended December 31, 1997 pro forma, 1997 pro forma, as adjusted, and
for the nine months ended September 30, 1998 pro forma and 1998 pro forma, as
adjusted.
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(In thousands of U.S.dollars, except per share data)
Year Ended December 31,
----------------------------------------------------------------
1997
----------------------------------------
Actual Pro Forma Pro Forma,
1995 1996 As Adjusted
----------------------- ----------------------------------------
Statement of Operations Data:
Revenue:
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U.S................................. $ 36,252 $ 77,570 $103,952 $ 113,624 $ 113,624
International....................... 2,470 6,781 17,950 141,030 141,030
-------- -------- -------- --------- ---------
38,722 84,351 121,902 254,654 254,654
Other income, net.................... -- 5,417 -- -- --
Operating costs and expenses:
Data communications and 32,124 70,102 94,363 194,283 194,283
operations.........................
Sales and marketing................. 23,930 27,064 25,831 46,039 46,039
General and administrative.......... 10,569 20,648 22,947 52,010 52,010
Depreciation and amortization....... 14,778 28,035 28,347 67,844 67,844
Charge for acquired in-process -- -- -- -- --
research and development...........
Intangible asset write-down......... 9,938 -- -- 12,570 12,570
-------- -------- -------- --------- ---------
Total operating costs and 91,339 145,849 171,488 372,746 372,746
expenses.......................... -------- -------- -------- --------- ---------
Loss from operations................. (52,617) (56,081) (49,586) (118,092) (118,092)
Interest expense..................... (1,964) (5,025) (5,362) (80,618) (121,589)
Loss before income taxes............. (53,160) (55,256) (46,078) (194,416) (235,387)
Net loss............................. (53,160) (55,097) (45,602) (194,507) (235,478)
Return to preferred shareholders..... -- -- (411) (411) (411)
Net loss available to common $(53,160) $(55,097) $(46,013) $(194,918) $(235,889)
shareholders........................ ======== ======== ======== ========= =========
Basic and diluted loss per share..... $(2.01) $(1.40) $(1.14) $(3.86) $(4.67)
Shares used in computing basic and ======== ======== ======== ========= =========
diluted loss per share (in
thousands)......................... 26,485 39,378 40,306 50,536 50,536
======== ======== ======== ========= =========
<CAPTION>
(In thousands of U.S.dollars, except per share data)
Nine Months Ended September 30,
----------------------------------------------------
Actual Pro Forma Pro Forma,
As Adjusted
--------------------- -----------------------------
1997 1998 1998 1998
--------------------------------------------------
Statement of Operations Data:
Revenue:
<S> <C> <C> <C> <C>
U.S................................. $ 75,497 $ 110,703 $ 115,093 $ 115,093
International....................... 11,650 55,029 116,255 116,255
-------- --------- --------- ---------
87,147 165,732 231,348 231,348
Other income, net.................... -- -- -- --
Operating costs and expenses:
Data communications and 66,847 130,517 179,757 179,757
operations.........................
Sales and marketing................. 18,070 37,919 44,577 44,577
General and administrative.......... 16,976 29,439 45,933 45,933
Depreciation and amortization....... 20,648 37,011 59,902 59,902
Charge for acquired in-process -- 40,400 40,400 40,400
research and development...........
Intangible asset write-down......... -- -- -- --
-------- --------- --------- ---------
Total operating costs and 122,541 275,286 370,569 370,569
-------- --------- --------- ---------
expenses..........................
Loss from operations................. (35,394) (109,554) (139,221) (139,221)
Interest expense..................... (4,162) (38,193) (64,285) (95,013)
Loss before income taxes............. (31,741) (130,006) (186,054) (216,782)
Net loss............................. (31,265) (130,071) (186,336) (217,064)
Return to preferred shareholders..... -- (2,313) (2,313) (2,313)
Net loss available to common $ 31,265) $(132,384) $(188,649) $(219,377)
shareholders........................ ======== ======== ======== ========
Basic and diluted loss per share..... $(0.78) $(2.70) $(3.68) $(4.28)
Shares used in computing basic and ======== ======== ======== ========
diluted loss per share (in
thousands)......................... 40,264 49,120 51,204 51,204
======== ======== ======== ========
</TABLE>
12
<PAGE>
(In thousands of U.S. dollars, except ratio and operating data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------- -----------------------------
1995 1996 1997 1997 1998
Other Financial Data:
<S> <C> <C> <C> <C> <C>
EBITDA (as defined):
U.S............................ $(26,930) $(20,562) $(13,071) $ (9,275) $ (17,466)
International.................. (971) (7,484) (8,168) (5,471) (14,677)
$(27,901) $(28,046) $(21,239) $(14,746) $ (32,143)
Cash flows used in operating
activities.................... $(30,093) $(32,543) $(15,457) $(13,009) $ (76,931)
Cash flows provided by (used in)
investing activities.......... (21,958) (7,897) (15,560) 13,030 (326,028)
Cash flows provided by (used in)
financing activities.......... 151,403 (10,529) 12,598 (12,206) 654,228
Capital expenditures............. 45,166 38,390 50,068 29,076 103,300
Ratio of earnings to fixed
charges (deficiency of earnings
to fixed charges).............. (52,956) (54,449) (46,078) (31,741) (130,006)
Other Operating Data:
Number of points-of-presence..... 241 350 350 350 475
Number of customer accounts...... 8,200 17,800 26,400 23,000 46,700
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1998
------------------------------- ---------------------------------
1995 1996 1997 Actual Pro Forma Pro Forma,
As
Adjusted
--------- -------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and $102,710 $ 56,390 $ 33,322 $335,428 $222,621 $ 565,414
short-term investments...........
Restricted cash and investments.... -- 954 20,690 127,617 127,617 127,617
Total assets....................... 201,830 177,112 186,181 878,630 922,984 1,275,984
Lines of credit and current
portion of long-term debt and
capital lease obligations....... 16,643 26,915 39,633 44,746 44,746 44,746
Long-term debt and capital lease
obligations, less current
portion........................ 24,130 26,938 33,820 772,998 780,387 1,133,387
Shareholders' equity (deficit)..... 143,230 89,783 73,429 (26,633) (26,633) (26,633)
</TABLE>
13
<PAGE>
ACQUISITIONS
Recent Acquisitions. As part of our growth strategy, over the fifteen
month period ending December 31, 1998, we have acquired 18 Internet service
providers in eight of the 20 largest global telecommunications markets. The
aggregate amount of the purchase prices and related payments for these
acquisitions was approximately $289.8 million, exclusive of indebtedness
assumed in connection with such acquisitions. Of such amount, we have paid
$251.1 million as of December 31, 1998 and retained the balance to secure
performance by certain sellers of indemnification or other contractual
obligations. The following table summarizes certain information concerning these
acquisitions:
<TABLE>
<CAPTION>
Ranking
Name of Among 20
Acquired Date of Principal Business Consumer Largest Global
Company Acquisition Market Territory Accounts (1) Accounts (1) Telecom Markets
- ------- ----------- ---------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
CalvaCom 10/97 France 1,500 2,300 5
Iprolink 1/98 Switzerland 2,400 2,600 14
iSTAR 2/98 Canada 2,700 47,000 10
ITL 4/98 Jersey, Channel Islands -- -- N/A
INX 5/98 Germany 650 15,600 3
IoNet 6/98 U.S. 2,300 21,500 1
LinkAge 6/98 Hong Kong 1,100 -- 19
CalvaPro 6/98 Sub-Sahara Africa 425 30 N/A
Interlog 7/98 Canada 2,100 41,000 10
Rimnet 8/98 Japan 260 56,000 2
TWICS 9/98 Japan 70 1,700 2
HKIGS 9/98 Hong Kong 200 -- 19
Inet 9/98 Korea 1,100 13,000 12
Tokyo Interet 10/98 Japan 6,500 10,000 2
IXE/USN 10/98 Netherlands 85 -- 13
AsiaNet 11/98 Hong Kong 180 250 19
Spider Net 12/98 Hong Kong 30 100 19
Huge Net 12/98 Hong Kong 90 -- 19
------ -------
Total 21,690 211,080
====== =======
</TABLE>
- ---------------------
(1) As of the respective dates of acquisition.
14
<PAGE>
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks, including the ones listed below. You should carefully consider
these risk factors, as well as the other information contained in this
prospectus, in evaluating an investment in our securities.
We have significant indebtedness and we may not be able to meet our obligations
We are highly leveraged and have significant debt service requirements. As
of September 30, 1998, after giving pro forma effect to the offerings of the
initial notes (and the application of the net proceeds therefrom) and the
acquisition of Tokyo Internet, our total indebtedness would have been
approximately $1.178 billion, representing 102% of total capitalization, and
our interest expense for the nine months ended September 30, 1998 would have
been approximately $95.0 million. See "Unaudited Pro Forma Consolidated
Financial Information."
Our high level of indebtedness could have several important effects on our
future operations, which, in turn, could have important consequences for the
holders of our securities, including the following:
. a substantial portion of our cash flow from operations must be used to pay
interest on our indebtedness and, therefore, will not be available for other
business purposes;
. covenants contained in the agreements evidencing our debt obligations require
us to meet certain financial tests, and other restrictions limit our ability
to borrow additional funds or to dispose of assets and may affect our
flexibility in planning for, and reacting to, changes in our business,
including possible acquisition activities and capital expenditures; and
. our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired.
Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors. We
historically have been unable to generate sufficient cash flow from operations
to meet our operating needs and have relied on equity, debt and capital lease
financings to fund our operations. However, based on our current level of
operations, management believes that existing working capital, existing credit
facilities, capital lease financings, proceeds of the initial notes offering and
prior offerings and proceeds of future equity or debt financings, will be
adequate to meet our presently anticipated future requirements for working
capital, capital expenditures and scheduled payments of interest on our debt
(including the notes). We cannot assure, however, that our business will
generate sufficient cash flow from operations or that future working capital
borrowings will be available in an amount sufficient to enable us to service our
debt (including the notes) or to make necessary capital expenditures. In
addition, we cannot assure that we will be able to raise additional capital for
any refinancing of our debt in the future.
We have experienced continuing losses, negative cash flow and fluctuations in
operating results
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, we must, among other things, respond to
competitive developments, continue to attract and retain qualified persons, and
continue to upgrade our technologies and commercialize our network services
incorporating such technologies. We cannot assure that we will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on our business, financial condition, results of operations and ability
to pay when due principal, interest and other amounts in respect of our debt
(including the notes). Although we have experienced revenue growth on an annual
basis with revenue increasing from $38.7 million in 1995 to $84.4 million in
1996 to $121.9 million in 1997 and $165.7 million for the first nine months of
1998, we have incurred losses and experienced negative earnings before
depreciation and amortization, interest income and expense, other income (loss),
income tax expense (benefit), gain on sale of
15
<PAGE>
investments, equity in loss of affiliate and intangible asset write-down and
charge for acquired in-process research and development (``EBITDA") during each
of such periods. Management expects to continue to operate at a net loss and
experience negative EBITDA in the near term as we continue our acquisition
program and the expansion of our global network operations. We have incurred net
losses available to common shareholders of $53.2 million, $55.1 million and
$46.0 million and have incurred negative EBITDA of $27.9 million, $28.0 million
and $21.2 million for each of the years ended December 31, 1995, 1996 and 1997,
respectively. Additionally, we incurred net losses available to common
shareholders of $132.4 million and negative EBITDA of $32.1 million,
respectively, for the nine months ended September 30, 1998. At September 30,
1998, we had an accumulated deficit of $295.0 million. We cannot assure that we
will be able to achieve or sustain profitability or positive EBITDA.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future as a result of a variety of factors some of which
are outside our control. These factors, include, among others:
. general economic conditions and specific economic conditions in the Internet
access industry;
. user demand for Internet services;
. capital expenditures and other costs relating to the expansion of operations
our network;
. the introduction of new services by us or our competitors;
. the mix of services sold and the mix of channels through which those services
are sold;
. pricing changes and new product introductions by us and our competitors;
. delays in obtaining sufficient supplies of sole or limited source equipment
and telecom facilities; and
. potential adverse regulatory developments.
As a strategic response to a changing competitive environment, we may elect
from time to time to make certain pricing, service or marketing decisions that
could have a material adverse effect on our business, results of operations and
cash flow.
We are partially dependent on our subsidiaries for repayment of debt
We are an operating entity which also conducts a significant portion of our
business through our subsidiaries. Our cash flow from operations and
consequently our ability to service our debt (including the notes) is therefore
partially dependent upon our subsidiaries' earnings and their distributions of
those earnings to us. It may also be dependent upon loans, advances or other
payments of funds to us by those subsidiaries. Our subsidiaries have no
obligation, contingent or otherwise, to make any funds available to us for
payment of the principal of or interest on certain of our debt obligations
(including the notes). Our subsidiaries' ability to make payments may be
subject to the availability of sufficient surplus funds, the terms of such
subsidiaries' indebtedness, applicable laws and other factors.
Our subsidiaries' creditors and holders of preferred stock, if any, of such
subsidiaries will have priority to the assets of such subsidiaries over the
claims of PSINet and the holders of our indebtedness. One exception is that if
such subsidiaries have provided guarantees of our indebtedness and if loans made
by us to our subsidiaries are recognized as indebtedness, they will not have
such priorities. In any event, the notes are effectively subordinated in right
of payment to all existing and future indebtedness and other liabilities of our
subsidiaries, including trade payables. As of September 30, 1998, after giving
pro forma effect to the offerings of the initial notes (and the application of
the net proceeds therefrom) and the acquisition of Tokyo Internet, our
subsidiaries would have had approximately $123.5 million of total liabilities
(including trade payables and accrued liabilities), to which holders of the
notes would have been structurally subordinated. Under the terms of certain
agreements evidencing our debt obligations, certain of our subsidiaries are
restricted in their ability to incur debt in the future. We had approximately
$108.5 million of indebtedness outstanding under our credit facility on
September 30, 1998, which we repaid prior to the closing of the initial offering
of the initial notes.
16
<PAGE>
We may not be able to fund the expansion we will need to remain competitive
In order to maintain our competitive position and continue to meet the
increasing demands for service quality, availability and competitive pricing, we
expect to make significant capital expenditures. We have recently acquired or
agreed to acquire approximately $326.0 million worth of global fiber-based
telecommunications bandwidth and related equipment, including indefeasible
rights of use or other rights. We also expect that there will be additional
costs, such as connectivity and equipment charges, in connection with taking
full advantage of such acquired bandwidth and indefeasible rights of use,
although we are currently unable to estimate the extent of such additional
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Commitments, Capital Expenditures and Future Financing
Requirement" and "Business--PSINet's Network." In addition, we expect to incur
capital expenditures over the next several years of $95.0 million in order to
take full advantage of the bandwidth acquired from IXC. We also expect that we
will require substantial capital for acquisitions of Internet assets and
businesses.
We historically have been unable to generate sufficient cash flow from
operations to meet our operating needs and have relied on equity, debt and
capital lease financings to fund our operations. However, we believe that we
will have a reasonable degree of flexibility to adjust the amount and timing of
these capital expenditures in response to market conditions, competition, our
then-existing financing capabilities and other factors. We also believe that
working capital generated from the use of acquired bandwidth, together with
other existing working capital , existing credit facilities, capital lease
financings, proceeds of the initial notes offerings and prior offerings and
proceeds of future equity or debt financings will be sufficient to meet the
presently anticipated working capital and capital expenditure requirements of
our operations.
We may need to raise additional funds in order to take advantage of
unanticipated opportunities, more rapid international expansion or acquisitions
of complementary businesses. In addition, we may need to raise additional funds
to develop new products or otherwise respond to changing business conditions or
unanticipated competitive pressures. We cannot assure that we will be able to
raise such funds on favorable terms. In the event that we are unable to obtain
such additional funds on acceptable terms, we may determine not to enter into
various expansion opportunities.
We face risks associated with acquisitions and strategic alliances
Growth through acquisitions represents a principal component of our
business strategy. Over the last fifteen months, we have acquired 18 Internet
service providers in eight of the 20 largest global telecommunications markets.
We expect to continue to acquire assets and businesses principally relating to
or complementary to our current operations. We may also seek to develop
strategic alliances both domestically and internationally. Any such future
acquisitions or strategic alliances would be accompanied by the risks commonly
encountered in strategic alliances with or acquisitions of companies. Such risks
include, among other things:
. the difficulty of integrating the operations and personnel of the companies;
. the potential disruption of our ongoing business;
. the inability of management to maximize our financial and strategic position
by the successful incorporation of licensed or acquired technology and rights
into our service offerings; and
. the inability to maintain uniform standards, controls, procedures and
policies and the impairment of relationships with employees and customers as
a result of changes in management.
We cannot assure that we will be successful in overcoming these risks or
any other problems encountered in connection with such acquisitions or strategic
alliances. We believe that after eliminating redundant network architecture and
administrative functions and taking other actions to integrate the operations of
acquired companies we will be able to realize cost savings. However, we cannot
assure that our integration of acquired companies' operations will be
successfully accomplished. Our inability to improve the operating performance of
acquired companies' businesses or to integrate successfully the operations of
acquired companies could have a material
17
<PAGE>
adverse effect on our business, financial condition and results of operations.
In addition, as we proceed with acquisitions in which the consideration consists
of cash, a substantial portion of our available cash will be used to consummate
such acquisitions.
As with each of our recent acquisitions, the purchase price of many of the
businesses that might become attractive acquisition candidates for us likely
will significantly exceed the fair values of the net assets of the acquired
businesses. As a result, material goodwill and other intangible assets would be
required to be recorded which would result in significant amortization charges
in future periods. In addition, an intangible asset that frequently arises in
connection with the acquisition of a technology company is "acquired in-process
research and development," which under U.S. accounting standards, as presently
in effect, must be expensed immediately upon acquisition. Such expenses, in
addition to the financial impact of such acquisitions, could have a material
adverse effect on our business, financial condition and results of operations
and could cause substantial fluctuations in our quarterly and yearly operating
results. Furthermore, in connection with acquisitions, we could incur
substantial expenses, including the expenses of integrating the business of the
acquired company or the strategic alliance with our existing business.
We expect that competition for appropriate acquisition candidates may be
significant. We may compete with other telecommunications companies with similar
acquisition strategies, many of which may be larger and have greater financial
and other resources than we have. Competition for Internet companies is based on
a number of factors including price, terms and conditions, size and access to
capital, ability to offer cash, stock or other forms of consideration and other
matters. We cannot assure that we will be able to successfully identify and
acquire suitable companies on acceptable terms and conditions.
We face a possible inability to manage our growth and expansion
We have over 500 points-of-presence and we plan to continue to expand the
capacity of existing points-of-presence as customer-driven demand dictates. In
addition, we have completed a number of acquisitions of companies and
telecommunications bandwidth during 1998 and plan to continue to do so. We
anticipate that our Carrier and ISP Services business unit, as well as other
business growth, may require continued enhancements to and expansion of our
network. However, our rapid growth has placed a strain on our administrative,
operational and financial resources and has increased demands on our systems and
controls. The process of consolidating the businesses and implementing the
strategic integration of these acquired businesses with our existing business
may take a significant amount of time. It may also place additional strain on
our resources and could subject us to additional expenses. We cannot assure that
we will be able to integrate these companies successfully or in a timely manner.
In addition, we cannot assure that our existing operating and financial control
systems and infrastructure will be adequate to maintain and effectively monitor
future growth.
Our continued growth may also increase our need for qualified personnel. We
cannot assure that we will be successful in attracting, integrating and
retaining such personnel. The following risks, associated with our growth ,
could have a material adverse effect on our business, results of operations and
financial condition:
. our inability to continue to upgrade our networking systems or our operating
and financial control systems;
. our inability to recruit and hire necessary personnel or to successfully
integrate new personnel into our operations;
. our inability to successfully integrate the operations of acquired companies
or to manage our growth effectively; or
. our inability to adequately respond to the emergence of unexpected expansion
difficulties.
18
<PAGE>
We face risks associated with our acquisitions of bandwidth and strategic
alliance with IXC
We are subject to a variety of risks relating to our recent acquisitions of
fiber-based telecommunications bandwidth from IXC and various other global
network suppliers and the delivery, operation and maintenance of such bandwidth.
Such risks include, among other things, the following:
. the risk that financial, legal, technical and/or other matters may adversely
affect such suppliers' ability to perform their respective operation,
maintenance and other services relating to such bandwidth, which may
adversely affect our use of such bandwidth;
. the risk that we will not have access to sufficient additional capital and/or
financing on satisfactory terms to enable us to make the necessary capital
expenditures to take full advantage of such bandwidth;
. the risk that such suppliers may not continue to have the necessary financial
resources to enable them to complete, or may otherwise elect not to complete,
their contemplated buildout of their respective fiber optic
telecommunications systems; and
. the risk that such buildout may be delayed or otherwise adversely affected by
presently unforeseeable legal, technical and/or other factors.
In addition, we are subject to additional risks relating specifically to
our strategic alliance with IXC. Such risks include:
. the risk that, in the event of a material default by IXC under our purchase
agreement with IXC at such time as IXC is in bankruptcy, our use of the
bandwidth acquired from IXC may be materially adversely affected or
curtailed;
. the risk that, in the event of a change of control or change in management of
IXC, IXC's successor or new management, as the case may be, may not share
IXC's commitment to the buildout of its fiber optic telecommunications system
or may not otherwise allocate the necessary human, financial, technical and
other resources to satisfactorily meet its obligations to us under our
purchase agreement with IXC that would adversely affect our use of the
bandwidth acquired from IXC;
. the risk that IXC, as our largest shareholder and through its ex-chairman's
seat on our Board of Directors, could subject us to certain conflicts of
interest or could influence our management in a manner that could adversely
affect our business or the control of PSINet; and
. the risk that future sales by IXC of substantial numbers of shares of our
common stock could adversely affect the market price of our common stock and
make it more difficult for us to raise funds through equity offerings and to
effect acquisitions of businesses or assets in consideration for issuances of
our common stock.
We cannot assure that we will be successful in overcoming these risks or
any other problems encountered in connection with our acquisitions of bandwidth
or our strategic alliance with IXC. See "Certain Transactions--Strategic
Alliance With IXC."
International expansion is a key component of our business strategy and, if we
are unable to complete this expansion, our financial condition may be adversely
affected
A key component of our business strategy is our continued expansion into
international markets. We may need to enter into joint ventures or other
strategic relationships with one or more third parties in order to conduct our
foreign operations successfully. However, we cannot assure that we will be able
to obtain the permits and operating licenses required for us to operate, to hire
and train employees or to market, sell and deliver high quality services in
these markets. In addition to the uncertainty as to our ability to expand our
international presence, there are certain risks inherent in doing business on an
international level. Such risks include:
19
<PAGE>
. unexpected changes in or delays resulting from regulatory requirements,
tariffs, customs, duties and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer payment cycles and problems in collecting accounts receivable;
. political instability, expropriation, nationalization, war, insurrection and
other political risks;
. fluctuations in currency exchange rates and foreign exchange controls which
restrict or prohibit repatriation of funds;
. technology export and import restrictions or prohibitions;
. delays from customs brokers or government agencies;
. seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world; and
. potentially adverse tax consequences, which could adversely impact the
success of our international operations.
We cannot assure that such factors will not have an adverse effect on our
future international operations and, consequently, on our business, financial
condition and results of operations. In addition, we cannot assure that laws or
administrative practice relating to taxation, foreign exchange or other matters
of countries within which we operate will not change. Any such change could have
a material adverse effect on our business, financial condition and results of
operations.
In particular, we have also recently made significant investments in Japan,
which is currently experiencing a severe economic recession. Other Asian-Pacific
countries in which we operate are also experiencing economic difficulties and
uncertainties. These economic difficulties and uncertainties could have a
material adverse effect on our business, financial condition and results of
operations.
We depend on certain key personnel and could be affected by the loss of their
services
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of persons with knowledge of
and experience in the Internet service industry. The process of locating such
personnel with the combination of skills and attributes required to carry out
our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, technical,
marketing and sales personnel and upon the continued contributions of such
management and personnel. In particular, our success is highly dependent upon
the personal abilities of our senior executive management, including William L.
Schrader, our Chairman of the Board and Chief Executive Officer and the founder
of PSINet, Harold S. Wills, our President and Chief Operating Officer, David N.
Kunkel, our Executive Vice President and General Counsel, and Edward D. Postal,
our Senior Vice President and Chief Financial Officer. We have employment
agreements with each of these executive officers, with the exception of Mr.
Schrader. The loss of the services of any one of them could have a material
adverse effect on our business, financial condition or results of operations.
We depend on certain suppliers and could be affected by changes in suppliers or
delays in delivery of their products and services
We have few long-term contracts with our suppliers. We are dependent on
third party suppliers for our leased-line connections or bandwidth. Certain of
these suppliers are or may become competitors of ours, and such suppliers are
not subject to any contractual restrictions upon their ability to compete with
us. If these suppliers change their pricing structures, we may be adversely
affected. Due to the consummation of our transaction with IXC and our recent
acquisitions of telecommunications bandwidth from other global network
providers, we anticipate that our dependence upon certain of these suppliers
will be decreased as we accept delivery of OC-48 bandwidth from IXC and
bandwidth from our other global network providers. Nevertheless, until the fiber
optic
20
<PAGE>
telecommunications systems of IXC and our other global network providers
are completed (and in the case of IXC, it is not obligated under the terms of
our purchase agreement to extend its buildout of the IXC system beyond
approximately 6,640 unique route miles of OC-48 bandwidth) and, in certain
geographic areas, even after such completion, we will continue to be dependent
upon such suppliers. Moreover, any failure or delay of IXC or such other network
providers to deliver bandwidth to us or to provide operations, maintenance and
other services with respect to such bandwidth in a timely or adequate fashion
could adversely affect us.
We are also dependent on certain third party suppliers of hardware
components. Although we attempt to maintain a minimum of two vendors for each
required product, certain components used by us in providing our networking
services are currently acquired or available from only one source. We have from
time to time experienced delays in the receipt of certain hardware components
and telecommunications facilities, including delays in delivery of primary rate
interface telecommunications facilities (which connect dial-up customers to our
network). A failure by a supplier to deliver quality products on a timely basis,
or the inability to develop alternative sources if and as required, could result
in delays which could have a material adverse effect on us. Our remedies against
suppliers who fail to deliver products on a timely basis are limited by
contractual liability limitations contained in supply agreements and purchase
orders and, in many cases, by practical considerations relating to our desire to
maintain good relationships with the suppliers. As our suppliers revise and
upgrade their equipment technology, we may encounter difficulties in integrating
the new technology into our network.
Certain of the vendors from whom we purchase telecommunications bandwidth,
including the RBOCs, CLECs and other local exchange carriers, currently are
subject to tariff controls and other price constraints which in the future may
be changed. In addition, newly enacted legislation will produce changes in the
market for telecommunications services. These changes may affect the prices
which we are charged by the RBOCs and other carriers, which could have a
material adverse effect on our business, financial condition and results of
operations. Moreover, we are subject to the effects of other potential
regulatory actions which, if taken, could increase the cost of our
telecommunications bandwidth through, for example, the imposition of access
charges.
The terms of our financing arrangements may restrict our operations
Certain of our financing arrangements are secured by substantially all of
our assets and stock of certain of our subsidiaries. These financing
arrangements require that we satisfy certain financial covenants. Our ability
to satisfy these financial covenants may be affected by events beyond our
control and, as a result, we cannot assure you that we will be able to continue
to satisfy such covenants. These financing arrangements also currently prohibit
us from paying dividends and repurchasing our capital stock without the lender's
consent. Our failure to comply with the covenants and restrictions in these
financing arrangements could lead to a default under the terms of these
agreements. In the event of a default under the financing arrangements, our
lenders would be entitled to accelerate the indebtedness outstanding thereunder
and foreclose upon the assets securing such indebtedness. They would also be
entitled to be repaid from the proceeds of the liquidation of those assets
before the assets would be available for distribution to the holders of our
securities, including the holders of the notes. In addition, the collateral
security arrangements under our existing financing arrangements may adversely
affect our ability to obtain additional borrowings.
Our financial condition may be adversely affected if our systems and those of
our suppliers fail because of Year 2000 problems
The commonly referred to Year 2000 ("Y2K") problem results from the fact
that many existing computer programs and systems use only two digits to identify
the year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not corrected,
computer applications that use a two-digit format could fail or create erroneous
results in any computer calculation or other processing involving the Year 2000
or a later date. We have identified two main areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in our
operations; and
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2. Computer systems or embedded chips of third parties including
(without limitation) financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others ("Material Third Parties") could be disrupted or fail, causing an
interruption or decrease in our ability to continue our operations.
We have developed, or are in the process of developing, detailed plans for
implementation and testing of any necessary modifications to our key computer
systems and equipment with embedded chips to ensure that they are Y2K compliant.
We have engaged a third party consultant to perform an assessment of our
systems, domestically and internationally. We expect that the assessment, which
is being done in stages, will be complete by early 1999. We anticipate that
our domestic internal systems will be Y2K ready by June 30, 1999, and our
international systems will be Y2K compliant by the end of the third quarter of
1999, which is consistent with prior plans. We believe that with these detailed
plans and completed modifications, the Y2K issue will not pose significant
operational problems for us. However, if the modifications and conversions are
not made, or not completed in a timely fashion, the Y2K issue could have a
material impact on our operations.
Our cost of addressing Y2K issues has been minor to date, less than five
percent (5%) of our information technology budget, but this amount will increase
as substantial consultants or personnel resources are required or if
operationally-important equipment must be remediated or replaced. The risk that
Y2K issues could present to us include, without limitation, disruption, delay or
cessation of operations, including operations that are subject to regulatory
compliance. In each case, the correction of the problem could result in
substantial expense and disruption or delay of our operations. The total cost of
Y2K assessments and remediation is funded through cash flows generated through
operations and available from other sources and, to date, we are expensing these
costs. The financial impact of making any required systems changes or other
remediation efforts cannot be known precisely at this time, but it is not
expected to be material to our financial position, results of operations, or
cash flows. We have not canceled any principal information technology projects
as a result of our Y2K effort, although we have rescheduled some tasks to
accommodate this effort.
In addition, we have identified and prioritized and are communicating with
Material Third Parties to determine their Y2K status and any probable impact on
us. We will continue to track and evaluate our long-term relationship with
Material Third Parties based on the responses we receive and on information
learned from other sources. If any of our Material Third Parties are not Y2K
ready and their non-compliance causes a material disruption to any of their
respective businesses, our business could be materially adversely affected.
Disruptions could include, among other things: the failure of a Material Third
Party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to our facilities; and other interruptions in
the normal course of our operations, the nature and extent of which we cannot
foresee. We will continue to evaluate the nature of these risks, but at this
time we are unable to determine the probability that any such risk will occur,
or if it does occur, what the nature, length or other effects, if any, it may
have on us. If a significant number of Material Third Parties experience
failures in their computer systems or operations due to Y2K non-compliance, it
could affect our ability to process transactions or otherwise engage in similar
normal business activities. For example, while we expect our internal systems,
domestic and international, to be Y2K ready in stages during 1999, we and our
customers who communicate internationally will be dependent upon the Y2K-
readiness of many foreign providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, we and
our customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on the business and
revenues of us and our customers. While many of these risks are outside our
control, we have instituted a program to identify Material Third Parties and to
address any non-compliance issues.
While we believe that we are adequately addressing the Y2K issue, there can
be no assurance that our Y2K analyses will be completed on a timely basis or
that the cost and liabilities associated with the Y2K issue will not materially
adversely impact our business, prospects, revenues or financial position. We are
uncertain as to our most reasonably likely worst case Y2K scenario and have not
yet developed a contingency plan to handle a worst case scenario. We expect to
have a contingency plan to handle this situation by September 30, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
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IF WE BECOME SUBJECT TO PROVISIONS OF THE INVESTMENT COMPANY ACT, OUR BUSINESS
OPERATIONS MAY BE RESTRICTED
Pending our utilization of all the net proceeds from our offerings of the
initial notes and the 10% senior notes, we have significant amounts of cash
invested in short term investment grade and government securities, which
investments could conceivably subject us to the provisions of the Investment
Company Act of 1940 (the "Investment Company Act"). We do not propose to
engage in investment activities in a manner or to an extent which would require
us to register as an investment company under the Investment Company Act. The
Investment Company Act places restrictions on the capital structure and business
activities of companies registered thereunder. Accordingly, we will seek to
limit our holding of "investment securities" (as defined in the Investment
Company Act) to an amount which is less than 40% of the value of our total
assets as calculated pursuant to the Investment Company Act. The Investment
Company Act permits a company to avoid becoming subject to such Act for a period
of up to one year despite the holding of investment securities in excess of such
amount if, among other things, its Board of Directors has adopted a resolution
which states that it is not the company's intention to become an investment
company. Our Board of Directors may adopt such a resolution. Application of the
provisions of the Investment Company Act would have a material adverse effect on
us.
WE CANNOT BE CERTAIN ABOUT THE RESULTS OF OUR PENDING LITIGATION
On November 25, 1997, Chatterjee Management Company ("Chatterjee")
initiated arbitration proceedings against us before the International Chamber of
Commerce, Court of Arbitration, in London, England. The claim was based upon a
joint venture agreement which we previously entered into with Chatterjee.
Following the signing of the agreement, we both acknowledged structural
difficulties associated with the joint venture as originally contemplated, which
prevented its implementation. Chatterjee alleges that we breached the joint
venture agreement by repudiating our obligations under the agreement and by
breaching a covenant not to compete. Chatterjee seeks an order directing us to
specifically perform our obligations under the agreement or, in the alternative,
to pay damages of not less than $25.0 million, plus our actual or anticipated
profits in Europe plus the costs of arbitration, including attorneys' fees and
interest. The arbitration hearing commenced in October 1998 in London,
England. On February 9, 1999, the arbitrator advised the parties that he is in
the process of preparing a draft decision in the case for review by the
International Court of Arbitration of the International Chamber of Commerce and,
accordingly, we believe that a decision in the arbitration will be rendered in
the near future. An unfavorable outcome in this matter could have a material
adverse effect on our business, financial condition and results of operations.
See "Business--Legal Proceedings."
WE FACE A HIGH LEVEL OF COMPETITION IN THE INTERNET SERVICES INDUSTRY
The market for Internet connectivity and related services is extremely
competitive. We anticipate that competition will continue to intensify as the
use of the Internet grows. The tremendous growth and potential market size of
the Internet access market has attracted many new start-ups as well as
established businesses from different industries.
Our current and prospective competitors include: other national, regional
and local Internet service providers, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers and on-line service providers. We believe that
our network, products and customer service distinguish us from these
competitors. However, some of these competitors have a significantly greater
market presence, brand recognition and financial, technical and personnel
resources than us.
We compete with all of the major long distance companies (also known as
interexchange carriers), including AT&T, MCIWorldCom, Sprint and Cable &
Wireless/IMCI, which also offer Internet access services. The recent sweeping
reforms in the federal regulation of the telecommunications industry have
created greater opportunities for local exchange carriers, including the
Regional Bell Operating Companies ("RBOCs"), to enter the Internet
connectivity market. We believe that there is a move toward horizontal
integration through acquisitions of, joint ventures with, and the wholesale
purchase of connectivity from Internet service providers to address the Internet
connectivity requirements of the current business customers of long distance and
local carriers. The WorldCom/MFS/UUNet consolidation, the WorldCom/MCI merger,
the ICG/NETCOM merger, Cable & Wireless'
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purchase of the internetMCI assets, the Intermedia/DIGEX merger, GTE's
acquisition of BBN, Frontier's acquisition of Global Center and AT&T's purchase
of IBM's global communications network are indicative of this trend.
Accordingly, we expect to experience increased competition from the traditional
telecommunications carriers. Many of these telecommunications carriers may have
the ability to bundle Internet access with basic local and long distance
telecommunications services. Such bundling of services may have an adverse
effect on our ability to compete effectively with the telecommunications
providers and may result in pricing pressure on us that could have a material
adverse effect on our business, financial condition and results of operations.
Many of the major cable companies have announced that they are exploring
the possibility of offering Internet connectivity, relying on the viability of
cable modems and economical upgrades to their networks. Several announcements
also have recently been made by other alternative service companies approaching
the Internet connectivity market with various wireless terrestrial and
satellite-based service technologies.
The predominant on-line service providers, including America Online,
CompuServe, Microsoft Network and Prodigy, have all entered the Internet access
business by engineering their current proprietary networks to include Internet
access capabilities. We compete to a lesser extent with these on-line service
providers. However, America Online's recently announced acquisition of Netscape
Communications Corporation and related strategic alliance with Sun Microsystems
will, if completed, enable it to offer a broader array of Internet protocol-
based services and products that could significantly enhance its ability to
appeal to the business marketplace and, as a result, compete more directly with
us.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies. These services would include new technologies such as cable
modems and xDSL. These providers have initially targeted the residential
consumer. However, it is likely that their target markets will expand to
encompass business customers, which is our target market. This expansion could
adversely affect the pricing of our service offerings.
As a result of the increase in the number of competitors and the vertical
and horizontal integration in the industry, we currently encounter and expect to
continue to encounter significant pricing pressure and other competition in the
future. Advances in technology as well as changes in the marketplace and the
regulatory environment are constantly occurring, and we cannot predict the
effect that ongoing or future developments may have on us or on the pricing of
our products and services. Increased price or other competition could result in
erosion of our market share and could have a material adverse effect on our
business, financial condition and results of operations. We cannot assure that
we will have the financial resources, technical expertise or marketing and
support capabilities to continue to compete successfully.
As we continue to expand our operations outside the United States, we will
encounter new competitors and competitive environments. In some cases, we will
be forced to compete with and buy services from government-owned or subsidized
telecommunications providers. Some of these providers may enjoy a monopoly on
telecommunications services essential to our business. We cannot assure that we
will be able to purchase such services at a reasonable price or at all. In
addition to the risks associated with our previously described competitors,
foreign competitors may pose an even greater risk, as they may possess a better
understanding of their local markets and better working relationships with local
infrastructure providers and others. We cannot assure that we can obtain similar
levels of local knowledge. Failure to obtain that knowledge could place us at a
significant competitive disadvantage.
Risks of technology trends and evolving industry standards
Our products and services are targeted toward users of the Internet, which
has experienced rapid growth. The market for Internet access and related
services is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product and service
introductions. Our future success will depend, in part, on our ability to
effectively use and develop leading technologies.
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We cannot assure that we will be successful in responding to changing
technology or market trends. In addition, services or technologies developed by
others may render our services or technologies uncompetitive or obsolete.
Furthermore, changes to our services in response to market demand may require
the adoption of new technologies that could likewise render certain of our
assets technologically uncompetitive or obsolete. As we accept bandwidth from
IXC and our other existing global network suppliers or acquire bandwidth or
equipment from other suppliers that may better meet our needs than existing
bandwidth or equipment, certain of our assets could be determined to be obsolete
or excess. The disposition of obsolete or excess assets could have a material
adverse effect on our business, financial condition and results of operations.
Even if we do successfully respond to technological advances and emerging
industry standards, the integration of new technology may require substantial
time and expense, and we cannot assure that we will succeed in adapting our
network infrastructure in a timely and cost-effective manner.
Potential liability for information disseminated through network
The law relating to liability of Internet service providers for information
carried on or disseminated through their networks is not completely settled. A
number of lawsuits have sought to impose such liability for defamatory speech
and infringement of copyrighted materials. The U.S. Supreme Court has let stand
a lower court ruling which held that an Internet service provider was protected
from liability for material posted on its system by a provision of the
Communications Decency Act. However, the findings in that case may not be
applicable in other circumstances. Other courts have held that online service
providers and Internet service providers may, under certain circumstances, be
subject to damages for copying or distributing copyrighted materials. Certain
provisions of the Communications Decency Act, which imposed criminal penalties
for using an interactive computer service for transmitting obscene or indecent
communications, have been found unconstitutional by the U.S. Supreme Court.
However, on October 21, 1998, new federal legislation was enacted that requires
limitations on access to pornography and other material deemed ``harmful to
minors." This legislation has been attacked in court as a violation of the
First Amendment. We are unable to predict the outcome of this case. The
imposition upon Internet service providers or web server hosts of potential
liability for materials carried on or disseminated through their systems could
require us to implement measures to reduce our exposure to such liability. Such
measures may require that we spend substantial resources or discontinue certain
product or service offerings. Any of these actions could have a material adverse
effect on our business, operating results and financial condition.
We carry errors and omissions insurance with a policy limit of $5.0
million, subject to deductibles and exclusions. Such coverage may not be
adequate or available to compensate us for all liability that may be imposed.
The imposition of liability in excess of, or the unavailability of, such
coverage could have a material adverse effect on our business, financial
condition and results of operations.
The law relating to the regulation and liability of Internet access
providers in relation to information carried or disseminated also is undergoing
a process of development in other countries. Decisions, laws, regulations and
other activities regarding regulation and content liability may significantly
affect the development and profitability of companies offering on-line and
Internet access services, including the Company.
FCC regulations may limit the services we can offer
Consistent with our growth and acquisition strategy, we are now engaged in,
or will soon be engaged in, activities that subject us to varying degrees of
federal, state and local regulation. The Federal Communications Commission
("FCC") exercises jurisdiction over all facilities of, and services offered
by, telecommunications carriers to the extent that they involve the provision,
origination or termination of jurisdictionally interstate or international
communications. The state regulatory commissions retain jurisdiction over the
same facilities and services to the extent they involve origination or
termination of jurisdictionally intrastate communications.
Our Internet operations are not currently subject to direct regulation by
the FCC or any other governmental agency, other than regulations applicable to
businesses generally. However, the FCC has recently indicated that certain
services offered over the Internet, such as phone-to-phone Internet protocol
telephony, may be functionally
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indistinguishable from traditional telecommunications service offerings and
their non-regulated status may have to be re-examined. We are unable to predict
what regulations may be adopted in the future, or to what extent existing laws
and regulations may be found applicable, or the impact such new or existing laws
may have on our business. We can give no assurance that new laws or regulations
relating to Internet services, or existing laws found to apply to them, will not
have a material adverse effect on us. Although the FCC has recently decided not
to allow local telephone companies to impose per-minute access charges on
Internet service providers, and that decision has been upheld by the reviewing
court, further regulatory and legislative consideration of this issue is likely.
In addition, some telephone companies are seeking relief through state
regulatory agencies. Such rules, if adopted, would affect our costs of serving
dial-up customers and could have a material adverse effect on our business,
financial condition and results of operations.
In addition to our Internet activities, our wholly-owned subsidiary,
PSINetworks Company, has received a license from the FCC to provide global
facilities-based telecommunications services. Our wholly-owned subsidiary,
PSINet Telecom UK Limited, has received an international facilities license from
DTI and OFTEL, the responsible telecommunications regulatory bodies in the
United Kingdom. Currently, the FCC and OFTEL do not closely regulate the charges
or practices of non-dominant carriers, such as our subsidiaries. Nevertheless,
these regulatory agencies have the power to impose more stringent regulatory
requirements on us and to change our regulatory classification, which may
adversely affect our business.
PSINetworks Company has also received competitive local exchange carrier
("CLEC") certification in Colorado and Texas, has applied for CLEC
certification in Virginia, California and New York, and is considering the
financial, regulatory and operational implications of becoming a CLEC in certain
other states. As a provider of domestic basic telecommunications services,
particularly competitive local exchange services, we could become subject to
further regulation by the FCC and/or another regulatory agency, including state
and local entities.
A critical issue for CLECs is the right to receive reciprocal compensation
for the transport and termination of Internet traffic. Most states have
required incumbent local exchange carriers to pay Internet service providers
reciprocal compensation. Federal regulators and some state regulators are
currently considering the proper jurisdictional classification of local calls
placed to an Internet service provider and whether Internet service provider
calling triggers an obligation to pay reciprocal compensation. On October 30,
1998, the FCC determined that dedicated Digital Subscriber Line service is an
interstate service and properly tariffed at the interstate level. However, the
FCC specifically did not apply this decision to the question of whether local
exchange carriers are entitled to receive reciprocal compensation when they
deliver circuit-switched dial-up traffic to Internet service providers. It is
expected that the FCC will address this question in the near future. There can
be no assurance that any FCC decision on this matter will favor our position.
An unfavorable result may have an adverse effect on our potential future
revenues as a CLEC as well as increasing our costs for primary rate interfaces
in general.
If we experience system failure or shutdown, we may not be able to deliver
services
Our success depends upon our ability to deliver reliable, high-speed access
to the Internet and upon the ability and willingness of our telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. Our network, and other networks providing services to us, are
vulnerable to damage or cessation of operations from fire, earthquakes, severe
storms, power loss, telecommunications failures and similar events, particularly
if such events occur within a high traffic location of the network. We have
designed our network to minimize the risk of such system failure, for instance,
with redundant circuits among points-of-presence to allow traffic rerouting. In
addition, we perform lab and field testing before integrating new and emerging
technology into the network, and we engage in capacity planning. Nonetheless, we
cannot assure that we will not experience failures or shutdowns relating to
individual points-of-presence or even catastrophic failure of the entire
network.
We carry business personal property insurance at both scheduled locations
and unscheduled locations, with a blanket property limit of $168.0 million and
business interruption insurance with a blanket limit of $10.0 million. Such
coverage, however, may not be adequate or available to compensate us for all
losses that may occur. In addition, we generally attempt to limit our liability
to customers arising out of network failures by contractually disclaiming all
such liability. In respect of certain services, we have also contractually
limited liability to a usage
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credit based upon the amount of time that the system was not operational. We
cannot assure, however, that such limitations will be enforceable. In any event,
significant or prolonged system failures or shutdowns could damage our
reputation and result in the loss of customers.
Although we have implemented network security measures, our network may be
susceptible to viruses, break-ins or disruptions
We have implemented certain network security measures, such as limiting
physical and network access to our routers. Nonetheless, our network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by our customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. Furthermore,
such inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers. This could, in turn, deter potential customers and
adversely affect our existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center at
Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on us.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of such problems may result in
claims against us or liability on our part. Such claims, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on our business or reputation or on our ability to attract and
retain customers for our products. Moreover, until more consumer reliance is
placed on security technologies available, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet service
industry and our customer base and revenues.
Risk associated with dependence on technology and with proprietary rights
Our success and ability to compete is dependent in part upon our technology
and technical expertise and, to a lesser degree, on our proprietary rights as
well. In order to establish and protect our technology, we rely on a combination
of copyright, trademark and trade secret laws and contractual restrictions.
Nevertheless, we cannot assure that such measures are adequate to protect our
proprietary technology. It may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization or to
develop similar technology independently. In addition, our products may be
licensed or otherwise utilized in foreign countries where laws may not protect
our proprietary rights to the same extent as do laws in the United States. It is
our policy to require employees and consultants and, when obtainable, suppliers
to execute confidentiality agreements upon the commencement of their
relationships with us. Nonetheless, we cannot assure that these precautions will
be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
In addition, we are also subject to the risk of adverse claims and
litigation alleging infringement by us of the intellectual property rights of
others. From time to time we have received claims that we have infringed other
parties' proprietary rights. While we do not believe that we have infringed the
proprietary rights of other parties, we cannot assure that third parties will
not assert infringement claims in the future with respect to our current or
future products. Such claims may require that we enter into license arrangements
or may result in protracted and costly litigation, regardless of the merits of
such claims. We cannot assure that any necessary licenses will be available or
that, if available, such licenses can be obtained on commercially reasonable
terms.
We have recently introduced new enterprise service offerings, including
value-added, Internet protocol-based enterprise communication services and xDSL-
based Internet access services in limited areas. The failure of
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these services to gain market acceptance in a timely manner or at all, or the
failure of xDSL-based services, in particular, to achieve significant market
coverage could have a material adverse effect on our business, financial
condition and results of operations. If we introduce new or enhanced services
with reliability, quality or compatibility problems, it could significantly
delay or hinder market acceptance of such services, which could adversely affect
our ability to attract new customers and subscribers. Our services may contain
undetected errors or defects when first introduced or as enhancements are
introduced. Despite testing by us or our customers, we cannot assure that errors
will not be found in new services after commencement of commercial deployment.
Such errors could result in additional development costs, loss of or delays in
market acceptance, diversion of technical and other resources from our other
development efforts and the loss of credibility with our customers and
subscribers. Any such event could have a material adverse effect on our
business, financial condition and results of operations.
Additionally, if we are unable to match our network capacity to customer
demand for our services, our network could become congested during periods of
peak customer demand. Such congestion could adversely affect the quality of
service we are able to provide. Conversely, due to the high fixed cost nature of
our infrastructure, if our network is under-utilized, it could adversely affect
our ability to provide cost-efficient services. Our failure to match network
capacity to demand could have a material adverse effect on our business,
financial condition or results of operations.
We may not have the ability to raise the funds necessary to finance the change
of control offer which may be required by the indenture
Upon the occurrence of a change of control (as defined in the indenture
governing the notes), we will be required to make an offer to purchase any or
all of the notes and our 10% senior notes at the prices stated in the respective
indentures governing such securities. However, our ability to repurchase such
securities upon a change of control may be limited by the terms of our then
existing contractual obligations and those of our subsidiaries. Our credit
facility requires that we pay all amounts outstanding under it before we
repurchase any notes or 10% senior notes upon a change of control. In addition,
we may not have adequate financial resources to effect such a purchase, and
there can be no assurance that we would be able to obtain such resources through
a refinancing of such securities to be purchased or otherwise. If we fail to
repurchase all of such securities tendered for purchase upon the occurrence of a
change of control, such failure will constitute an event of default under the
respective indentures governing such securities.
With respect to the sale of assets referred to in the definition of change
of control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under the relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person and
therefore it may be unclear whether a change of control has occurred and whether
such securities are subject to an offer to purchase.
The change of control provision may not necessarily afford the holders of
the notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving us
that may adversely affect the holders of the notes, because such transactions
may not involve a shift in voting power or beneficial ownership or, even if they
do, may not involve a shift of the magnitude required under the definition of
change of control to trigger such provisions. Except as described under
"Description of Notes--Change of Control," the indenture governing the notes
will not contain provisions that permit the holders thereof to require us to
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
You may find it difficult to sell your notes
Currently, there is no public market for the exchange notes or the initial
notes. We do not intend to apply for listing of the notes on any securities
exchange or on any automated dealer quotation system. Although the initial
purchasers of the initial notes have informed us that they intend to make a
market in the notes, they are not obligated to do so and may discontinue any
such market at any time without notice. In addition, such market making
activity may be limited during the exchange offer or during an offering under a
shelf registration statement should we
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decide to file one. As a result, we can make no assurances to you as to the
development or liquidity of any market for the notes, your ability to sell the
notes, or the price at which you may be able to sell the notes. Future trading
prices of the notes will depend on many factors, including, among other things,
prevailing interest rates, our operating results and the market for similar
securities. Historically, the market for securities similar to the notes,
including non-investment grade debt, has been subject to disruptions that have
caused substantial volatility in the prices of such securities. We cannot assure
you that, if a market develops, it will not be subject to similar disruptions.
Any such disruptions may have an adverse effect on the holders of the notes.
If you fail to exchange your notes or follow the procedure for tendering, your
notes will continue to be restricted
Issuance of exchange notes in exchange for the initial notes pursuant to
the exchange offer will only be made following the prior satisfaction of the
procedures and conditions set forth in "The Exchange Offer--Procedure for
Tendering." Such procedures and conditions include timely receipt by the
exchange agent (as defined) of such initial notes, and of a properly completed
and duly executed letter of transmittal. Initial notes that are not tendered or
are tendered but not accepted will, following the consummation of the exchange
offer, continue to be restricted securities and may not be offered or sold
except pursuant to any exemption from, or in a transaction not subject to, the
Securities Act of 1933 and applicable state securities law.
Forward-looking statements
Some of the information contained in this prospectus may contain forward-
looking statements. Such statements can be identified by the use of forward-
looking terminology such as ``believes," "expects," "may," "will,"
"should," or "anticipates" or similar words, or by discussions of strategy
that involve risks and uncertainties. These statements may discuss our future
expectations or contain projections of our results of operations or financial
condition or expected benefits to us resulting from certain acquisitions or
transactions. We cannot assure that the future results indicated, whether
expressed or implied, will be achieved. The risk factors noted in this section
and other factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
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USE OF PROCEEDS
We will not receive any cash proceeds from the exchange offer. In
consideration for issuing the exchange notes in exchange for the initial
notes, we will receive initial notes in like principal amount. We will cancel
all initial notes surrendered in exchange for the exchange notes.
The net proceeds of the offerings of the initial notes, after deducting
underwriting discounts and commissions and our estimated expenses, were
approximately $342.8 million. We expect to use the net proceeds to finance
capital expenditures including the acquisition of additional telecommunications
bandwidth and related facilities and equipment, and the construction of Internet
data centers, and general corporate purposes. In addition, we also expect to use
a portion of the net proceeds to make strategic investments in or acquisitions
of certain businesses or assets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
We will retain a significant amount of discretion over the application of
the net proceeds of the offerings of the initial notes. Because of the number
and variability of factors that determine our use of the net proceeds of the
offerings of the initial notes, there can be no assurance that such
applications will not vary substantially from our current intentions. Pending
such utilization, we intend to invest the net proceeds of the offerings of the
initial notes in short-term investment grade and government securities.
Prior to the closing of the initial offering of the initial notes, we
repaid the $108.5 million of borrowings outstanding under our $110 million
principal amount three-year secured credit facility with The Chase Manhattan
Bank, as administrative agent, and other lenders, with other cash on hand. Such
indebtedness, which bore interest at 8.125% per annum on October 15, 1998, was
incurred as of September 29, 1998 to finance a portion of our acquisition of
Tokyo Internet. Following the closings of the offerings of the initial notes,
we continue to have borrowing capacity of up to $110 million under our credit
facility, subject to its terms. See "Description of Certain Indebtedness--
Credit Facility."
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes the material terms of the
exchange offer, including those set forth in the letter of transmittal
distributed with this prospectus. This summary is qualified in its entirety by
reference to the full text of the documents underlying the exchange offer
(including the indenture and the registration rights agreements governing the
notes), which are exhibits to the exchange offer registration statement of
which this prospectus is a part.
Registration Rights
The initial notes were sold by us to Donaldson, Lufkin & Jenrette
Securities Corporation, Chase Securities Inc. and Morgan Stanley & Co.
Incorporated, as initial purchasers, on November 3, 1998 pursuant to an
Offering Memorandum dated October 27, 1998 covering $200 million principal
amount of the initial notes and on November 13, 1998 pursuant to an offering
memorandum dated November 9, 1998 covering $150 million principal amount of the
initial notes. The initial notes were then subsequently resold to qualified
institutional buyers pursuant to Rule 144A and Regulation S under the
Securities Act of 1933. In connection with the first of the initial notes
offerings, we entered into a Registration Rights Agreement dated as of November
3, 1998, and in connection with the second of the initial notes offerings, we
entered into a Registration Rights Agreement dated as of November 13, 1998.
The registration rights agreements require among other things, that we:
. file with the Securities and Exchange Commission before January 18, 1999 a
registration statement under the Securities Act of 1933 with respect to an
issue of exchange notes of PSINet identical in all material respects to the
initial notes (other than transfer restrictions, registration rights and the
requirement, under certain circumstances, to pay liquidated damages),
. use our best efforts to cause such exchange offer registration statement to
become effective under the Securities Act of 1933 before April 2, 1999 ,
. upon the effectiveness of such exchange offer registration statement,
commence the exchange offer and keep the exchange offer open for a period of
not less than 20 business days, and
. use our best efforts to cause the exchange offer to be consummated within 30
business days after the effective date.
The exchange offer would allow holders of the initial notes the
opportunity, with certain exceptions, to exchange their initial notes for a like
principal amount of exchange notes, which would be issued without a restrictive
legend and may generally be reoffered and resold by the holders without
restrictions or limitations under the Securities Act of 1933, subject to the
terms and conditions enunciated by the staff of the Securities and Exchange
Commission (the "Staff") in the Morgan Stanley No-Action Letter (Morgan Stanley
and Co., Inc. (available June 5, 1991)) and the Exxon Capital No-Action Letter
(Exxon Capital Holdings Corporation (available May 13, 1988)), as interpreted in
the Securities and Exchange Commission's letter to Shearman & Sterling dated
July 2, 1993, and similar no-action letters. However, holders of the initial
notes are not entitled to rely on the position of the Staff in the no-action
letters referred to above and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act of 1933 in connection with the resale of the exchange notes, if
such holder:
. is an "affiliate" of PSINet (within the meaning of Rule 405 under the
Securities Act of 1933),
. does not acquire the exchange notes in the ordinary course of business,
. tenders in the exchange offer with the intention to participate, or for the
purpose of participating, in a distribution of the exchange notes, or
. is a broker-dealer which acquired such initial notes directly from
PSINet.
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Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes, where such initial notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution." We have
agreed to include in this prospectus certain information necessary to allow such
broker-dealers to exchange such initial notes pursuant to the exchange offer and
to satisfy the prospectus delivery requirements in connection with resales of
exchange notes received by such broker-dealer in the exchange offer. We have
also agreed to maintain the effectiveness of the exchange offer registration
statement for such purposes for one year.
In addition, we agreed, pursuant to the registration rights agreements, to
file a shelf registration statement pursuant to Rule 415 under the Securities
Act of 1933, registering for resale:
. any initial notes held by persons who are not permitted by law or any policy
of the Securities and Exchange Commission to participate in the exchange
offer and who satisfy certain other conditions,
. any exchange notes acquired in the exchange offer by any holder who must
comply with the prospectus delivery requirements of the Securities Act of
1933 in connection with the resales of such exchange notes if this prospectus
is not appropriate or available for such resales by such holder, or
. any initial notes held by a broker-dealer which were acquired directly from
PSINet or one of its affiliates.
To participate in such a shelf registration, any such holder of notes must so
notify PSINet within 10 business days following consummation of the exchange
offer and provide to PSINet the information requested by PSINet within 10
business days of such request. We have agreed to file with the Securities and
Exchange Commission such a shelf registration statement no later than 30 days
after the earlier of (1) the date on which we determine that the exchange offer
is not permitted by applicable law or (2) the date on which we receive the
notice from the holder as specified above, and to use our best efforts to cause
such shelf registration statement to become effective under the Securities Act
of 1933 as soon as practicable but in no event later than 60 days after the
filing of the shelf registration statement (or such longer period, not to exceed
150 days after the filing of the shelf registration statement, as may be
necessary to avoid conflicts with existing contractual obligations of PSINet).
In addition, we agreed to use our best efforts to keep such shelf registration
statement continually effective, supplemented and amended for a period of at
least two years following the closing date of the initial offering of the
initial notes, or such shorter period as will terminate when all initial notes
covered by such shelf registration statement have been sold pursuant thereto.
Registration Defaults; Liquidated Damages
If the applicable registration statement or amendment is not timely filed
or declared effective or thereafter ceases to be effective or fails to be usable
for its intended purpose without being succeeded immediately by a post-effective
amendment that cures such failure and is itself immediately declared effective,
or if the exchange offer has not been consummated on or prior to the 30th
business day after the effective date, we have agreed to pay liquidated damages
to each holder of initial notes affected thereby in an amount equal to $.05 per
week for each $1,000 in principal amount of notes held by such holder for each
week or portion thereof that such default continues for the first 90-day period
immediately following the occurrence of such default. The amount of such
liquidated damages will increase by an additional $.05 per week per $1,000 in
principal amount of initial notes for each subsequent 90-day period until all
such default have been cured, up to a maximum amount of liquidated damages of
$.50 per week per $1,000 in principal amount of initial notes, provided that we
shall in no event be required to pay liquidated damages for more than one
default at any given time. Following the cure of any default, the payment of
liquidated damages in respect of the notes will cease. Notwithstanding the fact
that any initial notes for which liquidated damages are due cease to be
restricted securities within the meaning of the Securities Act of 1933, all of
our obligations to pay liquidated damages with respect to such securities
outstanding prior to the time such initial notes ceased to be restricted
securities shall survive until such time as such obligations shall have been
satisfied in full.
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Except as set forth above, this prospectus may not be used for any offer to
resell, resale or other transfer of exchange notes.
Except as set forth above, after consummation of the exchange offer,
holders of notes have no registration or exchange rights under the registration
rights agreements. See "--Consequences of Failure to Exchange."
Expiration Date; Extensions; Amendments
The term "expiration date" shall mean 5:00 p.m., New York City time, on
_________________, 1999 (20 business days after the effective date of the
exchange offer registration statement), unless PSINet, in its sole discretion,
extends the exchange offer, in which case the term "expiration date" shall mean
the latest date and time to which the exchange offer is extended.
To extend the exchange offer, we will notify the exchange agent of any
extension by oral or written notice, followed by a public announcement thereof
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date. In no event will the expiration date be
extended to a date more than 30 business days after effectiveness of the
exchange offer registration statement.
We reserve the right, in our reasonable judgment, (1) to delay accepting
any initial notes, to extend the exchange offer or to terminate the exchange
offer if any of the conditions set forth below under "--Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the exchange agent or (2) to amend the terms of the exchange
offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by a public announcement
thereof.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all initial notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time on the
expiration date. We will issue $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of outstanding initial notes accepted
in the exchange offer. Holders of the initial notes may tender some or all of
their initial notes pursuant to the exchange offer; however, initial notes may
be tendered only in integral multiples of $1,000. The exchange notes will
evidence the same debt as the initial notes and will be entitled to the benefits
of the indenture. The form and terms of the exchange notes are substantially the
same as the form and terms of the initial notes except that:
. the exchange notes have been registered under the Securities Act of 1933 and
thus will not bear legends restricting the transfer thereof, and
. holders of the exchange notes generally will not be entitled to certain
rights under the registration rights agreements or liquidated damages, which
rights generally will terminate upon consummation of the exchange offer.
Holders of initial notes do not have any appraisal or dissenters' rights
under the New York Business Corporation Law or the indenture in connection with
the exchange offer. We intend to conduct the exchange offer in accordance with
the applicable requirements of the Securities Exchange Act of 1934 and the rules
and regulations of the Securities and Exchange Commission thereunder, including
Rule 14e-1.
We shall be deemed to have accepted validly tendered initial notes when, as
and if we have given oral or written notice thereof to the exchange agent. The
exchange agent will act as agent for the tendering holders pursuant to the
exchange agent agreement for the purpose of receiving the exchange notes from
us.
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If any tendered initial notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted initial notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the expiration date.
Holders who tender their initial notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
initial notes pursuant to the exchange offer. We will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the exchange offer. See "--Fees and Expenses."
Interest on Exchange Notes
Each exchange note will bear interest from the most recent date to which
interest has been paid or duly provided for on the initial note surrendered in
exchange for such exchange note or, if no such interest has been paid or duly
provided for on such initial note, from November 3, 1998. Holders of the initial
notes whose initial notes are accepted for exchange will not receive accrued
interest on such initial notes for any period from and after the last interest
payment date to which interest has been paid or duly provided for on such
initial notes prior to the original issue date of the exchange notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such initial notes, and will be deemed to have waived the right to
receive any interest on such initial notes accrued from and after such interest
payment date or, if no such interest has been paid or duly provided for, from
and after November 3, 1998. Interest on the notes will be payable semi-annually
on May 1 and November 1 of each year, commencing May 1, 1999.
Procedures for Tendering Initial Notes
Only holders of initial notes may tender such initial notes in the exchange
offer. To tender in the exchange offer, a holder must complete, sign and date
the letter of transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the letter of transmittal, and mail or otherwise
deliver such letter of transmittal or such facsimile, together with the initial
notes and any other required documents, to the exchange agent so as to be
received by the exchange agent at the address set forth below prior to 5:00
p.m., New York City time, on the expiration date. Delivery of the initial notes
may be made by book-entry transfer of such initial notes into the exchange
agent's account at the Depository Trust Corporation in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the exchange agent prior to the expiration date.
By executing the letter of transmittal, each holder will make to PSINet the
representation set forth below in the second paragraph under the heading "--
Resale of Exchange Notes."
The tender by a holder and the acceptance thereof by PSINet will constitute
an agreement between such holder and PSINet in accordance with the terms and
subject to the conditions set forth herein and in the letter of transmittal.
The method of delivery of initial notes and the letter of transmittal and
all other required documents to the exchange agent is at the election and risk
of the holder. Instead of delivery by mail, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent before the expiration date. No
letter of transmittal or notes should be sent to PSINet. Holders may request
their respective brokers, dealers, commercial banks, trust companies or nominees
to effect the above transactions for such holders.
Any beneficial owner whose initial notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf.
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Signatures on the letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an "eligible institution" (as defined below)
unless the initial notes tendered pursuant thereto (1) are signed by the
registered holder, unless such holder has completed the box entitled "Special
Exchange Instructions" or "Special Delivery Instructions" on the letter of
transmittal or (2) are tendered for the account of an eligible institution. In
the event that signatures on a letter of transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934 (an "eligible institution").
If the letter of transmittal is signed by a person other than the
registered holder of any initial notes listed therein, such initial notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such initial
notes, with the signature thereon guaranteed by an eligible institution.
If the letter of transmittal or any initial notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by PSINet, evidence
satisfactory to PSINet of their authority to so act must be submitted with the
letter of transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered initial notes and withdrawal of tendered
initial notes will be determined by PSINet in its sole discretion, which
determination will be final and binding. PSINet reserves the absolute right to
reject any and all initial notes not properly tendered or any initial notes
PSINet's acceptance of which would, in the opinion of counsel for PSINet, be
unlawful. PSINet also reserves the right to waive any defects, irregularities or
conditions of tender as to particular initial notes. PSINet's interpretation of
the terms and conditions of the exchange offer (including the instructions in
the letter of transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of initial
notes must be cured within such time as PSINet shall determine. Although PSINet
intends to notify holders of initial notes of defects or irregularities with
respect to tenders of initial notes, none of PSINet, the exchange agent or any
other person shall incur any liability for failure to give such notification.
Tenders of initial notes will not be deemed to have been made until such defects
or irregularities have been cured or waived. Any initial notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
Book-Entry Delivery Procedures
Promptly after the date of this prospectus, the exchange agent will
establish accounts with respect to the initial notes at the Depository Trust
Company (the "Book-Entry Transfer Facility") for purposes of the exchange offer.
Any financial institution that is a participant in the Book-Entry Transfer
Facility systems may make book-entry delivery of the initial notes by causing
the Depository Trust Company to transfer such initial notes into the exchange
agent's account at such Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for such transfer. Timely book-entry
delivery of initial notes pursuant to the exchange offer, however, requires
receipt of a confirmation of a book-entry transfer ("Book-Entry Confirmation")
prior to the expiration date. In addition, although delivery of initial notes
may be effected through book-entry transfer into the exchange agent's account at
the Book-Entry Transfer Facility, the letter of transmittal (or a manually
signed facsimile thereof), together with any required signature guarantees and
any other required documents, or an "agent's message" (as defined below) in
connection with a book-entry transfer, must, in any case, be delivered or
transmitted to and received by the exchange agent at its address set forth on
the back cover page of this prospectus prior to the expiration date to receive
exchange notes for tendered initial notes, or the guaranteed delivery procedure
described below must be complied with. Tender will not be deemed made until such
documents are received by the exchange agent. Delivery of documents to the Book-
Entry Transfer Facility does not constitute delivery to the exchange agent.
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Tender of Initial Notes Held Through Depository Trust Company
The exchange agent and the Depository Trust Company have confirmed that the
exchange offer is eligible for the Depository Trust Company's Automated Tender
Offer Program. Accordingly, participants in the Depository Trust Company's
Automated Tender Offer Program may, in lieu of physically completing and signing
the applicable letter of transmittal and delivering it to the exchange agent,
electronically transmit their acceptance of the exchange offer by causing the
Depository Trust Company to transfer initial notes to the exchange agent in
accordance with the Depository Trust Company's Automated Tender Offer Program
procedures for transfer. The Depository Trust Company will then send an agent's
message to the exchange agent.
The term "agent's message" means a message transmitted by the Depository
Trust Company, received by the exchange agent and forming part of the Book-Entry
Confirmation, which states that the Depository Trust Company has received an
expressed acknowledgment from a participant in the Depository Trust Company is
Automated Tender Offer Program that is tendering initial notes which are the
subject of such Book-Entry Confirmation, that such participant has received and
agrees to be bound by the terms of the applicable letter of transmittal (or, in
the case of an agent's message relating to guaranteed delivery, that such
participant has received and agrees to be bound by the applicable notice of
guaranteed delivery), and that PSINet may enforce such agreement against such
participant.
Guaranteed Delivery Procedures
Holders who wish to tender their initial notes and (1) whose initial notes
are not immediately available, (2) who cannot deliver their initial notes, the
letter of transmittal or any other required documents to the exchange agent or
(3) who cannot complete the procedures for book-entry transfer, prior to the
expiration date, may effect a tender if:
(a) the tender is made through an eligible institution;
(b) prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of guaranteed
delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate number(s) of such initial notes
and the principal amount of initial notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the expiration date, the letter of transmittal (or facsimile
thereof), together with the certificate(s) representing the initial notes (or a
Book-Entry Confirmation transfer of such initial notes into the exchange agent's
account at the Depository Trust Company) and all other documents required by the
letter of transmittal, will be deposited by the eligible institution with the
exchange agent; and
(c) such properly completed and executed letter of transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
initial notes in proper form for transfer (or a Book-Entry Confirmation transfer
of such initial notes into the exchange agent's account at the Depository Trust
Company) and all other documents required by the letter of transmittal, are
received by the exchange agent within three New York Stock Exchange trading days
after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their initial notes according to the
guaranteed delivery procedures set forth above.
Withdrawals of Tenders
Except as otherwise provided herein, tenders of initial notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of initial notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at the address set forth herein prior to 5:00 p.m., New York City time, on
the expiration date. Any such notice of withdrawal must
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. specify the name of the person having deposited the initial notes to be
withdrawn (the "depositor"),
. identify the initial notes to be withdrawn (including the certificate
number(s) and principal amount of such initial notes, or, in the case of
initial notes transferred by book-entry transfer, the name and number of the
account at the Depository Trust Company to be credited),
. be signed by the holder in the same manner as the original signature on the
letter of transmittal by which such initial notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the trustee under the indenture register the transfer of
such initial notes into the name of the person withdrawing the tender, and
. specify the name in which any such initial notes are to be registered, if
different from that of the depositor. All questions as to the validity, form
and eligibility (including time or receipt) of such notices will be
determined by PSINet, whose determination shall be final and binding on all
parties. Any initial notes so withdrawn will be deemed not to have been
validly tendered for purposes of the exchange offer and no exchange notes
will be issued with respect thereto unless the initial notes so withdrawn are
validly retendered. Any initial notes which have been tendered but which are
not accepted for exchange will be returned to such holder without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn initial notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, PSINet shall not be
required to accept for exchange any initial notes, and may terminate or amend
the exchange offer as provided herein before the acceptance of such initial
notes, if:
(a) in the opinion of counsel to PSINet, the exchange offer or any part
thereof contemplated herein violates any applicable law or interpretation of the
Staff;
(b) any action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of PSINet to proceed with the exchange offer or any material adverse
development shall have occurred in any such action or proceeding with respect to
PSINet;
(c) any governmental approval has not been obtained, which approval PSINet
shall deem necessary for the consummation of the exchange offer as contemplated
hereby;
(d) any cessation of trading on The Nasdaq Stock Market or any exchange, or
any banking moratorium, shall have occurred, as a result of which PSINet is
unable to proceed with the exchange offer; or
(e) a stop order shall have been issued by the Securities and Exchange
Commission or any state securities authority suspending the effectiveness of the
exchange offer registration statement or proceedings shall have been initiated
or, to the knowledge of PSINet, threatened for that purpose.
If PSINet determines in its reasonable judgment that any of the foregoing
conditions are not satisfied, PSINet may:
(1) refuse to accept any initial notes and return all tendered initial
notes to the tendering holders,
(2) extend the exchange offer and retain all initial notes tendered prior
to the expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such initial notes (see "--Withdrawals of Tenders"), or
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(3) waive such unsatisfied conditions with respect to the exchange offer
and accept all properly tendered initial notes which have not been withdrawn.
Exchange Agent
Wilmington Trust Company will act as exchange agent for the exchange
offer with respect to the initial notes.
Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal for the initial notes and
requests for copies of the notice of guaranteed delivery should be directed to
the exchange agent, addressed as follows:
By registered or certified mail or overnight courier:
Attn: Kristin Long
Wilmington Trust Company
Corporate Trust Operations
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
By facsimile (for eligible institutions only): (302) 651-1079
Confirm by telephone: (302) 651-1562
Kristin Long
Fees and Expenses
The expenses of soliciting initial notes for exchange will be borne by
PSINet. The principal solicitation is being made by mail by the exchange agent.
However, additional solicitation may be made by telephone, facsimile or in
person by officers and regular employees of PSINet and its affiliates and by
persons so engaged by the exchange agent.
PSINet will pay the exchange agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith and pay other registration expenses, including fees and
expenses of the trustee under the indenture, filing fees, blue sky fees and
printing and distribution expenses.
PSINet will pay all transfer taxes, if any, applicable to the exchange of
the initial notes pursuant to the exchange offer. If, however, certificates
representing the exchange notes or the initial notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered holder of the initial notes
tendered, or if tendered initial notes are registered in the name of any person
other than the person signing the letter of transmittal, or if a transfer tax is
imposed for any reason other than the exchange of the initial notes pursuant to
the exchange offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other person) will be payable by the tendering
holder.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
initial notes, which is the aggregate principal amount of the initial notes, as
reflected in PSINet's accounting records on the date of exchange. Accordingly,
no gain or loss for accounting purposes will be recognized in connection with
the exchange offer. The expenses of the initial notes offerings and the exchange
offer will be amortized over the term of the exchange notes.
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Resale of Exchange Notes
PSINet is making the exchange offer in reliance on the position of the
Staff's Exxon Capital no-action letter, Morgan Stanley no-action letter,
Shearman & Sterling no-action letter, and other interpretive letters addressed
to third parties in other transactions; however, PSINet has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the exchange offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, PSINet believes that exchange notes issued pursuant to this exchange
offer in exchange for initial notes may be offered for resale, resold and
otherwise transferred by holders of such exchange notes, other than such a
holder who is a broker-dealer, without further compliance with the registration
and prospectus delivery requirements of the Securities Act of 1933, provided
that such exchange notes are acquired in the ordinary course of such holder's
business and that such holder is not participating, and has no arrangement or
understanding with any person to participate, in a distribution (within the
meaning of the Securities Act of 1933) of such exchange notes. Notwithstanding
the above, any holder of initial notes may be subject to separate restrictions
if it:
. is an "affiliate" of PSINet (within the meaning of Rule 405 under the
Securities Act of 1933),
. does not acquire such exchange notes in the ordinary course of its business,
. intends to participate in the exchange offer for the purpose of
distributing exchange notes, or
. is a broker-dealer who purchased such initial notes directly from PSINet.
Holders of initial notes falling into any of the categories above:
. will not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters,
. will not be permitted or entitled to tender such initial notes in the
exchange offer, and
. must comply with the registration and prospectus delivery requirements of the
Securities Act of 1933 in connection with any sale or other transfer of such
initial notes unless such sale is made pursuant to an exemption from such
requirements.
In addition, as described below, if any broker-dealer holds initial notes
acquired for its own account (a "Participating Broker-Dealer"), then such
Participating Broker-Dealer may be deemed a statutory "underwriter" within the
meaning of the Securities Act of 1933 and must deliver a prospectus meeting the
requirements of the Securities Act of 1933 in connection with any resales of
such exchange notes.
As a condition to its participation in the exchange offer, each holder of
initial notes (including, without limitation, any holder who is a Participating
Broker-Dealer) shall furnish, upon the request of PSINet, prior to the
consummation of the exchange offer, a written representation to PSINet
(contained in the letter of transmittal) to the effect that:
. it is not an affiliate of PSINet,
. any exchange notes to be received by it are being acquired in the ordinary
course of its business, and
. it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution (within the meaning of the Securities Act of 1933) of such
exchange notes.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it acquired the initial
notes for its own account as a result of market-making activities or other
trading activities (and not directly from PSINet) and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act of 1933 in
connection with any resale of such exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, such a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act of 1933. Based on the
39
<PAGE>
position taken by the Staff in the interpretive letters referred to above,
PSINet believes that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the exchange notes received upon exchange
of such initial notes with a prospectus meeting the requirements of the
Securities Act of 1933, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such exchange notes. Accordingly, this prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of exchange notes received in exchange for initial notes where such
initial notes were acquired by such Participating Broker-Dealer for its own
account as a result of market-making or other trading activities.
Subject to certain provisions set forth in the registration rights
agreements, PSINet shall use its best efforts to keep the exchange offer
registration statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for sales of exchange notes by
Participating Broker-Dealers, and to ensure that the exchange offer registration
statement conforms with the requirements of the Securities Act of 1933 and the
policies, rules and regulations of the Securities and Exchange Commission as
announced from time to time, for a period of one year from the consummation of
the exchange offer or such shorter period as will terminate when all initial
notes covered by the exchange offer registration statement have been sold
pursuant thereto. See "Plan of Distribution." Any Participating Broker-Dealer
who is an affiliate of PSINet may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act of 1933 in connection with any resale transaction.
Each holder of initial notes and each initial purchaser who is required to
deliver a prospectus in connection with sales or market making activities, by
acquisition of an initial note, agrees that, upon receipt of notice from PSINet
that:
(1) the issuance by the Securities and Exchange Commission of any stop
order suspending the effectiveness of the exchange offer registration
statement under the Securities Act of 1933 or of the suspension by any
state securities commission of the qualification of the initial notes
from offering or sale in any jurisdiction, or the initiation of any
proceeding for any of the preceding purposes; or
(2) the existence of any fact or the happening of any event that makes any
statement of a material fact made in the exchange offer registration
statement or this prospectus, or any amendment or supplement thereto or
any document incorporated by reference herein untrue, or that requires
the making of any additions or changes in the exchange offer
registration statement or this prospectus in order to make the
statements herein, in light of the circumstances under which they were
made, not misleading (in each case, a "Suspension Notice")
such holder or person shall discontinue disposition of the initial notes
pursuant to this prospectus until such holder or person has received copies of
the supplemented or amended prospectus or such holder or person is advised in
writing by PSINet that use of the prospectus may be resumed and has received
copies of any additional or supplemental filings that are incorporated by
reference in the prospectus (in each case, the "Recommencement Date").
In addition, each holder or person will be deemed to have agreed that it
will either:
(1) destroy any prospectuses, other than permanent file copies, then
in such holder or person's possession which have been replaced by
PSINet with more recently dated prospectuses or
(2) deliver to PSINet, at PSINet's expense, all copies, other than
permanent file copies, then in such holder's or person's possession
of the prospectus covering such initial notes that was current at
the time of receipt of the Suspension Notice.
PSINet shall extend the time period regarding the effectiveness of the exchange
offer registration statement by a number of days equal to the number of days in
the period from and including the date of delivery of the Suspension Notice to
the date of delivery of the Recommencement Date.
40
<PAGE>
Consequences of Failure to Exchange
Any initial notes tendered and exchanged in the exchange offer will reduce
the aggregate principal amount of initial notes outstanding. Following the
consummation of the exchange offer, holders who did not tender their initial
notes generally will not have any further registration rights under the
registration rights agreements, and such initial notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such initial notes could be adversely affected. The initial notes are
currently eligible for sale pursuant to Rule 144A through PORTAL. Because PSINet
anticipates that most holders will elect to exchange such initial notes for
exchange notes pursuant to the exchange offer due to the absence of restrictions
on the resale of exchange notes (except for applicable restrictions on any
holder of exchange notes who is an affiliate of PSINet or is a broker-dealer
which acquired the initial notes directly from PSINet) under the Securities Act
of 1933, PSINet anticipates that the liquidity of the market for any initial
notes remaining after the consummation of the exchange offer may be
substantially limited.
As a result of the making of this exchange offer, PSINet will have
fulfilled certain of its obligations under the registration rights agreements,
and holders who do not tender their initial notes, except for certain instances
involving the initial purchasers or holders of initial notes who are not
eligible to participate in the exchange offer, will not have any further
registration rights under the registration rights agreements or otherwise or
rights to receive liquidated damages for failure to register. Accordingly, any
holder that does not exchange its initial notes for exchange notes will continue
to hold the untendered initial notes and will be entitled to all the rights and
subject to all the limitations applicable thereto under the indenture, except to
the extent that such rights or limitations, by their terms, terminate or cease
to have further effectiveness as a result of the exchange offer.
The initial notes that are not exchanged for exchange notes pursuant to the
exchange offer will remain restricted securities within the meaning of the
Securities Act of 1933. Accordingly, such initial notes may be resold only:
. to PSINet or any of its subsidiaries,
. inside the United States to a qualified institutional buyer in compliance
with Rule 144A under the Securities Act of 1933,
. inside the United States to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933), an "accredited investor" that, prior to such transfer, furnishes (or
has furnished on its behalf by a U.S. broker-dealer) to the trustee under
the indenture a signed letter containing certain representations and
agreements relating to the restrictions on transfer of the notes (the form
of which letter can be obtained from such trustee),
. outside the United States in compliance with Rule 904 under the Securities
Act of 1933,
. pursuant to the exemption from registration provided by Rule 144 under the
Securities Act of 1933 (if available), or
. pursuant to an effective registration statement under the Securities Act of
1933.
Each accredited investor that is not a qualified institutional buyer and
that is an original purchaser of any of the initial notes from the initial
purchasers will be required to sign a letter confirming that such person is an
accredited investor under the Securities Act of 1933 and that such person
acknowledges the transfer restrictions summarized herein.
Other
Participation in the exchange offer is voluntary and holders of initial
notes should carefully consider whether to accept the offer to exchange their
initial notes. Holders of initial notes are urged to consult their financial and
tax advisors in making their own decision on what action to take with respect to
the exchange offer. PSINet may in the future seek to acquire untendered initial
notes in open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. PSINet has no present plans to acquire any initial
41
<PAGE>
b
notes that are not tendered in the exchange offer or to file a registration
statement to permit resales of any untendered initial notes.
42
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of material United States federal income tax
consequences relevant in the opinion of Nixon, Hargrave, Devans & Doyle LLP,
counsel to PSINet, to the exchange of initial notes for exchange notes pursuant
to the exchange offer and the purchase, ownership and disposition of the notes,
but does not purport to be a complete analysis of all potential tax effects.
This summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time, which change may be retroactive. Such
counsel has relied upon representations by PSINet and its officers with respect
to factual matters for purposes of this summary. This summary is not binding on
the Internal Revenue Service or on the courts, and no ruling will be requested
from the Internal Revenue Service on any issues described below. There can be no
assurance that the Internal Revenue Service will not take a different position
concerning the matters discussed below and that such positions of the Internal
Revenue Service would not be sustained.
This summary applies only to those persons who are the initial holders of
notes, who acquired the notes for cash and who hold notes as capital assets. It
does not address the tax consequences to taxpayers who are subject to special
rules (such as financial institutions, tax-exempt organizations, insurance
companies and, except as discussed below under "Certain U.S. Federal Income Tax
Considerations for Non-U.S. Holders," persons who are not "U.S. Holders"). A
"U.S. Holder" means a beneficial owner of a note who purchased the notes
pursuant to the offerings of the initial notes that is for U.S. federal income
tax purposes:
(1) a citizen or resident of the United States;
(2) a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
(4) a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust and (B) one or more
U.S. fiduciaries have the authority to control all substantial decisions of the
trust.
The following discussion is for general information only. Each holder of a
note is strongly urged to consult with its own tax advisors to determine the
impact of such holder's personal tax situation on the anticipated tax
consequences, including the tax consequences under state, local, foreign or
other tax laws, of the acquisition, ownership and disposition of the notes.
Exchange of Initial Notes for Exchange Notes
Pursuant to this prospectus, PSINet is offering to effect a registered
exchange offer for the initial notes, through which holders would be entitled to
exchange the initial notes for exchange notes that would be substantially
identical in all material respects to the initial notes, except that the
exchange notes would be registered and therefore would not be subject to
transfer restrictions. Alternatively, PSINet may file a shelf registration
statement with respect to the notes which, if effective, would have the effect
of eliminating transfer restrictions on the notes, thereby permitting their
resale. Neither participation in this exchange offer nor the filing of a shelf
registration statement as described above should result in a taxable exchange to
PSINet or any holder of a note. No taxable exchange should occur or should be
deemed to occur because there would be no material alteration in the terms of
the notes and any modification of the terms of the notes resulting from such an
action would be by operation of the original terms of the notes pursuant to a
unilateral act by PSINet. As a result, counsel to PSINet is of the opinion that
there should be no U.S. federal income tax consequences to holders electing to
exchange initial notes for exchange notes. If, however, such transaction were
treated as an
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<PAGE>
"exchange" for U.S. federal income tax purposes, the transaction should
constitute a recapitalization for U.S. federal income tax purposes. Under the
rules applicable to recapitalizations, counsel to PSINet is of the opinion that
holders electing to exchange initial notes for exchange notes should not
recognize any gain or loss upon such exchange.
Interest
The stated interest on the notes generally will be taxable to a U.S. Holder
as ordinary income at the time that it is paid or accrued, in accordance with
the holder's method of accounting for federal income tax purposes.
Treatment of Pre-issuance Interest
The purchase price for a note issued in the second of the offerings of the
initial notes includes pre-issuance interest accrued from November 3, 1998. For
federal income tax purposes, the issue price of such notes will be equal to the
first price at which a substantial amount of notes are initially sold reduced by
the amount of the purchase price for a note that is allocable to pre-issuance
accrued interest on such notes. Accordingly, the receipt of stated interest on
May 1, 1999 equal to such amount of pre-issuance interest on such note will not
be treated as a payment of interest or principal on such note but rather will be
a tax-free return of pre-issuance interest.
Liquidated Damages
If, within the applicable period after the original issuance of the initial
notes, PSINet has not filed an exchange offer registration statement or a shelf
registration statement with respect to the initial notes, as the case may be, or
if PSINet otherwise defaults with respect to its obligations under the
registration rights agreements, liquidated damages shall become payable in cash
with respect to the applicable initial notes. See "The Exchange Offer--
Registration Defaults; Liquidated Damages." Although the characterization of
such liquidated damages is uncertain, liquidated damages probably would
constitute contingent interest, which generally is not includible in income
before it is fixed or paid. If liquidated damages become fixed or paid, they
should be included in the holder's gross income in accordance with the holder's
method of accounting for federal income tax purposes.
According to regulations under the Code, the possibility of a change in the
interest rate will not affect the amount of interest income recognized by a U.S.
Holder if the likelihood of the change, as of the date the notes are issued, is
remote. PSINet believes that the likelihood of a change in the interest rate on
the notes is remote and does not intend to treat the possibility of a change in
the interest rate as affecting the yield to maturity of any note. If, as
anticipated, the issue price of the notes equals their stated principal amount,
and the likelihood of a change in the interest rate is remote, the notes will
not be issued with original issue discount.
Amortizable Bond Premium
A U.S. Holder that purchases a note for an amount in excess of the
principal amount (e.g., in the second of the offerings of the initial notes)
will be considered to have purchased such note at a "premium." A U.S. Holder
generally may elect to amortize the premium over the remaining term of such note
on a constant yield method. However, a note may be redeemed by PSINet for an
amount in excess of the purchase price starting on November 1, 2003 until
October 31, 2004. Accordingly, a U.S. Holder may not begin to amortize bond
premium until on and after November 1, 2005. The bulk of the bond premium is
amortizable on and after November 1, 2006 until the maturity date at November 1,
2008. The amount amortized in any year will be treated as a reduction of the
U.S. Holder's interest income from such note, and any bond premium allocable to
a year in excess of such interest income allocable to the year will be allowed
as a deduction. Bond premium on a note held by a U.S. Holder that does not make
such an election will decrease the gain or increase the loss otherwise
recognized on disposition of such note. The election to amortize premium on a
constant yield method, once made, applies to all debt obligations held or
subsequently acquired by the electing U.S. Holder on or after the first day of
the first taxable year to which the election applies and may not be revoked
without the consent of the IRS. Holders of notes purchased at a premium are
urged to consult their tax advisors regarding the election to amortize premium.
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<PAGE>
Sale, Exchange and Redemption of Notes
A sale, exchange or redemption of notes will result in taxable gain or loss
equal to the difference between the amount of cash or other property received
and the holder's adjusted tax basis in the note. A holder's adjusted tax basis
for determining gain or loss on the sale or other disposition of a note will
initially equal the cost of the note to such holder and will be decreased by the
amount of any principal payments received by such holder, and any amortizable
bond premium used to offset interest income of such holder or otherwise allowed
as a deduction. Gain or loss upon a sale, exchange, or redemption of a note will
be capital gain or loss if the note is held as a capital asset. With respect to
individual holders, if the note is held for more than 12 months, the maximum
rate of tax on any capital gain is 20%. The distinction between capital gain or
loss and ordinary income or loss is also relevant for purposes of, among other
things, limitations on the deductibility of capital losses.
Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders
The following summary describes certain United States federal income and
estate tax consequences of the ownership of notes as of the date hereof by any
holder who is a beneficial owner of a note but is not a "U.S. Holder" (a "Non-
U.S. Holder").
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) generally no withholding of United States federal income tax will be
required with respect to payment by PSINet or any paying agent of principal or
interest on a note owned by a Non-U.S. Holder, provided
(1) that the beneficial owner does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of
PSINet entitled to vote within the meaning of section 871(h)(3) of the Code
and the regulations thereunder,
(2) the beneficial owner is not a "controlled foreign corporation" (as
defined in Section 957 of the Code) that is related directly, indirectly or
constructively to PSINet through stock ownership and
(3) the beneficial owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the Code
and the regulations thereunder;
(b) generally no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-U.S. Holder upon
the sale, exchange or retirement of a note; and
(c) a note beneficially owned by an individual who at the time of death
is a Non-U.S. Holder generally will not be includible in the individual's gross
estate for the purposes of the United States federal estate tax as a result of
such individual's death, provided that such individual does not at the time of
death actually or constructively own 10% or more of the total combined voting
power of all classes of stock of PSINet entitled to vote within the meaning of
section 871(h)(3) of the Code and provided that the interest payments with
respect to such note will not have been, if received at the time of such
individual's death, effectively connected with the conduct of a United States
trade or business by such individual.
To satisfy the requirement referred to in (a)(3) above, the beneficial
owner of such note, or a financial institution holding the note on behalf of
such owner, must provide, in accordance with specified procedures, PSINet or a
paying agent of PSINet with a statement to the effect that the beneficial owner
is not a U.S. person. Pursuant to current temporary Regulations, these
requirements will be met if (1) the beneficial owner provides the payor his name
and address, and certifies, under penalties of perjury, that he is not a U.S.
person, which certification may be made on an Internal Revenue Service Form W-8
(or successor or substitute form) or (2) a financial institution that holds
customers' securities in the ordinary course of its trade or business and holds
the note on behalf of the beneficial owner certifies, under penalties of
perjury, that such statement has been received by
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<PAGE>
it (or by another financial institution acting on behalf of the Non-U.S.
Holder), and furnishes a paying agent with a copy thereof.
Regulations recently issued by the Internal Revenue Service, which will be
effective for payments made after December 31, 1999 (subject to certain
transition rules), make modifications to the certification procedures applicable
to Non-U.S. Holders. In general, these regulations unify certain certification
procedures and forms and clarify and modify reliance standards. A Non-U.S.
Holder should consult its own tax advisor regarding the effect of the new
Regulations.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest made to Non-
U.S. Holders will generally be subject to a 30% withholding tax, or such lower
rate as may be specified by an applicable income tax treaty, unless the
beneficial owner of the note provides PSINet or its paying agent, as the case
may be, with a properly executed (1) Internal Revenue Service Form 1001 (or
successor form) claiming an exemption from withholding under the benefit of a
tax treaty or (2) Internal Revenue Service Form 4224 (or successor form) stating
that interest paid on the note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or business
in the United States.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the note is effectively connected with the conduct of such trade
or business, the Non-U.S. Holder, although exempt from the withholding tax
discussed above, will generally be subject to United States federal income tax
on such interest on a net income basis in the same manner as if it were a United
States person. In addition, if such holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, or such lower rate as may be
specified by an applicable income tax treaty, subject to adjustments.
Any gain or income realized upon the sale, exchange or retirement of a
note generally will not be subject to United States federal income tax unless
(1) such gain or income is effectively connected with a trade or business in the
United States of the Non-U.S. Holder, or (2) in the case of a Non-U.S. Holder
who is a nonresident alien individual, such holder is present in the United
States for 183 days or more in the taxable year of such sale, exchange or
retirement, and certain other conditions are met.
Information Reporting and Backup Withholding
The "backup" withholding and information reporting requirements may apply
to certain payments of principal and interest on a note and to certain payment
of proceeds from the sale or retirement of a note. PSINet, its agent, a broker,
the Trustee or any paying agent, as the case may be, is required to withhold tax
from any payment that is subject to backup withholding at a rate of 31% of such
payment if the holder fails to furnish his taxpayer identification number
(social security number or employer identification number), or to certify that
such holder is not subject to backup withholding rules. Certain holders
(including, among others, all corporations) are not subject to the backup
withholding and reporting requirements.
Under current Treasury Regulations, backup withholding and information
reporting do not apply to payments made by PSINet or any agent thereof (in its
capacity as such) to a holder of a note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder as set
forth in the third paragraph under "Certain U.S. Federal Income Tax
Considerations for Non-U.S. Holders" or has otherwise established an exemption,
provided that neither PSINet nor such agent has actual knowledge that the holder
is a U.S. Holder or that the conditions of any other exemption are not in fact
satisfied. Payments of the proceeds from the sale by a holder who is not a U.S.
Holder of a note made to or through a foreign office of a broker will not be
subject to U.S. information reporting or backup withholding, except that if the
broker is a U.S. person, a controlled foreign corporation for U.S. tax purposes
or a foreign person 50% or more of whose gross income is effectively connected
with a United States trade or business for a specified three-year period, U.S.
information reporting may apply to such payments.
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<PAGE>
Payments of the proceeds from the sale of a note to or through the United
States office of a broker is subject to U.S. information reporting and backup
withholding unless the holder or beneficial owner certifies as to its non-U.S.
status or otherwise establishes an exemption from U.S. information reporting and
backup withholding.
In October 1997, Regulations were issued which alter the foregoing rules in
certain respects and which generally will apply to any payments in respect of a
note or proceeds from the sale of a note that are made after December 31, 1999.
Among other things, such regulations expand the number of foreign intermediaries
that are potentially subject to information reporting and address certain
documentary evidence requirements relating to exemption from the general backup
withholding requirements. Holders of the notes should consult their tax advisors
concerning possible application of the final regulations to any payments made on
or with respect to the notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder may be claimed as a credit against such holder's United States federal
income tax liability.
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<PAGE>
CAPITALIZATION
The following table sets forth the cash, cash equivalents and short-term
investments, restricted cash and short-term investments, and capitalization of
PSINet as of September 30, 1998 on (1) an actual basis, (2) a pro forma basis to
give effect to the acquisition of Tokyo Internet and (3) on a pro forma, as
adjusted basis, which further adjusts the pro forma amounts to give effect to
the initial notes offerings and the application of the net proceeds therefrom,
as if each of the foregoing had occurred on September 30, 1998. This table
should be read in conjunction with the Consolidated Financial Statements and
notes thereto, the Unaudited Pro Forma Consolidated Financial Information and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Capital Structure" and "Use of Proceeds" included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
--------- ----------------------------
(In thousands of U.S. dollars)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments..................... $ 335,428 $ 222,621 $ 565,414
========= ========= ==========
Restricted cash and short-term investments............................ $ 127,617 $ 127,617 $ 127,617
========= ========= ==========
Lines of credit and current portion of long-term debt and capital
lease obligations.................................................... $ 44,746 $ 44,746 $ 44,746
--------- --------- ----------
Long-term debt:
10% Senior Notes.................................................... 600,000 600,000 600,000
Initial Notes (plus unamortized premium of $3,000,000).............. -- -- 353,000
Revolving credit facility........................................... 108,500 108,500 108,500
Notes payable with banks............................................ 3,354 3,354 3,354
Other notes payable................................................. 220 220 220
Capital lease obligations........................................... 60,924 68,313 68,313
--------- --------- ----------
Total long-term debt............................................. 772,998 780,387 1,133,387
--------- --------- ----------
Shareholders' deficit:
Preferred stock, $.01 par value; 29,324,858 shares authorized; no
shares issued and outstanding...................................... -- -- --
Convertible preferred stock, $.01 par value; $50.00 stated value;
675,142 shares authorized; 600,000 shares issued
and outstanding................................................... 28,637 28,637 28,637
Common stock, $.01 par value; 250,000,000 shares authorized;
51,790,340 shares outstanding...................................... 519 519 519
Capital in excess of par value...................................... 400,949 400,949 400,949
Retained deficit.................................................... (295,033) (295,033) (295,033)
Treasury stock, 99,556 shares, at cost.............................. (2,005) (2,005) (2,005)
Accumulated other comprehensive income.............................. (1,150) (1,150) (1,150)
Bandwidth asset to be delivered under IRU agreement................. (158,550) (158,550) (158,550)
--------- --------- ----------
Total shareholders' deficit...................................... (26,633) (26,633) (26,633)
--------- --------- ----------
Total capitalization............................................. $ 791,111 $ 798,500 $1,151,500
========= ========= ==========
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands of U.S. dollars, except per share, ratio and operating data)
The following table sets forth for the periods indicated selected
consolidated financial and operating data for PSINet. The consolidated balance
sheet data and consolidated statement of operations data as of and for the years
ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from
PSINet's Consolidated Financial Statements which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and as of and for the nine
months ended September 30, 1997 and 1998 have been derived from PSINet's
unaudited Consolidated Financial Statements. The following selected consolidated
financial and operating data are qualified by and should be read in conjunction
with PSINet's more detailed Consolidated Financial Statements and notes thereto
and the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
EBITDA is used in the Internet services industry as one measure of a
company's operating performance and historical ability to service debt. EBITDA
is not determined in accordance with GAAP, is not indicative of cash used by
operating activities and should not be considered in isolation or as an
alternative to, or more meaningful than, measures of performance determined in
accordance with GAAP. PSINet defines EBITDA as losses before interest expense
and interest income, taxes, depreciation and amortization, other income and
expense, gain on sale of investments, equity in loss of affiliate, and charges
for intangible asset write-down and acquired in-process research and
development. PSINet's definition of EBITDA may not be comparable to similarly
titled measures used by other companies.
For the purposes of computing the ratio of earnings to fixed charges,
earnings consist of losses before income taxes, equity in loss of affiliate and
fixed charges. Fixed charges consist of interest on all indebtedness,
amortization of debt financing costs and that portion of rental expense which we
believe to be representative of interest (deemed to be one-third of rental
expense).
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue................................................... $ 8,665 $15,214 $ 38,722 $ 84,351 $121,902
Other income, net......................................... -- -- -- 5,417 --
------- ------- -------- -------- --------
8,665 15,214 38,722 89,768 121,902
Operating costs and expenses:
Data communications and operations....................... 5,320 9,489 32,124 70,102 94,363
Sales and marketing...................................... 1,845 3,599 23,930 27,064 25,831
General and administrative............................... 1,666 3,605 10,569 20,648 22,947
Depreciation and amortization............................ 1,719 3,183 14,778 28,035 28,347
Charge for acquired in-process research and
development............................................. -- -- -- -- --
Intangible asset write-down.............................. -- -- 9,938 -- --
------- ------- -------- -------- --------
Total operating costs and expenses....................... 10,550 19,876 91,339 145,849 171,488
------- ------- -------- -------- --------
Loss from operations...................................... (1,885) (4,662) (52,617) (56,081) (49,586)
Interest expense.......................................... (311) (731) (1,964) (5,025) (5,362)
Loss before income taxes................................. (2,159) (5,342) (53,160) (55,256) (46,078)
Income tax expense (benefit).............................. (246) -- -- (159) (476)
------- ------- -------- -------- --------
Net loss.................................................. (1,913) (5,342) (53,160) (55,097) (45,602)
Return to preferred shareholders.......................... -- -- -- -- (411)
------- ------- -------- -------- --------
Net loss available to common shareholders................. $(1,913) $(5,342) $(53,160) $(55,097) $(46,013)
======= ======= ======== ======== ========
Basic and diluted loss per share.......................... $(0.42) $(2.01) $(1.40) $(1.14)
======= ======== ======== ========
Shares used in computing basic and diluted loss per
share (in thousands).................................... 12,805 26,485 39,378 40,306
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1998
-------- ----------
<S> <C> <C>
Statement of Operations Data:
Revenue................................................... $ 87,147 $ 165,732
Other income, net......................................... -- --
-------- ---------
87,147 165,732
Operating costs and expenses:
Data communications and operations....................... 66,847 130,517
Sales and marketing...................................... 18,070 37,919
General and administrative............................... 16,976 29,439
Depreciation and amortization............................ 20,648 37,011
Charge for acquired in-process research and 40,400
development............................................. -- --
Intangible asset write-down.............................. -- --
-------- ---------
Total operating costs and expenses....................... 122,541 275,286
-------- ---------
Loss from operations...................................... (35,394) (109,554)
Interest expense.......................................... (4,162) (38,193)
Loss before income taxes.................................. (31,741) (130,006)
Income tax expense (benefit).............................. (476) 65
-------- ---------
Net loss.................................................. (31,265) (130,071)
Return to preferred shareholders.......................... -- (2,313)
-------- ---------
Net loss available to common shareholders................. $(31,265) $(132,384)
======== =========
Basic and diluted loss per share.......................... $(0.78) $(2.70)
======== =========
Shares used in computing basic and diluted loss per
share (in thousands).................................... 40,264 49,120
</TABLE>
-49-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Cash flows used in operating activities................... $ (209) $(1,097) $(30,093) $(32,543) $(15,457)
Cash flows provided by (used in) investing activities..... (3,656) (1,937) (21,958) (7,897) (15,560)
Cash flows provided by (used in) financing activities..... 5,490 4,527 151,403 (10,529) 12,598
EBITDA (as defined)....................................... (166) (1,479) (27,901) (28,046) (21,239)
Capital expenditures...................................... 7,043 5,009 45,166 38,390 50,068
Ratio of earnings to fixed charges (deficiency of
earnings to fixed charges)............................... (2,159) (5,307) (52,956) (54,449) (46,078)
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1998
--------- ---------
<S> <C> <C>
Other Financial Data:
Cash flows used in operating activities................... $(13,009) $ (76,931)
Cash flows provided by (used in) investing activities..... 13,030 (326,028)
Cash flows provided by (used in) financing activities..... (12,206) 654,228
EBITDA (as defined)....................................... (14,746) (32,143)
Capital expenditures...................................... 29,076 103,300
Ratio of earnings to fixed charges (deficiency of
earnings to fixed charges)............................... (31,741) (130,006)
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------- ------------
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments............ $ 1,865 $ 3,358 $102,710 $ 56,390 $ 33,322 $335,428
Restricted cash and short-term investments................... -- -- -- 954 20,690 127,617
Total assets................................................. 13,821 17,055 201,830 177,112 186,181 878,630
Lines of credit and current portion of long-term debt and
capital lease obligations.................................. 2,540 3,369 16,643 26,915 39,633 44,746
Long-term debt and capital lease obligations, less
current portion............................................ 3,581 4,397 24,130 26,938 33,820 772,998
Redeemable preferred and common stock........................ 6,725 13,617 -- -- -- --
Shareholders' equity (deficit)............................... (1,427) (8,283) 143,230 89,783 73,429 (26,633)
Other Operating Data:
Number of POPs............................................... 68 82 241 350 350 475
Number of customer accounts.................................. 2,830 4,220 8,200 17,800 26,400 46,700
</TABLE>
- 50 -
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet at September
30, 1998 presents, on a pro forma basis, PSINet's consolidated financial
position assuming the acquisition of Tokyo Internet had been consummated on
September 30, 1998. The following Unaudited Pro Forma Consolidated Balance
Sheet, as adjusted, at September 30, 1998 further gives effect to the initial
notes offerings and the application of the net proceeds therefrom as of
September 30, 1998. The following Unaudited Pro Forma Consolidated Statements of
Operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 (collectively with the Unaudited Pro Forma Consolidated
Balance Sheet, the "Pro Forma Financial Information") present, on a pro forma
basis, PSINet's consolidated results of operations assuming (1) the acquisitions
of iSTAR, ioNET, LinkAge, INX, Rimnet, Iprolink, Inet, Interlog, CalvaCom and
Tokyo Internet, (2) the entering into of PSINet's credit facility and the
borrowing of $108,500,000 thereunder (3) the issuance by of PSINet of 10,229,789
shares of common stock to IXC and (4) the issuance by PSINet of $600,000,000
principal amount of 10% senior notes had each occurred on January 1, 1997. The
following Unaudited Pro Forma Consolidated Statements of Operations, as
adjusted, for the year ended December 31, 1997 and the nine months ended
September 30, 1998 further give effect to the initial notes offerings and the
application of the net proceeds therefrom as of January 1, 1997.
The Pro Forma Financial Information does not include the financial position
or results of operations of ITL, CalvaPro, TWICS, HKIGS, IXE/USN, Spider Net,
AsiaNet or Huge Net due to the immaterial nature of their financial position and
results of operations to the PSINet Inc. consolidated financial position and
consolidated results of operations.
The purchase prices for certain of PSINet's more significant acquisitions
in 1998 -- the acquisitions of iSTAR, INX, ioNet, LinkAge, Rimnet and Tokyo
Internet -- were $19,490,000, $9,395,000, $22,215,000, $11,800,000, $31,980,000
and $140,125,000, respectively, and the aggregate purchase price for PSINet's
remaining acquisitions was $54,800,000. Each of the acquisitions was paid for in
cash and has been accounted for as a purchase business combination and,
accordingly, the purchase price has been allocated to tangible assets acquired
and liabilities assumed, based upon their respective fair values, with the
excess allocated to intangible assets to be amortized over the estimated
economic lives of the intangible assets from the respective dates of
acquisition. The consolidated retained deficit reflected in the Unaudited Pro
Forma Consolidated Balance Sheet does not reflect any expense related to
intangible assets attributable to the value of purchased in-process research and
development associated with the acquisition of Tokyo Internet. PSINet has
undertaken a study by an independent third party to determine the allocation of
the total purchase price of the Tokyo Internet acquisition to the various assets
acquired, including in-process research and development, and the liabilities
assumed. The portion of the purchase price allocated to in-process research and
development will be recognized in PSINet's historical financial statements in
the fourth quarter of 1998, the period in which the acquisition occurred. Such
amounts related to the Tokyo Internet acquisition may be material.
The Pro Forma Financial Information is not intended to be indicative of the
results which would actually have been obtained had the transactions described
above occurred on the dates indicated or which may be obtained in the future.
The pro forma adjustments are based upon available information and assumptions
that PSINet believes are reasonable in the circumstances. The Pro Forma
Financial Information should be read in conjunction with PSINet's Consolidated
Financial Statements and notes thereto, the iSTAR Consolidated Financial
Statements and notes thereto, and the Tokyo Internet Financial Statements and
notes thereto included elsewhere in this prospectus.
- 51 -
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Tokyo iSTAR Tokyo
PSINet Internet internet Other Internet
Inc.(1) Corporation(2) inc.(3) Acquisitions(4) Adjustments(5)
-------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue................ $121,902 $43,342 $ 29,338 $60,072
Operating cost and
expenses:
Data communications
and operations....... 94,363 29,738 31,561 38,621
Sales and marketing... 25,831 4,653 8,406 7,149
General and Admin-
istrative........... 22,947 5,687 9,082 14,294
Depreciation and
amortization........ 28,347 2,654 5,799 3,387 $ 14,500(2a)
Intangible asset
write-down........... -- -- 12,570 --
-------- ------- -------- ------- --------
Total operating
costs and Expenses.. 171,488 42,732 67,418 63,451 14,500
-------- ------- -------- ------- --------
Income (loss) from
operations............ (49,586) 610 (38,080) (3,379) (14,500)
Interest expense....... (5,362) (296) (1,016) (1,742) (9,452)(2b)
Interest income........ 3,059 3 8 143
Other income (expense). 110 (932) -- (3,798)
Gain on sale of
subsidiary............ 5,701 -- -- --
-------- ------- -------- ------- --------
Loss before taxes...... (46,078) (615) (39,088) (8,776) (23,952)
Income tax expense
(benefit)............. (476) 26 -- 541
-------- ------- -------- ------- --------
Net loss............... (45,602) (641) (39,088) (9,317) (23,952)
Return to preferred
shareholders.......... (411) -- -- --
-------- ------- -------- ------- --------
Net loss available to
common shareholders... $(46,013) $ (641) $(39,088) $(9,317) $(23,952)
======== ======= ======== ======= ========
Basic and diluted loss
per share............. $(1.14)
========
Shares used in
computing basic and
diluted loss per
share (in thousands).. 40,306
========
<CAPTION>
Pro Forma,
Other Pro Offering As
Adjustments(5) Forma(6) Adjustments(5) Adjusted(7)
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Revenue................ $ 254,654 $ 254,654
Operating cost and
expenses:
Data communications
and operations....... 194,283 194,283
Sales and marketing... 46,039 46,039
General and Admin-
istrative........... 52,010 52,010
Depreciation and
amortization........ $ 13,157 (2a) 67,844 67,844
Intangible asset
write-down........... 12,570 12,570
------------ --------- -------- ---------
Total operating
costs and Expenses.. 13,157 372,746 372,746
------------ --------- -------- ---------
Income (loss) from
operations............ (13,157) (118,092) (118,092)
Interest expense....... (62,750)(2b) (80,618) (40,971)(2b) (121,589)
Interest income........ 3,213 3,213
Other income (expense). (4,620) (4,620)
Gain on sale of........ 5,701 5,701
subsidiary
------------ --------- -------- ---------
Loss before taxes...... (75,907) (194,416) (40,971) (235,387)
Income tax expense..... 91 91
------------ --------- -------- ---------
(benefit)
Net loss............... (75,907) (194,507) (40,971) (235,478)
Return to preferred
shareholders.......... (411) (411)
------------ --------- -------- ---------
Net loss available to
common shareholders... $ (75,907) $(194,918) $(40,971) $(235,889)
============ ========= ======== =========
Basic and diluted loss
per share............. $(3.86) $(4.67)
========= =========
Shares used in
computing basic and
diluted loss per
share (in thousands).. 10,230 (2c) 50,536 50,536
============ ========= =========
</TABLE>
(1) Reflects the audited consolidated results of operations of PSINet for the
year ended December 31, 1997.
(2) Amounts have been derived from the unaudited results of operations of Tokyo
Internet for the twelve month period ended March 31, 1998 prepared in
accordance with accounting principles generally accepted in the United
States (at an exchange rate of $1.00:138.07 Japanese Yen). Certain amounts
have been reclassified to conform with PSINet's presentation.
(3) Amounts have been derived from the unaudited consolidated results of
operations of iSTAR for the twelve months ended November 30, 1997 prepared
in accordance with accounting principles generally accepted in the United
States (at an exchange rate of US$1.00:Cdn$1.38). Certain amounts have been
reclassified to conform with PSINet's presentation.
(4) Amounts have been derived from the unaudited results of operations of
CalvaCom for the ten months ended October 31, 1997, Iprolink for twelve
months ended December 31, 1997, ioNET for the twelve months ended December
31, 1997, LinkAge for the twelve months ended December 31, 1997, INX for the
twelve months ended December 31, 1997, Rimnet for the twelve months ended
September 30, 1997, Inet for the twelve months ended December 31, 1997 and
Interlog for the twelve months ended December 31, 1997. Amounts have been
developed in accordance with accounting principles generally accepted in the
United States. The results of operations of CalvaCom from November 1, 1997
to December 31, 1997 are included in PSINet's audited results of operations
for the year ended December 31, 1997.
(5) See notes to Unaudited Pro Forma Consolidated Statements of Operations (Note
2--Pro Forma Adjustments).
(6) Reflects the results of operations of PSINet, on a pro forma basis, assuming
(i) the acquisitions of Tokyo Internet, iSTAR, CalvaCom, Iprolink, ioNET,
LinkAge, INX, Rimnet, Inet and Interlog, (ii) the entering into of the
credit facility and the borrowing of $108.5 million thereunder, (iii) the
issuance by PSINet of the 10% senior notes, and (iv) the issuance by PSINet
of 10,229,789 shares of common stock to IXC each had been consummated on
January 1, 1997.
(7) Further gives effect to the initial notes offerings and the application of
the net proceeds therefrom as of January 1, 1997.
-52-
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
PSINet Tokyo Internet iSTAR Other Tokyo Internet
Inc.(1) Corporation(2) internet inc.(3) Acquisitions(4) Adjustments(5)
--------- -------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 165,732 $29,762 $ 2,031 $33,823
Operating cost and expenses:
Data communications and 130,517 20,208 4,038 24,994
operations................
Sales and marketing........ 37,919 2,694 914 3,050
General and administrative. 29,439 7,186 815 8,493
Depreciation and
Amortization.............. 37,011 2,400 487 2,851 10,875 (2d)
Charge for acquired in-
process research and
development............... 40,400 -- -- --
--------- -------------- ---------------- --------------- --------------
Total operating costs
and expenses............. 275,286 32,488 6,254 39,388 10,875
--------- -------------- ---------------- --------------- --------------
Income (loss) from
operations................. (109,554) (2,726) (4,223) (5,565) (10,875)
Interest expense............ (38,193) (223) (169) (1,752) (7,089)(2e)
Interest income............. 11,391 17 -- 77
Other income (expense)...... 703 (174) -- (209)
Gain on sale
of investments............. 5,647 -- -- --
--------- -------------- ---------------- --------------- --------------
Income (loss) before taxes.. (130,006) (3,106) (4,392) (7,449) (17,964)
Income tax expense.......... 65 24 -- 193
--------- -------------- ---------------- --------------- --------------
Net income (loss)........... (130,071) (3,130) (4,392) (7,642) (17,964)
Return to preferred
shareholders.............. (2,313) -- -- --
--------- -------------- ---------------- --------------- --------------
Net income (loss) available
to common shareholders..... $(132,384) $(3,130) $(4,392) $(7,642) $(17,964)
========= ============== ================ =============== ==============
Basic and diluted loss per
share..................... $(2.70)
=========
Shares used in computing
basic and diluted loss per
share (in thousands)....... 49,120
=========
<CAPTION>
Other Pro Offering Pro Forma,As
Adjustments(5) Forma(6) Adjustment(5) Adjusted(7)
-------------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue..................... $ 231,348 $ 231,348
Operating cost and expenses:
Data communications and 179,757
operations................ 179,757
Sales and marketing........ 44,577 44,577
General and administrative. 45,933 45,933
Depreciation and
Amortization.............. 6,278 (2d) 59,902 59,902
Charge for acquired in-
process research and
development............... 40,400 40,400
-------------- --------- ------------- ------------
Total operating costs
and expenses............. 6,278 370,569 370,569
-------------- --------- ------------- ------------
Income (loss) from
operations................. (6,278) (139,221) (139,221)
Interest expense............ (16,859)(2e) (64,285) (30,728)(2e) (95,013)
Interest income............. 11,485 11,485
Other income (expense)...... 320 320
Gain on sale
of investments............. 5,647 5,647
-------------- --------- ------------- ------------
Income (loss) before taxes.. (23,137) (186,054) (30,728) (216,782)
Income tax expense.......... 282 282
-------------- --------- ------------- ------------
Net income (loss)........... (23,137) (186,336) (30,728) (217,064)
Return to preferred
shareholders.............. (2,313) (2,313)
-------------- --------- ------------- ------------
Net income (loss) available
to common shareholders..... $(23,137) $(188,649) $(30,728) $(219,377)
-------------- --------- ------------- ------------
Basic and diluted loss per
share..................... $(3.68) $(4.28)
========= ============
Shares used in computing
basic and diluted loss per
share (in thousands)....... 2,084(2c) 51,204 51,204
============== ========= ============
</TABLE>
- --------------------
(1) Reflects the unaudited consolidated results of operations of PSINet for
the nine months ended September 30, 1998.
(2) Amounts have been derived from the unaudited results of operations of Tokyo
Internet for the nine months ended September 30, 1998 prepared in
accordance with accounting principles generally accepted in the United
States (at an exchange rate of $1.00:134.90 Japanese Yen). Certain amounts
have been reclassified to conform with PSINet's presentation. Included in
the results of operations for the nine months ended September 30, 1998 are
revenues of $11,479,000 and net income of $1,149,000 related to the three
months ended March 31, 1998. Such amounts are also included in the results
of Tokyo Internet for the twelve months ended March 31, 1998.
(3) Amounts have been derived from the unaudited consolidated results of
operations of iSTAR for the one month ended January 31, 1998 prepared in
accordance with accounting principles generally accepted in the United
States (at an exchange rate of US$1.00: Cdn$1.44). Certain amounts have
been reclassified to conform with PSINet's presentation.
(4) Amounts have been derived from the unaudited results of operations of ioNET
for the six months ended June 30, 1998, LinkAge for the six months ended
September 30, 1998, INX for the five months ended May 31, 1998, Rimnet for
the eight months ended May 31, 1998, Inet for the nine months ended June
30, 1998 and Interlog for the seven months ended April 30, 1998. Amounts
have been developed in accordance with accounting principles generally
accepted in the United States. The results of operations of iSTAR,
Iprolink, ioNET, LinkAge, INX, Interlog, Rimnet and Inet are included in
PSINet's unaudited results of operations for the nine months ended
September 30, 1998 from their respective dates of acquisition.
(5) See notes to Unaudited Pro Forma Consolidated Statements of Operations
(Note 2--Pro Forma Adjustments).
- 53 -
<PAGE>
(6) Reflects the results of operations of PSINet, on a pro forma basis,
assuming (i) the acquisitions of Tokyo Internet, iSTAR, Iprolink, ioNET,
LinkAge, INX, Rimnet, Inet and Interlog, (ii) the entering into of the
credit facility and the borrowing of $108.5 million thereunder, (iii) the
issuance by PSINet of the 10% senior notes, and (iv) the issuance by PSINet
of 10,229,789 shares of common stock to IXC each had been consummated on
January 1, 1997.
(7) Further gives effect to the initial notes offerings and the application of
the net proceeds therefrom as of January 1, 1997.
- 54 -
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997 and the
Nine Months Ended September 30, 1998
Note 1--Basis of Presentation
The Unaudited Pro Forma Consolidated Statements of Operations do not give
effect to any potential cost savings and synergies that could result from the
acquisitions included therein.
Management believes that the assumptions used in preparing the Unaudited
Pro Forma Consolidated Statements of Operations provide a reasonable basis for
presenting all of the significant effects of the acquisitions included therein,
that the pro forma adjustments give appropriate effect to those assumptions and
that the pro forma adjustments are properly applied in the Unaudited Pro Forma
Consolidated Statements of Operations.
Note 2--Pro Forma Adjustments
The pro forma adjustments outlined below present separate adjustments
related to the acquisition of Tokyo Internet and the adjustments related to the
other transactions reflected in the Unaudited Pro Forma Consolidated Statements
of Operations.
The purchase price of each acquisition has been allocated to tangible
assets acquired and liabilities assumed, based upon their respective fair
values, with the excess allocated to intangible assets to be amortized over the
estimated economic lives of the intangible assets of up to fifteen years from
the respective dates of acquisition.
PSINet has undertaken a study by an independent third party to determine
the allocation of the total purchase price of Tokyo Internet. Until the study is
complete, PSINet is not able to determine the amount of purchased in-process
research and development that will result from this acquisition. However, as of
the acquisition date, Tokyo Internet was in the process of working on several
key projects which had not yet been determined to be technologically feasible
and which have no alternative future use, which would give rise to such a
charge. The three most significant projects include:
. A project to develop specialized software to efficiently support a domain
name registration activity for one or more Generic Top Level Domains
("gTLD"). Completing the development of this technology would enable
Tokyo Internet to generate revenue by becoming an authorized registrar
for the new domain name system so that it could offer domain registration
services globally. Material technology risks exist in finalizing the
software development, as the completed product must have sufficient
quality and reliability to enable it to support a large-scale, scalable
business activity that would serve a very large and rapidly growing
market segment. Management believes that the project was approximately
70% complete at the time of acquisition and that Tokyo Internet could
begin benefiting from the technology in mid-1999.
. A project to develop software that would enable Tokyo Internet to
generate revenue through the wholesale of its network capacity to
external service providers. If completed successfully, the technology
would manage a database of customer access information that would allow
end users to access the Internet by way of Tokyo Internet's dialup server
infrastructure. The functionality includes interaction with and
management of the customer access database, interface with an
authentication and access control infrastructure, and interface with
relevant billing apparatus. Material technology risks exist in being able
to link together the systems in a manner that would support the
scalability and performance of the constructed system, which could also
potentially serve a very large and rapidly growing market segment.
Management believes that the project was approximately 75% complete at
- 55 -
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997 and the
Nine Months Ended September 30, 1998
the time of acquisition and that Tokyo Internet could begin benefiting
from the technology in mid-1999.
. A project to develop technology and operational practices that would
allow Tokyo Internet to reduce its operating costs by making use of lower
cost public switched data services in its backbone network while still
preserving its traditional strategies for network redundancy and
reliability. The technology risk for this project relates to the
application of a public ATM service to the specific strategy employed by
Tokyo Internet to assure reliable backbone operation. Management believes
that the project was approximately 50% complete at the time of
acquisition and that Tokyo Internet could begin benefiting from the
technology in late-1999.
If none of these projects is successfully developed, PSINet's sales and
profitability may be adversely affected in future periods. However, the failure
of any particular individual project in-process would not have a material impact
on PSINet's financial condition or results of operations. Additionally, the
failure of any particular individual project in-process could impair the value
of other intangible assets acquired.
For purposes of this Pro Forma Financial Information, PSINet has attributed
the excess of the purchase price over the acquired net tangible assets for Tokyo
Internet of $145,231,000 to goodwill with a ten year useful life. To the extent
that a portion of the purchase price of Tokyo Internet is allocated to other
intangible assets with a shorter useful life than ten years, the adjustment for
amortization expense for the twelve months ended December 31, 1997 and for the
nine months ended September 30, 1998 would be higher. To the extent that a
portion of the purchase price of the Tokyo Internet acquisition is allocated to
purchased in-process research and development, a charge, which may be material,
would be recognized in PSINet's consolidated operating results and the
adjustment for amortization expense reflected in the Pro Forma Financial
Information would be lower. Assuming a portion of the purchase price of Tokyo
Internet is allocated to purchased in-process research and development in the
amount of $10,000,000, $20,000,000 or $30,000,000, annual amortization expense
for goodwill and other intangibles and net loss available to common shareholders
would decrease by $1,000,000, $2,000,000 or $3,000,000, respectively.
For the Year Ended December 31, 1997
(a) Reflects the increase in depreciation and amortization resulting from
the allocation of the purchase price to the acquired net tangible and intangible
assets (principally tradename, customer relationships, goodwill, assembled
workforce and existing technology) relating to the acquisitions included
therein. The assigned lives of the acquired intangible assets range from one to
fifteen years.
<TABLE>
<CAPTION>
(in thousands of U.S. dollars)
Tokyo Internet Others
---------------- --------
<S> <C> <C>
Depreciation....................................... $ -- $ 776
Amortization....................................... 14,500 12,381
------- -------
$14,500 $13,157
======= =======
</TABLE>
- 56 -
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997 and the
Nine Months Ended September 30, 1998
Note 2--Pro Forma Adjustments--(Continued)
(b) Reflects the following (tabular amounts in thousands of U.S. dollars):
<TABLE>
<S> <C>
Tokyo Internet Adjustments:
Interest expense on the $108,500,000 principal amount of indebtedness drawn
under the credit facility at an annual rate of 8.125%. If the interest rate on the credit
facility changed by 0.125%, interest expense would change by $135,625 on an annual basis.... $ 8,816
Amortization of deferred financing costs associated with the credit facility (estimated
$1,910,000)................................................................................. 636
-------
$ 9,452
=======
Other Adjustments:
Interest expense on the $600,000,000 principal amount 10% senior notes from
January 1, 1997--December 31, 1997........................................................ $60,000
Amortization of deferred financing costs associated with the 10% senior notes
from January 1, 1997--December 31, 1997................................................... 2,750
-------
$62,750
=======
Offering Adjustments:
Interest expense on the notes................................................................ $40,250
Amortization of deferred financing costs associated with the initial notes
offerings (assumed $10,207,500)........................................................... 1,021
Amortization of the premium on the notes.................................................... (300)
-------
$40,971
=======
</TABLE>
(c) Reflects the adjustment to weighted average shares assuming the
issuance of 10,229,789 shares of common stock to IXC had occurred on January 1,
1997.
For the Nine Months Ended September 30, 1998
(d) Reflects the increase in depreciation and amortization resulting from
the allocation of the purchase price to the acquired net tangible and intangible
assets (principally tradename, customer relationships, goodwill, assembled
workforce and existing technology) relating to the acquisitions included
therein. The assigned lives of the acquired intangible assets range from one to
fifteen years.
<TABLE>
<CAPTION>
(in thousands of U.S. dollars)
Tokyo Internet Others
--------------- ---------
<S> <C> <C>
Depreciation.................................................................... $ -- $ 65
Amortization.................................................................... 10,875 6,213
--------------- ---------
$10,875 $6,278
=============== =========
</TABLE>
- 57 -
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS (Continued)
For the Year Ended December 31, 1997 and the
Nine Months Ended September 30, 1998
Note 2--Pro Forma Adjustments--(Continued)
(e) Reflects the following (tabular amounts in thousands of U.S. dollars):
<TABLE>
<S> <C>
Tokyo Internet Adjustments:
Interest expense on the $108,500,000 principal amount of indebtedness drawn under
the credit facility at an annual rate of 8.125%. If the interest rate on the credit $ 6,612
facility changed by 0.125%, interest expense would change by $135,625 on an annual basis.... 477
Amortization of deferred financing costs associated with the credit facility (estimated -------
$1,910,000)................................................................................. $ 7,089
=======
Other Adjustments:
Interest expense on the $600,000,000 principal amount 10% senior notes from
January 1, 1998--April 10, 1998 (date of issuance of the 10% senior notes)................ $16,500
Amortization of deferred financing costs associated with the 10% senior notes from
January 1, 1998--April 10, 1998 (date of issuance of the 10% senior notes)................ 688
Interest expense avoided through assumed repayment of the $20,000,000 acquisition
credit facility from the proceeds of the 10% senior notes offering. The
acquisition credit facility was incurred in conjunction with the acquisition
of iSTAR in February 1998 and repaid from the proceeds of the 10% senior
notes in April 1998....................................................................... (329)
-------
$16,859
=======
Offering Adjustments:
Interest expense on the notes................................................................ $30,187
Amortization of deferred financing costs associated with the initial notes
offerings (assumed $10,207,500)........................................................... 766
Amortization of the premium on the notes..................................................... (225)
-------
$30,728
=======
</TABLE>
Note 3--Basic and Diluted Loss per Share
Basic and diluted loss per share are computed using net loss available to
common shareholders divided by the weighted average number of shares of
PSINet's common stock that were outstanding during the periods presented and
assumes that the issuance of 10,229,789 shares of common stock to IXC had
occurred on January 1, 1997. As all common stock equivalents and contingently
issuable shares are antidilutive, basic and diluted loss per share are the same
for all periods presented.
- 58 -
<PAGE>
Note 4--Intangible Asset Write-Down
During the twelve months ended November 30, 1997, iSTAR wrote-off $12.6
million related to the permanent impairment of certain intangible assets, mainly
customer lists and goodwill, which resulted from iSTAR's acquisitions of
consumer-oriented Internet service providers and Internet-oriented professional
service companies. In accordance with guidelines of the Securities and Exchange
Commission, this non-recurring charge has not been eliminated from the Unaudited
Pro Forma Consolidated Statement of Operations for the year ended December 31,
1997.
On an ongoing basis, iSTAR management reviewed the valuation of customer
lists and goodwill, taking into consideration any events and circumstances which
might have impaired value. As a result of a number of factors involving changes
in the Internet industry in Canada and the evolution of iSTAR from a provider of
access products to a provider of Internet business solutions, iSTAR management
determined that the value of its customer lists and goodwill was permanently
impaired. The value of the customer lists and goodwill included both the
management expertise and the value of the acquired consumer-oriented customer
lists. Since the dial subscriber market in Canada had become a commodity
business, most of the customers acquired from the predecessor Internet service
providers left iSTAR for other Internet service providers and iSTAR management
determined that the value associated with the customer lists was permanently
impaired and could not be supported by future expected revenue streams from
customers acquired in the acquisitions. Additionally, most of the former owners
and other key management personnel, whose expertise was used in creating the
acquired companies, were no longer employed by iSTAR. All of these management
departures resulted from the reorganization by iSTAR as it shifted its focus
away from the consumer-oriented dial-up market in Canada to the corporate-
oriented dedicated access market. On an overall basis, the continuing net cash
usage, net losses, loss of management and increased competition in the Canadian
marketplace for consumer-oriented dial-up subscribers did not support the
existence of the value of the customer lists and goodwill from the purchased
companies.
- 59 -
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of September 30, 1998
(In thousands of U.S. dollars)
<TABLE>
<CAPTION> Tokyo
PSINet Tokyo Internet Internet Pro Offering Pro Forma,
Inc.(1) Corporation(2) Adjustments(3) Forma(4) Adjustments(3) As Adjusted(5)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 282,586 $ 618 $(113,425) $ 169,779 $ 342,793 $ 512,572
Restricted cash and short-term
investments............................ 127,617 -- 127,617 127,617
Short-term investments.................. 52,842 -- 52,842 52,842
Accounts receivable, net................ 36,932 2,468 39,400 39,400
Notes receivable........................ 1,347 -- 1,347 1,347
Prepaid expenses........................ 5,052 226 5,278 5,278
Other current assets.................... 16,906 17 16,923 16,923
----------- ---------- ----------- ----------- ----------- ------------
Total current assets.................. 523,282 3,329 (113,425) 413,186 342,793 755,979
Property and equipment, net............. 221,390 7,505 228,895 228,895
Goodwill and other intangibles, net..... 103,504 1,292 145,231 250,028 250,028
Other assets and deferred charges....... 30,454 421 30,875 10,207 41,082
----------- ---------- ----------- ----------- ----------- ------------
Total assets............................ $ 878,630 $ 12,547 $ 31,806 $ 922,984 $ 353,000 $1,275,984
----------- ---------- ----------- ----------- ----------- ------------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Lines of credit and short-term debt..... $ -- $ -- $ -- $ --
Current portion of long-term debt....... 44,746 6,581 $ (6,581) 44,746 44,746
Trade accounts payable.................. 34,727 1,573 36,300 36,300
Accrued payroll and related expenses.... 7,646 -- 7,646 7,646
Other accounts payable and accrued
liabilities............................ 25,667 1,008 34,374 61,050 61,050
Deferred revenue........................ 9,878 -- 9,878 9,878
----------- ---------- ----------- ----------- ----------- ------------
Total current liabilities............. 122,664 9,162 27,793 159,620 159,620
Long-term debt.......................... 772,998 7,389 780,387 $353,000 1,133,387
Other liabilities....................... 9,601 9 9,610 9,610
----------- ---------- ----------- ----------- ----------- ------------
Total liabilities....................... 905,263 16,560 27,793 949,617 353,000 1,302,617
----------- ---------- ----------- ----------- ----------- ------------
Shareholders' equity (deficit):
Preferred stock......................... -- -- -- --
Convertible preferred stock............. 28,637 -- 28,637 28,637
Common stock............................ 519 8,817 (8,817) 519 519
Capital in excess of par value.......... 400,949 -- 400,949 400,949
Treasury stock.......................... (2,005) -- (2,005) (2,005)
Retained earnings (deficit)............. (295,033) (12,830) 12,830 (295,033) (295,033)
Accumulated other comprehensive
income................................ (1,150) -- (1,150) (1,150)
Bandwidth asset to be delivered under
IRU agreement.......................... (158,550) -- (158,550) (158,550)
----------- ---------- ----------- ----------- ----------- ------------
Total shareholders' equity (deficit).... (26,633) (4,013) 4,013 (26,633) (26,633)
----------- ---------- ----------- ----------- ----------- ------------
Total liabilities and shareholders'
equity (deficit)....................... $ 878,630 $ 12,547 $ 31,806 $ 922,984 $353,000 $1,275,984
----------- ---------- ----------- ----------- ----------- ------------
</TABLE>
- --------------------
(1) Reflects the unaudited consolidated financial position of PSINet as of
September 30, 1998.
(2) Reflects the unaudited financial position of Tokyo Internet as of September
30, 1998 which has been prepared in accordance with accounting principles
generally accepted in the United States (at an exchange rate of $1.00:
135.35 Japanese Yen).
(3) See notes to Unaudited Pro Forma Consolidated Balance Sheet (Note 2--Pro
Forma Adjustments).
(4) Reflects the consolidated financial position of PSINet, on a pro forma
basis, assuming the acquisition of Tokyo Internet had been consummated on
September 30, 1998.
(5) Further gives effect to the initial notes offerings and the application of
the net proceeds therefrom as of September 30, 1998.
- 60 -
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of September 30, 1998
Note 1--Basis of Presentation
Management believes that the assumptions used in preparing the Unaudited
Pro Forma Consolidated Balance Sheet provide a reasonable basis for presenting
all of the significant effects of the acquisition of Tokyo Internet and that the
pro forma adjustments give appropriate effect to those assumptions and that the
pro forma adjustments are properly applied in the Unaudited Pro Forma
Consolidated Balance Sheet.
Note 2--Pro Forma Adjustments
Reflects the acquisition of Tokyo Internet, including:
(1) cash paid at closing ($104,800,000 purchase price consideration and the
payment at closing of $8,625,000 of assumed liabilities),
(2) goodwill adjustment as discussed below,
(3) estimated additional consideration ($26,200,000) under a hold-back
provision of the purchase agreement to ensure compliance with certain
representations, warranties and covenants of the sellers to be paid at a future
date,
(4) the repayment of certain short term borrowings of Tokyo Internet repaid
at closing,
(5) estimated closing costs of $500,000,
(6) liabilities recorded associated with termination penalties relating to
overseas bandwidth of acquired companies ($7,674,000), and
(7) the elimination of the equity accounts of Tokyo Internet.
PSINet has undertaken a study by an independent third party to determine
the allocation of the total purchase price of Tokyo Internet. For purposes of
this Unaudited Pro Forma Consolidated Financial Information, PSINet has
attributed the excess of the purchase price over the acquired net tangible
assets of Tokyo Internet of $145,231,000 to goodwill with a ten year useful
life. To the extent that a portion of the purchase price is allocated to in-
process research and development, a charge against operating results, which may
be material, would be recognized in the period in which this acquisition
occurred with a corresponding decrease in the recorded amount of goodwill.
-61 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
prospectus. The results shown herein are not necessarily indicative of the
results to be expected in any future periods. This discussion contains certain
forward-looking statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events could differ
materially from the forward-looking statements as a result of a number of
factors. For a discussion of the risk factors that could cause actual results to
differ materially from the forward-looking statements, you should read the "Risk
Factors" section which begins on page 15.
General
We were founded in 1989, were the first commercial Internet Service
Provider ("ISP") and offered Internet connectivity to businesses. In 1993, we
commenced offering dial-up Internet connectivity to individual consumers in the
U.S. on a nationwide basis. We funded the initial buildout of our domestic
network and expansion of our operations through the private placement of equity
securities and through capital lease financings. Since 1993, we have pursued a
strategy of both internal growth and growth through acquisitions of
complementary businesses to increase both individual and business customer
accounts, enter into new geographic markets and increase our service and product
offerings. During 1995, we raised net proceeds of $47.3 million through an
initial public offering of common stock and an additional $86.6 million through
a follow-on public offering of common stock to continue the buildout of our
domestic network and to increase our sales, marketing and customer support
infrastructure.
In mid-1996, in order to avoid increasing pricing competition and the high
marketing and customer care costs of providing consumer access and to better
utilize our network backbone, we altered our strategy to focus on providing
wholesale access services to consumer-oriented ISPs in the United States, rather
than providing consumer access services directly. To further refine our focus on
providing business Internet services, in February 1997, we sold our software
subsidiary for cash consideration of $12.0 million and $8.5 million as repayment
of intercompany debt owed by the subsidiary to us. In December 1997, we
realigned our core domestic operations into three customer-focused business
units to more effectively meet the emerging needs of the Internet marketplace.
These business units are comprised of the (1) Corporate Network Services group,
which provides high quality Internet connectivity services to business
customers, (2) the Carrier and ISP Services group, which delivers Internet
access services on a private-label basis to other ISPs and telecommunications
services providers, and (3) the Applications and Web Services group, which
provides value-added Internet protocol ("IP") based services and products to new
and existing business customers. Beginning in the third quarter of 1996, we
hired several new executive officers with extensive experience in the
telecommunications industry to assist us in executing our business strategy.
We derive a majority of our revenues from providing Internet access
services to business customers and other ISPs. Business customers are typically
signed to contracts that range from one to three years. Revenues generated from
business customers are typically comprised of recurring monthly fees,
installation and start-up charges and sales of related equipment and services.
Revenues from other ISPs are generated pursuant to network access agreements
which typically require a minimum number of subscribers and obligate the ISP
customers to pay specified monthly fees for each subscriber using the PSINet
network. In addition, we provide a variety of value-added services, including,
among others, corporate intranets, Web hosting, security services, commerce
solutions and other advanced IP-based applications, such as Internet fax.
Revenues from value-added services are typically in the form of monthly charges
and are often bundled with Internet access services.
Since the commencement of our operations, we have undertaken a program of
developing and expanding our data communications network. In connection with
this program, we have made significant investments in telecommunications
circuits and equipment to produce an IP-optimized, geographically dispersed,
ATM, ISDN and SMDS compatible frame relay network. These investments generally
are made in advance of anticipated customer growth and resulting revenue. As
part of our ongoing efforts to further expand and enhance our network, we have
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<PAGE>
acquired or agreed to acquire significant amounts of global fiber-based
telecommunications bandwidth, including indefeasible rights of use ("IRUs") or
other rights in:
. up to 10,000 equivalent route miles of OC-48 capacity across the United
States,
. STM-1 transatlantic capacity connecting the United States, the United
Kingdom and continental Europe,
. dark fiber connecting the New York City and Washington, D.C.
metropolitan areas and major metropolitans areas in between,
. six DS-3s of transpacific capacity connecting the United States and
Japan,
. four dark fiber optic strands connecting multiple cities in the San
Francisco Bay area,
. STM-1 network bandwidth having the capability of connecting Japan,
China, Southeast Asia, India, the Middle East, Europe and the United
Kingdom,
. STM-1 network bandwidth connecting 30 European Cities, and
. 20 dark fiber optic strands connecting the Vancouver, British Columbia
and Seattle, Washington metropolitan areas.
In addition, we have entered into an agreement with other leading global
telecommunications companies to build the Japan-U.S. Cable Network. The
acquisition of these bandwidth assets is expected to increase our network
capacity by at least 50 times and to reduce significantly our future data
communications and operations costs per equivalent mile. In addition, the
increased network capacity is expected to enable us to offer a wider variety of
higher-speed Internet and Internet-related services to a larger customer base.
As a result, we anticipate that our data communications and operations costs as
a percentage of revenue will decrease as we substitute the acquired bandwidth
for leased circuit arrangements with various telecommunications carriers.
International Operations
We currently have operations in 12 of the 20 largest international
telecommunications markets including, in addition to the United States, Africa,
Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, the Netherlands,
Republic of Korea, Switzerland and the United Kingdom. We typically enter a new
market through an investment in a start-up company within the particular market
or by acquiring a local ISP. Revenue from international operations continues to
increase as a percentage of consolidated results, comprising 38.1% of revenue in
the third quarter of 1998. By comparison, it was 18% of revenue in the fourth
quarter of 1997, 28% in the first quarter of 1998 and 31% in the second quarter
of 1998.
Nine Months Ended September 30, 1998 As Compared To The Nine Months Ended
September 30, 1997
Results of Operations
Revenue. We generate revenue primarily from the sale of Internet access and
related services to businesses. Revenue was $165.7 million for the nine months
ended September 30, 1998, an increase of $78.6 million, or 90%, from $87.1
million for the nine months ended September 30, 1997. The 90% year-to-date
revenue growth is broken down into 55% from those operations that were in
existence at September 30, 1997 and 35% from companies acquired since that date.
Our organic growth is attributable to a number of factors, including an increase
in the number of business customer and ISP accounts, an increase in the average
annual revenue realized per new customer account, and an increase in the
business account retention rate.
Our customer account base increased by 103% to 46,700 business accounts
including 141 ISPs at September 30, 1998, from 23,000 business accounts
including 41 ISPs at September 30, 1997. The 103% year-to-date business account
growth is broken down into 39% from those operations that were in existence at
September 30, 1997 and 64% from companies acquired since that date. Average
annual new contract value
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<PAGE>
increased to $5,900 from $5,800 in the second quarter of 1998, which we believe
reflects an increasing demand for value-added services and higher levels of
bandwidth.
Data Communications and Operations. Data communications and operations
expenses consist primarily of leased long distance and local circuit costs as
well as personnel and related operating expenses associated with network
operations, customer support and field service. Data communications and
operations expenses were $130.5 million (78.8% of revenue) for the nine months
ended September 30, 1998, an increase of $63.7 million from $66.8 million (76.7%
of revenue) for the nine months ended September 30, 1997. The increase in
expenses related principally to increases in (1) leased long distance, dedicated
customer and dial-up circuit costs, (2) expenditures for additional primary rate
interfaces ("PRIs") to support the growth of our Carrier and ISP Services
business, and (3) personnel costs resulting from the expansion of our network
operations, customer support and field service staff, including through
acquisitions. The dedicated customer account base grew from 6,000 at September
30, 1997, to 11,500 at September 30, 1998, an increase of 91.7%. Dedicated
customer circuit costs increased $12.2 million (or 73.4%) for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997. PRI expense increased $12.4 million (or 122.3%) for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997.
Personnel costs increased $10.2 million (or 84.7%) for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997.
Circuit costs relating to our new and expanded POPs and PRIs generally are
incurred by us in advance of anticipated growth in our customer base. Although
we expect that data communications and operations expenses will continue to
increase as our customer base grows, we anticipate that such expenses will
decrease over time as a percentage of revenue due to decreases in unit costs and
continued increases in network utilization. In particular, we anticipate that
costs for data communications and operations as a percentage of revenue will
decrease as we substitute network bandwidth purchased or acquired under capital
lease agreements for bandwidth currently taken under operating lease agreements.
This will, in turn, result in increases in depreciation and amortization
expense.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, advertising costs, distribution costs and
related occupancy costs. Sales and marketing expenses were $37.9 million (22.9%
of revenue) for the nine months ended September 30, 1998, an increase of $19.8
million from $18.1 million (20.7% of revenue) for the nine months ended
September 30, 1997. The increase resulted principally from costs related to a
branding and advertising campaign and from costs associated with the growth of
our sales force in conjunction with our growth and acquisition strategy. All
advertising and marketing costs are expensed in the period incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for executive, financial, legal and
administrative personnel and provision for uncollectible accounts receivable.
General and administrative expenses were $29.4 million (17.8% of revenue) for
the nine months ended September 30, 1998, an increase of $12.4 million from
$17.0 million (19.5% of revenue) for the nine months ended September 30, 1997.
The increase resulted from the addition of management staff and related
operating expenses across the organization, including in conjunction with our
growth and acquisition strategy, and increases in the provision for doubtful
accounts receivable associated with our growth in revenue.
Depreciation and Amortization. Depreciation and amortization costs were
$37.0 million (22.3% of revenue) for the nine months ended September 30, 1998,
an increase of $16.4 million from $20.6 million (23.7% of revenue) for the nine
months ended September 30, 1997. Depreciation and amortization costs have
increased as a result of capital expenditures associated with network
infrastructure enhancements and amortization of intangible assets related to
acquisitions. We anticipate that our depreciation and amortization expenses will
continue to increase significantly as a percentage of revenue as we substitute
network bandwidth purchased or acquired under capital lease agreements for
bandwidth currently taken under operating lease agreements, and as we record
depreciation and amortization on tangible and intangible assets related to
business combinations and expansion of our operations.
Acquired In-Process Research and Development. The results for the nine
months ended September 30, 1998 include a $40.4 million charge (24.4% of
revenue) for acquired in-process research and development. The
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<PAGE>
charges were based on independent valuations and reflect technologies acquired
prior to technological feasibility and for which there is no alternative future
use. There were no comparable charges in 1997.
Interest Expense. Interest expense was $38.2 million for the nine months
ended September 30, 1998, an increase of $34.0 million from $4.2 million for the
nine months ended September 30, 1997. The increase was due to interest on our
issuance of $600.0 million aggregate principal amount of 10% senior notes, as
well as to increased borrowings and capital lease obligations incurred to
finance our network expansion and to fund our working capital requirements. We
expect interest expense to increase in future quarters as a result of the
issuance of the 11 1/2% senior notes.
Interest Income. Interest income was $11.4 million for the nine months
ended September 30, 1998, an increase of $9.4 million from $2.0 million for the
nine months ended September 30, 1997. The increases were due to interest
received on the net proceeds of our offering of the 10% senior notes, which
proceeds are invested in U.S. Government securities, A-1/P-1 rated certificates
of deposit or A-1/P-1 rated commercial paper until such time as they are used
for other purposes.
Gain on Sale of Investment. The gain on the sale of investments of $5.6
million for the nine months ended September 30, 1998 relates to the recognition
of realized gains on equity securities that we sold during the third quarter.
The gain on the sale of investments of $5.7 million for the nine months ended
September 30, 1997 relates to the sale in the first quarter of 1997 of our
software subsidiary.
Net Loss to Common Shareholders and Loss per Share. Our net loss to common
shareholders for the nine months ended September 30, 1998 was $132.4 million, or
$2.70 basic and diluted loss per share, a $101.1 million increase from a net
loss to common shareholders for the nine months ended September 30, 1997 of
$31.3 million, or $0.78 basic and diluted loss per share. The primary reasons
for the increase were (1) the increase in data communications costs related to
additional PRIs, (2) the first portions of our acquired IRUs were installed that
led to an increase in depreciation and personnel costs to manage the IRUs (3)
the charge for acquired in-process research and development relating to
acquisitions in 1998, and (4) the increase in interest expense due to the
issuance of 10% senior notes. The return to preferred shareholders, which
comprises the dividends with respect to our Series B 8% Convertible Preferred
Stock and accretion of the related conversion premium on the Series B Preferred
Stock, is subtracted from net loss in determining the net loss to common
shareholders. Because inclusion of common stock equivalents is antidilutive,
basic and diluted loss per share are the same for each period presented.
Year Ended December 31, 1997 As Compared To The Year Ended December 31, 1996
Results of Operations
Revenue. We generate revenue primarily from the sale of Internet access and
related services to businesses. Revenue increased by 45% to $121.9 million in
1997, from $84.4 million in 1996. The increase was attributable to a number of
factors, including an increase in the number of business customer and ISP
accounts, an increase in the average annual revenue realized per new customer
account and an increase in sales by our international subsidiaries. The growth
was driven by an expansion of our sales force and greater public awareness and
utilization of the Internet.
In comparison with 1996, revenue for 1997 was affected by the sale in 1996
of our individual consumer accounts and related assets and by the sale in 1997
of our software subsidiary, which together provided $15.6 million of revenue in
1996 but only $0.3 million in 1997. If such revenue was excluded from 1996
revenue, our growth in revenue from 1996 to 1997 would have been 77% instead of
45%. Revenue growth in 1997 was also impacted by a drop in our customer
retention rate from 94% in 1996 to 82% in 1997, which was attributable in part
to an initiative by us to remove certain non-performing accounts.
Our customer account base increased by 48% to 26,400 business customers at
December 31, 1997, including 47 ISPs, from 17,800 business customers, including
22 ISPs, at December 31, 1996. Our revenue from
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<PAGE>
international operations increased by 165% to $18.0 million in 1997 from $6.8
million in 1996, principally as a result of significant growth in our operations
in the United Kingdom, Japan and Canada.
Other Income, Net. We did not have other income, net, in 1997, compared
with $5.4 million during 1996, consisting of the consideration received, net of
related asset costs and expenses, relating to the sale of our individual
consumer subscribers and certain related tangible and intangible assets during
the second and third quarters of 1996.
Data Communications and Operations. Data communications and operations
expenses consist primarily of leased long distance and local circuit costs as
well as personnel and related operating expenses associated with network
operations, customer support and field service. Data communications and
operations expenses were $94.4 million (77.4% of revenue) during 1997, an
increase of $24.3 million from $70.1 million (83.1% of revenue) during 1996. The
increase in expenses related principally to increases in:
. leased long distance, dedicated customer and dial-up circuit costs,
. expenditures for additional PRIs to support the growth of our Carrier
and ISP Services business, and
. personnel costs resulting from the expansion of our network operations,
customer support and field service staff.
Circuit costs relating to our new and expanded points-of-presence ("POPs")
and PRIs generally are incurred by us in advance of anticipated growth in our
customer base. Although we expect that data communications and operations
expenses will continue to increase as our customer base grows, we anticipate
that such expenses will continue to decrease over time as a percentage of
revenue due to decreases in unit costs and continued increases in network
utilization. In particular, we anticipate that costs for data communications and
operations as a percentage of revenue will decrease as we accept delivery of
bandwidth from IXC and, in connection therewith, substitute this bandwidth for
leased circuit arrangements with IXC as well as with other telecommunications
carriers.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, advertising costs, distribution costs and
related occupancy costs. Sales and marketing expenses were $25.8 million (21.2%
of revenue) during 1997, a decrease of $1.3 million from $27.1 million (32.1% of
revenue) during 1996. The decrease resulted principally from reductions in costs
following the sale of our individual consumer subscribers and related
infrastructure in 1996 and the sale of our software operations in 1997, which
were offset in part by an increase in sales and marketing expenses relating to
the expansion of our operations. All advertising and marketing costs are
expensed in the period incurred. We expect that as a result of continued
emphasis on expanding all of our lines of business and increasing our business
customer base, sales and marketing expenses will grow, primarily with respect to
marketing personnel costs and advertising, but should continue to decrease as a
percentage of revenue.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for executive, financial, legal and
administrative personnel and provision for uncollectible accounts receivable.
General and administrative expenses were $22.9 million (18.8% of revenue) during
1997, an increase of $2.3 million from $20.6 million (24.5% of revenue) during
1996. The increase resulted from the addition of management staff and related
operating expenses across the organization, including in conjunction with our
expansion outside of the United States, and increases in the provision for
doubtful accounts receivable. These expenses were in part offset by decreased
expenses following the sale of our individual consumer subscribers and related
assets in 1996 and the sale of its software operations in 1997.
Depreciation and Amortization. Depreciation and amortization costs were
$28.3 million (23.3% of revenue) during 1997, an increase of $0.3 million from
$28.0 million (33.2% of revenue) during 1996. Depreciation costs increased due
to additional capital expenditures associated with network infrastructure
enhancements, which were partially offset by decreases in costs resulting from
the elimination of depreciation and amortization that had been associated with
the individual consumer subscriber and software assets sold in 1996 and 1997,
respectively. We anticipate that as we accept delivery of bandwidth from IXC,
and as the operations and assets of companies we
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<PAGE>
have recently acquired are integrated with existing operations, our depreciation
and amortization expenses will increase significantly.
Interest Expense. Interest expense was $5.4 million during 1997, an
increase of $0.4 million from $5.0 million in 1996. The increase was principally
due to increased borrowings and capital lease obligations incurred by us to
finance network expansion and to fund working capital requirements. As we
continue the international expansion of our network and positions ourself to
take advantage of certain anticipated benefits resulting from the recently
completed transaction with IXC, we expect, subject to applicable financing
agreements, to incur increased borrowings and capital lease obligations which
will further increase the amount of the our interest expense.
Interest Income. Interest income was $3.1 million during 1997, a decrease
of $0.7 million from $3.8 million in 1996. The decrease was principally due to a
reduction in the amount of cash and short-term, interest-bearing investments
held by us.
Gain on Sale of Subsidiary. The gain on the sale of subsidiary of $5.7
million in 1997 relates to the sale in the first quarter of 1997 of our software
subsidiary as discussed above.
Net Loss and Loss Per Share. As a result of the factors discussed above,
our net loss for 1997 was $45.6 million (37.4% of revenue), or $1.14 basic and
diluted loss per share, a $9.5 million improvement from a net loss in 1996 of
$55.1 million (65.3% of revenue), or $1.40 basic and diluted loss per share. The
return to preferred shareholders, which comprises the dividends with respect to
our Series B 8% Convertible Preferred Stock ("Series B Preferred Stock") and
accretion of the related conversion premium on the Series B Preferred Stock, is
included in the calculation of the net loss available to common shareholders
used to compute basic and diluted loss per share. Because inclusion of common
stock equivalents is antidilutive, basic and diluted loss per share are the same
for each year presented.
Year Ended December 31, 1996 As Compared To The Year Ended December 31, 1995
Results of Operations
Revenue. Revenue increased by 118% to $84.4 million in 1996 from $38.7
million in 1995. The increase was attributable to a number of factors, including
an increase in the number of business subscribers facilitated by an increase in
the number of POPs in operation, an expansion of our sales force, and greater
public awareness and utilization of the Internet.
Our business account base increased by 117% to 17,800 business customers
including 22 ISPs at December 31, 1996, from 8,200 business customers at
December 31, 1995. Our network infrastructure increased to 350 POPs at December
31, 1996 from 240 POPs at December 31, 1995.
Other Income, Net. Other income, net, was $5.4 million during 1996,
consisting of the consideration received, net of related asset costs and
transfer expenses, relating to the sale of our individual consumer subscribers
and certain related tangible and intangible assets in connection with the
implementation of our Carrier and ISP strategy during the second and third
quarters of 1996. We did not have other income, net, in 1995.
Data Communications and Operations. Data communications and operations
expenses were $70.1 million (83.1% of revenue) during 1996, an increase of $38.0
million from $32.1 million (83.0% of revenue) during 1995. The increase in
expenses related principally to increases in (1) costs associated with providing
dedicated circuits to our business customers and (2) circuit costs relating to
our new POPs deployed in late 1995 and early 1996. The increase also was due, to
a lesser extent, to an increase in personnel costs resulting from the expansion
of our network operations, customer support and field service staff concentrated
in late 1995 and early 1996. The number of network operations, customer support
and field service personnel employed by us at December 31, 1996 was lower than
the number of such personnel employed at December 31, 1995 due to the transfer
of approximately 75 employees to another ISP in connection with the sale of the
consumer ISP business and entry into the Carrier and ISP Services market.
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<PAGE>
Sales and Marketing. Sales and marketing expenses were $27.1 million (32.1%
of revenue) during 1996, an increase of $3.2 million from $23.9 million (61.8%
of revenue) during 1995. The increase resulted principally from an increase in
sales and marketing activity relating to our subsidiaries in Canada and the
United Kingdom during such period.
General and Administrative. General and administrative expenses were
$20.6 million (24.5% of revenue) during 1996, an increase of $10.0 million from
$10.6 million (27.3% of revenue) during 1995. The increase in 1996 principally
related to increased general and administrative staff and activity as compared
to 1995.
Depreciation and Amortization. Depreciation and amortization costs were
$28.0 million (33.2% of revenue) during 1996, an increase of $13.2 million from
$14.8 million (38.2% of revenue) during 1995. A significant portion of this
increase related to POP expansion and existing POP equipment upgrades as well as
the effect of capital expenditures on facility expansions required as a result
of additional hiring in sales, marketing and administration in 1995 and early
1996. Additionally, a full year of amortization in 1996 on certain intangible
assets recorded in connection with acquisitions completed in 1995 contributed to
this increase.
Interest Expense. Interest expense increased to $5.0 million in 1996, an
increase of $3.0 million from $2.0 million in 1995. The increase was principally
due to increased borrowings and capital lease obligations incurred by us to
finance network expansion and to fund working capital requirements.
Interest Income. Interest income was $3.8 million in 1996, an increase of
$2.2 million from $1.6 million in 1995. The increase was principally due to the
investment of proceeds from our public equity offering in December 1995.
Other Income. Other income of $2.9 million in 1996 relates to the
recognition of realized gains on equity securities that were sold by us, which
we did not have in 1995.
Net Loss and Loss Per Share. As a result of the factors discussed above,
our net loss for 1996 was $55.1 million (65.3% of revenue), or $1.40 basic and
diluted loss per share, $1.9 million higher in amount but better on a percentage
of revenue and per share basis than the net loss of $53.2 million (137.5% of
revenue), or $2.01 basic and diluted loss per share for 1995.
Income Taxes
At December 31, 1997, we had domestic net operating loss carryforwards of
approximately $123.1 million for federal income tax purposes. These net
operating loss carryforwards may be carried forward in varying amounts until
2012, and may be limited in their use under Section 382 of the Internal Revenue
Code in the event of significant changes in our ownership. In accordance with
generally accepted accounting principles, we have provided a valuation allowance
for net deferred tax assets arising from these carryforwards since realization
of these benefits cannot be reasonably assured.
Quarterly Results
The following tables set forth certain unaudited quarterly financial data,
and such data expressed as a percentage of revenue, for the eleven quarters
ended September 30, 1998. In the opinion of management, the unaudited financial
information set forth below has been prepared on the same basis as the audited
financial information included elsewhere herein and includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth. The operating results for any quarter are not
necessarily indicative of results for any future period.
-68 -
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------
1996
------------------------------------------------------
Mar 31 June 30 Sep 30 Dec 31
------ ------- ------ ------
<S> <C> <C> <C> <C>
(In thousands of U.S. dollars, except per share amounts)
Revenue........................ $ 17,181 $ 20,219 $ 24,147 $ 22,804
Other income, net.............. -- 2,400 3,017 --
-------- -------- -------- --------
17,181 22,619 27,164 22,804
Operating costs and expenses:
Data communications and
operations................... 13,942 16,529 19,698 19,933
Sales and marketing........... 7,844 7,021 6,000 6,199
General and administrative.... 5,475 4,228 5,309 5,636
Depreciation and
amortization................. 6,182 7,026 8,377 6,450
Charge for acquired in-
process research
and development.............. -- -- -- --
-------- -------- -------- --------
Total operating costs and
expenses.................... 33,443 34,804 39,384 38,218
-------- -------- -------- --------
Loss from operations........... (16,262) (12,185) (12,220) (15,414)
Interest expense............... (857) (1,386) (1,411) (1,371)
Interest income................ 1,224 943 1,179 448
Other income (expense)......... 1,068 1,776 19 --
Gain on sale of investments ... -- -- -- --
Equity in loss of affiliate.... (100) (107) (100) (500)
-------- -------- -------- --------
Loss before income taxes....... (14,927) (10,959) (12,533) (16,837)
Income tax expense (benefit)... (39) (40) (40) (40)
-------- -------- -------- --------
Net loss....................... (14,888) (10,919) (12,493) (16,797)
Return to preferred
shareholders................. -- -- -- --
-------- -------- -------- --------
Net loss available to common
shareholders.................. $(14,888) $(10,919) $(12,493) $(16,797)
Basic and diluted loss per
share (1).................... $(0.39) $(0.28) $(0.31) $(0.42)
Shares used in computing
loss per share (in
thousands)................... 38,178 39,379 39,888 40,085
<CAPTION>
Quarter Ended
-------------------------------------------------------
1997
-------------------------------------------------------
Mar 31 June 30 Sep 30 Dec 31
------ ------- ------ ------
(In thousands of U.S. dollars, except per share amounts)
<S> <C> <C> <C> <C>
Revenue........................ $ 25,639 $ 29,507 $ 32,001 $ 34,755
Other income, net.............. -- -- -- --
-------- -------- -------- --------
25,639 29,507 32,001 34,755
Operating costs and expenses:
Data communications and
operations................... 20,968 22,114 23,765 27,516
Sales and marketing........... 6,002 5,858 6,210 7,761
General and administrative.... 5,481 6,141 5,354 5,971
Depreciation and
amortization................. 8,034 6,058 6,557 7,698
Charge for acquired in-
process research
and development.............. -- -- -- --
-------- -------- -------- --------
Total operating costs and
expenses.................... 40,485 40,171 41,886 48,946
-------- -------- -------- --------
Loss from operations........... (14,846) (10,664) (9,885) (14,191)
Interest expense............... (1,350) (1,297) (1,516) (1,199)
Interest income................ 775 670 550 1,064
Other income (expense)......... (25) (32) 177 (10)
Gain on sale of investments ... 5,701 -- -- --
Equity in loss of affiliate.... -- -- -- --
-------- -------- -------- --------
Loss before income taxes....... (9,745) (11,323) (10,674) (14,336)
Income tax expense (benefit)... (476) -- -- --
-------- -------- -------- --------
Net loss....................... (9,269) (11,323) (10,674) (14,336)
Return to preferred
shareholders................. -- -- -- (411)
-------- -------- -------- --------
Net loss available to common
shareholders.................. $ (9,269) $(11,323) $(10,674) $(14,747)
Basic and diluted loss per
share (1).................... $(0.23) $(0.28) $(0.26) $(0.36)
Shares used in computing
loss per share (in
thousands)................... 40,158 40,225 40,407 40,436
<CAPTION>
Quarter Ended
-------------------------------------
1998
-------------------------------------
Mar 31 June 30 Sep. 30
------ ------- -------
(In thousands of U.S. dollars, except per share amounts)
<S> <C> <C> <C>
Revenue........................ $ 44,469 $ 53,713 $ 67,550
Other income, net.............. -- -- --
-------- -------- --------
44,469 53,713 67,550
Operating costs and expenses:
Data communications and
operations................... 36,666 41,943 51,908
Sales and marketing........... 10,732 12,486 14,701
General and administrative.... 7,585 10,287 11,566
Depreciation and
amortization................. 9,465 12,889 14,658
Charge for acquired in-
process research
and development.............. 7,000 20,000 13,400
-------- -------- --------
Total operating costs and
expenses.................... 71,448 97,605 106,233
-------- -------- --------
Loss from operations........... (26,979) (43,892) (38,683)
Interest expense............... (2,579) (16,892) (18,722)
Interest income................ 585 6,059 4,747
Other income (expense)......... (99) 1,103 (301)
Gain on sale of investments ... -- -- 5,647
Equity in loss of affiliate.... -- -- --
-------- -------- --------
Loss before income taxes....... (29,072) (53,622) (47,312)
Income tax expense (benefit)... -- 29 36
-------- -------- --------
Net loss....................... (29,072) (53,651) (47,348)
Return to preferred
shareholders................. (782) (763) (768)
-------- -------- --------
Net loss available to common
shareholders.................. $(29,854) $(54,414) $(48,116)
Basic and diluted loss per
share (1).................... $(0.67) $(1.06) $(0.93)
Shares used in computing
loss per share (in
thousands)................... 44,596 51,111 51,659
</TABLE>
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<PAGE>
(1) Since there are changes in the weighted average number of shares
outstanding each quarter, the sum of the loss per share by quarter may not
equal the loss per share for 1996 and 1997 or year-to-date for 1998.
- 70 -
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
1996 1997
------------------------------------ ------------------------------------
Mar 31 June 30 Sep 30 Dec 31 Mar 31 June 30 Sep 30 Dec 31
------ ------- ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Other income, net................ -- 11.8 12.5 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
100.0 111.8 112.5 100.0 100.0 100.0 100.0 100.0
Operating costs and expenses:
Data communications and
Operations..................... 81.1 81.7 81.6 87.4 81.8 74.9 74.3 79.2
Sales and marketing............. 45.7 34.7 24.8 27.2 23.4 19.9 19.4 22.3
General and administrative...... 31.9 20.9 22.0 24.7 21.4 20.8 16.7 17.2
Depreciation and amortization... 36.0 34.8 34.7 28.3 31.3 20.5 20.5 22.1
Charge for acquired in-process
Research and development....... -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating costs and
Expenses...................... 194.7 172.1 163.1 167.6 157.9 136.1 130.9 140.8
Loss from operations............. (94.7) (60.3) (50.6) (67.6) (57.9) (36.1) (30.9) (40.8)
Interest expense................. (5.0) (6.9) (5.8) (6.0) (5.2) (4.4) (4.7) (3.4)
Interest income.................. 7.1 4.7 4.9 2.0 3.0 2.3 1.7 3.1
Other income (expense)........... 6.2 8.8 0.1 -- (0.1) (0.1) 0.6 (0.1)
Gain on sale of investments...... -- -- -- -- 22.2 -- -- --
Equity in loss of affiliate...... (0.5) (0.5) (0.5) (2.2) -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Loss before income taxes......... (86.9) (54.2) (51.9) (73.8) (38.0) (38.3) (33.3) (41.2)
Income tax expense (benefit)..... (0.2) (0.2) (0.2) (0.2) (1.8) -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net Loss........................ (86.7)% (54.0)% (51.7)% (73.6)% (36.2)% (38.3)% (33.3)% (41.2)%
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
Quarter Ended
----------------------------
1998
----------------------------
Mar. 31 June 30 Sep. 30
------ ------- -------
<S> <C> <C> <C>
Revenue.......................... 100.0% 100.0% 100.0%
Other income, net................ -- -- --
----- ----- -----
100.0 100.0 100.0
Operating costs and expenses:
Data communications and
Operations..................... 82.5 78.1 76.8
Sales and marketing............. 24.1 23.2 21.8
General and administrative...... 17.1 19.2 17.1
Depreciation and amortization... 21.3 24.0 21.7
Charge for acquired in-process
Research and development....... 15.7 37.2 19.8
----- ----- -----
Total operating costs and
Expenses...................... 160.7 181.7 157.3
----- ----- -----
Loss from operations............. (60.7) (81.7) (57.3)
Interest expense................. (5.8) (31.4) (27.7)
Interest income.................. 1.3 11.3 7.0
Other income (expense)........... (0.2) 2.0 (0.4)
Gain on sale of investments...... -- -- 8.4
Equity in loss of affiliate...... -- -- --
----- ----- -----
Loss before income taxes......... (65.4) (99.8) (70.0)
Income tax expense (benefit)..... -- 0.1 0.1
----- ----- -----
Net Loss........................ (65.4)% (99.9)% (70.1)%
===== ===== =====
</TABLE>
- 71 -
<PAGE>
Our quarterly operating results have fluctuated and will continue to
fluctuate from period to period depending upon such factors as:
. the success of our efforts to expand our customer base,
. changes in and the timing of expenditures relating to the continued
expansion of our network,
. the delivery of bandwidth from IXC and our other global network
providers,
. the development of new services,
. the success of sales and marketing efforts,
. changes in pricing policies by us or our competitors, and
. certain factors relating to our acquisition strategy as further
described under "--Liquidity and Capital Resources."
In view of the significant historical growth of our operations, we believe
that period-to-period comparisons of our financial results should not be relied
upon as an indication of future performance and that we may experience
significant period-to-period fluctuations in operating results in the future.
We expect to focus in the near term on building and increasing our customer base
and increasing our network utilization both through internal growth and through
acquisitions which may require us from time to time to increase our expenditures
for personnel, marketing, network infrastructure and the development of new
services.
Liquidity And Capital Resources
We have historically had losses from operations, which have been funded
primarily through borrowings and capital lease financings from vendors,
financial institutions and other third parties, and through the issuance of debt
and equity securities.
Cash Flows For The Nine Months Ended September 30, 1998 And 1997
Cash flows used in operating activities were $76.9 million and $13.0
million for the nine months ended September 30, 1998 and 1997, respectively.
Cash flows used in operating activities can vary significantly from period to
period depending upon our net income or loss in addition to the timing of
operating cash receipts and payments, especially accounts receivable, prepaid
expenses and other assets, and accounts payable and accrued liabilities.
Cash flows used in investing activities were $326.0 million and cash flows
provided by investing activities were $13.0 million for the nine months ended
September 30, 1998 and 1997, respectively. Purchases of short-term investments
related to our 10% senior notes offering during the nine months ended September
30, 1998 were $247.2 million, offset by proceeds from the sale of short-term
investments of $200.0 million. The change in restricted cash, including the
escrow for interest on our 10% senior notes, was $106.2 million. The expansion
of our network resulted in capital expenditures of $103.3 million and $29.1
million for the nine months ended September 30, 1998 and 1997, respectively
(which included capital expenditures financed under equipment financing
agreements aggregating $54.9 million and $20.0 million, respectively).
Acquisition activities resulted in the use of $123.8 million of cash for the
nine months ended September 30, 1998, net of cash acquired. Cash flows provided
by investing activities for the nine months ended September 30, 1997 benefited
from the sale in February 1997 of our software subsidiary for cash consideration
of $12.0 million and the receipt of $8.5 million as repayment of intercompany
debt owed by our software subsidiary.
Cash flows provided by financing activities were $654.2 million and cash
flows used in financing activities were $12.2 million for the nine months ended
September 30, 1998 and 1997, respectively. The financing cash flow in 1998
primarily relates to our issuance of the 10% senior notes and borrowings under
our credit facility, offset
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<PAGE>
by repayments on our financing facilities. During the nine months ended
September 30, 1998 and 1997, we made repayments aggregating $61.5 million and
$19.6 million, respectively, on such financing facilities.
As of September 30, 1998, we had $463.0 million of cash, cash equivalents,
restricted cash and short-term investments, and short-term investments and
marketable securities, including $122.8 million escrowed for the repayment of
interest on our 10% senior notes.
Cash Flows For The Years Ended December 31, 1997, 1996 And 1995
Cash flows used in operating activities were $15.5 million, $32.5 million
and $30.1 million for 1997, 1996 and 1995, respectively. Cash flows from
operating activities can vary significantly from period to period depending upon
the timing of operating cash receipts and payments, especially accounts
receivable, prepaid expenses and other assets, and accounts payable and accrued
liabilities. In all three years, our net loss was the primary component of cash
used in operating activities, offset by significant non-cash depreciation and
amortization expenses relating to our network and intangible assets.
Cash flows used in investing activities were $15.6 million, $7.9 million
and $22.0 million for 1997, 1996 and 1995, respectively. The expansion of our
network resulted in capital expenditures of $50.0 million, $38.4 million and
$45.2 million for those same three years (which included capital expenditures
financed under equipment financing agreements aggregating $37.4 million, $25.6
million and $29.1 million for the respective periods). Cash flows used in
investing activities for 1997 benefited from the sale of our software subsidiary
for cash consideration of $12.0 million and the receipt of $8.5 million of
repayments of intercompany debt owed by the subsidiary to us. Investing cash
flows for 1997 were reduced by the $19.7 million increase in "restricted cash
and short-term investments," $17.5 million of which supported a $15.4 million
irrevocable letter of credit issued by a bank on our behalf in conjunction with
the acquisition of iSTAR. This restriction was removed in February 1998 when we
finalized the funding for this acquisition. During 1997, we invested $3.0
million in equity and debt securities with original maturities of greater than
90 days and received $7.6 million from the maturity or sale of certain equity
investments held by us.
Cash flows provided by (used in) financing activities were $12.6 million
for 1997, ($10.5) million for 1996, and $151.4 million for 1995. In November
1997, we completed a private placement of 600,000 shares of our Series B
Preferred Stock for gross proceeds of $30.0 million. In 1997, 1996 and 1995, we
made repayments aggregating $27.7 million, $19.8 million and $5.8 million,
respectively, on our capital lease obligations and financing facilities and
received proceeds from the issuance of notes payable of $6.4 million, $8.3
million and $8.3 million, respectively. Additionally, in 1995, we had net
proceeds from three separate common and preferred stock offerings totaling
$146.9 million.
As of December 31, 1997, we had $54.0 million of cash, cash equivalents,
restricted cash and short-term investments.
Capital Structure
Our capital structure at September 30, 1998 consisted of lines of credit,
capital lease obligations and notes payable (including our 10% senior notes),
preferred stock and common stock.
Total borrowings at September 30, 1998 were $817.7 million, which included
$44.7 million in current obligations and $773.0 million in long-term capital
lease obligations and notes payable. We also had $0.6 million of letters of
credit outstanding as of September 30, 1998. As of that date, the aggregate
unused portion under our various financing arrangements for purchases of
equipment and other fixed assets was $60.4 million. The aggregate unused portion
of our operating lines of credit (some of which are subject to a borrowing base
formula) was $0.4 million.
Prior to the closing of the first of the offerings of the initial notes, we
repaid, with other cash on hand, $108.5 million of borrowings outstanding under
our credit facility. Following the closings of the initial notes
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<PAGE>
offerings, we continued to have borrowing capacity of up to $110 million under
our credit facility, subject to its terms.
Our bank financing arrangements in the United States, which are secured by
substantially all of our assets, require us to satisfy certain financial
covenants such as those relating to consolidated revenue, leverage, liquidity
and EBITDA (as defined therein), and prohibit us from paying cash dividends and
repurchasing our capital stock without the lender's consent. In particular, we
are prohibited from permitting:
. consolidated revenue for any period of four consecutive fiscal quarters
to be less than $215.0 million on or after December 31, 1998 but prior
to June 30, 1999, $285.0 million on or after June 30, 1999 but prior to
December 31, 1999, $350.0 million on or after December 31, 1999 but
prior to June 30, 2000, $425.0 million on or after June 30, 2000 but
prior to December 31, 2000, and $500.0 million on December 31, 2000 and
thereafter;
. the ratio of consolidated debt minus cash (excluding cash escrowed with
respect to the payment of obligations) to annualized consolidated
revenue for the most recent fiscal quarter for which financial
statements have been delivered (as adjusted to give pro forma effect to
any acquisitions completed during or after such fiscal quarter) to
exceed 2.5 to 1 at any time;
. the sum of cash (excluding cash escrowed with respect to the payment of
obligations) and available borrowing capacity under our credit facility
at any time to be less than $100.0 million; and
. EBITDA (as defined therein), to be less than negative $45.0 million,
negative $40.0 million, negative $29.0 million, negative $15.0 million,
$0, $15.0 million, $25.0 million, $40.0 million and $50.0 million for
any period of four consecutive fiscal quarters ending on each of
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999,
December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000 and
December 31, 2000, respectively. See "Description of Certain
Indebtedness--Credit Facility."
In April 1998, we completed an offering of $600.0 million aggregate
principal amount of 10% senior notes and, in November 1998, we completed the
initial notes offerings. The aggregate net proceeds of these offerings, after
giving effect to discounts, commissions and estimated expenses and the
establishment of a $138.7 million escrow arrangement to fund when due the first
five interest payments on our 10% senior notes, were $785.1 million.
The indentures governing the 10% senior notes and the notes contain certain
financial covenants with which we must comply relating to, among other things,
the following matters:
. limitation on our payment of cash dividends, repurchase of capital
stock, payment of principal on subordinated indebtedness and making of
certain investments, unless after giving effect to each such payment,
repurchase or investment, certain operating cash flow coverage tests are
met, excluding certain permitted payments and investments;
. limitation on our incurrence and our subsidiaries' incurrence of
additional indebtedness, unless at the time of such incurrence, our
ratio of debt to annualized operating cash flow would be less than or
equal to 6.0 to 1.0 prior to April 1, 2001 and less than or equal to 5.5
to 1.0 on or after April 1, 2001, excluding certain permitted
incurrences of debt;
. limitation on our incurrence and our subsidiaries' incurrence of liens,
unless the 10% senior notes and the notes are secured equally and
ratably with the obligation or liability secured by such lien, excluding
certain permitted liens;
. limitation on the ability of any of our subsidiaries to create or
otherwise cause to exist any encumbrance or restriction on the payment
of dividends or other distributions on their capital stock, payment of
indebtedness owed to us or to any of our other subsidiaries, making of
investments in us or in any of our other subsidiaries, or transfer of
any of their properties or assets to us or any of our other
subsidiaries, excluding certain permitted encumbrances and restrictions;
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. limitation on certain mergers, consolidations and sales of assets by us
or our subsidiaries;
. limitation on certain transactions with our affiliates;
. limitation on the ability of any of our subsidiaries to guarantee or
otherwise become liable with respect to any of our indebtedness unless
such subsidiary provides for a guarantee of the 10% senior notes and the
notes on the same terms as the guarantee of such indebtedness;
. limitation on certain sale and leaseback transactions by us or our
subsidiaries;
. limitation on certain issuances and sales of capital stock of our
subsidiaries; and
. limitation on the ability of us or our subsidiaries to engage in any
business not substantially related to a telecommunications business. See
"Description of Notes" and "Description of Certain Indebtedness--10%
Senior Notes."
In November 1997, we completed a private placement of 600,000 shares of our
Series B Preferred Stock for gross proceeds of $30.0 million. Each share of
Series B Preferred Stock has a stated value of $50.00 per share. The Series B
Preferred Stock accrues dividends at an annual rate of 8%, payable quarterly in
cash or, at our option, additional shares of our Series B Preferred Stock. The
Series B Preferred Stock is convertible into a number of shares of our common
stock equal to the stated value of the Series B Preferred Stock at a conversion
price of $10 per share of common stock during the first year. The conversion
price may be reset at the end of the first and second anniversary dates, under
certain circumstances, to the common stock's then current market value. At the
third anniversary date, the conversion price may be reset, under certain
circumstances, to 95% of the common stock's then current market value. To
reflect the nature of these conversion rights, preferred stock has been reduced
by $1.5 million with a corresponding increase to capital in excess of par value.
The Series B Preferred Stock may be redeemed, at our option, under certain
circumstances commencing on the third anniversary of original issuance. So long
as any Series B Preferred Stock remains outstanding, except for any payment that
may be made pursuant to the IRU Purchase Agreement with IXC, neither we nor any
of our subsidiaries will:
. redeem, purchase or otherwise acquire directly or indirectly any common
stock or other junior securities,
. directly or indirectly pay or declare any dividend or make any
distribution (other than certain dividends or distributions or a
distribution on securities issuable pursuant to any rights under our
shareholder rights plan) upon, nor will any distribution (other than
certain dividends or distributions or a distribution on securities
issuable pursuant to any rights pursuant to the rights plan) be made in
respect of, any common stock or other junior securities, or
. set aside any funds for or apply any funds to the purchase, redemption
or acquisition (through a sinking fund or otherwise) of any common stock
or other junior securities (other than pursuant to the rights plan).
We may, however, redeem, purchase or otherwise acquire and set aside funds
for and apply funds to the purchase, redemption or acquisition of common stock
or other junior securities:
. for up to an aggregate amount not to exceed, at any point in time the
sum of: (1) $10.0 million plus (2) an amount equal to 100% of the
aggregate net cash proceeds received by us after November 10, 1997 from
the issuance of common stock or other junior securities or debt
securities that have been converted into common stock or other junior
securities plus (3) an amount equal to 50% of our cumulative
consolidated positive earnings before interest, taxes, depreciation and
amortization as reported by us in respect of each fiscal quarter
commencing with the fiscal quarter ending December 31, 1997, or
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. pursuant to the right of first offer granted pursuant to the IRU
Purchase Agreement with IXC, provided that immediately after giving
effect thereto, our consolidated shareholders' equity will not be less
than $20.0 million.
We have a credit facility with a Canadian bank which provides borrowing
availability to our Canadian subsidiary in three components:
. a revolving credit facility of Cdn. $150,000;
. a term loan of Cdn. $1,000,000, having a balance outstanding of Cdn.
$281,000 as of September 30, 1998, repayable in February 1999; and
. an equipment leasing facility of Cdn. $1,000,000 having a balance
outstanding of Cdn. $773,000 as of September 30, 1998, and a final
maturity date of March 2001.
Borrowings under the revolving credit facility and the term loan bear
interest at the applicable prime rate of the bank plus 1.5%. Borrowings under
the equipment lease facility bear interest at an average rate of 8.7%. See
"Description of Certain Indebtedness--Canadian Credit Facility."
Commitments, Capital Expenditures And Future Financing Requirements
As of September 30, 1998, we had commitments to certain telecommunications
vendors totaling $80.2 million. The commitments require minimum monthly usage
levels of data and voice communications over the next five years. Additionally,
we have various agreements to lease office space and facilities and, as of
September 30, 1998, were obligated to make future minimum lease payments of
$35.5 million on non-cancellable operating leases expiring in various years
through 2005. We are obligated, under the terms of one of our Carrier and ISP
Services agreements, to provide the ISP customer with a rental facility of up to
$5.0 million for telecommunications equipment owned or leased by us and deployed
in the customer's network. At September 30, 1998, we had provided $1.4 million
of equipment under this facility. In certain cases we also obtain local customer
circuits under multi-year agreements that permit us to redesignate the circuit
to a different customer but which obligate us for that circuit until expiration.
In order to take full advantage of the bandwidth acquired from IXC, in
addition to other planned capital expenditures, we expect to incur capital
expenditures over the next several years of up to $95.0 million. We expect to
incur these capital expenditures in the deployment of high activity POPs
throughout the United States designed and located with the objective of
optimizing the efficient use of the bandwidth. These POPs are expected to
contain switching, routing and modem equipment, together with any computing
equipment as may be necessary to address the increase in customer demand
anticipated as a result of the enhanced capacity provided by the PSINet IRUs. In
addition, we expect to incur on an annual basis $1.2 million in operation and
maintenance fees for each 1,000 equivalent route miles of OC-48 bandwidth
accepted from IXC. Other planned capital expenditures expected to be incurred by
us over the next several years include up to $48.0 million in connection with
the anticipated build-out of our pan-European Internet network, including in
connection with our recent acquisitions of IRUs in transatlantic STM-1 bandwidth
connecting the United States, the United Kingdom and the Netherlands and in STM-
1 bandwidth connecting 30 European cities, and for construction of our recently
opened network operations center in Switzerland. In addition, we expect to incur
capital expenditures of:
. approximately $45.0 million over the next 20 years in connection with
our acquisition and lighting of IRUs in 18 dark fiber optic strands
connecting the New York City to Washington, D.C. metropolitan areas and
major metropolitan areas in between,
. approximately $47.0 million in connection with our acquisition of IRUs
in transpacific DS-3 bandwidth connecting the United States and Japan,
. in excess of $100.0 million of total costs over the 25 year term of the
agreement in connection with our agreement with a group of leading
global telecommunications companies to build the Japan-U.S. Cable
Network,
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. approximately $32.0 million over the next 20 years in connection with
our acquisition and lighting of IRUs in four dark fiber optic strands
connecting multiple cities in the San Francisco Bay area,
. approximately $36.0 million IRUs in connection with our acquisition of
IRUs in STM-1 bandwidth having the capability of connecting Japan,
China, Southeast Asia, India, the Middle East, Europe and the United
Kingdom, and
. approximately $18.0 million in connection with our acquisition and
lighting of IRUs in 20 dark fiber optic strands connecting the
Vancouver, British Columbia and Seattle, Washington metropolitan areas.
We also expect that there will be additional costs, such as connectivity and
equipment charges in connection with taking full advantage of our acquired
bandwidth and IRUs, although we are currently unable to estimate the extent of
such additional costs. We currently anticipate that these expenditures will be
financed through a combination of capital leases, a portion of the net proceeds
from the 10% Senior Notes offering and the Initial Notes Offerings, and with
other sources of financing. We expect to continue to seek opportunities to
acquire bandwidth to enhance our global network capabilities.
In connection with our recently announced 20-year strategic commercial
partnership with the Baltimore Ravens of the National Football League, we
acquired, among other things, rights to name the Ravens' NFL Stadium "PSINet
Stadium" as well as rights for sponsorship and promotion of team events and
related advertising and marketing rights. In addition, we have the right to
develop a Baltimore Ravens' web site and provide related Internet services to
subscribing fan members which, along with other commercial aspects of the
transaction, are expected to bring revenues to both organizations through
service and membership fees, e-commerce and promotional ventures. In exchange
for all of these rights, we will make payments to the Baltimore Ravens over a
20-year period, beginning with a payment of $11.8 million in 1999, which
includes a one-time prepayment of $9.25 million under the stadium naming rights
agreement. Annual payments for 2000 and for the 18 years thereafter start at
$2.6 million, with successive annual 5% increases. It is expected that the total
payments made over the 20-year period will be approximately $93.5 million.
We presently believe, based on the flexibility we expect to have in the
timing of orders of bandwidth from IXC, in outfitting our POPs with appropriate
telecommunications and computer equipment, and in controlling the pace and scope
of our anticipated buildout of our international Internet network, that we will
have a reasonable degree of flexibility to adjust the amount and timing of such
capital expenditures in response to our then existing financing capabilities,
market conditions, competition and other factors. Accordingly, we believe that
working capital generated from the use of acquired bandwidth, together with
other existing working capital, existing credit facilities, from capital lease
financings, from the proceeds of the initial notes offerings and prior offerings
and from future equity or debt financings, which we presently expect to be able
to obtain when needed, will be sufficient to meet the currently anticipated
working capital and capital expenditure requirements of our operations,
including, without limitation, our payment obligations under our strategic
commercial relationship with the Baltimore Ravens. There can be no assurance,
however, that we will have access to sufficient additional capital and/or
financing on satisfactory terms to enable us to meet our capital expenditure and
working capital requirements. See "Risk Factors--We May Not Have the Ability to
Raise the Additional Capital Needed to Finance Growth and Capital Requirements."
We have certain payment obligations related to earnout and purchase price
retention arrangements pursuant to certain agreements between us and third
parties.
OTHER POSSIBLE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We anticipate that we will continue to seek to develop relationships with
strategic partners, both domestically and internationally, and to acquire
assets, including, without limitation, additional telecommunications bandwidth,
and businesses principally relating to or complementary to our existing
business. Certain of these strategic relationships may involve other
telecommunications companies that desire to enter into joint marketing and
services arrangements with us pursuant to which we would provide Internet and
Internet-related services to such companies. Such transactions, if deemed
appropriate by us, may also be effected in conjunction
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with an equity and/or debt investment by such companies in us. Such
relationships and acquisitions may require additional financing and may be
subject to the consent of our lenders and other third parties.
We have not, in the past, used in any material respect financial
instruments as hedges against certain financial and currency risks or for
trading. However, as a result of the recent increase in our foreign operations,
we may begin to use various financial instruments, including derivative
financial instruments, in the ordinary course of business, for purposes other
than trading. These instruments could include letters of credit, guarantees of
debt, interest rate swap agreements and foreign currency exchange contracts
relating to intercompany payables of foreign subsidiaries. We do not intend to
use derivative financial instruments for speculative purposes. Foreign currency
exchange contracts would be used to mitigate foreign currency exposure and with
the intent of protecting the U.S. dollar value of certain currency positions and
future foreign currency transactions. Interest rate swap agreements would be
used to reduce our exposure to risks associated with interest rate fluctuations.
By their nature, all such instruments would involve risk, including the risk of
nonperformance by counterparties, and our maximum potential loss may exceed the
amount recognized in our balance sheet. We would attempt to control our exposure
to counterparty credit risk through monitoring procedures and by entering into
multiple contracts.
Risks Associated With Year 2000
The commonly referred to Year 2000 ("Y2K") problem results from the fact
that many existing computer programs and systems use only two digits to identify
the year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not corrected,
computer applications that use a two-digit format could fail or create erroneous
results in any computer calculation or other processing involving the Year 2000
or a later date. We have identified two main areas of Y2K risk:
. Internal computer systems or embedded chips could be disrupted or fail,
causing an interruption or decrease in productivity in our operations;
and
. Computer systems or embedded chips of third parties including (without
limitation) financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others ("Material Third Parties") could be disrupted or fail, causing an
interruption or decrease in our ability to continue our operations.
We have developed, or are in the process of developing, detailed plans for
implementation and testing of any necessary modifications to our key computer
systems and equipment with embedded chips to ensure that they are Y2K compliant.
We have engaged a third party consultant to perform an assessment of our
systems, domestically and internationally. We expect that the assessment, which
is being done in stages, will be complete by early 1999. We anticipate that our
domestic internal systems will be Y2K ready by June 30, 1999, and our
international systems will be Y2K compliant by the end of the third quarter of
1999, which is consistent with prior plans. We believe that with these detailed
plans and completed modifications, the Y2K issue will not pose significant
operational problems for us. However, if the modifications and conversions are
not made, or not completed in a timely fashion, the Y2K issue could have a
material impact on our operations.
Our cost of addressing Y2K issues has been minor to date, less than five
percent (5%) of our information technology budget, but this amount will increase
as substantial consultants or personnel resources are required or if
operationally- important equipment must be remediated or replaced. The risk
that Y2K issues could present to us include, without limitation, disruption,
delay or cessation of operations, including operations that are subject to
regulatory compliance. In each case, the correction of the problem could result
in substantial expense and disruption or delay of our operations. The total cost
of Y2K assessments and remediation is funded through cash flows generated
through operations and available from other sources and, to date, we are
expensing these costs. The financial impact of making any required systems
changes or other remediation efforts cannot be known precisely at this time, but
it is not expected to be material to our financial position, results of
operations, or cash flows. We have not canceled any principal information
technology projects as a result of our Y2K effort, although we have rescheduled
some tasks to accommodate this effort.
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In addition, we have identified and prioritized and are communicating with
Material Third Parties to determine their Y2K status and any probable impact on
us. We will continue to track and evaluate our long-term relationship with
Material Third Parties based on the responses we receive and on information
learned from other sources. If any of our Material Third Parties are not Y2K
ready and their non-compliance causes a material disruption to any of their
respective businesses, our business could be materially adversely affected.
Disruptions could include, among other things: the failure of a Material Third
Party's business; a financial institution's inability to take and transfer
funds; an interruption in delivery of supplies from vendors; a loss of voice and
data connections; a loss of power to our facilities; and other interruptions in
the normal course of our operations, the nature and extent of which we cannot
foresee. We will continue to evaluate the nature of these risks, but at this
time we are unable to determine the probability that any such risk will occur,
or if it does occur, what the nature, length or other effects, if any, it may
have on us. If a significant number of Material Third Parties experience
failures in their computer systems or operations due to Y2K non- compliance, it
could affect our ability to process transactions or otherwise engage in similar
normal business activities. For example, while we expect our internal systems,
domestic and international, to be Y2K ready in stages during 1999, we and our
customers who communicate internationally will be dependent upon the Y2K-
readiness of many foreign providers of telecommunication services and their
vendors and suppliers. If these providers and others are not Y2K ready, we and
our customers will not be able to send and receive data and other electronic
transmissions, which would have a material adverse effect on the business and
revenues of us and our customers. While many of these risks are outside our
control, we have instituted a program to identify Material Third Parties and to
address any non-compliance issues.
While we believe that we are adequately addressing the Y2K issue, there can
be no assurance that our Y2K analyses will be completed on a timely basis or
that the cost and liabilities associated with the Y2K issue will not materially
adversely impact our business, prospects, revenues or financial position. We are
uncertain as to our most reasonably likely worst case Y2K scenario and have not
yet developed a contingency plan to handle a worst case scenario. We expect to
have a contingency plan to handle this situation by September 30, 1999. See
"Risk Factors--Risks Associated With Year 2000."
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. The Statement establishes standards for the
way companies report information about operating segments in annual and interim
financial statements. Generally, the Statement requires financial information to
be reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. We will adopt
the Statement's disclosure requirements in the financial statements as of and
for the year ending December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging securities.
To the extent we begin to enter into such transactions in the future, we will
adopt the Statement's disclosure requirements in the financial statements for
the year ending December 31, 2000.
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BUSINESS
PSINet is a leading global facilities-based provider of Internet access
services and related products to businesses. PSINet provides dedicated and
dial-up Internet connections to businesses in 90 of the 100 largest metropolitan
statistical areas in the U.S. and in 12 of the 20 largest global
telecommunications markets. PSINet also offers IP-based value-added services and
products to businesses, including corporate intranets, Web hosting and
collocation, remote user access, multi-currency electronic commerce, security
and voice-over-IP services, that enable businesses to maximize utilization of
their corporate networks and the Internet. Additionally, PSINet provides network
connectivity and related services to other telecommunications carriers and ISPs
to further exploit its network capacity.
PSINet's mission is to build a premier IP-based communications company.
PSINet grows its business through multiple sales channels, including direct
sales as well as resellers, and by acquiring other ISPs and related businesses
in key markets. By providing services and products that enhance its customers'
business processes through the effective use of the Internet and related tools,
PSINet has increased revenues from $8.7 million in 1993 to $121.9 million in
1997, representing a 94% compounded annual growth rate. Over the last twelve
months, PSINet has experienced rapid growth through the acquisition of 15 ISPs
in eight of the 20 largest global telecommunications markets. On a pro forma
basis, after giving effect to these recent acquisitions, revenues for the nine
months ended September 30, 1998 would have been approximately $231.3 million.
Although PSINet has experienced significant revenue growth, it has also incurred
significant indebtedness, growing net losses and negative cash flow from
operations. As of September 30, 1998 and for the nine months ended September 30,
1998, after giving pro forma effect to the initial notes offerings and the
acquisition of Tokyo Internet, PSINet had approximately $1.178 billion of
indebtedness, net losses available to common shareholders of $219.4 million and
negative EBITDA (as defined) of $38.9 million.
PSINet owns and operates a technologically advanced, high-speed frame
relay network. As of October 1, 1998, the PSINet network served over 53,000
business accounts, including 141 ISPs, and connected to over 500 POPs in 12
countries. The PSINet network is one of the primary backbones that comprise the
Internet and is connected with other large ISPs at 27 public and private peering
points. PSINet believes that its scaleable IP-optimized network, in combination
with its highly trained, around-the-clock customer care team, enables PSINet to
deliver superior performance and reliability.
Industry Overview
Overview. Internet access services is one of the fastest growing segments
of the global telecommunication services market place. According to IDC, the
number of Internet users worldwide reached 38 million in 1996 and is forecasted
to grow to over 173 million by the year 2000. Internet access services represent
the means by which ISPs interconnect either businesses or individual consumers
to the Internet's resources or to corporate intranets and extranets. Access
services include dial-up access for individuals and small businesses, and
high-speed dedicated access used primarily by mid-sized and larger
organizations. In addition to Internet access services, business-focused ISPs
are increasingly providing a range of value-added services, including managed
access (i.e., intranets), shared and dedicated Web hosting, security services,
and advanced applications such as IP-based voice, fax and video services. These
services are being used by business customers to enhance productivity, ensure
reliability and reduce costs.
The ISP market is segmented into large national or multinational ISPs
("Tier 1 ISPs"), which are typically full-service providers that offer a broad
range of Internet access and value-added services to businesses, and regional
and local ISPs ("Tier 2" and "Tier 3 ISPs"), which typically offer a smaller
range of products and services to both individuals and business customers and
may specialize in the provision of one IP-based product or service. Tier 1 ISPs
also provide wholesale services by reselling capacity on their networks to
smaller regional and local ISPs, thereby enabling these smaller ISPs to provide
Internet services on a private label basis without building their own
facilities. Tier 1 ISPs exchange Internet traffic at multiple public peering
points known as network access points ("NAPs") and through private peering
arrangements. As the number of ISPs have grown, Tier 1 ISPs have
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increased their requirements for peering arrangements thereby increasing the
barriers to entry into the top-tier. Tier 2 and Tier 3 ISPs generally rely on
Tier 1 ISPs for Internet access and interconnection. The ISP market is highly
fragmented with over 4,000 providers estimated to be doing business in the U.S.
and Canada alone. Because of the low barriers to entry, there are many local and
regional ISPs entering the market, which has caused the level of competition to
intensify. In addition, there recently have been certain large acquisitions of
ISPs by multinational telecommunications companies seeking to offer a more
complete package of telecommunications products to their customers.
Market Size and Growth. The domestic Internet service market is forecast
to continue its rapid growth for the foreseeable future. IDC estimates that the
U.S. Internet service market's aggregate annual revenues may grow from $3.3
billion in 1996 to $18.3 billion in the year 2000, reflecting a compounded
annual growth rate of over 50%. According to IDC estimates, in 1996, business
connectivity and value-added services represented approximately 62% of this
market.
Growth in U.S. demand for business connectivity is being driven by a
number of factors, including an increase in online market penetration,
particularly in the small and medium-sized business segments, and increased use
of the Internet by businesses. Specifically, IDC forecasts dedicated business
connectivity revenues to grow from approximately $1.9 billion in 1996 to $6.7
billion in 2000, representing a compounded annual growth rate of approximately
36%. In addition, as more businesses evolve from establishing an Internet
presence to utilizing secure connectivity between geographically-dispersed
locations, remote access to corporate networks and business-to-business commerce
solutions, the demand for high quality Internet connectivity and value-added
services and products should grow. IDC forecasts that value-added services
revenues will grow rapidly from $125.0 million in 1996 to $7.0 billion in 2000,
representing a compounded annual growth rate of approximately 174%.
In Europe, IDC estimates that the total market for Internet access
services and products reached $676.0 million in 1996 with business connectivity
and value-added services representing approximately 56% of the market. IDC
forecasts the European Internet access and services market to grow at a compound
rate of over 70% per annum to approximately $6.1 billion in 2000 with business
connectivity and value-added services representing approximately 65% of the
market. PSINet believes, based on its operational knowledge of and experience in
such markets, that the Canadian and Asian Internet access services and products
markets should grow at least at the same rate as the European market.
Growth in Business Use of the Internet. Since the commercialization of the
Internet in the early 1990s, businesses have rapidly established corporate
Internet sites and connectivity as a means to expand customer reach and improve
communications efficiency. Currently, many businesses are utilizing the Internet
as a lower-cost alternative to certain traditional telecommunications services.
For example, many corporations are connecting their remote locations using
intranets to enable efficient communications with employees, customers and
suppliers worldwide, providing remote access for a mobile workforce, reducing
telecommunications costs by using value-added services such as IP-based fax and
videoconferencing, and migrating legacy database applications to run over
IP-based networks. Businesses of all sizes are demanding advanced, highly
reliable solutions designed specifically to enhance productivity and improve
efficiency. Moreover, businesses are seeking national and global ISPs that can
securely and efficiently connect multiple, geographically-dispersed locations,
provide global remote access capabilities and offer a full range of value-added
services that meet their particular networking needs.
The PSINet Solution
PSINet provides high quality IP-based services and products that are
tailored to meet the needs of businesses. PSINet offers Internet access services
ranging from low-cost dial-up connections to high-speed continuous access in the
U.S. and 12 of the 20 largest international telecommunications markets. PSINet
also offers a variety of value-added services such as the provisioning of
corporate intranets, Web hosting, security, multi-currency electronic commerce
solutions and advanced applications which can be bundled with Internet access
services to provide complete, turnkey solutions. PSINet believes that the
business market is particularly attractive due to its low customer churn
characteristics, relatively low penetration and early stage of development. In
addition, PSINet believes that within the business access marketplace there is a
significant opportunity to upsell to higher
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service levels and provide additional value-added services as businesses grow
from establishing basic Internet connectivity and corporate Web sites to
utilizing the Internet and corporate intranets for more advanced,
mission-critical applications. Further, PSINet believes that small and medium
sized businesses will continue to seek to outsource certain information
technology functions to large full-service ISPs to reduce costs and improve
service levels. Moreover, PSINet believes that regional and local ISPs will
continue to seek business relationships with large, Tier 1 ISPs that enable them
to sell Internet connectivity services without making significant investments in
facilities.
The PSINet Strategy
PSINet's objective is to be one of the top three providers of Internet
access services and related communications services and products in each of the
20 largest global telecommunications markets. The principal elements of PSINet's
business strategy are summarized below:
o Pursue Internal Growth Through Multiple Sales Channels. PSINet is
pursuing growth opportunities through multiple channels consisting
of its direct sales force, a reseller and referral program and
strategic alliances. PSINet has built a direct sales force, which,
as of October 1, 1998, consisted of approximately 340 individuals,
more than half of whom are employed outside of the United States.
PSINet's sales people have a strong Internet technical background
and product knowledge, which assist them in effectively marketing
PSINet's products and services to targeted business customers.
PSINet has forged an authorized reseller and referral program with
selected telecommunications services and equipment suppliers,
networking service companies, systems integrators and computer
retailers. As of October 1, 1998, PSINet's reseller and referral
program consisted of approximately 720 resellers and referral
sources in the United States and 730 outside of the United States.
This program enables PSINet to utilize the sales and marketing
resources of its resellers and referral sources to offer PSINet
Internet access services and products to a broader and more diverse
prospect base. PSINet also seeks to establish strategic alliances
with selected telecommunications carriers, such as it has with
American Communications Network, Inc., ATX Telecommunications
Services, e.Spire Communications, Inc. and IXC, to offer PSINet's
IP-based services and products to the carriers' customer base on a
private label or co-branded basis as part of an integrated package
of telecommunications and Internet services and products.
o Accelerate Growth Through Targeted Acquisitions. PSINet intends to
accelerate its growth domestically and expand its presence in key
markets internationally by acquiring primarily business-focused ISPs
and related businesses and assets. PSINet intends to acquire local
or regional ISPs in markets where it has an established POP and can
benefit from the increased network utilization and local sales
force. Given an increasingly competitive environment and the large
capital requirements required to offer a broad base of IP services
and products and to develop access to a reliable, high-speed global
network, PSINet believes that undercapitalized local and regional
ISPs will continue to benefit from combining their operations with
PSINet. In addition, PSINet believes that its entrepreneurial
environment will be attractive to and help retain key employees of
acquired ISPs. PSINet also intends to make strategic acquisitions in
the eight largest global telecommunications markets where it
currently does not have a presence or in those global
telecommunications markets where PSINet's current presence would be
significantly enhanced. PSINet may also seek to acquire other
businesses relating or complementary to PSINet's existing business
to broaden its market presence and expand its strengths in key
product areas, such as application, Web hosting or data center
companies, or data-processing companies with legacy networks which
would benefit by migrating to IP-based technologies. PSINet seeks
acquisition targets that, once integrated into PSINet's existing
operations, generally will be accretive to EBITDA. PSINet plans to
effect future acquisitions through the use of existing cash, cash
generated from operations and from then available credit facilities,
issuances of shares of its common stock and preferred stock and a
portion of the net proceeds of the initial notes offerings.
o Capture Economies of Scale by Integrating Operations. After PSINet
has acquired an ISP, it typically acts to generate economies of
scale and cost savings by eliminating redundant operations and
network architecture and migrating the acquired ISP's customers on
to the PSINet network. Connecting an acquired
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ISP's customers to the PSINet network typically entails minimal
incremental data communication costs and enables PSINet to
significantly reduce its transit costs. PSINet seeks to generate
cost savings by centralizing back office operations, such as network
monitoring, customer billing, human resources and accounting. PSINet
also endeavors to realize efficiencies by consolidating an acquired
ISP's purchasing, product development and marketing and sales
operations into PSINet's established programs. PSINet believes this
integration of operations improves the quality, breadth, consistency
and scaleability of the services and products offered to customers
of acquired ISPs.
o Increase Sales of Value-Added Services and Products. PSINet intends
to capitalize on the trend of companies to increasingly outsource
their critical business applications and integrate Web-based
services and products as part of their core data networking strategy
by aggressively marketing value-added services and products to its
existing account base and prospective business customers. PSINet
currently offers a number of value-added services, such as corporate
intranets, Web hosting and collocation, remote user access,
multi-currency electronic commerce, security and voice-over IP
services, that can be bundled with Internet access services to
provide complete, turnkey solutions. In addition, the enhanced
capacity resulting from PSINet's recent acquisitions of global
network bandwidth will enable PSINet to offer a wider variety of
high quality Internet and Internet-related services and products,
such as IP-based voice, video and other multimedia services. PSINet
believes that providing value-added services not only reduces
customer churn by increasing customer switching costs but also
improves profitability through the sale of higher margin value-added
services. PSINet believes that there is a significant opportunity
within its existing account base to upgrade service levels and is
actively marketing additional services to these accounts. To improve
upon its ability to provide these value-added services, PSINet
recently opened a new global Internet hosting center for dedicated
business applications, completed construction of an additional
global Internet hosting center in Switzerland, and plans to
construct and open eight additional global Internet hosting centers
before January 1, 2000.
o Continue to Acquire Network Facilities to Reduce Costs. PSINet
remains focused on reducing costs as a percentage of revenue by
maintaining a scaleable network and increasing utilization of and
controlling strategic assets, such as telecommunications bandwidth
through IRUs and acquisition of dark fiber. PSINet's flexible
network architecture utilizes advanced ATM, ISDN and SMDS compatible
frame relay equipment, which allows the PSINet network to
cost-effectively scale the number of POPs and the number of users
accessing a POP in response to customer demand. PSINet has enhanced
its network significantly through several strategic acquisitions of
fiber-based telecommunications bandwidth, including acquisitions of
IRUs or other rights in the following:
o up to 10,000 equivalent route miles of OC-48 capacity across
the United States;
o STM-1 transatlantic capacity connecting the United States, the
United Kingdom and continental Europe;
o four dark fiber optic strands connecting the New York City and
Washington, D.C. metropolitan areas and major metropolitan
areas in between;
o six DS-3s connecting the United States and Japan;
o four dark fiber optic strands connecting multiple cities in
the San Francisco Bay area;
o STM-1 network bandwidth having the capability of connecting
Japan, China, Southeast Asia, India, the Middle East, Europe
and the United Kingdom;
o STM-1 network bandwidth connecting 30 European cities;
o 20 dark fiber optic strands connecting the Vancouver, British
Columbia and Seattle, Washington metropolitan areas; and an
o agreement with other leading global telecommunications
companies to build the Japan-U.S. Cable Network. These
transactions represent an important strategic step in PSINet's
objective to be a leading global facilities-based ISP.
Additionally, PSINet continues to evaluate alternative
broadband local loop strategies, including wireless, xDSL and
cable modem solutions.
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o Enhance Brand Name Recognition. PSINet was the first commercial ISP
and has established significant brand recognition among information
technology professionals in the United States. In 1998, PSINet
launched a major program to develop and enhance the PSINet brand
name as a leading global facilities-based ISP. PSINet's branding
program includes the rebranding of acquired ISP operations and
services under the PSINet name and the select use of television
commercials, print ads and direct mailings which target key decision
makers in the United States and abroad. By combining this branding
program with PSINet's multiple sales channel distribution strategy,
PSINet seeks to expand market share, increase customer loyalty and
develop global brand recognition in the Internet market.
o Build Strong Customer Loyalty. PSINet believes that superior
customer service is a critical element in attracting and retaining
customers. PSINet has made significant investments in customer
service personnel and systems that enhance customer care and service
throughout the complete customer life cycle from order entry and
billing to selling of value-added services. To ensure consistency in
the quality and approach to customer care, both domestic and
international technical support associates attend an extensive
technical training and certification program. PSINet monitors and
responds to customer needs by providing 24-hours per day, seven-days
per week technical support and service from its network operations
center ("NOC") in Troy, New York. As part of PSINet's international
expansion strategy, PSINet recently opened a fully redundant NOC in
Switzerland and anticipates adding a third NOC in Asia in 1999. By
maintaining geographically centralized support services, PSINet
seeks to increase operational efficiencies and enhance the quality,
consistency and scaleability of its customer care.
PSINet Services
PSINet offers a broad range of reliable, high-speed Internet access
options and related services in the U.S. and international markets at a variety
of prices designed to meet the requirements of commercial, educational,
governmental and other organizations that link their computers, networks and
information servers to, or otherwise seek to benefit from the use of, the
Internet. PSINet provides Internet solutions to help business and other
organizations reduce costs, increase productivity and access new markets. Access
options range from dial-up services to high-speed continuous access provided by
dedicated circuits. PSINet believes that its broad range of competitively priced
Internet services and products allows PSINet to compete effectively in the
Internet access market for corporate and other institutional customers. PSINet
has recently organized its core operations into three customer-focused business
units--Corporate Network Services, Carrier and ISP Services, and Applications
and Web Services--in an effort to better align its operations with the needs of
the emerging Internet marketplace.
Connectivity Services. PSINet offers global connectivity services,
including a variety of dial-up and dedicated access solutions in bundled and
unbundled packages, which provide high-speed continuous access to the Internet
for businesses' local area networks ("LANs"). PSINet provides turnkey
configuration solutions encompassing such services as domain name ("DNS")
registration, line ordering and installation, IP address assignment, router
configuration, installation and management, security planning and management and
technical consultation services. All of PSINet's connectivity customers receive
24-hours per day, seven-days per week technical support. PSINet also offers a
full range of customer premise equipment ("CPE") required to connect to the
Internet, including routers, Channel Service Units/Data Service Units
("CSU/DSUs"), software, and other products, as needed. Due to its business
relationships with a variety of vendors, PSINet is able to offer competitive
hardware pricing and bundled services to its customers.
o Dedicated Access. PSINet offers a broad line of high-speed dedicated
connectivity services which provide business customers with direct
access to a full range of Internet applications. PSINet's flagship
access service, InterFrame(R), provides companies with robust,
full-time, dedicated Internet connectivity in a range of access
speeds, from 56 Kbps to 45 Mbps. InterFrame is designed to offer
comprehensive network security and to help ensure bandwidth
availability for priority business applications. PSINet believes
that the traffic-management advantages of the frame relay technology
deployed in its network provide its customers with fully integrated
Internet access and improved performance. For higher bandwidth
needs, PSINet provides its InterMAN(R) access service in major U.S.
cities in connection speeds ranging from 1.5 Mbps to 45 Mbps.
InterMAN is a turnkey solution in
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which PSINet provides, installs and maintains equipment at the
customers' premises. InterMAN affords cost advantages over
competitive dedicated access services by utilizing high-speed SMDS
and ATM data transmission technologies.
o Wireless Access. PSINet's recently introduced InterSky(R) service
offers dedicated high-speed wireless Internet access utilizing
Airdata WIMAN digital microwave technology in the unlicensed 2.4 GHz
spread spectrum band. Speeds of up to 128Kbps are currently
available with faster capabilities of up to 512Kbps and up to 2 Mbps
anticipated to be made available during 1999 and 2000, respectively.
PSINet's InterSky is currently operational in certain cities in
Florida, with expansion to additional areas throughout the
southeastern U.S. expected to occur later in 1999. InterSky provides
an affordable, high-speed alternative to traditional land-based
Internet services, commonly referred to as "local loop connections,"
offered by telecommunications carriers.
o Dial-up Access. PSINet's LAN-Dial(R) dial-up services offer a
cost-effective, entry-level Internet solution that provides access
to PSINet's advanced network backbone via ordinary telephone lines
at speeds of up to 56 Kbps. PSINet's LAN-ISDN service provides
dial-up access through digital ISDN lines at speeds of up to 128
Kbps.
Value-Added Services. PSINet believes that business customers on a
worldwide basis will continue to increase their use of the Internet as a
business tool and will increasingly rely upon an expanding range of value-added
services to enhance productivity, reduce costs and improve service reliability.
PSINet offers a variety of value-added services, including intranets, Web
hosting, electronic commerce, collocation, remote access, security services,
applications, including fax and electronic mail, and voice-over-IP designed to
meet the diverse networking needs of businesses. In addition, in order to
capitalize on its technologically advanced, high-capacity network, PSINet
intends to continue to develop new IP-based services and products that increase
customer use of the Internet, including bandwidth-intensive multimedia services
such as video conferencing over the Internet.
o Intranets. PSINet's IP-optimized network allows it to create private
IP networks (known as "intranets" or "virtual private networks")
that are designed to securely isolate internal network traffic from
public Internet traffic and provide each site on the intranet access
to other sites on the intranet as well as to the Internet. PSINet's
PSI IntraNet(R) service integrates an organization's multiple sites
in different countries throughout the world by providing IP
connectivity with access speeds ranging from 56 Kbps to 2 Mbps. By
combining the security and control of a private network with
cost-effective Internet-compatible connectivity, PSI IntraNet
provides a turnkey solution for equipment management support and
offers significant savings over traditional WAN solutions.
o Web Hosting. PSINet provides a line of Web hosting and multimedia
streaming services that permit companies to market themselves and
their products on the Internet without having to invest in
technology infrastructure and operations staff. The PSIWeb(R)
services are backed by the industry's first 100% uptime guarantee
and by PSINet's advanced network backbone, which provides highly
reliable Internet connectivity. PSIWeb offers options such as
complete electronic commerce solutions as well as "TV on the WEB
LIVE," a joint service offering from PSINet and Gardy McGrath
International, which is an end-to-end solution for video
broadcasting of live events over the Internet.
o Security Solutions. The proprietary nature of business Internet
traffic demands protection from unauthorized access. PSINet delivers
a range of managed security services that were developed in
conjunction with certain strategic partners and are backed by the
expertise of PSINet's Security Planning and Response Team ("SPART").
PSINet's RouteWaller(R) service provides cost-effective perimeter
defense with sophisticated remote user authentication that helps to
ensure that no strategic applications or data can be accessed until
the user has proven his or her access clearance. SecureEnterprise(R)
is PSINet's management service designed to protect enterprises with
a full-featured, application-layer firewall.
o Remote Access. Today's work force increasingly operates outside the
traditional office setting. PSINet's InterRamp(R) Remote Access
service enables mobile personnel to access their corporate network
and systems resources using the Internet from over 2,400 POPs in
over 150 countries through
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PSINet's strategic relationship with iPass, an international data
communications network. In most locations where business is
conducted, InterRamp Remote Access offers full Internet access
through a local telephone call. As part of InterRamp Remote Access
service, PSINet provides its customers with a special account
management system that enables customers' MIS administrators to
control user access and monitor usage statistics.
o Multi-Currency Electronic Commerce. PSINet's PSIWeb eCommerce(SM)
service provides a turnkey solution to create and manage "Virtual
Storefronts" and is designed to give shoppers the ability to make
secure purchases in their local currency using the Web. PSIWeb
eCommerce integrates payment systems engineered for security with
virtual store technology, through alliances with CyberCash, Inc. and
Mercantec, Inc., to facilitate a seamless shopping experience. In
addition, PSIWeb Worldpay(SM) provides a cost-effective electronic
commerce solution for selling goods and services to an international
audience. Developed in association with Worldpay Ltd., an electronic
commerce transaction clearing house, and National Westminster Bank
PLC, PSIWeb Worldpay enables customers around the world to make
real-time purchases using the Web in over 100 currencies.
o Collocation. PSINet's PSIWeb Co-Locate (SM) service enables
companies to house business-critical servers in secure off-site
facilities with improved bandwidth management and reliable
connections. Collocation facilities are situated on the highest
bandwidth portions of PSINet's infrastructure in order to facilitate
optimal performance and high-speed capabilities.
o Faxing. Since a significant portion of telecommunications traffic
consists of fax transmissions, companies are looking for ways to
better manage fax costs. PSINet's InternetPaper (SM) service
supports hard-copy distribution of electronic documents from desktop
PCs to any fax machine in the world. This service offers centralized
management of document distribution, thereby significantly reducing
transmission costs.
o Electronic Mail. PSIMail (SM) enables customers to outsource their
e-mail service and its management to PSINet's highly trained systems
administrators and support staff. For a minimal monthly fee, PSINet
establishes accounts, manages the servers and provides full
accessibility to e-mail for its customers while saving them the
investment in additional servers and staff.
o Voice-Over-Internet Protocol. PSIVoice (SM) enables companies with
multiple business locations to communicate by voice among these
sites and with select third parties, such as business partners,
customers and suppliers, outside their corporate intranets via
low-cost IP telephony links. PSIVoice is a turnkey service allowing
for such enhanced features as desktop faxing, conference calling and
unified messaging services and includes all the hardware and network
management services required for high quality, private-line voice
connections among geographically dispersed offices. By providing
voice and Internet traffic on the same circuit, customers are able
to use existing bandwidth more efficiently, resulting in savings of
20%-50% over traditional long-distance telephone calling.
Carrier and ISP Services. In 1996, to maximize utilization of its network,
PSINet formed its Carrier and ISP Services business unit to provide dial-up
Internet access to telecommunications carriers and consumer-based ISPs, such as
Earthlink Network, Inc. and MindSpring Enterprises, Inc., whose customers
typically access the network during evening hours when business use tends to be
minimal. PSINet has recently expanded this business unit to offer peering and
transit services to telecommunications carriers and other ISPs and to offer its
connectivity and value-added services for resale, on a private label basis, to
larger telecommunications carriers and other ISPs that require high quality
business services and products to enhance their product portfolio. Through such
services, PSINet has the opportunity to significantly increase its distribution
channel.
o Consumer Dial-up Access. PSINet provides dial-up access to
consumer-oriented ISPs enabling them to expand their geographic
reach and network capacity by purchasing from PSINet access to
PSINet's IP-optimized network through 287 POPs in the United States
and Canada as of October 1, 1998. PSINet offers programs that
provide smaller ISPs the opportunity to increase their user base
over time and provide larger ISPs the opportunity to
cost-effectively manage their rapid growth. In
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addition, in certain domestic and international markets, PSINet
provides dial-up access services directly to individual customers.
o Peering and Transit. In order to support the exchange of information
between ISPs, which is critical to the effective operation of the
Internet, PSINet offers free private peering for all U.S.-based
ISPs. Private peering allows other ISPs' traffic to directly reach
PSINet's customers, which improves network performance and, PSINet
believes, thereby promotes customer satisfaction. Furthermore,
PSINet offers, for a fee, transit service, which allows an ISP to
transfer traffic through PSINet's network to another ISP. Transit
service enables ISPs to reduce their data communications expense by
leasing network utilization from PSINet in lieu of leasing
point-to-point circuits from other telecommunications providers.
o Commercial Private Label Services. For companies with which PSINet
has strategic alliances, PSINet provides its market-tested services
on a private label basis. This allows these companies to market and
resell PSINet's services under their own brand while leveraging
PSINet's nationwide network and expertise in service delivery.
PSINet assists in training the sales and support staffs of these
companies and provides technical support to facilitate their resale
efforts.
o Web Filtering. PSIChoice (SM) enables PSINet's carrier and ISP
customers to offer their consumers the option to protect themselves
from objectionable content on the World Wide Web by restricting
access to sites that contain undesirable information. PSIChoice is
hosted on the technologically advanced PSINet network and utilizes
content proxy services to screen Web content accessed by end-users.
PSIChoice requires no software implementation on the consumer's
computer and is initially available in the United States.
Services and Product Development. As part of PSINet's ongoing efforts to
develop IP-based services and products that enable businesses to take maximum
advantage of their corporate networks and the Internet, PSINet has continually
invested in service and product development programs. Since its inception,
PSINet has introduced to the Internet marketplace several major new services,
including the first LAN-based dial-up TCP/IP access service, the first managed
Internet security service, the first ISP electronic commerce service and the
first ISP intranet service. Major services and products currently under
development include multimedia services, such as video conferencing over the
Internet, and higher speed connectivity services.
PSINet's Network
Overview. PSINet owns and operates a global high capacity, IP-optimized
network which, as of October 1, 1998, was comprised of over 500 POPs, of which
245 were within the United States with the remainder located throughout Canada,
Europe and Asia. PSINet's network employs architecture designed to deliver
superior dedicated or dial-up Internet connections, reliable packet control and
intelligent data traffic routing. PSINet has strengthened its position as a
leading facilities-based ISP through several recent acquisitions of high
capacity, fiber optic telecommunications bandwidth and other strategic network
assets that have significantly reduced PSINet's incremental data communications
costs. The combination of PSINet's technologically advanced network architecture
and global network infrastructure has positioned PSINet to deliver the high
level of IP-based services, such as Web hosting and a broad array of multimedia
Internet services, increasingly demanded by businesses.
Network Architecture. PSINet has engineered an IP-optimized network by
integrating advanced Internet routers with high-speed frame relay switching
equipment that is compatible with ATM, ISDN and SMDS transmission technologies.
PSINet has planned for growth by ensuring that the network is scaleable,
flexible, fault tolerant, open standards-based and remotely manageable.
o Scaleable. PSINet's flexible, multi-layer network architecture
utilizes a high-speed switching fabric which enables PSINet to grow
the number of POPs and the number of users served in an incremental
manner that matches investment with demand. The network's
scalability extends beyond the currently installed base of over 500
POPs to allow for growth to 2,000 POPs without fundamental design
changes.
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o Flexible. PSINet's network architecture consists of an Internet
routing infrastructure overlaid upon a fast packet switching fabric
that enables PSINet to provide reliable, high-speed connections and
provides its customers the ability to manage bandwidth by type of
application and to accommodate applications that are
delay-sensitive. PSINet is able to use its flexible network
architecture in concert with its remote monitoring capability to
accommodate changing customer usage patterns and patterns of traffic
that, if left unmanaged, could otherwise degrade network
performance.
o Fault Tolerant. Redundancy and adaptive technology in PSINet's
network reduces the impact of isolated failures on the customer's
experience. Adaptive technology incorporated into PSINet's Internet
router infrastructure compensates automatically for circuit failures
that might otherwise interrupt the flow of customer traffic. Key
switching and router elements are redundantly configured to further
reduce the impact of individual component failures. In addition,
PSINet has an uninterruptible power supply at each POP, limiting the
impact of local power outages on PSINet's network.
o Open. PSINet's network is based on the open internetworking protocol
standard TCP/IP and on relevant international standards relating to
transmission and modulation technologies. PSINet is able to install
a variety of equipment types and capacities without impacting
network interoperability. As a result, PSINet's network can be
upgraded incrementally and benefit from multi-vendor supply
strategies.
o Manageable. From its NOCs, PSINet is able to monitor the network
remotely, perform network diagnostics and equipment surveillance,
and initialize customers. As a result of PSINet's network
architecture and its experience in Internet network management,
these tasks can be performed remotely regardless of POP location or
network status. This capability allows PSINet to respond quickly to
network problems and to control costs associated with on-site
network configuration and repair.
Global Network Infrastructure. As part of PSINet's ongoing efforts to
control strategic assets and further expand and enhance its network, PSINet has
recently acquired or agreed to acquire significant amounts of fiber-based
telecommunication bandwidth located throughout the world.
o In February 1998, PSINet acquired from IXC IRUs in up to 10,000
equivalent route miles of OC-48 network bandwidth across the United
States (including such major metropolitan areas as Atlanta, Chicago,
Cleveland, Dallas, Houston, Los Angeles, New York, Philadelphia,
Phoenix and Washington D.C.), in exchange for approximately 20% of
PSINet's Common Stock. As of January 1, 1999, approximately 6,000
route miles of OC-12 (equivalent to approximately 1,500 route miles
of OC-48) bandwidth, connecting New York and Los Angeles (and
certain major cities in between), have been accepted by PSINet and
placed into operation on the PSINet network and approximately 7,000
additional route miles of OC-12 bandwidth, extending the network to,
among other locations, Washington, D.C., Atlanta, Houston and San
Francisco (and certain major cities in between), are expected to be
placed into operation prior to the end of the first quarter of 1999.
PSINet currently anticipates delivery of the remaining bandwidth
from IXC over the next 18 to 24 months. For more detailed
information concerning PSINet's strategic alliance with IXC, see
"Certain Transactions--Strategic Alliance With IXC."
o In March 1998, PSINet acquired from Global Crossing Ltd. IRUs in
12,000 route miles of STM-1 (equivalent to OC-3) network bandwidth
on the Atlantic Crossing undersea fiber optic system connecting the
United States, the United Kingdom and continental Europe. As of
January 1, 1999, the portion of this bandwidth linking New York City
and the United Kingdom is operational and integrated with the OC-12
bandwidth previously acquired from IXC.
o In May 1998, PSINet acquired from Metromedia Fiber Network 18 dark
fiber optic strands connecting the New York City and Washington,
D.C. metropolitan areas and major metropolitan areas in between.
Using currently available technology, this fiber will be capable of
carrying 96 Gbps of data in the New York to Washington, D.C.
corridor, which currently handles approximately 35% of the
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telecommunications traffic in the United States and is a vital route
connecting Internet traffic between Europe and the United States.
PSINet expects to receive delivery of the 18 dark fibers on or about
the end of February 1999.
o In August and September 1998, PSINet acquired from Pacific Telecom
Cable, Inc. in the United States and from International Digital
Communications, Inc. and Cable & Wireless PLC in Japan bandwidth
capacity equivalent to six DS-3s in the North Pacific Cable undersea
fiber optic system connecting the United States and Japan through a
combination of IRUs and long-term capital leases. As of January 1,
1999, two DS-3s connecting Portland, Oregon and Tokyo are
operational and PSINet expects the remainder of the capacity to
become operational in stages during the first half of 1999.
o In August 1998, PSINet entered into an agreement with a group of
leading telecommunications companies to build the Japan-U.S. Cable
Network, an undersea cable system connecting the United States
(through California and Hawaii) and Japan, on which PSINet will own
IRUs in 22 STM-1s (increasing to 30 STM-1s as the network is
upgraded) of bandwidth. Upon completion, the Japan-U.S. Cable
Network will initially operate at 80 Gbps, increasing to 155 Gbps as
the network is upgraded, and is currently anticipated to become
operational in the second quarter of 2000. Completion of the
undersea cable system is subject to a number of risks associated
with construction projects. See "Risk Factors--Risks Associated with
Acquisitions of Bandwidth and Strategic Alliance With IXC."
o In December 1998, PSINet acquired from Metromedia Fiber Network IRUs
in four dark fiber optic strands connecting multiple cities in the
San Francisco Bay area along a circular route extending south to the
Silicon Valley (including San Jose and Santa Clara) and east to
Hayward. This market is an important financial and technology
corridor and is expected to generate high demand for Internet
services well into the future. PSINet expects to receive portions of
this fiber prior to the end of 1999, with full delivery anticipated
in 2000.
o In January 1999, PSINet acquired from FLAG (Fiberoptic Link Around
the Globe) IRUs in STM-1 network bandwidth configured along an
approximately 27,300 kilometer route having the capability of
connecting Japan, China, Southeast Asia, India, the Middle East,
Europe and the United Kingdom. With this acquisition, the PSINet
network became the first independent Internet network to fully
circle the globe, serving customers on three continents. PSINet's
agreement with FLAG also enables it to purchase additional capacity
and insert new connections along the FLAG cable route to accommodate
future demand.
o In January 1999, PSINet acquired from Hermes IRUs in STM-1 network
bandwidth configured as multiple rings along an approximately 21,000
kilometer route linking 30 European cities. By the end of 1999,
PSINet expects a portion of this bandwidth to be connected to its
existing operations in England, the Netherlands, Belgium, France,
Germany and Switzerland. In 2000, PSINet anticipates that the
remainder of this bandwidth will be extended to additional cities in
Austria, Belgium, Denmark, France, Germany, Italy, Luxembourg,
Monaco, the Netherlands, Spain and Sweden. The acquisition of this
bandwidth will enable PSINet to expand its presence into an
additional three of the 20 largest global telecommunications markets
(Austria, Spain and Sweden) and should be sufficient to support
PSINet's European operations for the next several years.
o In January 1999, PSINet entered into an agreement to acquire from
Starcom Service Corporation IRUs in 20 dark fiber optic strands
connecting the Vancouver, British Columbia and Seattle, Washington
metropolitan areas, a high-demand international telecommunications
corridor.
PSINet expects to further expand its network in North America, Europe and
Asia, as well as in other select international markets, and to acquire
fiber-based IRUs and dark fiber in these regions to support demand growth and
reduce costs. PSINet is targeting cities with a high concentration of businesses
for global expansion with the objective, over the long-term, of providing local
access to its services and products to 80% of the businesses in those cities. In
furtherance of this plan, PSINet recently entered into agreements in Germany and
Switzerland that enable it to offer local telephone call access to PSINet's
services and products throughout each of these countries. PSINet already offers
local call access to 80% of the business markets in the United States, Canada,
Japan, the Netherlands, Hong Kong and France.
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The following table summarizes PSINet's bandwidth facilities as of
February 1, 1999.
<TABLE>
<CAPTION>
Location Capacity Connection Points Ownership
- ----------------- -------------------------------- --------------------------------------------------- -------------------
<S> <C> ` <C> <C>
United States 6,000 route miles of OC-12 New York--Chicago--Dallas--Los Angeles IRU
7,000 route miles of OC-12 Expanding to Washington, D.C.--Atlanta--Houston IRU
--San Francisco (during Q1 1999)
18 high capacity dark fibers New York-Washington, DC (on or about year-end 1998) Purchased
4 high capacity dark fibers San Francisco Bay Area Purchased
T-3 Intercontinental Leased
Trans-Atlantic 12,000 miles of STM-1 (OC-3) New York, NY--London, England IRU
Trans-Pacific 6,000 miles of 6 DS-3s 22 STM-1s US--Japan Japan-Hawaii-US (during Q2 IRU/Long-term lease
(increasing to 30) 2000)-India-MiddleEast-Europe IRU
Trans-Continental 27,300 km of STM-1 Japan-China-Southeast Asia-India-Middle-East-Europe IRU
Canada 20 high capacity dark fibers Vancouver, B.C. - Seattle, WA Purchased
T-3 Intercontinental Leased
Europe 21,000 km of STM-1 30 European cities (during 1999 and 2000) IRU
E-1 Intercontinental Leased
</TABLE>
Internet Data Centers. PSINet has recently opened a technologically
advanced, 10,000 square foot, global Internet hosting facility in Herndon,
Virginia, completed construction of a 10,000 square foot global Internet hosting
facility in Neuchatel, Switzerland, is currently in the process of constructing
a planned 45,000 square foot global Internet hosting facility in London, and has
plans for construction of seven additional global Internet hosting facilities
throughout the world, including in the United States, Canada, England, France,
Germany, the Netherlands, Switzerland and Japan, anticipated to be completed by
the end of 1999. The additional facilities will range from 10,000-50,000 square
feet, will be specifically designed for application hosting, collocation
services and high capacity access to the PSINet network, and will be equipped
with uninterruptible power supply and backup generators, fire suppression,
raised floors, HVAC, 24-hours per day, seven-days per week operations and
physical security. PSINet's partnership with Hewlett-Packard Company further
supports its ability to provide high-end Web services consisting of shared
hosting, dedicated hosting and collocation hosting.
PRI Circuits. In key geographically-dispersed cities located along the
configuration of the PSINet network (e.g., Atlanta, Chicago, Dallas, Los Angeles
and Washington, D.C.), PSINet is also investing in PRI circuits, which provide
dial-up access to its POPs, in order to increase the capacity available for its
consumer-oriented ISP customers. Through agreements with certain CLECs, PSINet
has lowered its average cost per PRI by approximately 15-20%. As of October 1,
1998, PSINet has more than doubled its dial-up capacity from December 31, 1997
as a result of its investment in PRIs, which PSINet believes will enhance
revenue growth in its Carrier and ISP Services business unit. As of October 1,
1998, nearly 100% of PSINet's dial-up capacity is accessible at 56 Kbps modem
speeds. PSINet anticipates that all newly deployed modems will support this
technology.
Peering Arrangements. PSINet maintains peering relationships with
national, regional and local ISPs by either private peering with the ISPs or by
participation in various public peering locations, known as network access
points. As of October 1, 1998, PSINet maintained more than 2,000 Mbps (2.0 Gbps)
of peering connectivity with 20 private agreements and seven public connections
strategically placed throughout the United States, the United Kingdom, Canada,
Japan and Europe. Recently, certain companies that have previously offered
peering have cut back or eliminated peering relations and are establishing new,
more restrictive criteria for peering. PSINet expects that, due to its offering
of peering with any of the estimated 4,000 ISPs in the United States without
settlement charges, it will substantially increase the number of ISPs with which
it peers over the next two years. PSINet believes that by entering into direct
peering relationships with a large number of ISPs, PSINet's business customers
will receive better service and the highest quality network performance.
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Global Network Management. PSINet believes that it offers superior network
management capabilities which enhance PSINet's customer satisfaction. PSINet has
established a 24-hours per day, seven-days per week NOC in the United States
that allows for continuous monitoring of PSINet's international network,
managing of traffic, and customer problem resolution. Back-up operating
facilities manned by trained personnel are available at PSINet's offices in
Herndon, Virginia and Cambridge, England in the event the U.S. NOC experiences
service interruptions or other difficulties. PSINet has recently opened its
European Technical Center in Switzerland as a second NOC with global
capabilities equivalent to those in the U.S. NOC. Furthermore, PSINet
anticipates that as it expands its presence in Asia it will construct a third
NOC in that region during 1999.
Sales and Marketing
PSINet has built a multi-channel sales and marketing infrastructure in an
effort to respond effectively to the growing opportunities in the business
Internet market. PSINet seeks to attract and retain customers by offering its
services and products through its direct sales force and its authorized reseller
and referral program and by seeking to forge strategic relationships with
selected telecommunications carriers. PSINet believes that this multi-channel
approach will enable it to utilize the technical skills and experience of its
direct sales force to penetrate PSINet's targeted customer base while utilizing
the potentially greater sales and marketing resources of the resellers, referral
sources and companies with which PSINet has strategic alliances to offer PSINet
services and products to a broader and more diverse potential customer base.
Direct Sales. PSINet has built a direct sales force, which, as of October
1, 1998, consisted of approximately 340 individuals (more than half of whom are
employed outside of the United States) who have a strong Internet technical
background and knowledge of potential applications of the Internet to meet the
critical needs of targeted business customers. Direct sales tactics include
direct contacts with targeted ISPs and potential significant corporate accounts
by PSINet's sales representatives and systems engineers, inbound and outbound
telemarketing, direct mail efforts, seminars and trade show participation.
PSINet has developed programs to attract and train high quality, motivated sales
representatives who, in addition to having strong Internet technical skills and
knowledge of potential applications of the Internet, have consultative sales
experience. These programs include technical sales training, consultative
selling technique training, sales compensation plan development and sales
representative recruiting profile identification. Sales representatives from
PSINet's U.S. and international operations jointly attend training programs in
order to ensure an integrated sales approach domestically and internationally.
Reseller and Referral Program. PSINet has forged an authorized reseller
and referral program with selected telecommunications service companies,
equipment suppliers, networking service companies, systems integrators and
computer retailers. This program, through which PSINet has established, as of
October 1, 1998, approximately 720 formal and informal arrangements in the
United States and 730 outside of the United States, affords PSINet an indirect
distribution mechanism in its targeted markets and is designed to enable PSINet
to utilize the potentially greater sales and marketing resources of the
resellers and referral sources to offer PSINet services and products to a
broader and more diverse potential customer base. Participants in PSINet's
reseller and referral program include Ascend Communications, Inc., a
manufacturer and developer of telecommunications equipment, CompUSA, a computer
equipment and software retailer, and Hewlett-Packard Company, a provider of
computer hardware and networking products. PSINet provides training and ongoing
support to the sales representatives of companies with which it has reseller and
referral relationships in order to strengthen the sales representatives'
knowledge of PSINet's services and products and brand loyalty to PSINet. PSINet
believes that the reseller and referral program has enabled PSINet to achieve
greater market reach with reduced overhead costs and to use the reseller and
referral sources to assist in the delivery of complete solutions to meet
customer needs. PSINet has a team of 18 individuals who pursue reseller and
referral arrangements for PSINet.
Strategic Alliances. In 1997, PSINet launched its strategic alliance
program, pursuant to which it seeks to establish strategic alliances with
selected telecommunications carriers which may afford PSINet access to recurring
revenue from the carriers' customer base, while enabling the carriers to offer
their customers an integrated package of telecommunications and Internet
services and products. PSINet also formed an alliance with the Baltimore Ravens
of the National Football League pursuant to which, among other things, PSINet
has the right to
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develop a Web site and provide related Internet subscriber services for the
Baltimore Ravens. PSINet believes that these strategic alliances may facilitate
the cost-effective acquisition of customers and increase PSINet's network
utilization. It is anticipated that, in most cases, the companies with which
PSINet has strategic alliances will offer PSINet services and products on an
unbranded or co-branded basis or under only their own trademark. As with the
reseller and referral program, PSINet provides training and ongoing support to
the sales representatives of companies with which it has strategic alliances in
order to strengthen the sales representatives' knowledge of PSINet's services
and products and brand loyalty to PSINet.
Marketing. PSINet's marketing program is intended to build national and
local strength and awareness of the PSINet brand. PSINet uses radio and print
advertising in targeted markets and publications to enhance awareness and
acquire leads for PSINet's direct sales team and companies with which PSINet has
resale, referral or strategic alliance relationships. PSINet's print
advertisements are placed in trade journals and special-interest publications.
PSINet employs public relations personnel in-house and works with an outside
public relations agency to provide broad coverage in the Internet and computer
networking fields. PSINet also attempts to create brand awareness by securing
corporate sponsorship rights, such as its recent acquisition of the naming
rights to the NFL stadium of the Baltimore Ravens and related sponsorship,
promotion, advertising and marketing rights, and by participating in industry
trade shows such as Networld, Interop, InterNet World and ISPCon, based on the
size and vertical makeup of the trade show audience, and relationships with
industry groups and the media. PSINet also uses direct mailings, telemarketing
programs, Web marketing, co-marketing agreements and joint promotional efforts
to reach new corporate customers. PSINet attempts to retain its customers
through active and responsive customer support as well as by continually
offering new value-added services.
Customers
PSINet had, as of October 1, 1998, over 53,000 business customers,
including 141 ISP customers. PSINet's customers include businesses in the
aerospace, finance, communications, computer data processing and related
industries, governmental agencies and educational and research institutions as
well as other ISPs pursuant to PSINet's recently formed Carrier and ISP Services
business unit. The following is a list of certain business customers in each of
ten selected industry groups to which PSINet provided Internet access and
related services in September 1998:
Aerospace and Defense Computer & Data Services
Boeing Company Automatic Data Processing, Inc.
Lockheed Martin Corporation Computer Sciences Corporation
Northrop Grumman Corporation Dun & Bradstreet Corp.
Raytheon Corporation Electronic Data Services
Microsoft Corporation
Oracle Corporation
Xerox Corporation
Airlines Electronics
AMR/The Sabre Group Applied Material, Inc.
Continental Airlines, Inc. Litton Applied Technology
Trans World Airlines, Inc. Motorola, Inc.
United Airlines, Inc.
Banks ISPs
BankAmerica Corporation Earthlink Network, Inc.
Chase Manhattan Bank MindSpring Enterprises, Inc.
First Chicago NBD Corporation IDT Corporation
First Union Corporation WebTV Networks, Inc.
Wells Fargo Bank NA
Financial Services Telecommunications
American Express Company AT&T Corporation
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Cigna Corporation Bell Atlantic Corporation
Donaldson, Lufkin & Jenrette Bell South Corporation
Federal National Mortgage Association GTE Corporation
Lehman Brothers Inc. MCI WorldCom
Merrill Lynch & Co.
Morgan Stanley Dean Witter & Co.
PaineWebber Incorporated
Travelers Group Inc.
Computers
Apple Computer, Inc.
Compaq Computer Corporation
Hewlett-Packard Company
International Business Machines Corporation
Lucent Technologies, Inc.
Sun Microsystems, Inc.
CUSTOMER SUPPORT
High quality customer service and support is critical to PSINet's
objective of retaining and developing its customers. PSINet has made significant
investments in customer service personnel and systems that enhance customer care
and service throughout the complete customer life cycle from order entry and
billing to selling of value-added services. As of October 1, 1998, PSINet's
technical support group consisted of over 540 individuals. To ensure consistency
in the quality and approach to customer care, both domestic and international
associates attend an intensive technical training and certification program at
PSINet's U.S. NOC. PSINet's U.S. NOC monitors and responds to customer needs by
providing 24-hours per day, seven-days per week technical support and service.
PSINet's customer support group utilizes a leading customer support trouble
ticketing and workflow management system from Remedy Corporation to track, route
and report on customer service issues. Network operations can remotely service
customer connections to PSINet's network. In addition, field service personnel
are dispatched in the event of an equipment failure that cannot be serviced
remotely. As part of PSINet's international expansion strategy, PSINet has
recently opened a fully redundant NOC in Switzerland and anticipates adding a
third in Asia in 1999. In connection with its customer care initiatives, PSINet
seeks to continuously improve systems that increase productivity and enhance
customer satisfaction. PSINet has recently reengineered its customer care
program to address the complex needs of its business customers and is scaling
its customer care resources to keep pace with projected increases in customer
requirements. By maintaining centralized support services, PSINet seeks to
increase operational efficiencies and enhance the quality, consistency and
scalability of customer care. PSINet is currently in the process of implementing
a new high quality, cost-effective and scaleable billing system to replace its
existing system in order to provide customers on a global basis with uniform and
easy-to-understand invoicing.
ACQUISITIONS
Recent Acquisitions. As part of its growth strategy, over the fifteen
month period ending December 31, 1998, PSINet has acquired 18 ISPs in eight of
the 20 largest global telecommunications markets. The aggregate amount of the
purchase prices and related payments for these acquisitions was approximately
$289.8 million, exclusive of indebtedness assumed in connection with such
acquisitions. Of such amount, PSINet has paid $251.1 million as of December 31,
1998 and retained the balance to secure performance by certain sellers of
indemnification or other contractual obligations. The following table summarizes
certain information concerning these acquisitions:
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<TABLE>
<CAPTION>
Ranking
Name of Among 20
Acquired Date of Principal Business Consumer Largest Global
Company Acquisition Market Territory Accounts(1) Accounts(1) Telecom Markets
- ------- ----------- ---------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
CalvaCom 10/97 France 1,500 2,300 5
Iprolink 1/98 Switzerland 2,400 2,600 14
ISTAR 2/98 Canada 2,700 47,000 10
ITL 4/98 Jersey, Channel Islands -- -- N/A
INX 5/98 Germany 650 15,600 3
IoNet 6/98 U.S. 2,300 21,500 1
LinkAge 6/98 Hong Kong 1,100 -- 19
CalvaPro 6/98 Sub-Sahara Africa 425 30 N/A
Interlog 7/98 Canada 2,100 41,000 10
Rimnet 8/98 Japan 260 56,000 2
TWICS 9/98 Japan 70 1,700 2
HKIGS 9/98 Hong Kong 200 -- 19
Inet 9/98 Korea 1,100 13,000 12
Tokyo Internet 10/98 Japan 6,500 10,000 2
IXE/USN 10/98 Netherlands 85 -- 13
AsiaNet 11/98 Hong Kong 180 250 19
Spider Net 12/98 Hong Kong 30 100 19
Huge Net 12/98 Hong Kong 90 -- 19
------ -------
Total 21,690 211,080
====== =======
</TABLE>
----------
(1) As of the respective dates of acquisition.
In October 1997, PSINet acquired Serveur Telematique Internet S.A. (doing
business as "CalvaCom"), a leading ISP and Web hosting company in France. The
acquisition established PSINet's market presence in France with over 1,500
dedicated and dial-up customer accounts through 24 POPs. CalvaCom also has a
significant commercial grade Web design and hosting business providing service
to such leading French companies as Total S.A. and La Chemise Lacoste S.A.
In January 1998, PSINet acquired Internet Prolink S.A. ("Iprolink"), the
leading commercial ISP in Switzerland. This acquisition expanded PSINet's market
presence in Switzerland by adding approximately 2,400 dedicated and dial-up
customer accounts and 18 POPs in Switzerland and France. Iprolink also has
relationships with over 170 resellers located throughout Switzerland, France and
Germany to augment its direct sales force.
In February 1998, PSINet acquired iSTAR internet inc. ("iSTAR"), one of
the leading Canadian providers of Internet services and solutions for business,
institutions and individuals. This acquisition established PSINet as the largest
ISP in Canada with over 2,700 business and Web services customers as well as
over 47,000 dial-up customer accounts through over 35 POPs. By eliminating
redundant network architecture and administrative functions and migrating
iSTAR's customers on to its integrated network backbone, PSINet has realized,
and believe it will continue to realize, significant cost savings in its
Canadian operations.
In April 1998, PSINet acquired Interactive Telephony Limited ("ITL"), the
largest ISP based in Jersey in the Channel Islands, and a 12.5% equity interest
in WorldPay Limited, a leading provider of electronic commerce payment solutions
also based in Jersey, Channel Islands.
In May 1998, PSINet acquired Interactive Networx GmbH ("INX"), the largest
ISP in Berlin and nationally recognized across Germany. This acquisition
expanded PSINet's market presence in Germany by adding approximately 650
business customers, 15,600 consumer dial-up customers and ten POPs in Germany.
The
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combination of INX with PSINet's existing German operations has resulted in it
becoming one of the largest ISPs in Germany, which is the fastest growing
Internet market in Europe.
In June 1998, PSINet acquired ioNet Internetworking Services ("ioNet"), a
provider of Internet and network systems integration services to businesses,
universities and residential customers in the south central region of the United
States. In addition, ioNet has developed a suite of vertical market Internet
services, including comprehensive banking, medical and telecommunications
Internet solutions, to enable customers to more efficiently meet their
internetworking needs. This acquisition resulted in the addition of
approximately 2,300 business and Web services accounts and 21,500 consumer
dial-up customers.
In June 1998, PSINet acquired LinkAge Online Limited ("LinkAge"), a Hong
Kong-based supplier of Internet solutions, including Web hosting, managed
co-location, intranets and extranets, to businesses, professionals, government
agencies and other ISPs throughout Southeast Asia. This acquisition established
PSINet's market presence in Hong Kong, the fifth largest telecommunications
market in Asia, by adding approximately 1,100 business and Web services
accounts.
In June 1998, PSINet acquired SCII-CalvaPro ("CalvaPro"), a full service
business-to-business telecommunications company headquartered in Paris, France
that provides Internet applications and other communications services primarily
to banks and shipping and forwarding agencies in the sub-Saharan African market.
This acquisition gives PSINet a market presence in sub-Saharan Africa by adding
approximately 425 business accounts and 30 consumer dial-up customers.
In July 1998, PSINet acquired INTERLOG Internet Services Inc.
("Interlog"), one of the first Internet-only service providers in Canada. This
acquisition further solidifies PSINet's market-leading presence in Canada by
adding approximately 2,100 business and Web services accounts and 41,000
consumer dial-up customers.
In August 1998, PSINet acquired Rimnet Corporation ("Rimnet"), one of
Japan's leading providers of Internet services and solutions to businesses. This
acquisition further strengthens PSINet's market presence in Japan, one of the 20
largest global telecommunications markets, by adding approximately 260 business
and Web services accounts and 56,000 consumer dial-up customers.
In September 1998, PSINet acquired TWICS Co., Ltd., one of the original
ISPs in Japan, primarily serving the small-office/home-office market. This
acquisition added approximately 70 business and Web services accounts and 1,700
consumer dial-up customers to PSINet's market presence in Japan.
In September 1998, PSINet acquired Hong Kong Internet & Gateway Services
("HKIGS"), one of the original ISPs in Hong Kong, primarily serving the business
market. This acquisition enhances PSINet's recently established market presence
in Hong Kong by adding approximately 200 business accounts.
In September 1998, PSINet acquired Inet, Inc. ("Inet"), one of Korea's
first ISPs that provides a comprehensive range of Internet access options,
applications, consulting services and education programs, including Web hosting
and content development, intranet application development and training. This
acquisition establishes PSINet's market presence in Korea, one of the 20 largest
global telecommunications markets, by adding approximately 1,100 business and
Web services accounts and 13,000 consumer dial-up customers.
In October 1998, PSINet acquired Tokyo Internet Corporation ("Tokyo
Internet"), one of the most widely used ISPs in Japan serving businesses, the
small-office/home-office market and individual Internet users. Tokyo Internet
offers a comprehensive range of Internet services, including individual and
business dial-up connection services, leased-line LAN connectivity services and
high quality collocation and Web services. In addition, Tokyo Internet has
created an IP network infrastructure that directly links 23 of Japan's largest
metropolitan areas. The combination of Tokyo Internet with PSINet's existing
Japanese operations has resulted in it becoming the second largest ISP in Japan,
based on customer domains serving business and commercial users, by adding
approximately 6,500 business and Web services accounts and 10,000 consumer
dial-up customers.
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In October 1998, PSINet acquired Internet Exchange Europe B.V. ("IXE"),
the first commercial top-level ISP in Holland to maintain its own Internet
backbone, and Unix Support Netherland B.V. ("USN"), a well-known provider of
Internet services, including Web hosting and maintenance, security and other
customized solutions, to businesses. These acquisitions provide PSINet with
additional business Internet expertise to enhance its market presence in the
Netherlands and Europe by focusing on value-added products.
In November and December 1998, PSINet acquired AsiaNet (Hong Kong)
Limited, Huge Net Limited and Spider Net Limited, three commercial ISPs in Hong
Kong, to supplement its acquisition of LinkAge and HKIGS. These acquisitions
expanded PSINet's market presence in the Hong Kong market by adding an aggregate
of approximately 300 business accounts and 350 consumer dial-up customers.
Competition
The market for Internet connectivity and related services is extremely
competitive. PSINet anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
existing businesses from different industries.
PSINet believes that a reliable international network, knowledgeable
salespeople and the quality of technical support currently are the primary
competitive factors in PSINet's targeted market and that the price is usually
secondary to these factors.
Current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers and on-line service providers. While PSINet
believes that its network, products and customer service distinguish it from
these competitors, some of these competitors have a significantly greater market
presence, brand recognition, and financial, technical and personnel resources
than PSINet.
ISPs. According to industry sources, there were over 4,000 ISPs in the
United States and Canada as of December 31, 1997, consisting of national,
regional and local providers. PSINet's current primary competitors include other
ISPs with a significant national presence which focus on business customers,
such as UUNet Technologies, Inc. ("UUNet"), GTE Internetworking (formerly BBN),
Concentric Network and DIGEX. While PSINet believes that its level of customer
service and support and target market focus distinguish it from these
competitors, many of these competitors have greater market share, brand
recognition, and financial, technical and personnel resources than PSINet.
PSINet also competes with unaffiliated regional and local ISPs in its targeted
geographic regions.
Telecommunications Carriers. The major long distance companies (also known
as interexchange carriers or IXCs), including AT&T, MCIWorldCom, Cable &
Wireless/IMCI and Sprint, offer Internet access services and compete with
PSINet. The recent reforms in the federal regulation of the telecommunications
industry have created greater opportunities for ILECs, including the RBOCs and
other competitive CLECs, to enter the Internet connectivity market. In order to
address the Internet connectivity requirements of the business customers of long
distance and local carriers, PSINet believes that there is a move toward
horizontal integration by ILECs and CLECs through acquisitions or joint ventures
with, and the wholesale purchase of, connectivity from ISPs. The recent
MCI/WorldCom merger (and the WorldCom/MFS/UUNet consolidation), GTE's recent
acquisition of BBN, the acquisition by ICG Communications, Inc. of Netcom , the
recent acquisition by Frontier Corp. of Global Center and AT&T's recent purchase
of IBM's global communications network are indicative of this trend.
Accordingly, PSINet expects that it will experience increased competition from
the traditional telecommunications carriers. Many of these telecommunications
carriers, in addition to their greater network coverage, market presence, and
financial, technical and personnel resources, also have large existing
commercial customer bases.
Cable Companies, Direct Broadcast Satellite and Wireless Communications
Companies. Many of the major cable companies have announced that they are
exploring the possibility of offering Internet connectivity, relying on the
viability of cable modems and economical upgrades to their networks. Continental
Cablevision, Inc.
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and Tele-Communications, Inc. ("TCI") have announced trials to provide Internet
cable service to their residential customers in select areas. Cable companies,
however, are faced with large-scale upgrades of their existing plant equipment
and infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. Additionally, their current subscriber base and
market focus is residential which requires that they partner with
business-focused providers or undergo massive sales and marketing and network
development efforts in order to target the business sector. Several
announcements also recently have been made by other alternative service
companies approaching the Internet connectivity market with various wireless
terrestrial and satellite-based service technologies. These include Hughes
Network Systems' DirecPC product that provides high-speed data through direct
broadcast satellite technology; CAI Wireless Systems Inc.'s ("CAI Wireless")
announcement of an MMDS wireless cable operator launching data services via 2.5
to 2.7 GHz and high-speed wireless modem technology; Cellularvision's
announcement that it is offering Internet access vial high-speed wireless LMDS
technology; and WinStar Communications, a 38 GHz radio company that wholesales
its network capacity to other carriers and now offers high-speed Internet access
to business customers. PSINet believes that there is a trend toward horizontal
integration involving cable companies through acquisitions or joint ventures
between cable companies and telecommunications carriers. The acquisition of TCI
by AT&T is indicative of this trend.
On-line Service Providers. The dominant on-line service providers,
including Microsoft Network, America Online, Incorporated ("America Online") and
Prodigy, Inc. ("Prodigy"), have all entered the Internet access business by
engineering their current proprietary networks to include Internet access
capabilities. PSINet competes to a lesser extent with these service providers,
which currently are primarily focused on the consumer marketplace and offer
their own content, including chat rooms, news updates, searchable reference
databases, special interest groups and shopping. However, America Online's
recently announced acquisition of Netscape Communications Corporation and
related strategic alliance with Sun Microsystems will, if completed, enable it
to offer a broader array of IP-based services and products that could
significantly enhance its ability to appeal to the business marketplace and, as
a result, compete more directly with PSINet. While CompuServe recently announced
it also will target Internet connectivity for the small to medium-sized business
market, this will require a significant transition from a consumer market focus
to a business market focus.
PSINet believes that its ability to attract business customers and to
market value-added services is a key to its future success. However, there can
be no assurance that its competitors will not introduce comparable services or
products at similar or more attractive prices in the future or that PSINet will
not be required to reduce its prices to match competition. Recently, many
competitive ISPs have shifted their focus from individual customers to business
customers. Moreover, there can be no assurance that more of PSINet's competitors
will not shift their focus to attracting business customers, resulting in even
more competition for PSINet. There can be no assurance that PSINet will be able
to offset the effects of any such competition or resulting price reductions.
Increased competition could result in erosion of PSINet's market share and could
have a material adverse effect on PSINet's business, financial condition and
results of operations. See "Risk Factors--We Face a High Level of Competition in
the Internet Services Industry."
Proprietary Rights
PSINet's success and ability to compete is dependent in part upon its
technology and proprietary rights, although PSINet believes that its success is
more dependent upon its technical expertise than its proprietary rights. PSINet
relies on a combination of copyright, trademark and trade secret laws and
contractual restrictions to establish and protect its technology. There can be
no assurance that the steps taken by PSINet will be adequate to prevent
misappropriation of its technology or that PSINet's competitors will not
independently develop technologies that are substantially equivalent or superior
to PSINet's technology. PSINet is also subject to the risk of adverse claims and
litigation alleging infringement of the intellectual property rights of others.
Regulatory Matters
In recent years there have been a number of U.S. and foreign legislative
and other initiatives seeking to control or affect the content of information
provided over the Internet. Some of these initiatives would impose criminal
liability upon persons sending or displaying, in a manner available to minors,
indecent material or material
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harmful to minors. Liability would also be imposed on an entity knowingly
permitting facilities under its control to be used for such activities. These
initiatives may decrease demand for Internet access, chill the development of
Internet content, or have other adverse effects on Internet access providers,
including PSINet.
Both the provision of Internet access service and the provision of
underlying telecommunications services are affected by federal, state and local
regulation. The Federal Communications Commission ("FCC") exercises jurisdiction
over all facilities of, and services offered by, telecommunications carriers to
the extent that they involve the provision, origination or termination of
jurisdictionally interstate or international communications. The state
regulatory commissions retain jurisdiction over the same facilities and services
to the extent they involve origination or termination of jurisdictionally
intrastate communications. In addition, as a result of the passage of the
Telecommunications Act of 1996 (the "1996 Act"), state and federal regulators
share responsibility for implementing and enforcing the domestic pro-competitive
policies of the 1996 Act. In particular, state regulatory commissions have
substantial oversight over the provision of interconnection and
non-discriminatory network access by incumbent local exchange carriers
("ILECs"). Municipal authorities generally have some jurisdiction over access to
rights of way, franchises, zoning and other matters of local concern.
PSINet's Internet operations are not currently subject to direct
regulation by the FCC or any other U.S. governmental agency (other than
regulations applicable to businesses generally). However, the FCC continues to
review its regulatory position on the usage of the basic network and
communications facilities by ISPs. Although in an April 1998 Report, the FCC
determined that ISPs should not be treated as telecommunications carriers and
therefore not regulated, it is expected that future ISP regulatory status will
continue to be uncertain. Indeed, in that report, the FCC concluded that certain
services offered over the Internet, such as phone-to-phone IP telephony, may be
functionally indistinguishable from traditional telecommunications service
offerings, and their non-regulated status may have to be re-examined.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from Regional
Bell Operating Companies ("RBOCs") or other telecommunications companies, could
have an adverse effect on PSINet's business. Although the FCC has decided not to
allow local telephone companies to impose per-minute access charges on ISPs, and
that decision has been upheld by the reviewing court, further regulatory and
legislative consideration of this issue is likely. In addition, some telephone
companies are seeking relief through state regulatory agencies. Such rules, if
adopted, are likely to have a greater impact on consumer-oriented Internet
access providers than on business-oriented ISPs, such as PSINet. Nonetheless,
the imposition of access charges would affect PSINet's costs of serving dial-up
customers and could have a material adverse effect on PSINet's business,
financial condition and results of operations.
In addition to its Internet activities, PSINet has recently focused
attention on acquiring telecommunications assets and facilities, which is a
regulated activity. PSINet's wholly-owned subsidiary, PSINetworks Company, has
received an international Section 214 license from the FCC to provide global
facilities-based telecommunications services, subjecting it to regulation as a
non-dominant international common carrier. In addition, PSINet's wholly-owned
subsidiary, PSINet Telecom UK Limited, has received an international facilities
license from DTI and OFTEL, the responsible telecommunications regulatory bodies
in the United Kingdom. Generally, the FCC and OFTEL have chosen not to closely
regulate the charges or practices of non-dominant carriers, such as our
subsidiaries. Nevertheless, these regulatory agencies act upon complaints
against such carriers for failure to comply with statutory obligations or with
the rules, regulations and policies of such regulatory agencies. These
regulatory agencies also have the power to impose more stringent regulatory
requirements on PSINet and to change its regulatory classification. PSINet
believes that, in the current regulatory environment, such regulatory agencies
are unlikely to do so. As PSINet enters new markets, it anticipates obtaining
similar licenses as required by applicable telecommunications rules and
regulations in order to acquire and maintain telecommunications assets and
facilities in such countries.
The laws relating to the provision of telecommunications services in other
countries, and in multinational organizations such as the International
Telecommunications Union, are also undergoing a process of development. As
PSINet continues its program of acquisition and expansion into international
markets, these laws will have an
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increasing impact on PSINet's operations. There can be no assurance that new or
existing laws or regulations will not have a material adverse effect on PSINet.
PSINetworks Company has also received competitive local exchange carrier
("CLEC") certification in Colorado and Texas, has applied for CLEC certification
in Virginia, California and New York, and is considering the financial,
regulatory and operational implications of becoming a CLEC in certain other
states. As a provider of domestic basic telecommunications services,
particularly competitive local exchange services, PSINet could become subject to
further regulation by the FCC and/or another regulatory agency, including state
and local entities.
The 1996 Act has caused fundamental changes in the markets for local
exchange services. In particular, the 1996 Act and the FCC rules issued pursuant
to it mandate competition in local markets and require that ILECs interconnect
with CLECs. Under the provisions of the 1996 Act, the FCC and state public
utility commissions share jurisdiction over the implementation of local
competition: the FCC was required to promulgate general rules and the state
commissions were required to arbitrate and approve individual agreements. The
courts have generally upheld the FCC in its promulgation of rules, including a
January 25, 1999 U.S. Supreme Court ruling which determined that the FCC has
jurisdiction to promulgate national rules in pricing for interconnection.
A critical issue for CLECs is the right to receive reciprocal compensation
for the transport and termination of Internet traffic. PSINet believes that,
under the 1996 Act and current FCC rules, CLECs are entitled to receive
reciprocal compensation from ILECs. However, some ILECs have disputed payment of
reciprocal compensation for Internet traffic, arguing that ISP traffic is not
local traffic. Most states have required ILECs to pay ISPs reciprocal
compensation. However, federal regulators and some state regulators are
currently considering the proper jurisdictional classification of local calls
placed to an ISP and whether ISP calling triggers an obligation to pay
reciprocal compensation. On October 30, 1998, the FCC determined that dedicated
Digital Subscriber Line service is an interstate service and properly tariffed
at the interstate level. However, the FCC specifically did not apply this
decision to the question of whether local exchange carriers are entitled to
receive reciprocal compensation when they deliver circuit-switched dial-up
traffic to ISPs. It is expected that the FCC will address this question in the
near future. There can be no assurance that any FCC decision on this matter will
favor PSINet's position. An unfavorable result may potentially have an adverse
effect on PSINet's potential future revenues as a CLEC as well as increasing its
costs for PRIs in general.
As PSINet becomes a competitor in local exchange markets, it will become
subject to state requirements regarding provision of intrastate services. This
may include the filing of tarriffs containing rates and conditions. As a new
entrant, without market power, PSINet expects to face a relatively flexible
regulatory environment. Nevertheless, it is possible that some states could
require the approval of the public utilities commission for the issuance of debt
or equity or other transactions which would result in a lien on PSINet's
property used to provide intrastate services.
Employees
As of October 1, 1998, PSINet had approximately 1,643 full-time employees
(735 in the United States and 908 outside of the United States), including
approximately 840 in data communications and operational positions, 522 in sales
and marketing and 281 in general and administrative positions. PSINet believes
that its relations with its employees are good. None of PSINet's employees are
represented by a labor union or covered by a collective bargaining agreement and
PSINet has never experienced a work stoppage.
Properties
PSINet's principal administrative, operational and marketing and sales
facilities total approximately 50,280 square feet and are located in an office
park in Herndon, Virginia. PSINet occupies 36,080 square feet of this space
under two leases which expire in September 2003 and include five-year renewal
options, and 14,200 square feet of this space pursuant to a lease which expires
in February 1999. PSINet also leases approximately 15,000 square feet of office
space in a second office park located in Herndon, Virginia, approximately 48,480
and 13,500
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square feet of office space in two office parks located in Reston, Virginia and
approximately 23,760 square feet of office space for its network operations
center in Troy, New York.
All of PSINet's regional offices and subsidiaries also lease their
facilities, except for PSINet's principal European administrative, operational,
marketing and sales facilities, which total approximately 3,900 square feet and
are owned by PSINet in Switzerland. PSINet also leases or is otherwise provided
with the right to utilize space in various geographic locations to provide an
operational facility for certain of its POPs. PSINet believes that these
facilities are adequate for its current needs and that suitable additional
space, should it be needed, will be available to accommodate expansion of
PSINet's operations on commercially reasonable terms.
LEGAL PROCEEDINGS
From time to time, PSINet has been involved in certain disputes and
threatened with or named as a defendant in lawsuits and administrative claims.
Certain of such disputes, lawsuits and threatened litigation include claims
asserting alleged breach of agreements and certain of them relate to relatively
novel or unresolved issues of law arising out of or relating to the developing
nature of the Internet and on-line services industries. See "Risk
Factors--Potential Liability for Information Disseminated through Network" and
"Risk Factors--Potential Adverse Impact of Government Regulation."
On November 25, 1997, Chatterjee Management Company ("Chatterjee")
initiated arbitration proceedings against PSINet before the International
Chamber of Commerce, Court of Arbitration, in London, England, with respect to a
joint venture agreement dated as of September 19, 1996 previously entered into
by Chatterjee and PSINet. As previously disclosed by PSINet in various filings
with the Commission, on September 19, 1996, PSINet and Chatterjee signed an
agreement pursuant to which PSINet and an investment group led by Chatterjee
would establish a joint venture for the purpose of building an Internet network
across Europe and providing Internet-related services in Europe. Such investment
group was to invest up to $41.0 million in the joint venture. No monies were
invested by Chatterjee or the investment group pursuant to the joint venture
agreement nor were any other actions undertaken to implement it. Following the
signing of the agreement, the parties acknowledged structural difficulties
associated with the joint venture as originally contemplated, which prevented
implementation of it. Instead, they sought, for several months, to negotiate a
direct investment in PSINet by Chatterjee in lieu of the prior agreement. Those
negotiations were not successful.
In the arbitration proceeding, Chatterjee has alleged that PSINet breached
the joint venture agreement by repudiating its obligations under the agreement
and by breaching a covenant not to compete. In the arbitration, Chatterjee
requests an award declaring that the agreement is still valid and binding upon
the parties and that PSINet stands in breach of the agreement, directing PSINet
to specifically perform its obligations under the agreement or, in the
alternative, awarding Chatterjee compensatory damages in an amount not less than
$25.0 million, awarding Chatterjee profits that PSINet has earned or stands to
earn in Europe, and awarding Chatterjee the costs of arbitration, including
attorneys' fees, and interest on the award of damages. PSINet believes that
Chatterjee's claims are without merit and intends vigorously to defend itself in
the arbitration. The arbitration hearing commenced in October 1998 in London,
England. On February 9, 1999, the arbitrator advised the parties that he is in
the process of preparing a draft decision in the case for review by the
International Court of Arbitration of the International Chamber of Commerce and,
accordingly, PSINet believes that a decision in the arbitration will be rendered
in the near future. An unfavorable outcome in this matter could have a material
adverse effect on PSINet's business, financial condition and results of
operations.
In addition, PSINet from time to time receives communications from third
parties asserting alleged infringement of patents, trademarks and service marks
of others. Although there is currently no material litigation arising out of any
alleged infringement of patents, trademarks or service marks, there can be no
assurance that litigation will not be commenced regarding these or other
matters.
PSINet is not involved in any other legal proceedings which PSINet
believes would, if adversely determined, have a material adverse effect upon its
business, financial condition or results of operations. There can be no
assurance whether these matters will be determined in a manner which is
favorable to PSINet or, if
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adversely determined, whether such determination would have a material adverse
effect upon PSINet's business, financial condition or results of operations.
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MANAGEMENT
The following sets forth certain information as of November 15, 1998
concerning the directors and certain executive officers of PSINet.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
Senior Executive Officers:
<S> <C> <C>
William L. Schrader(1)(3)............ 46 Chairman of the Board of Directors and Chief
Executive Officer (Founder)
Harold S. Wills...................... 56 President, Chief Operating Officer and Director
David N. Kunkel...................... 55 Executive Vice President, General Counsel and
Director
Edward D. Postal..................... 43 Senior Vice President and Chief Financial Officer
Geoffrey E. Axton.................... 41 Senior Vice President, Business and Corporate
Development
Harry G. Hobbs....................... 44 Senior Vice President and President, PSINet Europe
Chi H. Kwan ......................... 47 Senior Vice President and President, PSINet
Asia/Pacific
Robert D. Leahy...................... 46 Senior Vice President, Corporate Marketing and
Communications
Certain Other Officers:
Sandra L. Blaisdell.................. 43 Vice President, Field Services
James R. Davin....................... 42 Vice President and Chief Technical Officer
E. A. Davis ......................... 52 President, Network Division
Mark S. Fedor ....................... 34 Vice President, Engineering
James A. Haid ....................... 49 Vice President, Network Operations
John F. Kraft ....................... 41 Vice President, Carrier and ISP Services
Mitchell Levinn...................... 39 Vice President, Technical Design of Data Center/
Web Hosting
Michael Mael 42 Vice President, Application and Web Services
Michael J. Malesardi................. 38 Vice President and Controller
William A. Opet...................... 42 President, Corporate Network Services
Lawrence Winkler..................... 33 Vice President and Treasurer
Non-Executive Directors:
William H. Baumer(1)(2)(3)........... 66 Director
Ian P. Sharp(2)(3)................... 66 Director
Ralph J. Swett(1)(2)................. 64 Director
</TABLE>
- ----------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Financing Committee.
William L. Schrader is the founder of PSINet and has served as Chairman of
the Board of Directors and Chief Executive Officer of PSINet since its inception
and as President of PSINet from its inception to September 1998. Prior to
forming PSINet, Mr. Schrader served as President and Chief Executive Officer of
NYSERNet Inc., a provider of data networking services in New York State
("NYSERNet"), from January 1986 to December 1989. Mr. Schrader also was a
co-founder, and, from May 1984 until February 1987, served as Executive Director
of the Cornell Theory Center, a National Science Foundation supercomputer
center. Mr. Schrader's term of office as a director of PSINet expires in 1999.
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Harold S. Wills has served as President of PSINet since September 1998 and
as a director and Chief Operating Officer of PSINet since April 1996, and served
as Executive Vice President of PSINet from April 1996 to September 1998. Mr.
Wills served as Chief Operating Officer of Hospitality Information Networks,
Inc., a provider of information services for the hospitality industry, from July
1995 through January 1996. Mr. Wills also held various positions including,
Managing Director, International Computer Services, Technical Service Director
and Sales Director of Granada Group PLC, a computer services provider, from
September 1991 through September 1995. Mr. Wills's term of office as a director
of PSINet expires in 2000.
David N. Kunkel has served as Executive Vice President since 1998, as
Senior Vice President of PSINet since September 1996, as a director and
Secretary of PSINet since September 1995, as Vice President of PSINet since July
1995 and as General Counsel of PSINet since June 1995. Mr. Kunkel also served as
Vice President of International Operations of PSINet from April 1996 to
September 1996 and as Senior Counsel to Nixon, Hargrave, Devans & Doyle LLP,
outside counsel to PSINet, 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 PSINet from its inception until July 1995. Mr. Kunkel's term of
office as a director of PSINet expires in 1999.
Edward D. Postal has served as Senior Vice President and Chief Financial
Officer of PSINet since August 1997 and served as Vice President and Chief
Financial Officer of PSINet since October 1996. Prior to joining PSINet, Mr.
Postal served as Senior Vice President, Chief Financial Officer and a director
of The Hunter Group, Inc., a systems integration consulting firm, from March
1995 to October 1996, as Vice President and Chief Financial Officer of The Wyatt
Company, an international employee benefits and human resources consulting firm
(currently Watson Wyatt Worldwide), from December 1991 to October 1994 and as
controller/treasurer of The Wyatt Company from November 1985 to December 1991.
From 1981 to November 1985, Mr. Postal served in various financial management
positions at Satellite Business Systems, a satellite communications company
acquired by MCI in 1985, and, prior thereto, held various positions at Touche
Ross & Co. (currently Deloitte & Touche LLP).
Geoffrey E. Axton has served as Senior Vice President, Business and
Corporate Development of PSINet since October 1998. Prior to joining PSINet, Mr.
Axton served as Vice President of Strategy and Commercial Development for
Concert Communications, the former business telecommunications joint venture
between British Telecom and MCI, from May 1995 to October 1998. Prior thereto,
Mr. Axton served in various international management positions with British
Telecom from 1977 to May 1995, culminating in Head of Alliance Management.
Harry G. Hobbs has served as Senior Vice President and President, PSINet
Europe of PSINet since September 1998 and served as Vice President, Customer
Administration of PSINet from September 1997 to September 1998. Prior to joining
PSINet, 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 PSINet since October 1998. Prior to joining PSINet, 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., Finnegan-Mat
Instruments Inc. and H.B. Fuller Japan Inc.
Robert D. Leahy has served as Senior Vice President, Corporate Marketing
and Communications of PSINet since July 1998. Prior to joining PSINet, Mr. Leahy
was a Senior Vice President and Senior
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Communications Advisor to the Office of the Chairman at the National Association
of Securities Dealers, Inc. from June 1997 to July 1998. Prior thereto, Mr.
Leahy served as Vice President of Corporate Relations to Bowater, Incorporated,
a manufacturer of newsprint and other paper products, from March 1993 to May
1997, Director of Media Communications for International Paper Company from
October 1993 to March 1993 and Vice President, Corporate Communications for
Ardal Corp. from October 1987 to October 1989. Mr. Leahy has also served in
senior positions with the International Telecommunications Satellite
Organization (INTELSAT), as well as Manhattan and Washington D.C.-based
government and public relations agencies representing both domestic and
international clients.
Sandra L. Blaisdell has served as Vice President of Field Services of
PSINet since October 1998. Prior to joining PSINet, Ms. Blaisdell was President
of her own consulting firm, where she worked with cable companies in the United
States and the United Kingdom assisting them in entering the local and long
distance telecommunications markets, from April 1996 to June 1998. Prior
thereto, Ms. Blaisdell served as General Manager of Networks Operation and in
various division level positions in operations, strategic planning and sales and
marketing with Mountain Bell Telephone and US West Communications from 1980 to
April 1996.
James R. Davin has served as Vice President and Chief Technical Officer of
PSINet since February 1997. From January 1995 until February 1997, Mr. Davin
held various positions with PSINet, including Assistant Director of Engineering,
Assistant Director of New Product Development and Senior Scientist. Prior to
joining PSINet, Mr. Davin served as a member of the technical staff of Bell
Communications Research Inc., a telephone engineering and consulting company,
from August 1992 to January 1995, as a member of the research staff at the
Massachusetts Institute of Technology from June 1988 to August 1992 and as an
engineer for Proteon Inc., a provider of network access solutions, from February
1987 to June 1988.
E. A. "Ted" Davis has served as President--PSINet's Network Division of
PSINet since October 1998. Prior to joining PSINet, 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.
Mark S. Fedor has served as Vice President, Engineering of PSINet since
February 1997. From November 1989 until February 1997, Mr. Fedor held various
positions with PSINet, including Director of Engineering.
James A. Haid has served as Vice President, Network Operations of PSINet
since October 1998. Prior to joining PSINet, Mr. Haid served in various
management positions with AT&T from July 1972 to September 1998, most recently
as Vice President of Government Market Organizations for AT&T Business
Communications Service.
John F. Kraft has served as Vice President, Carrier and ISP Services of
PSINet since December 1997, served as Vice President, Wholesale Network Services
of PSINet from July 1997 to December 1997 and was the General Manager of
Wholesale Network Services of PSINet from July 1996 to July 1997. Prior to
joining PSINet, Mr. Kraft served as a Director of Sales of the Mid-Atlantic
Division of MCI Business Services, a unit of MCI, from February 1986 to July
1996.
Mitchell Levinn has served as Vice President, Technical Design of Data
Center/Web Hosting of PSINet since October 1998, served as Vice President,
Network Operations of PSINet from February 1995 to September 1998. Prior
thereto, Mr. Levinn had served as Director of Operations of PSINet since its
inception. Prior to joining PSINet, Mr. Levinn served as Director of the
Computer Science Laboratory of the Computer Science Department at Rensselaer
Polytechnic Institute from June 1985 to December 1990.
Michael Mael has served as Vice President, Application and Web Services of
PSINet since December 1997, served as Vice President, Web Services of PSINet
from September 1997 to December 1997 and served as General Manager, PSINet Web
Business of PSINet from May 1997 to August 1997. Prior to joining PSINet, Mr.
Mael served in various positions in the Business Management and Marketing groups
at MCI, including Director,
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Business Management, Director, Marketing and Director, Strategic Alliances, from
February 1992 to May 1997. From July 1990 to February 1992, Mr. Mael was
employed as a consultant at Aladdin Partners, an independent management
consulting firm.
Michael J. Malesardi has served as Vice President and Controller of PSINet
since July 1997. Prior to joining PSINet, Mr. Malesardi served as Director of
Financial Administration of Watson Wyatt Worldwide, an international employee
benefits and human resources consulting firm ("Watson Wyatt"), from April 1995
to May 1997 and as Controller of Watson Wyatt from February 1992 to April 1995.
From September 1982 to February 1992, Mr. Malesardi held various positions at
Price Waterhouse LLP, the latest as Senior Audit Manager.
William A. Opet has served as President, Corporate Network Services of
PSINet since July 1998. Prior to joining PSINet, Mr. Opet served in several
capacities at Geotek Data Company from April 1994 until June 1998, including
Senior Vice President of Marketing and Sales, Senior Vice President of Business
Development, Vice President of Marketing, and most recently, as President and
Chief Executive Officer. Prior thereto, Mr. Opet served as Vice President of
Marketing for LIN Broadcasting from June 1990 until April 1994, Vice President
of Sales and Marketing of Metrophone-LIN Broadcasting from May 1986 until June
1990, Director of Sales Management for ARGO Communications from April 1983 until
May 1986 and Manager of Revenues and Planning for CTEC Corporation from December
1978 until April 1983.
Lawrence Winkler has served as Vice President and Treasurer of PSINet
since September 1998 and served as Director of Capital Markets for PSINet from
November 1997 to September 1998. Prior to joining PSINet, Mr. Winkler was
Director of Investor Relations for the Mills Corporation where he was
responsible for investor relations and capital markets. From 1988 to 1990, Mr.
Winkler served in various senior financial management and consulting roles for
the Black and Decker Corporation, CRI Inc. and Arthur Andersen & Co./Andersen
Consulting.
William H. Baumer has served as a director of PSINet since 1993. Mr.
Baumer has been a Professor of Philosophy at the University at Buffalo since
1971 and was the Acting Chairman of the Department of Economics at the
University at Buffalo from June 1992 until June 1995. Mr. Baumer also served as
Treasurer and Vice President of NYSERNet from January 1986 to December 1990 and
from December 1989 to December 1990, respectively. Mr. Baumer's term of office
as a director of PSINet expires in 2000.
Ian P. Sharp has served as a director of PSINet since September 1996. Mr.
Sharp is currently retired and was the President and founder of I.P. Sharp
Associates, a software development company, from December 1964 through July
1989. Mr. Sharp's term of office as a director of PSINet expires in 1999.
Ralph J. Swett has served as a director of PSINet since February 25, 1998,
effective upon the closing of PSINet's transaction with IXC as described herein
under "Certain Transactions--Strategic Alliance with IXC." Mr. Swett is
currently retired, is a director of IXC Communications and was 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, Mr. Swett served as Chairman of the Board and Chief
Executive Officer of Communications Transmission, Inc. ("CTI") from 1986 to
1992. From 1969 to 1986, Mr. Swett served in increasingly senior positions (Vice
President, President and Chairman) of Times Mirror Cable Television ("TMCT"), a
subsidiary of Times Mirror and a previous owner of IXC Carrier, and as a Vice
President of Times Mirror from 1981 to 1986. Mr. Swett served as Chairman of IXC
Carrier from 1979 through April 1998, and served as its Chief Executive Officer
from 1986 to October 1997 and its President from 1991 to October 1997. Mr. Swett
has managed communications businesses for the past 26 years. Mr. Swett's term of
office as a director of PSINet expires in 2000. See "Certain
Transactions--Strategic Alliance With IXC."
Pursuant to the IRU Purchase Agreement between PSINet and IXC, Ralph J.
Swett, the former Chairman of IXC Communications Inc. ("IXC Communications"),
was elected, effective as of the closing of the transaction, to PSINet's Board
of Directors. The IRU Purchase Agreement provides that PSINet's Chairman will
recommend that Mr. Swett continue to be re-elected to PSINet's Board for so long
as IXC continues to own at least 95% of the
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IXC Initial Shares. IXC is an indirect wholly owned subsidiary of IXC
Communications. See "Certain Transactions--Strategic Alliance With IXC."
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CERTAIN TRANSACTIONS
Strategic Alliance With IXC
General Terms. In February 1998, PSINet acquired from IXC Internet
Services, Inc. ("IXC") 20-year noncancellable indefeasible rights of use for
specified purposes in up to 10,000 equivalent route miles of fiber-based OC-48
network bandwidth (the "PSINet IRUs") in selected portions across the IXC fiber
optic telecommunications system within the United States (the "Available
System") in exchange for the issuance to IXC of 10,229,789 shares of common
stock of PSINet, representing approximately 20% of the issued and outstanding
common stock of PSINet after giving effect to such issuance and having an
aggregate market value of $78.6 million based on the closing market price per
share of PSINet's common stock as reported by The Nasdaq Stock Market on such
date of $7.6875 (the "IXC Initial Shares"), pursuant to an IRU and Stock
Purchase Agreement, dated as of July 22, 1997, between PSINet and IXC, as
amended (the "IRU Purchase Agreement"). The IRU Purchase Agreement provides
that, if the fair market value of the IXC Initial Shares (based on the
volume-weighted average closing market price per share of PSINet's 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 $240.0
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), PSINet
would be obligated to provide IXC with additional shares of common stock or, at
the sole option of PSINet, cash or a combination thereof equal to the shortfall
(the "Contingent Payment Obligation"). The IRU Purchase Agreement also provided,
however, that the right of IXC to receive additional shares and/or cash pursuant
to the Contingent Payment Obligation would terminate on such date as the fair
market value of the IXC Initial Shares (as determined above) is equal to or
greater than $240.0 million. After the close of trading on The Nasdaq Stock
Market on January 13, 1999, the fair market value of the IXC Initial Shares (as
determined above) exceeded $240.0 million and, as a result, the Contingent
Payment Obligation terminated as of such date.
In the event IXC proposes to sell or otherwise dispose of any of the IXC
Transaction Shares (other than pursuant to a pledge to an unaffiliated third
party lender), PSINet 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 PSINet. Other than as set forth above and except for transfer
restrictions existing from time to time under applicable federal and state
securities laws, the IXC Transaction Shares are not subject to any transfer
restrictions or to any voting restrictions or other agreements.
PSINet IRUs. The total amount of bandwidth corresponding to the PSINet
IRUs is contemplated to be delivered to PSINet (to the extent then available) in
specified minimum increments every six months during the two year period
following the closing. As of January 1, 1998, approximately 6,000 route miles of
OC-12 (equivalent to approximately 1,500 route miles of OC-48) bandwidth
corresponding to the PSINet IRUs connecting New York and Los Angeles (and
certain major cities in between) have been accepted by PSINet and placed into
operation on the PSINet network and approximately 7,000 additional route miles
of bandwidth, extending the network to, among other locations, Washington D.C.,
Atlanta, Houston and San Francisco (and certain major cities in between) are
expected to be made available to PSINet and placed into operation prior to the
end of the first quarter of 1999. PSINet currently anticipates delivery of the
remaining bandwidth corresponding to the PSINet IRUs over the next 18 to 24
months. IXC has granted PSINet a security interest in, among other collateral, a
portion of the IRUs underlying the PSINet IRUs granted to IXC by IXC Carrier,
Inc., its direct parent company, and in a portion of certain other IRUs in IXC's
fiber optic telecommunications system to secure the performance of IXC's
obligations under the IRU Purchase Agreement to deliver the PSINet IRUs. IXC
will provide customary operation and maintenance services with respect to the
bandwidth delivered to PSINet at specified prices and terms, the total cost of
which to PSINet 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 PSINet at
agreed upon fees.
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Joint Marketing and Services Agreement. In connection with this
transaction, PSINet and IXC also entered into a Joint Marketing and Services
Agreement (the "Marketing Agreement") pursuant to which each party will be
entitled to market the products and services of the other under its own brand.
Pursuant to the Marketing Agreement, PSINet 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
PSINet of the PSINet IRUs and PSINet's other arrangements with IXC described
herein, PSINet has agreed will be, or will be equal to, the lowest offered by
PSINet.
Other Transactions. In addition to the transactions described above,
PSINet and IXC Communications or its affiliates are parties to transactions in
the ordinary course of business which PSINet believes are on terms no more
favorable than could be obtained on an arms' length basis with independent third
parties.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of PSINet's common
stock, as of November 15, 1998, by (1) each person who is known by PSINet to own
beneficially more than five percent of PSINet's Common Stock; (2) each director
of PSINet who owns shares of PSINet's common stock; (3) each of PSINet's present
senior executive officers named in the compensation table appearing in PSINet's
definitive Proxy Statement on Schedule 14A dated April 10, 1998, which is
incorporated by reference herein; and (4) all directors and executive officers
of PSINet as a group.
<TABLE>
<CAPTION>
Amount
Name of Beneficial Owner Beneficially Owned(1) Percent of Class
------------------------ --------------------- ----------------
<S> <C> <C>
IXC Internet Services, Inc................................ 10,229,789(2) 19.7%
William L. Schrader....................................... 5,737,477(3) 11.1
Harold S. Wills........................................... 317,028(4) *
David N. Kunkel........................................... 303,572(5) *
Edward D. Postal.......................................... 132,749(6) *
William H. Baumer......................................... 90,988(7) *
Ralph J. Swett............................................ 16,000(8) *
Ian P. Sharp.............................................. 6,250(9) *
Executive officers and directors as a group (31 persons).. 7,933,932(10) 15.3
</TABLE>
- ----------
* Less than 1%
(1) The persons named in the table have sole voting and dispositive power with
respect to all shares of PSINet's common stock shown as beneficially owned
by them, subject to the information contained in the notes to the table
and to community property laws, where applicable.
(2) These shares were issued to IXC in consideration for PSINet's acquisition
of the PSINet IRUs on February 25, 1998 upon the closing of the
transaction with IXC under the IRU Purchase Agreement (which number of
shares is equal to 19.99999% of the issued and outstanding shares of
common stock after giving effect to the issuance of such shares and to
224,274 shares of common stock issuable upon exercise of outstanding
warrants). These shares could be deemed to be beneficially owned by the
members of the Board of Directors of 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 Transactions--Strategic Alliance with
IXC."
(3) Includes (i) 427,000 shares issuable upon the exercise of vested options
and options which are deemed to be presently exercisable, (ii) 1,000
shares which are pledged with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") in respect of a non-recourse loan relating
to a margin brokerage account Mr. Schrader maintains with Merrill Lynch,
of which $22,541.95 (including principal and interest) was outstanding as
of November 15, 1998, at a standard margin interest rate currently equal
to approximately 10% per annum, and (iii) 3,140,020 shares which are
pledged with NationsBank in respect of two lines of credit providing Mr.
Schrader with up to $4,750,000 on an aggregate basis, of which
$4,334,774.55 (including principal and interest) was outstanding as of
November 15, 1998, at an interest rate equal to the 30 day LIBOR rate plus
1.75% per annum. Does not include 1,227,435 shares beneficially owned by
Mr. Schrader's wife. Mr. Schrader disclaims beneficial ownership of the
shares beneficially owned by his wife. Mr. Schrader's address is c/o
PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia, 20170.
(4) Includes 310,937 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
414,063 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(footnotes continue on next page)
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<PAGE>
(footnotes continued from previous page)
(5) Includes 301,043 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
250,150 shares issuable upon the exercise of options which are not deemed
to be presently exercisable or 30,571 shares beneficially owned by Mr.
Kunkel's wife. Mr. Kunkel disclaims beneficial ownership of the shares
beneficially owned by his wife.
(6) Includes 117,949 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
257,051 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(7) Includes (i) 50,000 shares issuable upon the exercise of outstanding
warrants and (ii) 1,000 shares issuable upon the exercise of vested
options and options which are deemed to be presently exercisable. Does not
include 6,000 shares issuable upon the exercise of options which are not
deemed to be presently exercisable.
(8) Includes 2,500 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include (i)
7,500 shares issuable upon the exercise of options which are not deemed to
be presently exercisable, (ii) 6,500 shares beneficially owned by Mr.
Swett's wife, and (iii) 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 (i) his
wife and (ii) IXC. See "Certain Transactions--Strategic Alliance With
IXC."
(9) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
8,750 shares issuable upon the exercise of options which are not deemed to
be presently exercisable.
(10) See notes (3) through (9) above. Includes also approximately 2,227,724
shares issuable upon the exercise of vested options and options which are
deemed to be presently exercisable granted to 31 executive officers and
directors. Does not include approximately 3,339,714 shares issuable upon
the exercise of outstanding options granted to 30 executive officers and
directors which are not deemed to be presently exercisable.
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<PAGE>
DESCRIPTION OF NOTES
The initial notes were issued and the exchange notes will be issued under
the Indenture dated as of November 3, 1998, as amended by the First Supplemental
Indenture, dated as of November 12, 1998 (the "Indenture"), between PSINet and
Wilmington Trust Company, as trustee (the "Trustee"). A copy of the Indenture
which will be made available to holders of the notes upon request to PSINet.
The following summaries of the material provisions of the notes, the
Indenture and the registration rights agreements do not purport to be complete.
Where reference is made to particular provisions of the Indenture and the
registration rights agreements, those provisions, including the definitions of
certain terms, are qualified in their entirety by reference to all of the
provisions of the Indenture and those terms made a part of the Indenture and the
registration rights agreements by the Trust Indenture Act of 1939. The initial
notes have not been registered under the Securities Act of 1933 and are subject
to certain transfer restrictions. For definitions of certain capitalized terms
used in the following summary, see "--Certain Definitions."
General
The notes:
o will mature on November 1, 2008;
o are limited to $350.0 million aggregate principal amount; and
o will bear interest at the rate set forth on the cover page of this
prospectus from November 3, 1998 or from the most recent interest
payment date to which interest has been paid, payable semiannually
on May 1 and November 1 in each year, commencing May 1, 1999, to the
Person in whose name the note is registered at the close of business
on the April 15 or October 15 immediately preceding such interest
payment date, with interest computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the notes will be payable,
and the notes will be exchangeable and transferable, at the office or agency of
PSINet in the City of New York maintained for such purposes, which initially
will be the corporate trust office of the Trustee; provided, however, that
payment of interest may be made at the option of PSINet by check mailed to the
Person entitled thereto as shown on the security register. The notes will be
issued only in fully registered form without coupons, in denominations of $1,000
and any integral multiple thereof. No service charge will be made for any
registration of transfer, exchange or redemption of notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
All payments of principal and interest will be made by PSINet in same day
funds. The notes will trade in the Same-Day Funds Settlement System of The
Depository Trust Company until maturity, and secondary market trading activity
for the notes will therefore settle in same day funds.
Optional Redemption
On or after November 1, 2003, the notes will be redeemable at the option
of PSINet, in whole at any time, or in part from time to time, on not less than
30 nor more than 60 days' prior notice in amounts of $1,000 or an integral
multiple thereof at the following redemption prices, expressed as percentages of
the principal amount, if redeemed during the 12-month period beginning on
November 1 of the years indicated below:
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Year Redemption Price
---- ----------------
2003........................................ 105.750%
2004........................................ 103.833%
2005........................................ 101.917%
2006 and thereafter......................... 100.000%
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the date of redemption, subject to the
rights of holders of record on relevant record dates to receive interest due on
an interest payment date.
In addition, on or prior to November 1, 2001, PSINet may, at its option,
use the Net Cash Proceeds of one or more Public Equity Offerings or the sale of
Capital Stock of PSINet, other than Disqualified Stock ,to a Strategic Investor
in a single transaction or a series of related transactions, to redeem up to an
aggregate of 35% of the aggregate principal amount of notes originally issued
under the Indenture at a redemption price equal to 111.5% of the aggregate
principal amount thereof, plus accrued and unpaid interest , if any, to the date
of redemption; provided that at least 65% of the original aggregate principal
amount of the notes remains outstanding immediately following such redemption.
In order to effect this redemption, PSINet must mail a notice of redemption no
later than 45 days after the related Public Equity Offering or sale to a
Strategic Investor and must consummate the redemption within 60 days of the
closing of the Public Equity Offering or sale to a Strategic Investor.
If less than all of the notes are to be redeemed, the Trustee shall select
the notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee deems fair and reasonable.
Sinking Fund
The notes will not be entitled to the benefit of any sinking fund.
Change of Control
If a Change of Control shall occur at any time, then each holder shall
have the right to require that PSINet purchase all such holder's notes in whole
or in part in integral multiples of $1,000, at a purchase price (the "Change of
Control Purchase Price") in cash, in an amount equal to 101% of the principal
amount of such notes or portion thereof, plus accrued and unpaid interest, if
any, to the date of purchase (the "Change of Control Purchase Date"), pursuant
to the offer described below (the "Change of Control Offer") and in accordance
with the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, PSINet shall notify the Trustee
of such Change of Control and give written notice of such Change of Control to
each holder of notes, by first-class mail, postage prepaid, at his or her
address appearing in the security register, stating that:
o a Change of Control has occurred and the date of such event, the
circumstances and relevant facts regarding such Change of Control;
o the purchase price and the purchase date, which shall be fixed by
PSINet on a business day no earlier than 30 days nor later than 60
days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Securities Exchange
Act of 1934;
o any note not tendered will continue to accrue interest;
o unless PSINet defaults in the payment of the Change of Control
Purchase Price, any notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the
Change of Control Purchase Date; and
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<PAGE>
o certain other procedures that a holder must follow to accept a
Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that
PSINet will have sufficient funds or financial resources necessary to pay the
Change of Control Purchase Price for all of the notes that might be delivered by
holders seeking to accept the Change of Control Offer. PSINet's credit facility
prohibits PSINet from repurchasing notes upon a Change of Control unless it has
paid all amounts outstanding under the credit facility prior thereto. See "Risk
Factors--We may not have the ability to raise funds necessary to finance the
change of control offer which may be required by the indenture." The failure of
PSINet to make or consummate the Change of Control Offer or pay the Change of
Control Purchase Price when due will give the Trustee and the note holders the
rights described under "Events of Default."
The term "all or substantially all" as used in the definition of "Change
of Control" has not been definitively interpreted under New York law, which is
the governing law of the Indenture, to represent a specific quantitative test.
As a consequence, in the event the holders elected to exercise their rights
under the Indenture and PSINet elected to contest such election, there could be
no assurance as to how a court interpreting New York law would interpret the
phrase.
The existence of a holder's right to require PSINet to repurchase such
holder's notes upon a Change of Control may deter a third party from acquiring
PSINet in a transaction which constitutes a Change of Control.
PSINet will comply with the applicable tender offer rules, including Rule
14e-1 under the Securities Exchange Act of 1934, and any other applicable
securities laws or regulations in connection with a Change of Control Offer.
Ranking
The notes:
o are senior unsecured obligations of PSINet;
o rank pari passu in right of payment with all other existing and
future unsecured and unsubordinated indebtedness of PSINet and
senior in right of payment to all existing and future Subordinated
Indebtedness of PSINet;
o are effectively subordinated to secured indebtedness of PSINet to
the extent of the value of the assets securing such indebtedness;
o are also effectively subordinated to the claims of creditors of
PSINet's subsidiaries and to the interests of holders of preferred
stock, if any, of such subsidiaries; and
o are not be entitled to any security and will not be entitled to the
benefit of any guarantees except under the limited circumstances
described under "--Certain Covenants--Limitation on Issuances of
Guarantees of Indebtedness."
As of September 30, 1998, on a pro forma basis after giving effect to the
initial notes offerings, and the application of the net proceeds therefrom, and
the acquisition of Tokyo Internet, there would have been approximately $231.5
million of total secured indebtedness outstanding to which holders of notes
would have been effectively subordinated in right of payment and approximately
$123.5 million of total liabilities of PSINet's subsidiaries, including trade
payables and accrued liabilities, to which noteholders would have been
structurally subordinated.
Certain Covenants
The Indenture contains, among others, the following covenants:
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Limitation on Indebtedness. (a) PSINet may not, and may not cause or
permit any Subsidiary to, directly or indirectly, Incur any Indebtedness, other
than the notes; provided, however, that PSINet may Incur Indebtedness, and
PSINet or any Subsidiary may Incur Acquired Indebtedness, if, at the time of
such Incurrence, the Debt to Annualized Operating Cash Flow Ratio would be less
than or equal to 6.0 to 1.0 prior to April 1, 2001, or less than or equal to 5.5
to 1.0 on or after April 1, 2001.
(b) The preceding limitations of paragraph (a) of this covenant will not
apply to any of the following, each of which shall be given independent effect:
(1) the Incurrence by PSINet or any of its Subsidiaries of
Indebtedness, other than Acquired Indebtedness, consisting of Capital
Lease Obligations, Purchase Money Obligations, installment sales, mortgage
financings or other obligations incurred for the purpose of financing all
or any part of the purchase price, cost of design, development,
acquisition, construction or improvement of real or personal property,
including, without limitation indefeasible rights of use or similar
rights, tangible or intangible, used or to be used in connection with the
Telecommunications Business or a credit facility or a master lease
arrangement entered into for the purpose of providing such financing,
provided that such Indebtedness, exclusive of the interest portion of such
Indebtedness and reasonable costs of financing, does not exceed the lesser
of Fair Market Value or the purchase price and related costs of design,
development, acquisition, construction or improvement of such assets or
property at the time of such Incurrence;
(2) the Incurrence by PSINet or any of its Subsidiaries of any
Indebtedness, and any refinancings (as defined) of such Indebtedness, so
long as the aggregate principal amount of such Indebtedness shall not
exceed $50 million at any one time outstanding;
(3) the Incurrence by PSINet of Indebtedness, other than Acquired
Indebtedness, in an aggregate principal amount not to exceed two (2) times
the sum of the Net Cash Proceeds received by PSINet after April 13, 1998,
other than from the issuance of Disqualified Stock in any case, in
connection with any Public Equity Offerings or sale of Capital Stock,
other than Disqualified Stock, to any Strategic Investor to the extent
that such Net Cash Proceeds have not been used pursuant to clause (b)(3)
or clause (c)(8) of "--Limitation on Restricted Payments" described below;
provided that such Indebtedness does not mature prior to the Stated
Maturity of the notes or has an Average Life to Stated Maturity at least
equal to the notes;
(4) the Incurrence by PSINet or any Subsidiary of any Indebtedness
entered into in the ordinary course of business (A) pursuant to Interest
Rate Agreements entered into to protect PSINet or any Subsidiary against
fluctuations in interest rates in respect of Indebtedness of PSINet or any
Subsidiary as long as the notional principal amount of such Interest Rate
Agreements does not exceed the aggregate principal amount of such
Indebtedness then outstanding, (B) under any Currency Hedging Arrangements
entered into to protect PSINet or any Subsidiary against fluctuations in
the value of any currency or (C) under any Commodity Price Protection
Agreements entered into to protect PSINet or any Subsidiary against
fluctuations in the price of any commodity;
(5) the Incurrence by PSINet or any of its Subsidiaries of
Indebtedness in respect of bid, performance or advance payment bonds,
standby letters of credit and appeal or surety bonds entered into in the
ordinary course of business and not in connection with the borrowing of
money;
(6) Indebtedness outstanding under the notes or the Indenture, or
Guarantees of the notes issued under the Indenture, other Indebtedness
existing on the date of the Indenture, other than Indebtedness described
in clause (8) below, or other Indebtedness represented by shares of
PSINet's Series B Preferred Stock issued on or after the date of the
Indenture as a dividend on shares of Series B Preferred Stock outstanding
on the date of the Indenture, or shares of Series B Preferred Stock issued
as a dividend in respect of any such shares of additional Series B
Preferred Stock so issued;
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<PAGE>
(7) the Incurrence of:
o Indebtedness of any Subsidiary owed to and held by PSINet or
another Subsidiary; and
o Indebtedness of PSINet owed to and held by any Subsidiary or
represented by a guarantee of Indebtedness of any Subsidiary
which Indebtedness such Subsidiary is otherwise permitted to
Incur under the Indenture;
provided that upon either (A) the transfer or other disposition by a
Subsidiary or PSINet of any Indebtedness so permitted to a Person other
than PSINet or a Subsidiary or (B) the issuance, sale, transfer or other
disposition of Capital Stock, including by amalgamation, consolidation or
merger, of a Subsidiary, such that upon such sale, transfer or other
disposition such Subsidiary would no longer meet the definition of a
Subsidiary, to a Person other than PSINet or a Subsidiary, the provisions
of this clause (7) shall no longer be applicable to such Indebtedness and
such Indebtedness shall be deemed to have been Incurred at the time of
such issue, sale, transfer or other disposition;
(8) Indebtedness incurred by PSINet or any Subsidiary under a
Permitted Credit Facility or Debt Securities, provided that the aggregate
principal amount at any time outstanding under this clause (8) does not
exceed $150 million; and
(9) any amendments, supplements, modifications, deferrals, renewals,
extensions, substitutions, refundings, refinancings or replacements
(collectively, a "refinancing") of any Indebtedness described in clauses
(1), (2), (3), (6), (7) and (8) above, and this clause (9), including any
successive refinancings so long as the borrower under such refinancing is
PSINet or, if not PSINet, the same as the borrower (or its successor) of
the Indebtedness being refinanced and the aggregate principal amount of
Indebtedness and accrued interest represented thereby, or the accreted
value thereof as of the date of refinancing, is not increased by such
refinancing, plus the lesser of (A) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (B) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of PSINet
or such borrower incurred in connection with such refinancing and, in the
case of any refinancing of Indebtedness that is Subordinated Indebtedness,
such new Indebtedness is made subordinated to the notes at least to the
same extent as the Indebtedness being refinanced and such refinancing does
not reduce the Average Life to Stated Maturity or the Stated Maturity of
such Subordinated Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness
under this covenant, Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of "--Limitations on
Issuances of Guarantees of Indebtedness."
(d) For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness may be Incurred through paragraph (a) of this
covenant or by meeting the criteria of one or more of the types of Indebtedness
described in paragraph (b) of this covenant (or the definitions of the terms
used therein), PSINet, in its sole discretion, may:
o classify such item of Indebtedness under and comply with
either of such paragraphs (or any of such definitions), as
applicable;
o classify and divide such item of Indebtedness into more than
one of such paragraphs (or definitions), as applicable; and
o elect to comply with such paragraphs (or definitions), as
applicable, in any order.
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Limitation on Restricted Payments. (a) PSINet will not, and will not
permit any Subsidiary to, directly or indirectly:
(1) declare or pay any dividend on, or make any distribution on any
shares of PSINet's Capital Stock, other than dividends or distributions
solely in shares of its Qualified Capital Stock or in options, warrants or
other rights to acquire shares of such Qualified Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, PSINet's Capital Stock or any Capital Stock of any
Affiliate of PSINet, other than Capital Stock of any Wholly Owned
Subsidiary of PSINet, or options, warrants or other rights to acquire such
Capital Stock;
(3) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(4) declare or pay any dividend or distribution on any Capital Stock
of any Subsidiary to any Person, other than (A) to PSINet or any of its
Wholly Owned Subsidiaries or (B) to all holders of any class, series or
the same type of Capital Stock of such Subsidiary on a pro rata basis;
provided that in the case of this clause (B), such dividend or
distribution shall not constitute Indebtedness or Disqualified Stock; or
(5) make any Investment in any Person, other than any Permitted
Investments
(any of the preceding actions described in clauses (1) through (5), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments"). The amount of any such Restricted Payment, if other than
cash, shall be as determined, in good faith, by the Board of Directors of
PSINet, whose determination shall be conclusive and evidenced by a board
resolution.
(b) The preceding limitations of paragraph (a) of this covenant will not
apply if:
(1) immediately before and immediately after giving effect to such
proposed Restricted Payment on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing;
(2) immediately before and immediately after giving effect to such
Restricted Payment on a pro forma basis, PSINet could incur $1.00 of
additional Indebtedness, other than Permitted Indebtedness, under
paragraph (a) of the provisions described under "--Limitation on
Indebtedness;" and
(3) after giving effect to the proposed Restricted Payment, the
aggregate amount of all such Restricted Payments declared or made after
April 13, 1998, does not exceed the sum of:
(A) the Cumulative Operating Cash Flow determined at the time
of such Restricted Payment, less 150% of cumulative Consolidated
Interest Expense determined for the period (treated as one
accounting period) commencing on April 13, 1998 and ending on the
last day of the most recent fiscal quarter immediately preceding the
date of such Restricted Payment for which consolidated financial
information of PSINet is required to be available; plus
(B) the aggregate Net Cash Proceeds received after April 13,
1998 by PSINet from the issuance or sale, other than to any of its
Subsidiaries, of Qualified Capital Stock of PSINet or any options,
warrants or rights to purchase such Qualified Capital Stock of
PSINet, except to the extent such proceeds are used to purchase,
redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth in clause (2) or (3) of paragraph (c)
below; plus
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(C) the aggregate Net Cash Proceeds received after April 13,
1998 by PSINet, other than from any of its Subsidiaries, upon the
exercise of any options, warrants or rights to purchase Qualified
Capital Stock of PSINet; plus
(D) the aggregate Net Cash Proceeds received after April 13,
1998 by PSINet from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of PSINet or its Subsidiaries
into or for Qualified Capital Stock of PSINet plus, to the extent
such debt securities or Redeemable Capital Stock were issued after
April 13, 1998, the aggregate of Net Cash Proceeds from their
original issuance; plus
(E) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment, an amount equal to the
lesser of (x) the cash return of capital with respect to such
Investment, less the cost of disposition and taxes, if any, and (y)
the initial amount of such Investment.
(c) Notwithstanding the foregoing, and in the case of clauses (2) through
(6) below, so long as there is no Default or Event of Default continuing, the
limitations of paragraph (a) of this covenant will not prohibit the following
actions (each of clauses (1) through (10) below being referred to as a
"Permitted Payment"):
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (b) of this covenant and such
payment shall have been deemed to have been paid on such date of
declaration;
(2) the repurchase, redemption, or other acquisition or retirement
for value of any shares of any class of Capital Stock of PSINet in
exchange for, including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in
lieu of the issuance of fractional shares or scrip, or out of the Net Cash
Proceeds of a substantially concurrent issuance and sale for cash, other
than to a Subsidiary, of other shares of Qualified Capital Stock of
PSINet; provided that the Net Cash Proceeds from the issuance of such
shares of Qualified Capital Stock are excluded from clause (3)(B) of
paragraph (b) of this covenant;
(3) the repurchase, redemption, defeasance, retirement or
acquisition for value or payment of principal of any Subordinated
Indebtedness or Redeemable Capital Stock in exchange for, or in an amount
not in excess of the Net Cash Proceeds of, a substantially concurrent
issuance and sale for cash, other than to any Subsidiary , of any
Qualified Capital Stock of PSINet, provided that the Net Cash Proceeds
from the issuance of such shares of Qualified Capital Stock are excluded
from clause (3)(B) of paragraph (b) of this covenant;
(4) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness, other than Redeemable Capital Stock, through the
substantially concurrent issuance of new Subordinated Indebtedness of
PSINet, provided that any such new Subordinated Indebtedness:
o shall be in a principal amount that does not exceed the
principal amount and accrued interest thereon so refinanced or
the accreted value thereof as of the date of refinancing, or,
if such Subordinated Indebtedness provides for an amount less
than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, then such lesser amount
as of the date of determination, plus the lesser of (A) the
stated amount of any premium or other payment required to be
paid in connection with such a refinancing pursuant to the
terms of the Indebtedness being refinanced or (B) the amount
of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount
of expenses of PSINet incurred in connection with such
refinancing,
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o has an Average Life to Stated Maturity greater than the
remaining Average Life to Stated Maturity of the notes,
o has a Stated Maturity for its final scheduled principal
payment later than the Stated Maturity for the final scheduled
principal payment of the notes, and
o is expressly subordinated in right of payment to the notes at
least to the same extent as the Subordinated Indebtedness to
be refinanced;
(5) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Redeemable Capital Stock through
the substantially concurrent issuance of new Redeemable Capital Stock of
PSINet, provided that any such new Redeemable Capital Stock:
o shall have an aggregate liquidation preference that does not
exceed the aggregate liquidation preference of the amount so
refinanced,
o has an Average Life to Stated Maturity greater than the
remaining Average Life to Stated Maturity of the notes, and
o has a Stated Maturity later than the Stated Maturity for the
final scheduled principal payment of the notes;
(6) the repurchase of shares of, or options to purchase shares of,
common stock of PSINet or any of its Subsidiaries from employees,
officers, consultants or directors or any former employees, officers,
consultants or directors of PSINet or any of its Subsidiaries, or
permitted transferees of such employees, officers, consultants or
directors or former employees, officers, consultants or directors,
pursuant to the terms of the agreements, including employment agreements,
or plans, or amendments thereto, or other arrangements or transactions
approved by the Board of Directors under which such individuals purchase
or sell or are granted the option to purchase or sell, shares of such
common stock; provided, however, that the aggregate amount of such
repurchases in any calendar year shall not exceed $1 million and $3
million in the aggregate pursuant to this clause (6);
(7) the (A) payment of dividends on PSINet's Series B Preferred
Stock in the form of cash or additional shares of Series B Preferred Stock
in an aggregate amount not to exceed $3 million in any calendar year,
provided that such amounts may, to the extent not previously paid, be
aggregated through the period prior to the conversion or redemption of
such Series B Preferred Stock, and (B) redemption of any shares of Series
B Preferred Stock outstanding on April 13, 1998, including any shares of
Series B Preferred Stock issued on or after April 13, 1998 as dividends
thereon or in respect of such additional shares so issued, pursuant to the
terms of such shares of Series B Preferred Stock as in effect on April 13,
1998 (or as such terms may be amended, from time to time, to the extent
that any such amendment has been determined by the Board of Directors, in
good faith, not to adversely affect the holders of the notes);
(8) Investments in any Person engaged principally in the
Telecommunications Business on the date of such Investments; provided that
the aggregate amount of any such Investments made pursuant to this clause
(8) does not exceed the sum of:
(A) the amount of the Net Cash Proceeds received by PSINet
after April 13, 1998 as a capital contribution or from the sale of
its Capital Stock, other than Disqualified Stock, to a Person who is
not a Subsidiary of PSINet, except to the extent that such Net Cash
Proceeds are used to Incur Indebtedness pursuant to clause (3) of
paragraph (b) under the covenant described above under "--Limitation
on Indebtedness" or to make Restricted Payments pursuant to clause
(3) of paragraph (b), or clauses (2), (3) or (4) of this paragraph
(c), of this "Limitation on Restricted Payments" covenant, plus
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(B) the net reduction in Investments made pursuant to this
clause (8) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such
Investments, except in each case to the extent any such payments or
proceeds are included in the calculation of Consolidated Net Income,
or from such Person becoming a Wholly Owned Subsidiary (valued in
each case as provided in the definition of "Permitted Investments");
(9) the payment or declaration of any dividend or the making of any
distribution on or the redemption of rights or any securities issued
pursuant to the Company Rights Agreement;
(10) the payment of cash in lieu of the issuance of fractional
shares pursuant to any agreement, warrant or option and any repurchase or
other acquisition of fractional shares from time to time; and
(11) the acquisition of Capital Stock of PSINet by PSINet in
connection with the cashless exercise of any options, warrants or similar
rights issued by PSINet on or prior to January 1, 1998.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (6), (7), (8), (9) and (10)
shall be included, without duplication, as Restricted Payments and shall not be
deemed a Permitted Payment for purposes of the calculation required by paragraph
(b) of this covenant.
Limitation on Transactions with Affiliates. PSINet will not, and will not
permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions, including, without limitation,
the sale, purchase, exchange or lease of assets, property or services, with or
for the benefit of any Affiliate of PSINet, other than PSINet or a Wholly Owned
Subsidiary, unless such transaction or series of related transactions is entered
into in good faith and in writing and:
(a) such transaction or series of related transactions is on terms that
are no less favorable to PSINet or such Subsidiary, as the case may be, than
those that would be reasonably expected to be available in a comparable
transaction in arm's-length dealings with an unrelated third party;
(b) with respect to any transaction or series of related transactions
involving aggregate value in excess of $5 million, PSINet delivers an officers'
certificate to the Trustee certifying that such transaction or series of related
transactions complies with clause (a) above; and
(c) with respect to any transaction or series of related transactions
involving aggregate value in excess of $10 million, either (A) such transaction
or series of related transactions has been approved by a majority of the
Disinterested Directors of PSINet, or in the event there is only one
Disinterested Director, by such Disinterested Director, or (B) PSINet delivers
to the Trustee a written opinion of an investment banking firm of national
standing or other recognized independent expert with experience appraising the
terms and conditions of the type of transaction or series of related
transactions for which an opinion is required stating that the transactions or
series of related transactions is fair to PSINet or such Subsidiary from a
financial point of view;
provided, however, that this covenant shall not apply to:
(1) compensation, severance and employee benefit arrangements with
any officer, director or employee of PSINet, including under any stock
option or stock incentive plans, in the ordinary course of business;
(2) any transaction solely between or among PSINet and/or any
Subsidiaries, if such transaction does not otherwise violate the terms of
the Indenture;
(3) any transaction otherwise permitted by the terms of the section
of the Indenture described under "--Limitations on Restricted Payments";
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(4) the execution and delivery of or payments made under any tax
sharing agreement between or among any of PSINet and any Subsidiary;
(5) licensing or sublicensing of use of any intellectual property by
PSINet or any Subsidiary to PSINet, any other Subsidiary of PSINet or to
any Permitted Joint Venture; provided that the licensor shall continue to
have access to such intellectual property to the extent necessary for the
conduct of its business and, in the case of any Permitted Joint Venture,
that the terms of any such arrangement are fair and reasonable to PSINet
or any such Subsidiary as determined in good faith by the Board of
Directors;
(6) arrangements between PSINet and any Subsidiary of PSINet for the
purpose of providing services or employees to PSINet or such Subsidiary;
and
(7) transactions undertaken pursuant to the IXC Agreement and other
agreements entered into in connection therewith and in effect on or after
April 13, 1998 (or as such other agreements may be amended, from time to
time, to the extent that any such amendment has been determined by the
Board of Directors, in good faith, not to adversely affect the holders of
notes).
Limitation on Liens. PSINet will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any
kind upon any property or assets, including any intercompany notes, of PSINet or
any Subsidiary owned on April 13, 1998 or acquired after April 13, 1998, or any
income or profits therefrom, unless the notes are directly secured equally and
ratably with (or, in the case of Subordinated Indebtedness, prior or senior
thereto, with the same relative priority as the notes shall have with respect to
such Subordinated Indebtedness) the obligation or liability secured by such Lien
except for any Permitted Liens.
Limitation on Sale of Assets. (a) PSINet will not, and will not permit any
of its Subsidiaries to, directly or indirectly, consummate an Asset Sale unless:
(1) at least 75% of the consideration from such Asset Sale is
received in cash or other comparable consideration (as described below);
and
(2) PSINet or such Subsidiary receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the shares or
assets subject to such Asset Sale, as determined by the Board of Directors
of PSINet and evidenced in a board resolution.
The following types of consideration shall be deemed "comparable
consideration" for the purposes of this covenant:
o Cash Equivalents,
o Liabilities, contingent or otherwise, of PSINet or a Subsidiary
assumed by the transferee (or its designee) such that PSINet or such
Subsidiary has no further liability therefor, and
o any securities, notes or other obligations received by PSINet or any
such Subsidiary from such transferee that, within 60 days after
receipt, are converted by PSINet or such Subsidiary into cash.
(b) PSINet or a Subsidiary may, within 365 days of the Asset Sale, invest
the Net Cash Proceeds thereof in Telecommunications Assets or to repay any Pari
Passu Indebtedness of PSINet or any Subsidiary, including the repurchase of
notes. The amount of such Net Cash Proceeds not used or invested within 365 days
of the Asset Sale as set forth in this paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million,
PSINet will apply the Excess Proceeds to the repayment of the notes and any
other Pari Passu Indebtedness outstanding with similar provisions
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requiring PSINet to make an offer to purchase such Indebtedness with the
proceeds from any Asset Sale as follows:
(A) PSINet will make an offer to purchase (an "Offer") from all
Holders in accordance with the procedures set forth in the Indenture in
the maximum principal amount (expressed as a multiple of $1,000) of notes
that may be purchased out of an amount (the "Note Amount") equal to the
product of such Excess Proceeds multiplied by a fraction, the numerator of
which is the outstanding principal amount of the notes, and the
denominator of which is the sum of the outstanding principal amount of the
notes and such Pari Passu Indebtedness, subject to proration in the event
such amount is less than the aggregate Offered Price (as defined herein)
of all notes tendered; and
(B) to the extent required by such Pari Passu Indebtedness to
permanently reduce the principal amount of such Pari Passu Indebtedness,
PSINet will make an offer to purchase or otherwise repurchase or redeem
Pari Passu Indebtedness (a "Pari Passu Offer") in an amount (the "Pari
Passu Debt Amount") equal to the excess of the Excess Proceeds over the
Note Amount; provided that in no event will PSINet be required to make a
Pari Passu Offer in a Pari Passu Debt Amount exceeding the principal
amount of such Pari Passu Indebtedness plus the amount of any premium
required to be paid to repurchase such Pari Passu Indebtedness.
The offer price for the notes will be payable in cash in an amount equal
to 100% of the principal amount of the notes plus accrued and unpaid interest,
to the date (the "Offer Date") such Offer is consummated (the "Offered Price"),
in accordance with the procedures set forth in the Indenture. To the extent that
the aggregate Offered Price of the notes tendered pursuant to the Offer is less
than the Note Amount relating thereto or the aggregate amount of Pari Passu
Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu
Debt Amount, PSINet will use any remaining Excess Proceeds for general corporate
purposes. If the aggregate principal amount of notes and Pari Passu Indebtedness
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the notes to be purchased on a pro rata basis. Upon the
completion of the purchase of all the notes tendered pursuant to an Offer and
the completion of a Pari Passu Offer, the amount of Excess Proceeds, if any,
shall be reset at zero.
(d) The Indenture provides that, if PSINet becomes obligated to make an
Offer pursuant to paragraph (c) above, the notes and the Pari Passu Indebtedness
shall be purchased by PSINet, at the option of the holders thereof, in whole or
in part in integral multiples of $1,000, on a date that is not earlier than 30
days and not later than 60 days from the date the notice of the Offer is given
to holders, or such later date as may be necessary for PSINet to comply with the
requirements under the Securities Exchange Act of 1934.
(e) The Indenture provides that PSINet will comply with the applicable
tender offer rules, including Rule 14e-1 under the Securities Exchange Act of
1934, and any other applicable securities laws or regulations in connection with
an Offer.
Limitation on Issuances of Guarantees of Indebtedness. (a) PSINet will not
permit any Subsidiary, directly or indirectly, to guarantee, assume or in any
other manner become liable with respect to any Pari Passu Indebtedness or
Subordinated Indebtedness of PSINet unless such Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for a
Guarantee of the notes on the same terms as the guarantee of such Indebtedness
except that:
(A) such guarantee need not be secured unless required pursuant to
"--Limitation on Liens", and
(B) if such Indebtedness is by its terms expressly subordinated to
the notes, any such assumption, guarantee or other liability of such
Subsidiary with respect to such Indebtedness shall be subordinated to such
Subsidiary's Guarantee of the notes at least to the same extent as such
Indebtedness is subordinated to the notes;
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provided that this paragraph shall not apply to any guarantee or assumption of
liability of Indebtedness permitted under the Indenture as described in clauses
(1), (2), (4), (5), (7) and (8) of paragraph (b) of "--Limitation on
Indebtedness."
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of the
notes shall provide by its terms that it, and all Liens securing the same, shall
be automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of PSINet, of all of
PSINet's Capital Stock in, or all or substantially all the assets of, such
Subsidiary, which transaction is in compliance with the terms of the Indenture
and such Subsidiary is released from its guarantees of other Indebtedness of
PSINet or any Subsidiaries.
Limitation on Sale and Leaseback Transactions. PSINet will not, and will
not permit any Subsidiary of PSINet to, directly or indirectly, enter into any
Sale-Leaseback Transaction with respect to any property or assets, whether now
owned or hereafter acquired, unless:
(a) the sale or transfer of such property or assets to be leased is
treated as an Asset Sale and complies with the "--Limitation on Sale of Assets"
covenant; and
(b) PSINet or such Subsidiary would be entitled under the "--Limitation on
Indebtedness" covenant to incur any Indebtedness, with the lease obligations
being treated as Indebtedness for purposes of ascertaining compliance with this
covenant unless such lease is properly classified as an operating lease under
GAAP, in respect of such sale and leaseback transaction.
The foregoing restriction does not apply to any Sale-Leaseback Transaction
if:
(1) the lease is for a period, including renewal rights, not in
excess of three years;
(2) the transaction is solely between PSINet and any Wholly Owned
Subsidiary or any Wholly Owned Subsidiary and any other Wholly Owned
Subsidiary; and
(3) the transaction is consummated within 180 days of the
acquisition by PSINet or its Subsidiary of the property or assets subject
to such sale-leaseback or entered into within 180 days after the purchase
or substantial completion of the construction of such property or assets
or 270 days in the event that the only condition delaying such
consummation is the receipt of applicable regulatory approvals.
Limitation on Issuance and Sale of Subsidiary Capital Stock. PSINet will
not permit:
(a) any Subsidiary of PSINet to issue any Capital Stock, except for:
(1) Capital Stock issued or sold to, held by or transferred to
PSINet or a Wholly Owned Subsidiary, or
(2) Capital Stock issued by a Person prior to the time (A) such
Person becomes a Subsidiary, (B) such Person merges with or into a
Subsidiary or (C) a Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such
Person in anticipation of the type of transaction contemplated by
subclause (A), (B) or (C), excluding for purposes of this proviso, shares
of Capital Stock issued in connection with customary accelerated vesting
provisions contained in option or similar plans or agreements which are
accelerated as a result of a change of control of such Person and which
option or similar plans or agreements were not adopted or implemented
solely in anticipation of or in connection with such transaction; or
(b) any Person, other than PSINet or a Wholly Owned Subsidiary, to acquire
Capital Stock of any Subsidiary from PSINet or any Subsidiary;
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except, in the case of each of clause (a) or (b):
o upon the acquisition of all the outstanding Capital Stock of
such Subsidiary in accordance with the terms of the Indenture,
o if, immediately after giving effect to such issuance or sale,
such Subsidiary would no longer constitute a Subsidiary, and
any Investment in such Person remaining after giving effect to
such issuance or sale would have been permitted to be made
under "--Limitations on Restricted Payments" if made on the
date of such issuance or sale,
o issuances of director's qualifying shares, or sales to foreign
nationals of shares of Capital Stock of foreign Subsidiaries,
to the extent required by applicable law or to maintain the
limited liability status of such foreign Subsidiaries, or
o issuances or sales of common stock of a Subsidiary,
provided that PSINet or such Subsidiary applies the Net Cash
Proceeds, if any, in a manner which does not violate the provisions of the
Indenture to the extent applicable, excluding for purposes of this proviso,
shares of Capital Stock issued in connection with customary accelerated vesting
provisions contained in option or similar plans or agreements which are
accelerated as a result of a change of control of such Person and which option
or similar plans or agreements were not adopted or implemented solely in
anticipation of or in connection with such transaction.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. PSINet will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Subsidiary to:
(a) pay dividends or make any other distribution on its Capital Stock;
(b) pay any Indebtedness owed to PSINet or any other Subsidiary;
(c) make any Investment in PSINet or any other Subsidiary; or
(d) transfer any of its properties or assets to PSINet or any other
Subsidiary, except for:
(1) any encumbrance or restriction, with respect to a
Subsidiary that was not a Subsidiary of PSINet on April 13, 1998, in
existence at the time such Person becomes a Subsidiary of PSINet and
not incurred in connection with, or in contemplation of, such Person
becoming a Subsidiary;
(2) encumbrances or restrictions (A) by reason of applicable
law, (B) under the Indenture, or (C) in any agreement, instrument or
indenture governing or relating to Indebtedness in respect of any
Permitted Credit Facility;
(3) customary non-assignment provisions of any contract or
lease of any Subsidiary entered into in the ordinary course of
business;
(4) encumbrances or restrictions imposed pursuant to
Indebtedness or contracts entered into in connection with Permitted
Liens, but solely to the extent such encumbrances or restrictions
affect only the property or assets subject to such Permitted Lien;
(5) any encumbrance or restriction imposed pursuant to
contracts for the sale of assets with respect to the assets to be
sold pursuant to such contract; and
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(6) any encumbrance or restriction existing under any
agreement that extends, renews, refunds, refinances or replaces the
agreements containing the encumbrances or restrictions in the
foregoing clauses (1) through (5), or in this clause (6), provided
that the terms and conditions of any such encumbrances or
restrictions are no more restrictive in any material respect than
those under or pursuant to the agreement evidencing the Indebtedness
so extended, renewed, refinanced or replaced.
Limitations on Unrestricted Subsidiaries. PSINet will not make, and will
not permit its Subsidiaries to make, any Investment in Unrestricted Subsidiaries
if, at the time thereof, the aggregate amount of such Investments would exceed
the amount of Restricted Payments then permitted to be made pursuant to the
"--Limitation on Restricted Payments" covenant. Any Investments in Unrestricted
Subsidiaries permitted to be made pursuant to this covenant will be treated as a
Restricted Payment in calculating the amount of Restricted Payments made by
PSINet.
Provision of Financial Statements. After the earlier to occur of the
consummation of the exchange offer and the 150th calendar day following the date
of original issue of the notes, whether or not PSINet is subject to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, PSINet will, to the
extent permitted under the Securities and Exchange Act of 1934, file with the
Securities and Exchange Commission the annual reports, quarterly reports and
other documents which PSINet would have been required to file with the
Securities and Exchange Commission pursuant to Sections 13(a) or 15(d) if PSINet
were so subject, such documents to be filed with the Securities and Exchange
Commission on or prior to the date (the "Required Filing Date") by which PSINet
would have been required so to file such documents if PSINet were so subject.
PSINet will also in any event:
(1) within 15 days of each Required Filing Date (A) transmit
by mail to all holders, as their names and addresses appear in the
security register, without cost to such holders and (B) file with
the Trustee copies of the annual reports, quarterly reports and
other documents which PSINet would have been required to file with
the Securities and Exchange Commission pursuant to Sections 13(a) or
15(d) of the Securities Exchange Act of 1934 if PSINet were subject
to either of such Sections; and
(2) if filing such documents by PSINet with the Securities and
Exchange Commission is not permitted under the Securities Exchange
Act of 1934, promptly upon written request and payment of the
reasonable cost of duplication and delivery, supply copies of such
documents to any prospective holder at PSINet's cost. If any
Guarantor's financial statements would be required to be included in
the financial statements filed or delivered pursuant to the
Indenture if PSINet were subject to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, PSINet shall include such
Guarantor's financial statements in any filing or delivery pursuant
to the Indenture. The Indenture also provides that, so long as any
of the notes remain outstanding, PSINet will make available to any
prospective purchaser of notes or beneficial owner of notes in
connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act of 1933, until the earlier of
such time as PSINet has completed its offer to exchange the notes
for securities identical in all material respects which have been
registered under the Securities Act or such time as the holders
thereof have disposed of such notes pursuant to an effective
registration statement under the Securities Act of 1933.
Limitation on Business. PSINet will not, and will not permit any of the
Subsidiaries to, engage in a business which is not substantially a
Telecommunications Business.
Consolidation, Merger or Sale of Assets
PSINet will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets to any Person or group of affiliated Persons, or
permit any of its Subsidiaries to enter into any such transaction or series of
related transactions if such transaction or series of related transactions, in
the aggregate, would result in a sale, assignment, conveyance, transfer, lease
or disposition of all or
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substantially all of the properties and assets of PSINet and its Subsidiaries on
a Consolidated basis to any other Person or group of affiliated Persons, unless
at the time and after giving effect thereto:
(1) either (a) PSINet will be the continuing corporation in
the case of a consolidation or merger involving PSINet or (b) the
Person, if other than PSINet, formed by such consolidation or into
which PSINet is merged or the Person which acquires by sale,
assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of PSINet and its
Subsidiaries on a Consolidated basis (the "Surviving Entity") will
be a corporation duly organized and validly existing under the laws
of the United States of America, any state thereof or the District
of Columbia and such Person expressly assumes, by a supplemental
indenture, in a form reasonably satisfactory to the Trustee, all the
obligations of PSINet under the notes, the Indenture and the
registration rights agreement, as the case may be, and the notes,
the Indenture and the registration rights agreement will remain in
full force and effect as so supplemented;
(2) immediately after giving effect to such transaction on a
pro forma basis, and treating any Indebtedness not previously an
obligation of PSINet or any of its Subsidiaries which becomes the
obligation of PSINet or any of its Subsidiaries as a result of such
transaction as having been incurred at the time of such transaction,
no Default or Event of Default will have occurred and be continuing;
(3) immediately after giving effect to such transaction on a
pro forma basis, PSINet (or the Surviving Entity if PSINet is not
the continuing obligor under the Indenture) could incur $1.00 of
additional Indebtedness, other than Permitted Indebtedness, under
paragraph (a) of the provisions of "--Certain Covenants--Limitation
on Indebtedness;"
(4) at the time of the transaction, each Guarantor, if any,
unless it is the other party to the transactions described above,
will have by supplemental indenture confirmed that its Guarantee
shall apply to such Person's obligations under the Indenture and the
notes; and
(5) at the time of the transaction PSINet or the Surviving
Entity will have delivered, or caused to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the
Trustee, an officers' certificate and an opinion of counsel, each to
the effect that such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other transaction and the
supplemental indenture in respect thereof comply with the Indenture.
Notwithstanding the foregoing, PSINet may merge or consolidate (A) with
any Wholly Owned Subsidiaries and (B) into any Person in a transaction designed
solely for the purpose of effecting a change in the jurisdiction of
incorporation of PSINet within the United States of America.
In the event of any transaction, other than a lease, described in and
complying with the conditions listed in the immediately preceding paragraph in
which PSINet is not the Surviving Person, such Surviving Person shall succeed
to, and be substituted for, and exercise every right and power of, PSINet, and
PSINet shall be discharged from all obligations and covenants under the
indenture, the notes and the registration rights agreements.
Events of Default
An Event of Default will occur under the Indenture if:
(1) there shall be a default in the payment of any interest on
any Note when it becomes due and payable, and such default shall
continue for a period of 30 days;
(2) there shall be a default in the payment of the principal
of or premium, if any, on any Note at its Maturity, upon
acceleration, optional or mandatory redemption, required repurchase
or otherwise;
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(3) (a) there shall be a default in the performance, or
breach, of any covenant or agreement of PSINet or any Guarantor
under the Indenture, the registration rights agreements or any
Guarantee, other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in clause
(1), (2) or in clause (b), (c) or (d) of this clause (3), and such
default or breach shall continue for a period of 30 days after
written notice has been given, by certified mail, (A) to PSINet by
the Trustee or (B) to PSINet and the Trustee by the holders of at
least 25% in aggregate principal amount of the outstanding notes;
(b) there shall be a default in the performance or breach of
the provisions described in "--Consolidation, Merger or Sale of
Assets";
(c) PSINet shall have failed to make or consummate an Offer in
accordance with the provision described in "--Certain
Covenants--Limitation on Sale of Assets"; or
(d) PSINet shall have failed to make or consummate a Change of
Control Offer in accordance with the provisions of "--Change of
Control";
(4) (a) any default by PSINet or any Subsidiary in the payment
of the principal, premium, if any, or interest has occurred with
respect to amounts in excess of $10 million under any agreement,
indenture or instrument evidencing Indebtedness when the same shall
become due and payable in full and such default shall have continued
after any applicable grace period and shall not have been cured or
waived and, if not already matured at its final maturity in
accordance with its terms, the holder of such Indebtedness shall
have the right to accelerate such Indebtedness; or
(b) any event of default as defined in any agreement,
indenture or instrument of PSINet evidencing Indebtedness in excess
of $10 million shall have occurred and the Indebtedness thereunder,
if not already matured at its final maturity in accordance with its
terms, shall have been accelerated;
(5) any Guarantee shall for any reason cease to be, or shall
for any reason be asserted in writing by any Guarantor or PSINet not
to be, in full force and effect and enforceable in accordance with
its terms, except to the extent contemplated by the Indenture and
any such Guarantee;
(6) one or more judgments or orders for the payment of money
in excess of $10 million, either individually or in the aggregate,
shall be rendered against PSINet and not paid unless covered by
financially sound third-party insurers, or any Subsidiary or any of
their respective properties and is not discharged and for which
there shall have been a period of 60 consecutive days during which a
stay of enforcement of such judgment or order, by reason of an
appeal or otherwise, shall not be in effect;
(7) any holder or holders of at least $10 million in aggregate
principal amount of Indebtedness of PSINet or any Subsidiary after a
default under such Indebtedness shall notify the Trustee of its
commencement of proceedings to foreclose on any assets of PSINet or
any Subsidiary that have been pledged to or for the benefit of such
holder or holders to secure such Indebtedness or shall commence
proceedings, or take any action, including by way of set-off, to
retain in satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of Indebtedness, assets of
PSINet or any Subsidiary, including funds on deposit or held
pursuant to lock-box and other similar arrangements;
(8) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of
PSINet or any Significant Subsidiary in an involuntary case or
proceeding under any applicable Bankruptcy Law or (b) a decree or
order adjudging PSINet or any Significant Subsidiary bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment or
composition of or in respect of PSINet or any Significant Subsidiary
under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of PSINet or any Significant Subsidiary or of
any substantial part of their respective properties, or ordering the
winding up or liquidation of their respective affairs, and any such
decree or order for relief shall continue to be in
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effect, or any such other decree or order shall be unstayed and in
effect, for a period of 60 consecutive days; or
(9) (a) PSINet or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or
any other case or proceeding to be adjudicated bankrupt or
insolvent,
(b) PSINet or any Significant Subsidiary consents to the
entry of a decree or order for relief in respect of PSINet or such
Significant Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law or to the commencement of any
bankruptcy or insolvency case or proceeding against it,
(c) PSINet or any Significant Subsidiary files a
petition or answer or consent seeking reorganization or relief under
any applicable federal or state law,
(d) PSINet or any Significant Subsidiary (A) consents to
the filing of such petition or the appointment of, or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of PSINet or such Significant
Subsidiary or of any substantial part of PSINet's Consolidated
properties, (B) makes an assignment for the benefit of creditors or
(C) admits in writing its inability to pay its debts generally as
they become due, or
(e) PSINet or any Significant Subsidiary takes any
corporate action in furtherance of any such actions in this
paragraph (9).
If an Event of Default, other than as specified in clauses (8) and (9) of
the prior paragraph with respect to PSINet, shall occur and be continuing with
respect to the Indenture, the Trustee or the holders of not less than 25% in
aggregate principal amount of the notes then outstanding may, and the Trustee at
the request of such holders shall, declare all unpaid principal of, premium, if
any, and accrued interest on all notes to be due and payable, by a notice in
writing to PSINet and to the Trustee if given by the holders, and upon any such
declaration, such principal, premium, if any, and interest shall become due and
payable immediately. If an Event of Default specified in clause (8) or (9) of
the prior paragraph occurs with respect to PSINet and is continuing, then all
the notes shall ipso facto become and be due and payable immediately in an
amount equal to the principal amount of the notes, together with accrued and
unpaid interest, to the date the notes become due and payable, without any
declaration or other act on the part of the Trustee or any holder. Thereupon,
the Trustee may, at its discretion, proceed to protect and enforce the rights of
the holders by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of notes outstanding by written notice to
PSINet and the Trustee, may rescind and annul such declaration and its
consequences if:
(a) PSINet has paid or deposited with the Trustee a sum sufficient to pay;
o all sums paid or advanced by the Trustee under the Indenture
and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel,
o all overdue interest on all notes then outstanding,
o the principal of and premium, if any, on any notes then
outstanding which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the notes, and
o to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the notes;
and
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(b) all Events of Default, other than the non-payment of principal of the
notes which have become due solely by such declaration of acceleration, have
been cured or waived as provided in the Indenture. No such rescission shall
affect any subsequent default or impair any right consequent thereon.
The holders of not less than a majority in aggregate principal amount of
the notes outstanding may on behalf of the holders of all outstanding notes
waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of, premium, if any, or interest on any
note or in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each note affected
by such modification or amendment.
PSINet is also required to notify the Trustee within 30 days of the
occurrence of any Default unless such Default shall have been cured. PSINet is
required to deliver to the Trustee, on or before a date not more than 60 days
after the end of each fiscal quarter and not more than 120 days after the end of
each fiscal year, a written statement as to compliance with the Indenture,
including whether or not any Default has occurred that is not cured.
The Trust Indenture Act of 1939 contains limitations on the rights of the
Trustee, should it become a creditor of PSINet or any Guarantor, if any, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Trustee is permitted to engage in other transactions, provided that if it
acquires any conflicting interest it must eliminate such conflict upon the
occurrence of an Event of Default or resign.
Defeasance or Covenant Defeasance of Indenture
PSINet may, at its option and at any time, elect to have the obligations
of PSINet, any Guarantor and any other obligor upon the notes discharged with
respect to the outstanding notes ("defeasance"). Such defeasance means that
PSINet, any such Guarantor and any other obligor under the Indenture shall be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding notes, except for:
(1) the rights of holders of such outstanding notes to receive
payments in respect of the principal of, premium, if any, and interest on
such notes when such payments are due,
(2) PSINet's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes, and the maintenance of an office or agency for payment
and money for security payments held in trust,
(3) the rights, powers, trusts, duties and immunities of the
Trustee, and
(4) the defeasance provisions of the Indenture. In addition, PSINet
may, at its option and at any time, elect to have the obligations of
PSINet and any Guarantor released with respect to certain covenants that
are described in the Indenture ("covenant defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
an Event of Default with respect to the notes. In the event covenant
defeasance occurs, certain events, not including non-payment, bankruptcy
and insolvency events, described under "Events of Default" will no longer
constitute an Event of Default with respect to the notes.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect,
except as to surviving rights of registration of transfer or exchange of the
notes as expressly provided for in the Indenture, as to all outstanding notes
under the Indenture when:
(a) either (1) all such notes theretofore authenticated and delivered,
except lost, stolen or destroyed notes which have been replaced or paid or notes
whose payment has been deposited in trust or segregated and held in trust by
PSINet and thereafter repaid to PSINet or discharged from such trust as provided
for in the
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Indenture, have been delivered to the Trustee for cancellation or (2) all notes
not theretofore delivered to the Trustee for cancellation:
o have become due and payable,
o will become due and payable at their Stated Maturity within
one year, or
o are to be called for redemption within one year under
arrangements reasonably satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in the name, and
at the expense, of PSINet;
and PSINet or any Guarantor has irrevocably deposited or caused to be deposited
with the Trustee as trust funds in trust an amount in United States dollars
sufficient to pay and discharge the entire indebtedness on the notes not
previously delivered to the Trustee for cancellation, including principal of,
premium, if any, and accrued interest at such Maturity, Stated Maturity or
redemption date;
(b) PSINet or any Guarantor has paid or caused to be paid all other sums
payable under the Indenture by PSINet and any Guarantor; and
(c) PSINet has delivered to the Trustee an officers' certificate and an
opinion of independent counsel each stating that (1) all conditions precedent
under the Indenture relating to the satisfaction and discharge of such Indenture
have been complied with and (2) such satisfaction and discharge will not result
in a breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which PSINet, any Guarantor or any
Subsidiary is a party or by which PSINet, any Guarantor or any Subsidiary is
bound.
Modifications and Amendments
Modifications and amendments of the Indenture may be made by PSINet, each
Guarantor, if any, and the Trustee with the consent of the holders of at least a
majority in aggregate principal amount of the notes then outstanding; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding note affected thereby:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, or change to an earlier date any redemption
date of, or waive a default in the payment of the principal, or interest
on, any such note or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or
change the coin or currency in which the principal of any such note or any
premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated
Maturity thereof or, in the case of redemption, on or after the redemption
date;
(2) amend, change or modify the obligation of PSINet to make and
consummate an Offer to such holder with respect to any Asset Sale or Asset
Sales in accordance with "--Certain Covenants--Limitation on Sale of
Assets" or the obligation of PSINet to make and consummate a Change of
Control Offer in the event of a Change of Control in accordance with
"--Change of Control," including, in each case, amending, changing or
modifying any definitions relating thereto;
(3) reduce the percentage in principal amount of such outstanding
notes, the consent of whose Holders is required for any such supplemental
indenture, or the consent of whose holders is required for any waiver or
compliance with certain provisions of the Indenture;
(4) modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to
increase the percentage of such outstanding notes required for such
actions or to provide that certain
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other provisions of the Indenture cannot be modified or waived without the
consent of the holder of each such Note affected thereby;
(5) except as otherwise permitted under "--Consolidation, Merger or
Sale of Assets," consent to the assignment or transfer by PSINet or any
Guarantor of any of its rights and obligations under the Indenture; or
(6) amend or modify any of the provisions of the Indenture in any
manner which subordinates the notes issued thereunder in right of payment
to any other Indebtedness of PSINet or which subordinates any Guarantee in
right of payment to any other Indebtedness of the Guarantor issuing any
such Guarantee.
Notwithstanding the foregoing, without the consent of any holders of the
notes, PSINet, any Guarantor and the Trustee may modify or amend the Indenture
or any Guarantee:
(a) to evidence the succession of another Person to PSINet or a Guarantor,
and the assumption by any such successor of the covenants of PSINet or such
Guarantor in the Indenture, the notes, the Registration Rights Agreement and in
any Guarantee in accordance with "--Consolidation, Merger or Sale of Assets";
(b) to add to the covenants of PSINet, any Guarantor or any other obligor
upon the notes for the benefit of the holders or to surrender any right or power
conferred upon PSINet or any Guarantor or any other obligor upon the notes, as
applicable, in the Indenture, in the notes or in any Guarantee;
(c) to cure any ambiguity, or to correct or supplement any provision in
the Indenture, the notes or any Guarantee which may be defective or inconsistent
with any other provision in the Indenture, the notes or any Guarantee or make
any other provisions with respect to matters or questions arising under the
Indenture, the notes or any Guarantee; provided that, in each case, such
provisions shall not adversely affect the interest of the holders of the notes;
(d) to comply with the requirements of the Securities and Exchange
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act of 1939;
(e) to add a Guarantor under the Indenture;
(f) to evidence and provide the acceptance of the appointment of a
successor Trustee under the Indenture; or
(g) to mortgage, pledge, hypothecate or grant a security interest in favor
of the Trustee for the benefit of the holders as additional security for the
payment and performance of PSINet's and any Guarantor's obligations under the
Indenture, in any property, or assets, including any of which are required to be
mortgaged, pledged or hypothecated, or in which a security interest is required
to be granted to the Trustee pursuant to the Indenture or otherwise.
The holders of a majority in aggregate principal amount of the notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Governing Law
The Indenture, the notes and any Guarantee will be governed by, and
construed in accordance with, the internal laws of the State of New York,
without giving effect to the conflicts of law principles thereof.
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Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of PSINet, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
as Trustee with such conflict or resign as Trustee.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs, which has not been cured, the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any holder of notes unless such holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
Certain Definitions
"Acquired Indebtedness" means Indebtedness of a Person:
(1) existing at the time such Person becomes a Subsidiary; or
(2) assumed in connection with the acquisition of assets from, or
merger or consolidation with or into, such Person, in each case, other
than Indebtedness incurred in connection with, or in contemplation of,
such Person becoming a Subsidiary or such acquisition, as the case may be;
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of, or substantially contemporaneously with, the
consummation of the transactions by which such Person becomes a Subsidiary or
such asset acquisition shall not constitute Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means:
(1) any capital contribution by means of transfers of cash or other
property to others or payments for property or services for the account or
use of others, or otherwise, by PSINet or any Subsidiary to any other
Person, or any acquisition or purchase of Capital Stock of any other
Person by PSINet or any Subsidiary, in either case pursuant to which such
Person shall become a Subsidiary or shall be consolidated, merged with or
into PSINet or any Subsidiary; or
(2) any acquisition by PSINet or any Subsidiary of the assets of any
Person which constitute substantially all of an operating unit or line of
business of such Person or which is otherwise outside of the ordinary
course of business of PSINet or such Subsidiary.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition, including, without limitation, by way of merger,
consolidation or sale and leaseback transaction (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of:
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(1) any Capital Stock of any Subsidiary;
(2) all or substantially all of the properties and assets of any
division or line of business of PSINet or its Subsidiaries; or
(3) any other properties or assets of PSINet or any Subsidiary other
than in the ordinary course of business. For the purposes of this
definition, the term "Asset Sale" shall not include any transfer of
properties and assets:
(A) that is governed by the provisions described under
"--Consolidation, Merger or Sale of Assets,"
(B) that is by PSINet to any Wholly Owned Subsidiary or by any
Wholly Owned Subsidiary to PSINet or any other Wholly Owned
Subsidiary in a manner which does not violate the terms of the
Indenture,
(C) that is of obsolete equipment in the ordinary course of
business,
(D) the Fair Market Value of which in the aggregate does not
exceed $5 million in any transaction or series of related
transactions,
(E) that is made in accordance with the provisions described
under "--Certain Covenants--Limitations on Restricted Payments,
(F) which constitutes the granting of any Permitted Lien, and
(G) that is transferred in exchange for Telecommunications
Assets; provided, that if the Fair Market Value of the assets to be
transferred by PSINet or such Subsidiary under this clause (G), plus
the Fair Market Value of any other consideration paid or credited by
PSINet or such Subsidiary exceeds $10 million, such transaction
shall require approval of the Board of Directors of PSINet.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of (a) the number of years from the date
of determination to the date or dates of each successive scheduled
principal payment of such Indebtedness multiplied by (b) the amount of
each such principal payment by
(2) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions or trust companies in The City
of New York or the city in which the Corporate Trust Office of the Trustee is
located are authorized or obligated by law, regulation or executive order to be
closed.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" (1) with respect to any Person that is a corporation, any
and all shares, interests, participations or other equivalents, however
designated and whether or not voting, of corporate stock, including
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each class of common stock and preferred stock of such Person and (2) with
respect to any Person that is not a corporation, any and all partnership,
membership or other equity interests of such Person.
"Cash Equivalents" means:
(1) any evidence of Indebtedness, maturing not more than one year
after the date of acquisition, issued by the United States of America, or
an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America;
(2) any certificate of deposit, maturing not more than one year
after the date of acquisition, issued by, or time deposit of, a commercial
banking institution that is a member of the Federal Reserve System and
that has combined capital and surplus and undivided profits of not less
than $500 million, whose short term debt has a rating, at the time as of
which any investment therein is made, of "P-1" or higher according to
Moody's Investors Service, Inc. ("Moody's") or any successor rating agency
or "A-1" or higher according to Standard & Poor's Corporation ("S&P") or
any successor rating agency;
(3) commercial paper, maturing not more than 270 days after the date
of acquisition, issued by a corporation (other than an Affiliate or
Subsidiary of PSINet) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment
therein is made, of "P-1" or higher according to Moody's or "A-1" or
higher according to S&P; and
(4) any money market deposit accounts issued or offered by a
domestic commercial bank having capital and surplus in excess of $500
million; provided that the short term debt of such commercial bank has a
rating, at the time of Investment, of "P-1" or higher according to Moody's
or "A-1" or higher according to S&P.
"Change of Control" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
Person shall be deemed to have beneficial ownership of all shares that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 50% of the total outstanding Voting Stock of PSINet, other than
IXC, IXC Communications, Inc. or any controlled affiliate thereof, in any
case pursuant to the issuance by PSINet of shares of Capital Stock in
satisfaction of any obligations under the terms of the IXC Agreement;
(2) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of PSINet,
together with any new directors whose election to such board or whose
nomination for election by the stockholders of PSINet was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to
constitute a majority of such Board of Directors then in office;
(3) PSINet consolidates with or merges with or into any Person or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates with or merges into or with PSINet
in any such event pursuant to a transaction in which the outstanding
Voting Stock of PSINet is changed into or exchanged for cash, securities
or other property, other than any such transaction where the outstanding
Voting Stock of PSINet is not changed or exchanged at all, except to the
extent necessary to reflect a change in the jurisdiction of incorporation
of PSINet or where no "person" or "group" owns, immediately after such
transaction, directly or indirectly, more than 50% of the total
outstanding Voting Stock of the surviving corporation; or
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(4) PSINet is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which complies with
the provisions described under "--Consolidation, Merger or Sale of
Assets." The good faith determination of the Board, based upon the advice
of outside counsel, of the beneficial ownership of securities of PSINet
within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall
be conclusive, absent contrary controlling judicial precedent or contrary
written interpretation published by the Commission.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations in
commodity prices.
"Company Rights Agreement" means the Rights Agreement, dated as of May 8,
1996, between PSINet and First Chicago Trust Company of New York, as in effect
on the date of the Indenture (or as amended, from time to time, to the extent
that such amendment has been determined by the Board of Directors, in good
faith, not to adversely affect the holders of the notes).
"Consolidated" means consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person and
its Consolidated subsidiaries for such period as determined in accordance with
GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of:
(a) the interest expense of such Person and its subsidiaries for such
period, on a Consolidated basis in accordance with GAAP, including, without
limitation:
(1) amortization of debt discount,
(2) the net costs associated with Interest Rate Agreements, Currency
Hedging Agreements and Commodity Price Protection Agreements, including
amortization of discounts,
(3) the interest portion of any deferred payment obligation, and
(4) accrued interest; plus
(b) (1) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (2) all capitalized interest of such Person
and its subsidiaries; plus
(c) the interest expense actually paid by such Person under any Guaranteed
Debt of such Person and any subsidiary to the extent not included under clause
(a)(4) above; plus
(d) the aggregate amount for such period of cash or non-cash dividends on
any Redeemable Capital Stock or Preferred Stock of PSINet and its Subsidiaries,
in each case as determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net
income of PSINet and any Subsidiary for such period determined on a consolidated
basis in accordance with GAAP, adjusted, to the extent included in calculating
such net income, by excluding, without duplication:
(a) all extraordinary gains or losses for such period;
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(b) all gains or losses from the sales or other dispositions of assets out
of the ordinary course of business (net of taxes, fees and expenses relating to
the transaction giving rise thereto) for such period;
(c) that portion of such net income derived from or in respect of
investments in Persons other than Subsidiaries, except to the extent actually
received in cash by PSINet or any Subsidiary, subject, in the case of any
Subsidiary, to the provisions of clause (f) of this definition;
(d) the portion of such net income (or loss) allocable to minority
interests in any Person, other than a Subsidiary, for such period, except to the
extent PSINet's allocation portion of such Person's net income for such period
is actually received in cash by PSINet or any Subsidiary, subject, in the case
of any Subsidiary, to the provisions of clause (f) of this definition;
(e) the net income (or loss) of any other Person combined with PSINet or
any Subsidiary on a "pooling of interests" basis attributable to any period
prior to the date of combination; and
(f) the net income of any Subsidiary to the extent that the declaration of
dividends or similar distributions by that Subsidiary of that income is not at
the time (regardless of any waiver) permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Subsidiary or its Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to the
extent deducted in calculating such Consolidated Net Income, by:
(a) Consolidated Income Tax Expense for such period;
(b) Consolidated Interest Expense for such period; and (c) depreciation,
amortization and any other non-cash items for such period, other than any
non-cash item which requires the accrual of, or a reserve for, cash charges for
any future period, of PSINet and any Subsidiary, including, without limitation,
amortization of capitalized debt issuance costs for such period, all of the
foregoing determined on a consolidated basis in accordance with GAAP minus
non-cash items to the extent they increase Consolidated Net Income, including
the partial or entire reversal of reserves taken in prior periods, for such
period.
"Cumulative Operating Cash Flow" means, as at any date of determination,
the positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on April 13, 1998 and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for which
consolidated financial information of PSINet is available or, if such cumulative
Consolidated Operating Cash Flow for such period is negative, the negative
amount by which cumulative Consolidated Operating Cash Flow is less than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar agreements
or arrangements designed to protect against the fluctuations in currency values.
"Debt Securities" means any debt securities issued by PSINet in a public
offering or private placement.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) four times the Consolidated Operating Cash Flow for
the latest fiscal quarter for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date:
(1) any Person that is a Subsidiary on the Determination Date, or
would become a Subsidiary on such Determination Date in connection with
the transaction that requires the determination of such
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Consolidated Operating Cash Flow, will be deemed to have been a Subsidiary
at all times during such Measurement Period,
(2) any Person that is not a Subsidiary on such Determination Date,
or would cease to be a Subsidiary on such Determination Date in connection
with the transaction that requires the determination of such Consolidated
Operating Cash Flow, will be deemed not to have been a Subsidiary at any
time during such Measurement Period, and
(3) if PSINet or any Subsidiary shall have in any manner (A)
acquired through an Acquisition or the commencement of activities
constituting such operating business, or (B) disposed of by an Asset Sale
or the termination or discontinuance of activities constituting such
operating business any operating business during such Measurement Period
or after the end of such period and on or prior to such Determination
Date, such calculation will be made on a pro forma basis in accordance
with GAAP as if, in the case of an Acquisition or the commencement of
activities constituting such operating business, all such transactions had
been consummated prior to the first day of such Measurement Period (it
being understood that in calculating Consolidated Operating Cash Flow, the
exclusions set forth in clauses (a) through (f) of the definition of
Consolidated Net Income shall apply to an Acquired Person as if it were a
Subsidiary).
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Board of Directors of PSINet who does
not have any material direct or indirect financial interest in or with respect
to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms or by the terms of any security into which it is convertible
or for which it is exchangeable, or upon the happening of any event, matures or
becomes mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or becomes exchangeable for Indebtedness at the option of the holder
thereof, or becomes redeemable at the option of the holder thereof, in whole or
in part, on or prior to the final maturity date of the notes;
provided such Capital Stock shall only constitute Disqualified Stock to the
extent it so matures or becomes so redeemable or exchangeable on or prior to the
final maturity date of the notes;
provided, further, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the notes shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained in
"Limitation on Sale of Assets" and "Change of Control" described above and such
Capital Stock specifically provides that such person will not repurchase or
redeem any such stock pursuant to such provision prior to PSINet's repurchase of
such notes as are required to be repurchased pursuant to the "Limitation on Sale
of Assets" and "Change of Control" provisions described above.
"Exchange Agent" means Wilmington Trust Company, as exchange agent under
the exchange agent Agreement, until a successor replaces it in accordance with
the provisions of the exchange agent Agreement and thereafter means such
successor.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market Value
shall be determined by the Board of Directors of PSINet acting in good faith and
shall be evidenced by a resolution of the Board of Directors.
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"Guarantee" means the guarantee by any Guarantor of PSINet's Indenture
Obligations.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such Person
through an agreement:
(1) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness,
(2) to purchase, sell or lease, as lessee or lessor, property, or to
purchase or sell services, primarily for the purpose of enabling the
debtor to make payment of such Indebtedness or to assure the holder of
such Indebtedness against loss,
(3) to supply funds to, or in any other manner invest in, the
debtor, including any agreement to pay for property or services without
requiring that such property be received or such services be rendered,
(4) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial condition
of the debtor ,or
(5) otherwise to assure a creditor against loss;
provided that the term "guarantee" shall not include endorsements
for collection or deposit, in either case in the ordinary course of business.
"Guarantor" means any Subsidiary which is required after the date of the
Indenture to execute a guarantee of the notes pursuant to the "Limitation on
Issuance of Guarantees of Indebtedness" covenant until a successor replaces such
party pursuant to the applicable provisions of the Indenture and, thereafter,
shall mean such successor.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur, including by conversion, exchange or otherwise,
assume, guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or other obligation on the balance sheet of such Person
(and "Incurrence," "Incurred" and "Incurring" shall have meanings correlative to
the foregoing). Indebtedness of a Person existing at the time such Person
becomes a Subsidiary or is merged or consolidated with or into PSINet or any
Subsidiary shall be deemed to be Incurred at such time.
"Indebtedness" means, with respect to any Person, without duplication:
(1) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities arising in the ordinary
course of business,
(2) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments,
(3) all indebtedness created or arising under any conditional sale
or other title retention agreement with respect to property acquired by
such Person, unless the rights and remedies of the seller or lender under
such agreement in the event of default are limited to repossession or sale
of such property, but excluding trade payables arising in the ordinary
course of business,
(4) all obligations under Interest Rate Agreements, Currency Hedging
Agreements or Commodity Price Protection Agreements of such Person,
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(5) all Capital Lease Obligations of such Person,
(6) all Indebtedness referred to in clauses (1) through (5) above of
other Persons and all dividends of other Persons, the payment of which is
guaranteed by such Person or which is otherwise secured by, or for which
the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by, any Lien, upon or with respect to property,
including, without limitation, accounts and contract rights, owned by such
Person, even though such Person has not directly assumed or become liable
for the payment of such Indebtedness,
(7) all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price
plus accrued and unpaid dividends, and
(8) any refinancing of any liability of the types referred to in
clauses (1) through (7) above. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a
fixed repurchase price shall be calculated in accordance with the terms of
such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the Fair Market Value of such Redeemable Capital Stock, such
Fair Market Value to be determined in good faith by the Board of Directors
of the issuer of such Redeemable Capital Stock. In no event shall
"Indebtedness" include any trade payable or other current liabilities
arising in the ordinary course of business. The amount of any item of
Indebtedness shall be the amount of such Indebtedness properly classified
as a liability on a balance sheet prepared in accordance with GAAP.
"Indenture Obligations" means the obligations of PSINet and any other
obligor under the Indenture or under the notes, including any Guarantor, to pay
principal of, premium, if any, and interest when due and payable, and all other
amounts due or to become due under or in connection with the Indenture, the
notes and the performance of all other obligations to the Trustee and the
holders under the Indenture and the notes, according to the respective terms
thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements, including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements, and/or other types of interest rate
hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly,
any advance, loan, including guarantees, or other extension of credit or capital
contribution to by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others, or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"IXC" means IXC Internet Services, Inc., a Delaware corporation, and any
successors or assigns under the IXC Agreement.
"IXC Agreement" means the IRU and Stock Purchase Agreement, dated as of
July 22, 1997, between PSINet and IXC, as amended, pursuant to which PSINet
acquired from IXC 20-year noncancellable indefeasible rights of use, as in
effect on the date of the Indenture (or as further amended, from time to time,
to the extent that such amendment has been determined by the Board of Directors,
in good faith, not to adversely affect the Holders).
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, hypothecation, or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired. A Person shall be deemed to own subject to a Lien
any property which such Person has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement, other than:
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(1) any lease properly classified as an operating lease under GAAP,
(2) intellectual property licensing arrangements, or
(3) cancellation or termination rights or provisions contained in
agreements governing any indefeasible rights of use or similar property
rights which do not materially impair the use of the property or interest
which is the subject of such cancellation or termination rights or
provisions.
"Liquidated Damages" has the meaning provided in section 5 of the
registration rights agreements.
"Maturity" means, when used with respect to the notes, the date on which
the principal of the notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control Offer in respect of a Change of Control, call
for redemption or otherwise.
"Net Cash Proceeds" means:
(a) with respect to any Asset Sale by any Person, the proceeds thereof
(without duplication in respect of all Asset Sales) in the form of cash or Cash
Equivalents including payments in respect of deferred payment obligations when
received in the form of, or stock or other assets when disposed of for, cash or
Cash Equivalents, except to the extent that such obligations are financed or
sold with recourse to PSINet or any Wholly Owned Subsidiary, net of
o brokerage commissions and other fees and expenses, including
fees and expenses of counsel and investment bankers, related
to such Asset Sale,
o provisions for all taxes payable as a result of such Asset
Sale,
o payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the
subject of such Asset Sale,
o amounts required to be paid to any Person, other than PSINet
or any Subsidiary, owning a beneficial interest in the assets
subject to the Asset Sale, and
o amounts contractually required to be deposited into escrow or
similar trust arrangements and other appropriate amounts to be
provided by PSINet or any Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against, any liabilities
associated with such Asset Sale and retained by PSINet or any
Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale or
reimbursement obligations related to letters of credit issued
against liabilities associated therewith, all as reflected in
an officers' certificate delivered to the Trustee, which
amounts shall become Net Cash Proceeds only at such time as
they are released from escrow or such trust arrangements or
otherwise cease to be reserved or subject to other obligations
to third parties; and
(b) with respect to any issuance or sale of Capital Stock or options,
warrants or rights to purchase Capital Stock, or debt securities or Capital
Stock that have been converted into or exchanged for Capital Stock as referred
to under "--Certain Covenants--Limitation on Restricted Payments," the proceeds
of such issuance or sale in the form of cash or Cash Equivalents including
payments in respect of deferred payment obligations when received in the form
of, or stock or other assets when disposed of for, cash or Cash Equivalents,
except to the extent that such obligations are financed or sold with recourse to
PSINet or any Subsidiary, net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with
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such issuance or sale or conversion, in the case of debt securities or Capital
Stock that have been converted, and net of taxes paid or payable as a result
thereof.
"Pari Passu Indebtedness" means (a) any Indebtedness of PSINet that is
pari passu in right of payment to the notes and (b) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment to such
Guarantee.
"Permitted Credit Facility" means any unsubordinated commercial term loan
and/or revolving credit facility entered into principally with commercial banks
and/or other financial institutions typically party to commercial loan
agreements and any refinancing thereof.
"Permitted Investment" means:
(1) Investments in any Wholly Owned Subsidiary or any Person which,
as a result of, or in connection with, such Investment, (a) becomes a
Wholly Owned Subsidiary or (b) is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, or is
liquidated into, PSINet or any Wholly Owned Subsidiary;
(2) Indebtedness of PSINet or a Subsidiary described under clauses
(4) and (7) of paragraph (b) under "--Certain Covenants--Limitation on
Indebtedness";
(3) Investments in any of the notes;
(4) Investments in Cash Equivalents;
(5) Investments acquired by PSINet or any Subsidiary in connection
with an Asset Sale permitted under "--Certain Covenants--Limitation on
Sale of Assets" to the extent such Investments are non-cash proceeds as
permitted under such covenant;
(6) Investments in existence or contractually committed to on or
after April 13, 1998 and any extension, modification or renewal of any
such Investment that does not increase the amount of such Investment;
(7) guarantees of Indebtedness of a Wholly Owned Subsidiary given by
PSINet or another Wholly Owned Subsidiary and guarantees of Indebtedness
of PSINet given by any Subsidiary, in each case, not otherwise in
violation of the terms of the Indenture;
(8) advances to employees or officers of PSINet in the ordinary
course of business so long as the aggregate amount of such advances shall
not exceed $2 million outstanding at any one time;
(9) any Investment in PSINet by any Subsidiary of PSINet; provided,
that any such Investment in the form of Indebtedness shall be Subordinated
Indebtedness;
(10) accounts receivable created or acquired in the ordinary course
of business of PSINet or any Subsidiary and Investments arising from
transactions by PSINet or any Subsidiary with trade creditors or customers
in the ordinary course of business, including any such Investment received
pursuant to any plan of reorganization or similar arrangement pursuant to
the bankruptcy or insolvency of such trade creditors or customers or
otherwise in settlement of a claim;
(11) loans in the ordinary course of business to employees, officers
or directors of PSINet or a Subsidiary to purchase Capital Stock of PSINet
pursuant to the terms of stock benefit plans;
(12) Investments the consideration of which is Capital Stock of
PSINet;
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(13) Investments in or acquisitions of Capital Stock or other
obligations, property or securities of Persons, other than Affiliates,
received in the bankruptcy or reorganization of or by such Person or
otherwise taken in settlement or satisfaction of claims, disputes or
judgments, and, in each case, extensions, modifications and renewals
thereof;
(14) Investments in prepaid expenses, negotiable instruments held
for collection, and lease, utility and workers' compensation, performance
and other similar deposits;
(15) Investments, not to exceed $100 million at any one time
outstanding, to obtain noncancellable indefeasible rights of use to, or
capacity in, fiber-based bandwidth or similar network bandwidth, related
equipment and/or other Telecommunications Assets in the ordinary course of
PSINet's business; and
(16) any other Investments in an aggregate amount not to exceed $50
million at any one time outstanding. In connection with any assets or
property contributed or transferred to any Person as an Investment, such
property and assets shall be equal to the Fair Market Value, as determined
by PSINet's Board of Directors at the time of such Investment.
"Permitted Joint Venture" means a corporation, partnership or other Person
engaged in a Telecommunications Business over which PSINet has, directly or
indirectly, the power to direct the policies, management and affairs in all
material respects.
"Permitted Lien" means:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of:
(1) any judgment, decree or order of any court, so long as such Lien
is adequately bonded and any appropriate legal proceedings which may have
been duly initiated for the review of such judgment, decree or order shall
not have been finally terminated or the period within which such
proceedings may be initiated shall not have expired,
(2) taxes not yet delinquent or which are being contested in good
faith,
(3) security for payment of workers' compensation or other insurance
or arising under workers' compensation laws or similar legislation,
(4) good faith deposits in connection with bids, tenders, leases,
contracts, other than contracts evidencing Indebtedness,
(5) zoning restrictions, easements, licenses, reservations, title
defects, rights of others for rights of way, utilities, sewers, electric
lines, telephone or telegraph lines, and other similar purposes,
provisions, covenants, conditions, waivers, restrictions on the use of
property or irregularities of title and, with respect to leasehold
interests, mortgages, obligations, liens and other encumbrances incurred,
created, assumed or permitted to exist and arising by, through or under a
landlord or owner of the leased property, with or without consent of the
lessee, none of which materially impairs the use of any parcel of property
material to the operation of the business of PSINet or any Subsidiary or
the value of such property for the purpose of such business,
(6) deposits to secure public or statutory obligations, or in lieu
of surety or appeal bonds, or
(7) operation of law in favor of landlords, carriers, warehousemen,
bankers, mechanics, materialmen, laborers, employees or suppliers,
incurred in the ordinary course of business for sums which are not yet
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delinquent or are being contested in good faith by negotiations or by
appropriate proceedings which suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases,
including, without limitation, statutory and common law landlord's liens,
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of business of
PSINet or any Subsidiary;
(d) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clause (1) of
paragraph (b) of "--Certain Covenants--Limitation on Indebtedness" which
attaches within 180 days of the incurrence of such Indebtedness or the date of
delivery of such property or asset, whichever occurs later; provided that such
Liens only extend to such acquired, developed or constructed property and any
accessories, accessions, additions, replacements and proceeds thereof;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(f) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clauses (2), (4) or
(8) of paragraph (b) of "--Limitation on Indebtedness;"
(g) any Lien in favor of PSINet or any Wholly Owned Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of PSINet or any of its Subsidiaries other than the property
or assets of the Acquired Person covered thereby or the property assets so
acquired;
(i) any Lien in favor of the Trustee for the benefit of the Holders or the
Trustee arising under the provisions in the Indenture;
(j) any Lien encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of PSINet or any
Subsidiary if and to the extent arising in the ordinary course of business,
including rights of offset and set-off;
(k) any Lien in favor of customs or revenue authorities to secure payment
of customs duties in connection with the importation of goods in the ordinary
course of business;
(l) leases, subleases, licenses or other similar rights granted to third
Persons not interfering with the ordinary course of business of PSINet or its
Subsidiaries;
(m) any Lien securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such letters of
credit; and
(n) any Lien securing any refinancing, in whole or in part, of any
obligation or Indebtedness described in the foregoing clauses (a) through (m),
other than clause (e), so long as no additional collateral is granted as
security thereby.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of Capital Stock,
other than Disqualified Stock, of PSINet with gross proceeds to PSINet of at
least $25 million pursuant to a registration statement that has been declared
effective by the Commission pursuant to the Securities Act of 1933, other than a
registration
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statement on Form S-8 or otherwise relating to equity securities issuable under
any employee benefit plan of PSINet.
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of PSINet and any additions, replacements,
modifications and accessions thereto, which are purchased by PSINet at any time
after the notes are issued; provided that:
(1) the security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively a "Purchase Money Security Agreement") shall be entered into
within 180 days after the purchase or substantial completion of the
construction of such assets and shall at all times be confined solely to
the assets so purchased or acquired, any additions, replacements,
modifications and accessions thereto and any proceeds and products
therefrom;
(2) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in
connection with the purchase of additions and accessions thereto and
except in respect of fees and other obligations in respect of such
Indebtedness; and
(3) (A) the aggregate outstanding principal amount of Indebtedness
secured thereby, determined on a per asset basis in the case of any
additions and accessions, shall not at the time such Purchase Money
Security Agreement are entered into exceed 100% of the purchase price to
PSINet of the assets subject thereto or (B) the Indebtedness secured
thereby shall be with recourse solely to the assets so purchased or
acquired, any additions, replacements, modifications and accessions
thereto and any proceeds and products therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is or upon the happening of an event or passage of
time would be, required to be redeemed prior to the Stated Maturity of the
principal of the notes or is redeemable at the option of the holder thereof at
any time prior to such Stated Maturity, or is convertible into or exchangeable
for debt securities at any time prior to such Stated Maturity at the option of
the holder thereof.
"Registration Default" has the meaning provided in Section 5 of the
registration rights agreements.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions pursuant to which PSINet or a Subsidiary sells or transfers
any property or asset in connection with the leasing, or the resale against
installment payments, of such property or asset to the seller or transferor.
"Shelf Registration Statement" means a shelf registration statement
pursuant to Rule 415 under the Securities Act of 1933.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as the
fixed date on which the principal of such Indebtedness or such installment of
interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is, or a controlled Affiliate
of any Person which is or a controlled Affiliate of which is, engaged
principally in the Telecommunications Business and which has a Total Market
Capitalization of at least $500 million.
"Subordinated Indebtedness" means Indebtedness of PSINet or a Guarantor
expressly subordinated by its terms in right of payment to the notes or the
Guarantee of such Guarantor, as the case may be.
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"subsidiary" means, with respect to any Person, a corporation, association
or other business entity (1) of which outstanding Capital Stock having at least
the majority of the votes entitled to be cast in the election of directors is
owned, directly or indirectly, by such Person and/or any one or more
subsidiaries of such Person, or (2) of which at least a majority of voting
interest is owned, directly or indirectly, by such Person and/or one or more
subsidiaries of such Person.
"Subsidiary" means any subsidiary of PSINet other than an Unrestricted
Subsidiary.
"Telecommunications Assets" means all assets, including Capital Stock,
rights, contractual or otherwise, and properties, real or personal, whether
tangible or intangible, used or intended for use in connection with a
Telecommunications Business.
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in:
(1) the business of transmitting, or providing services relating to
the transmission of, voice, video or data through owned or leased
transmission facilities,
(2) the business of creating, developing or marketing communications
related network equipment or services or computer-based information or
(3) businesses reasonably related thereto, which determination
shall, in any such case, be made in good faith by the Board of Directors.
"Total Consolidated Indebtedness" means, as at any date of determination,
an amount equal to the aggregate amount of all Indebtedness of PSINet and any
Subsidiary, on a Consolidated basis in accordance with GAAP, outstanding as of
such date of determination, after giving effect to any Incurrence of
Indebtedness and the application of the proceeds therefrom giving rise to such
determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of:
(a) the consolidated Indebtedness of such Person and any Subsidiaries on
such day; plus
(b) the product of (1) the aggregate number of outstanding shares of
common stock of such Person on such day, which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person, and (2) the average closing price of such common stock
over the 10 consecutive Trading Days ending not earlier than 10 Trading Days
immediately prior to such date of determination; plus
(c) the liquidation value of any outstanding shares of preferred stock of
such Person on such day.
If no such closing price exists with respect to shares of any such class, the
value of such shares for purposes of clause (b) of the preceding sentence shall
be determined by the Board in good faith and evidenced by a resolution of the
Board filed with the Trustee. Notwithstanding the foregoing, unless the Person's
Common Stock is listed on any national securities exchange or on The Nasdaq
National Market, the "Total Market Capitalization" of the Person shall mean, as
of any day of determination, the enterprise value, without duplication, of the
Person and any subsidiaries, including the fair market value of their debt and
equity, as determined by an independent banking firm of national standing with
experience in such valuations and evidenced by a written opinion in customary
form filed with the Trustee; provided that for purposes of any such
determination, the enterprise value of the Person shall be calculated as if the
Person were a publicly held corporation without a controlling stockholder. For
purposes of any such determination, such banking firm's written opinion may
state that such fair market value is no less than a specified amount and such
opinion may be as of a date no earlier than 90 days prior to the date of such
determination.
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"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Trustee" means Wilmington Trust Company, until a successor trustee shall
have become such pursuant to the applicable provisions of the Indenture, and
thereafter "Trustee" shall mean such successor trustee.
"Unrestricted Subsidiary" means:
(1) any subsidiary of PSINet that at the time of determination shall
be an Unrestricted Subsidiary, as designated by the Board of Directors of
PSINet, as provided below; and
(2) any subsidiary of an Unrestricted Subsidiary.
The Board of Directors of PSINet may designate any subsidiary of PSINet,
including any newly acquired or newly formed Subsidiary, to be an Unrestricted
Subsidiary if all of the following conditions apply:
(a) neither PSINet nor any of its Subsidiaries provides credit support for
Indebtedness of such subsidiary, including any undertaking, agreement or
instrument evidencing such Indebtedness;
(b) such subsidiary is not liable, directly or indirectly, with respect to
any Indebtedness other than Unrestricted Subsidiary Indebtedness;
(c) any Investment in such subsidiary made as a result of designating such
subsidiary an Unrestricted Subsidiary shall not violate the provisions of the
"--Certain Covenants--Limitation on Unrestricted Subsidiaries" covenant and such
Unrestricted Subsidiary is not party to any agreement, contract, arrangement or
understanding at such time with PSINet or any Subsidiary of PSINet unless the
terms of any such agreement, contract, arrangement or understanding are no less
favorable to PSINet or such Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of PSINet; and
(d) such Unrestricted Subsidiary does not own any Capital Stock in any
Subsidiary of PSINet which is not simultaneously being designated an
Unrestricted Subsidiary.
Any such designation by the Board of Directors of PSINet shall be evidenced to
the Trustee by filing with the Trustee a board resolution giving effect to such
designation and an officers' certificate certifying that such designation
complies with the foregoing conditions and shall be deemed a Restricted Payment
on the date of designation in an amount equal to the greater of (A) the net book
value of such Investment or (B) the fair market value of such Investment as
determined in good faith by PSINet's Board of Directors. The Board of Directors
of PSINet may designate any Unrestricted Subsidiary as a Subsidiary; provided
that:
o immediately after giving effect to such designation, PSINet
could incur $1.00 of additional Indebtedness, other than
Permitted Indebtedness, pursuant to the restrictions under
"--Certain Covenants, Limitation on Indebtedness"; and
o all Indebtedness of such Subsidiary shall be deemed to be
incurred on the date such Unrestricted Subsidiary becomes a
Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary
means Indebtedness of such Unrestricted Subsidiary:
(1) as to which neither PSINet nor any Subsidiary is directly or
indirectly liable, by virtue of PSINet or any such Subsidiary being the
primary obligor on, guarantor of, or otherwise liable in any respect to,
such Indebtedness, except Guaranteed Debt of PSINet or any Subsidiary to
any Affiliate, in which case, unless the incurrence of such Guaranteed
Debt resulted in a Restricted Payment at the time of incurrence, PSINet
shall be deemed to have made a Restricted Payment equal to the principal
amount of
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any such Indebtedness to the extent guaranteed at the time such Affiliate
is designated an Unrestricted Subsidiary, and
(2) which, upon the occurrence of a default with respect thereto,
does not result in, or permit any holder of any Indebtedness of PSINet or
any Subsidiary to declare, a default on such Indebtedness of PSINet or any
Subsidiary or cause the payment thereof to be accelerated or payable prior
to its Stated Maturity.
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of a corporation, irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which is owned by PSINet or another Wholly Owned Subsidiary. For the purposes of
this definition, any director qualifying shares or investments by foreign
nationals mandated by, or required to maintain its limited liability status
under, applicable law shall be disregarded in determining the ownership of a
Subsidiary.
Book-Entry; Delivery; Form and Transfer
The notes sold to Qualified Institutional Buyers initially will be in the
form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
will be deposited with the Trustee, as custodian for The Depository Trust
Company ("DTC"), in New York, New York, and registered in the name of DTC or its
nominee for credit to the accounts of DTC's Direct and Indirect Participants (as
defined below). The notes being offered and sold in offshore transactions in
reliance on Regulation S, if any, initially will be in the form of one or more
registered, global book-entry notes without interest coupons (the "Reg S Global
Notes"). The Reg S Global notes will be deposited with the Trustee, as custodian
for DTC, in New York, New York and registered in the name of a nominee of DTC
for credit to the accounts of Indirect Participants participating in DTC through
the Euroclear System ("Euroclear") and Cedel Bank, societe anonyme ("CEDEL").
Beneficial interests in the Reg S Global Notes may be transferred to a person
that takes delivery in the form of an interest in the U.S. Global Notes.
Beneficial interests in the U.S. Global Notes may be transferred to a person
that takes delivery in the form of an interest in the Reg S Global Notes,
provided, in each case, that the certification requirements described below are
complied with. See "--Transfers of Interests in One Global Note for Interests in
Another Global Note." All registered global notes are referred to herein
collectively as "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes (as
defined below), if any, will be subject to certain restrictions on transfer and
will bear a restrictive legend as described under "Notice to Investors." In
addition, transfer of beneficial interests in any Global Notes will be subject
to the applicable rules and procedures of DTC and its Direct or Indirect
Participants, including, if applicable, those of Euroclear and CEDEL, which may
change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for notes in certificated form in certain limited circumstances. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
DTC has advised PSINet that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Direct Participants") and to facilitate the clearance and settlement of
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transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Direct Participants. The Direct Participants
include securities brokers and dealers, including the initial purchasers, banks,
trust companies, clearing corporations and certain other organizations,
including Euroclear and Cedel. Access to DTC's system is also available to other
entities that clear through or maintain a direct or indirect, custodial
relationship with a Direct Participant (collectively, the "Indirect
Participants").
DTC has also advised PSINet that, pursuant to DTC's procedures, (1) upon
deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the initial purchasers with portions of the principal
amount of the Global Notes that have been allocated to them by the initial
purchasers, and (2) DTC will maintain records of the ownership interests of such
Direct Participants in the Global Notes and the transfer of ownership interests
by and between Direct Participants. DTC will not maintain records of the
ownership interests of, or the transfer of ownership interests by and between,
Indirect Participants or other owners of beneficial interests in the Global
Notes. Direct Participants and Indirect Participants must maintain their own
records of the ownership interests of, and the transfer of ownership interests
by and between, Indirect Participants and other owners of beneficial interests
in the Global Notes. PSINet expects that payments by Direct Participants to
owners of beneficial interests in such Global Notes held through such Direct
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the name of nominees for such customers. Such payments will be the
responsibility of such Direct Participants.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Global Notes may hold their interests therein directly through Euroclear or
CEDEL or indirectly through organizations that are participants in Euroclear or
CEDEL. Investors may also hold interests in the Reg S Global Notes through
organizations other than Euroclear and CEDEL that are Direct Participants in the
DTC system. Morgan Guaranty Trust Company of New York, Brussels office is the
operator and depository of Euroclear and Citibank, N.A. is the operator and
depository of CEDEL (each a "Nominee" of DTC for the benefit of Euroclear and
CEDEL, respectively). Therefore, they will each be recorded on DTC's records as
the holders of all ownership interests held by them on behalf of Euroclear and
CEDEL, respectively. Euroclear and CEDEL must maintain on their own records the
ownership interests, and transfers of ownership interests by and between, their
own customers' securities accounts. DTC will not maintain such records. All
ownership interests in any Global Notes, including those of customers'
securities accounts held through Euroclear or CEDEL, may be subject to the
procedures and requirements of DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the notes, see "--Reg S Global Notes" and
"--Transfers of Interests in Global Notes for Certificated Notes."
Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes", owners of beneficial interests in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, PSINet and the Trustee will treat the
persons in whose names the notes are registered, including notes represented by
Global Notes, as the owners thereof for the purpose of receiving payments and
for any and all other purposes whatsoever. Payments in respect of the principal,
premium, liquidated damages, if any, and interest on Global Notes registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither
PSINet, the Trustee nor any agent of PSINet or the Trustee has or will have any
responsibility or liability for (1) any aspect of DTC's records or any Direct
Participant's or Indirect Participant's records relating to or payments
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made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (2) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised PSINet that its current payment practice for payments of
principal, interest and the like with respect to securities such as the notes is
to credit the accounts of the relevant Direct Participants with such payment on
the payment date in amounts proportionate to such Direct Participant's
respective ownership interests in the Global Notes as shown on DTC's records.
Payments by Direct Participants and Indirect Participants to the beneficial
owners of the notes will be governed by standing instructions and customary
practices between them and will not be the responsibility of DTC, the Trustee or
PSINet. Neither PSINet nor the Trustee will be liable for any delay by DTC or
its Direct Participants or Indirect Participants in identifying the beneficial
owners of the notes, and PSINet and the Trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee as the
registered owner of the notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants, other than Indirect Participants
who hold an interest in the notes through Euroclear or CEDEL, who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will be settled in
immediately available funds. Transfers between and among Indirect Participants
who hold interests in the notes through Euroclear and CEDEL will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the
notes described herein, cross-market transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear's
or CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL; however, delivery of instructions relating to
crossmarket transactions must be made directly to Euroclear or CEDEL, as the
case may be, by the counterparty in accordance with the rules and procedures of
Euroclear or CEDEL and within their established deadlines (Brussels time for
Euroclear and UK time for CEDEL). Indirect Participants who hold interest in the
notes through Euroclear and CEDEL may not deliver instructions directly to
Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction
meets its settlement requirements, deliver instructions to its respective
Nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in the
relevant Global Note in DTC, and make or receive payment in accordance with
normal procedures for same-day fund settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a Reg
S Global Note to a DTC Participant until the European business day for Euroclear
or CEDEL immediately following DTC's settlement date.
DTC has advised PSINet that it will take any action permitted to be taken
by a holder of notes only at the direction of one or more Direct Participants to
whose account interests in the Global Notes are credited and only in respect of
such portion of the aggregate principal amount of the notes to which such Direct
Participant or Direct Participants has or have given direction. However, if
there is an Event of Default under the notes, DTC reserves the right to exchange
Global Notes, without the direction of one or more of its Direct Participants,
for legended notes in certificated form, and to distribute such certificated
forms of notes to its Direct Participants. See "--Transfers of Interests in
Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Reg S Global Notes and in the U.S.
Global Notes among Direct Participants, including Euroclear and
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CEDEL, they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of PSINet,
the initial purchasers or the Trustee shall have any responsibility for the
performance by DTC, Euroclear or CEDEL or their respective Direct and Indirect
Participants of their respective obligations under the rules and procedures
governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that PSINet believes to
be reliable, but PSINet takes no responsibility for the accuracy thereof.
Reg S Global Notes
An Indirect Participant who holds an interest in the Reg S Global Notes
through Euroclear or CEDEL must provide Euroclear or CEDEL, as the case may be,
with a certificate in the form required by the Indenture certifying that such
Indirect Participant is either not a U.S. Person (as defined below) or has
purchased such interests in a transaction that is exempt from the registration
requirements under the Securities Act of 1933, and Euroclear or CEDEL, as the
case may be, must provide to the Trustee (or the Paying Agent, if other than the
Trustee) a certificate in the form required by the Indenture prior to the
payment of interest or principal with respect to such Indirect Participant's
beneficial interests in such Reg S Global Notes.
"U.S. Person" means:
(1) any individual resident in the United States;
(2) any partnership or corporation organized or incorporated under
the laws of the United States;
(3) any estate of which an executor or administrator is a U.S.
Person, other than an estate governed by foreign law and of which at least
one executor or administrator is a non-U.S. Person who has sole or shared
investment discretion with respect to its assets;
(4) any trust of which any trustee is a U.S. Person, other than a
trust of which at least one trustee is a non-U.S. Person who has sole or
shared investment discretion with respect to its assets and no beneficiary
of the trust (and no settlor, if the trust is revocable) is a U.S. Person;
(5) any agency or branch of a foreign entity located in the United
States;
(6) any non-discretionary or similar account, other than an estate
or trust, held by a dealer or other fiduciary for the benefit or account
of a U.S. Person;
(7) any discretionary or similar account, other than an estate or
trust, held by a dealer, or other fiduciary organized, incorporated or, if
an individual, resident in the United States, other than such an account
held for the benefit or account of a non-U.S. Person; and
(8) any partnership or corporation organized or incorporated under
the laws of a foreign jurisdiction and formed by a U.S. Person principally
for the purpose of investing in securities not registered under the
Securities Act of 1933, unless it is organized or incorporated and owned
by "accredited investors" within the meaning of Rule 501(a) under the
Securities Act of 1933 who are not natural persons, estates or trusts;
provided, however that the term "U.S. Person" shall not include:
(A) a branch or agency of a U.S. Person that is located and
operating outside the United States for valid business purposes as a
locally regulated branch or agency engaged in the banking or
insurance business;
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(B) any employee benefit plan established and administered in
accordance with the law, customary practices and documentation of a
foreign country; and
(C) the international organizations set forth in Section
902(o)(7) of Regulation S under the Securities Act of 1933 and any
other similar international organizations, and their agencies,
affiliates and pension plans.
Transfers of Interests in One Global Note for Interests in Another Global Note
An Indirect Participant who holds an interest in Reg S Global Notes will
be permitted to transfer its interest to a U.S. Person who takes delivery in the
form of an interest in U.S. Global Notes only upon receipt by the Trustee of a
written certification from the transferor to the effect that such transfer is
being made in accordance with the restrictions on transfer set forth under
"--Notice to Investors" and set forth in the legend printed on the Reg S Global
Notes.
A Direct or Indirect Participant who holds an interest in U.S. Global
Notes may transfer its interests to a person who takes delivery in the form of
an interest in Reg S Permanent Global Notes only upon receipt by the Trustee of
a written certification from the transferor to the effect that such transfer is
being made in accordance with Rule 904 of Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through
DTC/Deposit Withdraw at Custodian (DWAC) system. Accordingly, in connection with
such transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount at maturity of the one Global Note and a corresponding increase
in the principal amount at maturity of the other Global Note, as applicable. Any
beneficial interest in the one Global Note that is transferred to a person who
takes delivery in the form of the other Global Note will, upon transfer, cease
to be an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive notes in registered,
certificated form without interest coupons ("Certificated Notes") if:
(1) DTC (a) notifies PSINet that it is unwilling or unable to
continue as depositary for the Global Notes and PSINet thereupon fails to
appoint a successor depositary within 90 days or (b) has ceased to be a
clearing agency registered under the Securities Exchange Act of 1934;
(2) PSINet, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Certificated Notes; or
(3) there shall have occurred and be continuing a Default or an
Event of Default with respect to the notes.
In any such case, PSINet will notify the Trustee in writing that, upon
surrender by the Direct and Indirect Participants of their interest in such
Global Note, Certificated Notes will be issued to each person that such Direct
and Indirect Participants and DTC identify as being the beneficial owner of the
related notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved
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denominations, requested by DTC on behalf of such Direct or Indirect
Participants, in accordance with DTC's customary procedures.
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Notice to Investors," unless PSINet
determines otherwise in compliance with applicable law.
Neither PSINet nor the Trustee will be liable for any delay by the holder
of any Global Note or DTC in identifying the beneficial owners of notes, and
PSINet and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the holder of the Global Note or DTC for all
purposes.
Same Day Settlement and Payment
The Indenture will require that payments in respect of the notes
represented by the Global Notes, including principal, premium, if any, interest
and liquidated damages, if any, be made by wire transfer of immediately
available same day funds to the accounts specified by the holder of interests in
such Global Note. With respect to Certificated Notes, PSINet will make all
payments of principal, premium, if any, interest and liquidated damages, if any,
by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. PSINet expects that secondary
trading in the Certificated Notes will also be settled in immediately available
funds.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The summaries contained herein of certain indebtedness of PSINet do not
purport to be complete and are qualified in their entirety by reference to the
provisions of the various agreements and indentures related thereto, copies of
which have been filed with the Securities and Exchange Commission and to which
reference is hereby made. See "Available Information."
Credit Facility
In September 1998, PSINet entered into a new three-year senior secured
revolving credit facility, pursuant to which The Chase Manhattan Bank ("Chase")
is acting as administrative agent, to replace PSINet's existing bank credit
arrangements in the United States. The credit facility is a secured revolving
credit facility with borrowing availability thereunder in the maximum principal
amount of $110 million, $108.5 million of which was drawn upon to finance a
portion of the purchase price for the acquisition of Tokyo Internet. Prior to
the closing of the first initial notes offering, PSINet repaid, with other cash
on hand, all borrowings outstanding under the credit facility. Following the
closings of the initial notes offerings, PSINet continued to have borrowing
capacity of up to $110 million under the credit facility, subject to its terms.
Interest. Borrowings under the credit facility bear interest at PSINet's
option, at (a) the London interbank offered rate for deposits in U.S. Dollars
for the relevant period multiplied by the statutory reserve rate plus the
Applicable Margin ("Eurodollar Rate") or (b) the higher of Chase's prime rate or
the Federal Funds effective rate plus 1/2 of 1%, plus the Applicable Margin
("ABR Rate"). The Applicable Margin varies based on the Leverage Ratio, as
defined in the credit facility, as of the most recent determination date.
Currently, the Applicable Margin is 1.75% for ABR Rate borrowings and 2.75% for
Eurodollar Rate borrowings.
Guarantees and Security. PSINet's obligations under the credit facility
are guaranteed by each existing and subsequently acquired or organized
significant domestic subsidiary of PSINet, a subsidiary which owns or maintains
at least $1,000,000 in assets or generates at least $1,000,000 in annual
revenues, and are secured by a lien on substantially all of the assets of PSINet
and each subsidiary guarantor and by a pledge by PSINet and each subsidiary
guarantor of all capital stock and other equity interests it owns (65% in the
case of equity interests in foreign subsidiaries).
Covenants. The credit facility contains covenants and provisions that
restrict, among other things, PSINet and its subsidiaries' ability to:
(1) make dividends and distributions on, and redemptions and repurchases
of, capital stock and other similar payments;
(2) make prepayments, redemptions and repurchases of indebtedness;
(3) incur liens and enter into sale-leaseback transactions;
(4) make certain loans and investments;
(5) incur additional indebtedness and certain contingent obligations;
(6) effect certain mergers, acquisitions and asset sales;
(7) engage in certain transactions with affiliates;
(8) effect certain changes in business conducted by PSINet; and
(9) amend and waive certain debt and other agreements.
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The credit facility also requires the satisfaction of certain financial
covenants, including a minimum annual consolidated revenue test, a minimum
debt-to-annualized adjusted revenue ratio, a minimum aggregate balance of
nonrestricted cash and available borrowings and a minimum EBITDA test. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Structure." In addition, the credit facility requires a
reduction in the maximum amount of availability and prepayments, if required as
a result of such reduction, equal to the net proceeds received from certain
asset sales aggregating more than $5 million and from certain casualty events.
Events of Default. Events of default under the credit facility include
various events of default customary for such type of agreement, such as failure
to pay scheduled payments when due, cross defaults with and cross acceleration
to other indebtedness, including the 10% senior notes, the occurrence of a
change in control (as defined in the credit facility) and certain events of
bankruptcy, insolvency and reorganization.
Canadian Credit Facility
PSINet has a credit facility with a Canadian bank which provides
availability of loans to PSINet's Canadian subsidiary in three components:
(1) a revolving credit facility of Cdn. $150,000;
(2) a term loan of Cdn. $1,000,000, having a balance outstanding of
Cdn. $336,000 as of September 1, 1998, repayable in February 1999; and
(3) an equipment leasing facility of Cdn. $1,000,000 having a
balance outstanding of Cdn. $534,000 as of September 1, 1998, and a final
maturity date of March 2001.
Interest. Borrowings under the revolving credit facility and the term loan
bear interest at the applicable prime rate of the bank plus 1.5%. Borrowings
under the equipment lease facility bear interest at an average rate of 8.7%.
10% Senior Notes
In April 1998, PSINet completed its offering of $600.0 million aggregate
principal amount of 10% Senior Notes due 2005, Series A. The 10% senior notes
were initially issued and sold in accordance with Rule 144A and Regulation S
under the Securities Act of 1933. In June 1998, PSINet completed an exchange
offer of 100% of the initial 10% senior notes for equivalent 10% Senior Notes
due 2005, Series B, which have been registered under the Securities Act of 1933.
The 10% senior notes are senior unsecured obligations of PSINet ranking
equivalent in right of payment to all existing and future unsecured and
unsubordinated indebtedness of PSINet and senior in right of payment to all
existing and future subordinated indebtedness of PSINet. The 10% senior notes
were issued under an Indenture dated as of April 13, 1998 between PSINet and
Wilmington Trust Company, as trustee.
The 10% senior notes will mature on February 15, 2005. Interest on the 10%
senior notes is payable semi-annually on August 15 and February 15 of each year,
commencing August 15, 1998. The 10% senior notes are redeemable at the option of
PSINet, in whole or in part, at any time on or after February 15 of 2002, 2003
and 2004 at 105%, 102.5% and 100% of the principal amount thereof, respectively,
in each case, plus accrued and unpaid interest to the date of redemption. In
addition, on or prior to February 15, 2001, PSINet may redeem up to 35% of the
original aggregate principal amount of the 10% senior notes at a redemption
price of 110% of the principal amount thereof, plus accrued and unpaid interest
to the date of redemption, with the net cash proceeds of certain public equity
offerings or the sale of stock to one or more strategic investors, provided that
at least 65% of the original aggregate principal amount of the 10% senior notes
remains outstanding immediately after such redemption. Upon the occurrence of a
change of control (as defined in the 10% senior notes indenture), PSINet will be
required to make an offer to purchase all of the 10% senior notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. PSINet may not have
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sufficient funds or the financial resources necessary to satisfy its obligations
to repurchase the 10% senior notes upon a change of control. PSINet's credit
facility prohibits PSINet from repurchasing any 10% senior notes upon a change
of control unless it has paid all amounts outstanding under the credit facility
prior thereto.
The 10% senior notes indenture contains certain financial covenants with
which PSINet must comply relating to, among other things, the following matters:
(1) limitation on PSINet's payment of cash dividends, repurchase of
capital stock, payment of principal on subordinated indebtedness and
making of certain investments, unless after giving effect to each such
payment, repurchase or investment, certain operating cash flow coverage
tests are met, excluding certain permitted payments and investments;
(2) limitation on PSINet's and its subsidiaries' incurrence of
additional indebtedness, unless at the time of such incurrence, PSINet's
ratio of debt to annualized operating cash flow would be less than or
equal to 6.0 to 1.0 prior to April 1, 2001 and less than or equal to 5.5
to 1.0 on or after April 1, 2001, excluding certain permitted incurrences
of debt;
(3) limitation on PSINet's and its subsidiaries' incurrence of
liens, unless the 10% senior notes are secured equally and ratably with
the obligation or liability secured by such lien, excluding certain
permitted liens;
(4) limitation on the ability of any subsidiary of PSINet to create
or otherwise cause to exist any encumbrance or restriction on the payment
of dividends or other distributions on its capital stock, payment of
indebtedness owed to PSINet or any other subsidiary, making of investments
in PSINet or any other subsidiary, or transfer of any properties or assets
to PSINet or any other subsidiary, excluding certain permitted
encumbrances and restrictions;
(5) limitation on certain mergers, consolidations and sales of
assets by PSINet or its subsidiaries;
(6) limitation on certain transactions with affiliates of PSINet;
(7) limitation on the ability of any subsidiary of PSINet to
guarantee or otherwise become liable with respect to any indebtedness of
PSINet unless such subsidiary provides for a guarantee of the 10% Senior
Notes on the same terms as the guarantee of such indebtedness;
(8) limitation on certain sale and leaseback transactions by PSINet
or its subsidiaries;
(9) limitation on certain issuances and sales of capital stock of
subsidiaries of PSINet; and
(10) limitation on the ability of PSINet or its subsidiaries to
engage in any business not substantially related to a telecommunications
business.
The events of default under the 10% senior notes indenture include various
events of default customary for such type of agreement, including, among others,
the failure to pay principal and interest when due on the 10% senior notes,
cross-defaults on other indebtedness for borrowed monies in excess of $10
million, which indebtedness would therefore include indebtedness outstanding
under the credit facility, certain judgments or orders for payment of money in
excess of $10 million, and certain events of bankruptcy, insolvency and
reorganization.
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PLAN OF DISTRIBUTION
This prospectus, as it may be amended or supplemented from time to time,
may be used by Participating Broker-Dealers in connection with resales of
exchange notes received in exchange for initial notes where such initial notes
were acquired as a result of market-making activities or other trading
activities. Each Participating Broker-Dealer that receives exchange notes for
its own account pursuant to the exchange offer must acknowledge that it will
deliver a prospectus in connection with any resale of such exchange notes.
PSINet has agreed that under certain circumstances, PSINet shall use its best
efforts to keep the exchange offer registration statement continuously
effective, supplemented and amended to the extent necessary to ensure that it is
available for sales of exchange notes by Participating Broker-Dealers, and to
ensure that the exchange offer registration statement conforms with the
requirements of the Securities Act of 1933 and the policies, rules and
regulations of the Securities and Exchange Commission as announced from time to
time, for a period of one year from the consummation of the exchange offer or
such shorter period as will terminate when all restricted securities covered by
the exchange offer registration statement have been sold pursuant thereto.
PSINet will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any Participating
Broker-Dealer that acquired initial notes as a result of market making
activities or other trading activities and who resells exchange notes that were
received by it pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933 and any profit on
any such resale of exchange notes and any commission or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act of 1933. The letter of transmittal states that, by acknowledging
that it will deliver and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act of 1933.
DOCUMENTS INCORPORATED BY REFERENCE
We are incorporating by reference in this prospectus the following
documents which we have filed with the Securities and Exchange Commission:
1. Our annual report on Form 10-K for our fiscal year ended December 31,
1997. This report contains:
o audited consolidated balance sheets for us and our
subsidiaries as of December 31, 1997 and 1996
o related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended
December 31, 1997, 1996 and 1995
2. Our quarterly reports on Form 10-Q for the quarters ended:
o March 31, 1998
o June 30, 1998
o September 30, 1998
3. Our current reports on Form 8-K dated:
o July 31, 1997 (solely insofar as it relates to our Shareholder
Rights Agreement dated May 8, 1996, as amended)
o August 20, 1997
o January 7, 1998
o January 22, 1998
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o February 12, 1998
o March 10, 1998
o March 26, 1998
o April 8, 1998
o April 22, 1998
o June 15, 1998
o September 15, 1998
o October 16, 1998
o October 28, 1998
o November 10, 1998.
4. Our registration statement on Form 8-A dated April 7, 1995, as amended
(registration no. 0-25812).
5. Our registration statement on Form 8-A dated June 4, 1996, as amended
(registration no. 0-25812).
We are also incorporating by reference in this prospectus all reports and
other documents that we file after the date of this prospectus pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, prior
to the termination of the offering of securities under this prospectus. These
reports and documents will be incorporated by reference in and considered to be
a part of this prospectus as of the date of filing of such reports and
documents.
Any statement contained in this prospectus or in a document which is
incorporated by reference herein will be modified or superseded for purposes of
this prospectus to the extent that a statement in any document that we file
after the date of this prospectus that also is incorporated by reference herein
modifies or supersedes such prior statement. Any such statement so modified or
superseded will not, except as so modified or superseded, constitute a part of
this prospectus.
This prospectus incorporates by reference documents which are not
presented in this prospectus or delivered to you with it. You may request, and
we will send to you, without charge, copies of these documents (other than
exhibits to these documents, which we will send to you for a reasonable fee).
Requests should be directed to the Office of the Secretary, PSINet Inc., 510
Huntmar Park Drive, Herndon, Virginia 20170 (telephone (703) 904-4100). In order
to assure timely delivery of the requested materials before the expiration of
the exchange offer, any request should be made prior to , 1999.
LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon by
Nixon, Hargrave, Devans & Doyle LLP, New York, New York, counsel for PSINet.
Certain attorneys with Nixon, Hargrave, Devans & Doyle LLP currently own in the
aggregate less than one percent of PSINet's common stock.
EXPERTS
The consolidated financial statements of PSINet Inc. as of December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997 included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of iSTAR internet inc. as of May 31,
1997 and 1996, and for each of the two years in the period ended May 31, 1997
included in this prospectus, have been audited by KPMG LLP, independent
auditors, as stated in their report appearing herein.
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The financial statements of Tokyo Internet Corporation as of March 31,
1998, 1997 and 1996 and for each of the three years in the period ended March
31, 1998 included in this prospectus, have been so included in reliance on the
report of Price Waterhouse, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of ioNET, Inc. as of December 31, 1997 and 1996
and for each of the two years in the period ended December 31, 1997 are
incorporated by reference in this prospectus from PSINet's Current Report on
Form 8-K as filed with the Securities and Exchange Commission on September 15,
1998 (the "September 15, 1998 Form 8-K"), and have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report included
in the September 15, 1998 Form 8-K and incorporated by reference herein.
The financial statements of Rimnet Corporation as of August 31, 1997 and
for the year then ended are incorporated by reference in this prospectus from
the September 15, 1998 Form 8-K, and have been audited by Chuo Audit
Corporation, independent certified public accountants, as stated in their report
included in the September 15, 1998 Form 8-K and incorporated by reference
herein.
The financial statements of LinkAge Online Limited as of December 31, 1997
and for the year then ended, appearing in the September 15, 1998 Form 8-K, have
been audited by Ernst and Young, independent auditors, as set forth in their
report thereon included therein , which is incorporated by reference herein from
the September 15, 1998 Form 8-K. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
Ernst and Young as experts in accounting and auditing.
The financial statements of Interactive Networx GmbH as of and for the
year ended December 31, 1997 are incorporated by reference in this prospectus
from PSINet Inc.'s September 15, 1998 Form 8-K, and have been so incorporated by
reference in reliance on the report of Price Waterhouse GmbH, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance with the Securities Exchange Act of 1934
we file reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any of such information on file with
the Securities and Exchange Commission at the Securities and Exchange
Commission's public reference facilities at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at Seven World Trade Center, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of filed documents can be obtained, at prescribed rates, by mail from the
Public Reference Section of the Securities and Exchange Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or by telephone at
1-800-SEC-0330, or electronically through the Securities and Exchange
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Securities and Exchange Commission's Web site (http://www.sec.gov). Our common
stock is listed on The Nasdaq Stock Market and copies of such reports and other
information can also be read and obtained at the offices of The Nasdaq Stock
Market, Reports Section, Demised Premises, N.W., Washington, D.C. 20006.
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933, with respect to the
exchange notes offered by this prospectus. As permitted by the rules and
regulations of the Securities Exchange Commission, this prospectus omits certain
information contained in the registration statement. For further information
with respect to PSINet and the exchange notes, reference is made to the
registration statement, including its exhibits and the financial statements,
notes and schedules filed as a part of it, which you may read and copy at the
public reference facilities of the Securities and Exchange Commission referred
to above. Statements contained in this prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the full text of such contract or document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference.
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We furnish our stockholders with annual reports containing our audited
financial statements and with proxy material for our annual meetings complying
with the proxy requirements of the Securities Exchange Act of 1934.
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GLOSSARY
Set forth below are definitions of some of the terms used in this
prospectus.
ATM Asynchronous Transfer Mode. A communications
standard that provides for information transfer in
the form of fixed-length cells of 53 bytes each. The
ATM format can be used to deliver voice, video and
data traffic at varying rates.
Backbone A centralized high-speed network that interconnects
smaller, independent networks.
Bandwidth The number of bits of information which can move
over a communications medium in a given amount of
time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically
available to business and residential end-users in
increments from 56 Kbps to T-3.
CLEC Competitive local exchange carrier. A category of
telephone service provider that offers services
similar to the former monopoly local telephone
company. A CLEC may also provide other types of
telecommunications.
CSU/DSU Channel Service Unit/Data Service Unit. A device
used in digital transmission for connecting data
terminal equipment, such as a router, to a digital
transmission circuit or service.
Dark fiber Fiber which does not have connected to it the
electronics required to transmit data on such fiber.
Dedicated circuits Telecommunications lines dedicated or reserved for
use by particular customers along predetermined
routes.
Dial-up line Communications circuit that is established by a
switched-circuit connection using the telephone
network.
DNS Domain Name System. Distributed name system used in
the Internet.
Electronic mail or e-mail An application that allows a user to send or receive
text messages to or from any other user with an
Internet address, commonly termed an e-mail address.
56 Kbps Equivalent to a single high-speed telephone service
line; capable of transmitting one voice call or 56
Kbps of data. Currently in widespread use by medium
and large businesses primarily for entry level
high-speed data and very low-speed video
applications.
Frame relay A communications standard that is optimized for
efficient switching of variable-length data packets.
Gbps Gigabits per second. A measure of digital
transmission rates. One gigabit equals 1,000
megabits.
Host A computer with direct access to the Internet.
HTML Hypertext Markup Language used to produce Web pages.
It is a method of presenting information where
selected words can be "expanded" to provide other
information about the word.
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ILEC Incumbent local exchange carrier. The local exchange
carrier that was the monopoly carrier, prior to the
opening of local exchange services to competition.
Internet An open global network of interconnected commercial,
educational and governmental computer networks which
utilize TCP/IP, a common communications protocol.
Internetworking The process of communicating between and among
networks.
Intranet A TCP/IP based network and Web site which is
securely isolated from the Internet and serves the
internal needs of a company or institution.
IP Internet protocol.
IRUs Indefeasible rights of use in network bandwidth
capacity.
ISDN Integrated Services Digital Network. A network that
provides digital voice and data services through a
single medium.
ISP Internet service provider.
Kbps Kilobits per second. A measure of digital
information transmission rates. One kilobit equals
1,000 bits of digital information. Normally, 10 bits
are used for each alpha-numeric character.
LAN Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a
localized environment.
LEC Local Exchange Carrier. A telecommunications company
that provides telecommunications services in a
geographic area in which calls generally are
transmitted without toll charges.
Mbps Megabits per second. A measure of digital
information transmission rates. One megabit equals
1,000 kilobits.
Modem A device for transmitting information over an analog
communications channel such as a POTS telephone
circuit.
Network A collection of distributed computers which share
data and information through inter-connected lines
of communication.
NOC Network operation center.
OC-3 OC-3 SONET high capacity optical telecommunications
line capable of transmitting data at 155.52 Mbps.
OC-12 OC-12 SONET high capacity optical telecommunications
line capable of transmitting data at 622.08 Mbps.
OC-48 OC-48 SONET high capacity optical telecommunications
line capable of transmitting data at 2488.32 Mbps.
OC-48 Equivalent One OC-48, four OC-12s, 16 OC-3s or 48 DS-3s.
OC-48 Equivalent Mile One Route Mile of OC-48 capacity, four Route Miles
of OC-12 capacity, 16 Route Miles of OC-3 capacity
or 48 Route Miles of DS-3 capacity.
On-line services Commercial information services that offer a
computer user access through a modem to a specified
slate of information, entertainment and
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communications menus. These services are generally
closed systems, although many are now offering full
Internet access.
Open systems A networking system which is based upon
non-proprietary protocols (i.e., protocols which are
in the public domain).
Peering The commercial practice under which nationwide ISPs
exchange each other's traffic, in most cases,
without the payment of settlement charges.
POPs Points-of- presence. An interlinked group of modems,
routers and other computer equipment, located in a
particular city or metropolitan area, that allows a
nearby subscriber to access the Internet through a
local telephone call or using a short-distance
permanent data circuit.
POTS Plain Old Telephone Service. Standard analog
telephone service used by many telephone companies
throughout the United States.
PRI Primary Rate Interface. ISDN interface to primary
rate access.
Protocol A formal description of message formats and the
rules two or more machines must follow in order to
communicate.
RBOC Regional Bell Operating Company. One of the LECs
created by the Divestiture of the local exchange
business by AT&T. These include BellSouth, Bell
Atlantic, Ameritech, US West, SBC, and PacTel.
Router A device that receives and transmits data packets
between segments in a network or different networks.
Route Mile One mile of the actual geographic length of the high
capacity telecommunications fiber route.
Server Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client software.
The term also refers to the computer on which server
software runs.
SMDS Switched Multimegabit Data Service. A public
packet-switching service offered by telephone
companies in many major metropolitan areas.
Packet-switching is a method of delivering voice and
data traffic.
SONET Synchronous Optical Network.
TCP/IP Transmission Control Protocol/Internet Protocol. A
compilation of network and transport-level protocols
that allow computers with different architectures
and operating system software to communicate with
other computers on the Internet.
T-3 or DS-3 A data communications line capable of transmitting
data at 45 Mbps.
UNIX A computer operating system for workstations and
personal computers and noted for its portability and
communications functionality.
VOIP Voice over internet protocol.
WAN Wide Area Network. A network spanning a wide
geographic area.
Web or World Wide Web A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication of
graphics, video and sound.
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Web server The computer system that runs Web software, used to
create custom Web sites, Web pages, and home pages.
Web sites or Web pages A site located on the Web, written in the HTML or
SGML language.
xDSL A term referring to a variety of new Digital
Subscriber Line technologies. Some of these
varieties are asymmetric with different data rates
in the downstream and upstream directions. Others
are symmetric. Downstream speeds range from 384
kilobits (or "SDSL") to 1.5-8 Mbps (or "ADSL").
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PSINET INC.
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 (audited) and
September 30, 1998 (unaudited)........................................... F-3
Consolidated Statements of Operations for the three years ended December
31, 1997 (audited) and nine months ended September 30, 1997 and 1998
(unaudited).............................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the three years ended December 31, 1997 (audited) and nine months ended
September 30, 1998 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows for the three years ended December
31, 1997 (audited) and nine months ended September 30, 1997 and 1998
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
ISTAR INTERNET INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Auditors' Report to the Directors......................................... F-33
Consolidated Balance Sheets as of May 31, 1996 and 1997................... F-34
Consolidated Statements of Operations and Deficit for the years ended May
31, 1996 and 1997........................................................ F-35
Consolidated Statements of Changes in Financial Position for the years
ended May 31, 1996 and 1997.............................................. F-36
Notes to Consolidated Financial Statements................................ F-37
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of February 28, 1997 and January 31, 1998
(Unaudited).............................................................. F-48
Consolidated Statements of Operations and Deficit for the nine months
ended February 28, 1997 and the eight months ended January 31, 1998
(Unaudited).............................................................. F-49
Consolidated Statements of Changes in Financial Position for the nine
months ended February 28, 1997 and eight months ended January 31, 1998
(Unaudited).............................................................. F-50
Notes to Consolidated Financial Statements (Unaudited).................... F-51
TOKYO INTERNET CORPORATION
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants......................................... F-54
Balance Sheets as of March 31, 1996, 1997 and 1998........................ F-55
Statements of Operations and Undisposed Deficit for the years ended March
31, 1996, 1997 and 1998.................................................. F-56
Notes to the Financial Statements......................................... F-57
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet as of September 30, 1998.................................... F-63
Statements of Operations and Undisposed Deficit for the six months ended
September 30, 1997 and 1998.............................................. F-65
Notes to the Unaudited Financial Statements............................... F-67
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of PSINet Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of PSINet Inc. and its subsidiaries at December 31, 1996 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Washington, D.C.
February 6, 1998, except as to
paragraphs 1, 2 and 6 of Note 11,
which are as of February 25, 1998
F-2
<PAGE>
PSINET INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------- September 30,
1996 1997 1998
--------- --------- -------------
(Unaudited)
(In Thousands of U.S. Dollars)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 51,741 $ 33,322 $ 282,586
Restricted cash and short-term
investments............................ 954 20,690 127,617
Short-term investments and marketable
securities............................. 4,649 -- 52,842
Accounts receivable, net of allowances
of $1,909,000, $2,101,000 and
$4,420,000 (unaudited)................. 17,421 11,022 36,932
Notes receivable........................ 747 7,224 1,347
Prepaid expenses........................ 1,963 1,478 5,052
Other current assets.................... 4,836 5,162 16,906
--------- --------- ---------
Total current assets.................. 82,311 78,898 523,282
Property and equipment, net............... 72,061 95,619 221,390
Goodwill and other intangibles, net of
accumulated amortization of $9,778,000,
$2,057,000 and $8,567,000 (unaudited).... 16,673 4,675 103,504
Other assets and deferred charges......... 6,067 6,989 30,454
--------- --------- ---------
Total assets.......................... $ 177,112 $ 186,181 $ 878,630
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Lines of credit......................... $ 2,000 $ 5,648 $ --
Current portion of long-term debt....... 24,915 33,985 44,746
Trade accounts payable.................. 19,868 25,031 34,727
Accrued payroll and related expenses.... 3,098 4,636 7,646
Other accounts payable and accrued
liabilities............................ 3,632 2,382 25,667
Deferred revenue........................ 5,612 5,944 9,878
--------- --------- ---------
Total current liabilities............. 59,125 77,626 122,664
Long-term debt............................ 26,938 33,820 772,998
Deferred income taxes..................... 476 -- --
Other liabilities......................... 790 1,306 9,601
--------- --------- ---------
Total liabilities..................... 87,329 112,752 905,263
--------- --------- ---------
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity (deficit):
Preferred stock, $.01 par value;
29,324,858 shares authorized; no shares
issued and outstanding................. -- -- --
Convertible preferred stock, $.01 par
value; $50.00 stated value; 675,142
shares authorized; 600,000 shares
issued and outstanding................. -- 28,135 28,637
Common stock, $.01 par value;
100,000,000 shares authorized;
40,212,790, 40,577,342 and 51,889,896
(unaudited) shares issued.............. 402 406 519
Capital in excess of par value.......... 208,000 210,162 400,949
Retained deficit........................ (116,636) (162,649) (295,033)
Treasury stock, 99,556 shares, at cost.. (2,005) (2,005) (2,005)
Accumulated other comprehensive income.. 22 (620) (1,150)
Bandwidth asset to be delivered under
IRU agreement.......................... -- -- (158,550)
--------- --------- ---------
Total shareholders' equity (deficit).. 89,783 73,429 (26,633)
--------- --------- ---------
Total liabilities and shareholders'
equity (deficit)..................... $ 177,112 $ 186,181 $ 878,630
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(Unaudited)
(In Thousands of U.S. Dollars, Except Per
Share Amounts)
<S> <C> <C> <C> <C> <C>
Revenue.................... $ 38,722 $ 84,351 $121,902 $ 87,147 $ 165,732
Other income, net.......... -- 5,417 -- -- --
-------- -------- -------- -------- ---------
38,722 89,768 121,902 87,147 165,732
-------- -------- -------- -------- ---------
Operating costs and
expenses:
Data communications and
operations.............. 32,124 70,102 94,363 66,847 130,517
Sales and marketing...... 23,930 27,064 25,831 18,070 37,919
General and
administrative.......... 10,569 20,648 22,947 16,976 29,439
Depreciation and
amortization............ 14,778 28,035 28,347 20,648 37,011
Intangible asset write-
down.................... 9,938 -- -- -- --
Charge for acquired in-
process research and
development (Note 14)... -- -- -- -- 40,400
-------- -------- -------- -------- ---------
Total operating costs
and expenses.......... 91,339 145,849 171,488 122,541 275,286
-------- -------- -------- -------- ---------
Loss from operations....... (52,617) (56,081) (49,586) (35,394) (109,554)
Interest expense........... (1,964) (5,025) (5,362) (4,162) (38,193)
Interest income............ 1,625 3,794 3,059 1,995 11,391
Other income............... -- 2,863 110 119 703
Gain on sale of
subsidiary................ -- -- 5,701 5,701 --
Gain on sale of
investment................ -- -- -- -- 5,647
Equity in loss of
affiliate................. (204) (807) -- -- --
-------- -------- -------- -------- ---------
Loss before income taxes... (53,160) (55,256) (46,078) (31,741) (130,006)
Income tax provision
(benefit)................. -- (159) (476) (476) 65
-------- -------- -------- -------- ---------
Net loss................... (53,160) (55,097) (45,602) (31,265) (130,071)
Return to preferred
shareholders.............. -- -- (411) -- (2,313)
-------- -------- -------- -------- ---------
Net loss available to
common shareholders....... $(53,160) $(55,097) $(46,013) $(31,265) $(132,384)
======== ======== ======== ======== =========
Basic loss per share....... $ (2.01) $ (1.40) $ (1.14) $ (0.78) $ (2.70)
======== ======== ======== ======== =========
Diluted loss per share..... $ (2.01) $ (1.40) $ (1.14) $ (0.78) $ (2.70)
======== ======== ======== ======== =========
Shares used in computing
basic and diluted loss per
share (thousands)......... 26,485 39,378 40,306 40,264 49,120
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Three Years Ended December 31, 1997 and for the Nine Months Ended
September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Bandwidth
Preferred Stock Common Stock Accumulated Asset To Be
------------------- ------------ Capital in Other Delivered
Outstanding Outstanding Par Excess Retained Treasury Comprehensive Under
Shares Amount Shares Value Of Par Deficit Stock Income IRU
----------- ------- ------------ ----- ---------- --------- -------- ------------- -----------
(In thousands of U.S. Dollars, except Share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994......... -- $ -- 11,202,791 $112 $ -- $ (8,379) $ -- $ (16) --
Comprehensive
income:
Net loss........ (53,160)
Unrealized
holding gains
(losses)........ 813
Foreign currency
translation
adjustment...... (388)
Total
comprehensive
income.......... [(53,160)] [425]
Accretion of
redeemable common
and convertible
preferred
stock............ (1,377)
Issuance of
common stock to
employees under
revenue bonus
plan............. 18,300 77
Issuance of
common stock for
acquisitions..... 4,514,304 45 43,509
Conversion of
redeemable
preferred stock
into common
stock............ 10,042,680 100 26,671
Expiration of
redemption rights
on redeemable
common stock..... 1,838,475 18 402
Initial public
offering, net of
expenses......... 4,370,000 44 47,229
Issuance of
common stock
pursuant to
exercise of stock
warrants......... 1,384,863 14 2,390 (2,005)
Issuance of
common stock
pursuant to
exercise of stock
options.......... 493,003 5 759 (49)
Public offering,
net of expenses.. 4,000,000 40 86,599
Employee stock
option loan
program.......... (224)
Issuance of
common stock in
escrow for
acquisition of
World Online..... 50,516 1
------- ------- ---------- ---- -------- --------- ------- ------- ---------
Balance, December
31, 1995......... -- -- 37,914,932 379 206,035 (61,539) (2,054) 409 --
Comprehensive
income:
Net loss........ (55,097)
Unrealized
holding gains
(losses)........ (813)
Foreign currency
translation
adjustment...... 426
Total
comprehensive
income.......... [(55,097)] [(387)]
Retirement of
treasury stock... (49) 49
Issuance of
common stock
pursuant to
exercise of stock
warrants......... 1,362,604 14 (14)
Issuance of
common stock
pursuant to
exercise of stock
options.......... 803,330 9 1,806
Issuance of
common stock in
escrow for
acquisition of
World Online..... 32,368
Repayments under
employee stock
option loan
program.......... 232
Interest under
employee stock
options loan
program.......... (10)
------- ------- ---------- ---- -------- --------- ------- ------- ---------
Balance, December
31, 1996......... -- -- 40,113,234 402 208,000 (116,636) (2,005) 22 --
Comprehensive
income:
Net loss........ (45,602)
Unrealized
holding gains
(losses)........
Foreign currency
translation
adjustment...... (642)
Total
comprehensive
income.......... [(45,602)] [(642)]
Issuance of
common stock
pursuant to
exercise of stock
warrants......... 164,185 2 3
Issuance of
common stock
pursuant to
exercise of stock
options.......... 283,251 3 659
Issuance of
Series B
convertible
preferred stock,
net of expenses.. 600,000 28,064 1,500
Return to
preferred
shareholders..... 71 (411)
Cancellation of
common stock for
acquisition of
World Online..... (82,884) (1)
------- ------- ---------- ---- -------- --------- ------- ------- ---------
Balance, December
31, 1997......... 600,000 28,135 40,477,786 406 210,162 (162,649) (2,005) (620)
Comprehensive
income
(unaudited):
Net loss
(unaudited)..... (130,071)
Foreign currency
translation
adjustment
(unaudited)..... (530)
Total
comprehensive
income
(unaudited)..... [(130,071)] [(530)]
Issuance of
common stock
pursuant to
exercise of stock
warrants
(unaudited)...... 174,274 2 279
Issuance of
common stock
pursuant to
exercise of stock
options
(unaudited)...... 908,491 9 4,636
Issuance of
common stock and
contingent
obligation to IXC
(unaudited)...... 10,229,789 102 185,872 (185,974)
Acceptance of
bandwidth under
IRU agreement
(unaudited)...... 27,424
Issuance of
Series B
convertible
preferred stock,
net of expenses
(unaudited)...... (11)
Return to
preferred
shareholders
(unaudited)...... 513 (2,313)
------- ------- ---------- ---- -------- --------- ------- ------- ---------
Balance,
September 30,
1998
(unaudited)...... 600,000 $28,637 51,790,340 $519 $400,949 $(295,033) $(2,005) $(1,150) $(158,550)
======= ======= ========== ==== ======== ========= ======= ======= =========
<CAPTION>
Total
Shareholders'
Equity
(Deficit)
-------------
<S> <C>
Balance, December
31, 1994......... $ (8,283)
Comprehensive
income:
Net loss........ (53,160)
Unrealized
holding gains
(losses)........ 813
Foreign currency
translation
adjustment...... (388)
Total
comprehensive
income.......... [(52,735)]
Accretion of
redeemable common
and convertible
preferred
stock............ (1,377)
Issuance of
common stock to
employees under
revenue bonus
plan............. 77
Issuance of
common stock for
acquisitions..... 43,554
Conversion of
redeemable
preferred stock
into common
stock............ 26,771
Expiration of
redemption rights
on redeemable
common stock..... 420
Initial public
offering, net of
expenses......... 47,273
Issuance of
common stock
pursuant to
exercise of stock
warrants......... 399
Issuance of
common stock
pursuant to
exercise of stock
options.......... 715
Public offering,
net of expenses.. 86,639
Employee stock
option loan
program.......... (224)
Issuance of
common stock in
escrow for
acquisition of
World Online..... 1
-------------
Balance, December
31, 1995......... 143,230
Comprehensive
income:
Net loss........ (55,097)
Unrealized
holding gains
(losses)........ (813)
Foreign currency
translation
adjustment...... 426
Total
comprehensive
income.......... [(55,484)]
Retirement of
treasury stock...
Issuance of
common stock
pursuant to
exercise of stock
warrants.........
Issuance of
common stock
pursuant to
exercise of stock
options.......... 1,815
Issuance of
common stock in
escrow for
acquisition of
World Online.....
Repayments under
employee stock
option loan
program.......... 232
Interest under
employee stock
options loan
program.......... (10)
-------------
Balance, December
31, 1996......... 89,783
Comprehensive
income:
Net loss........ (45,602)
Unrealized
holding gains
(losses)........
Foreign currency
translation
adjustment...... (642)
Total
comprehensive
income.......... [(46,244)]
Issuance of
common stock
pursuant to
exercise of stock
warrants......... 5
Issuance of
common stock
pursuant to
exercise of stock
options.......... 662
Issuance of
Series B
convertible
preferred stock,
net of expenses.. 29,564
Return to
preferred
shareholders..... (340)
Cancellation of
common stock for
acquisition of
World Online..... (1)
-------------
Balance, December
31, 1997......... 73,429
Comprehensive
income
(unaudited):
Net loss
(unaudited)..... (130,071)
Foreign currency
translation
adjustment
(unaudited)..... (530)
Total
comprehensive
income
(unaudited)..... [(130,601)]
Issuance of
common stock
pursuant to
exercise of stock
warrants
(unaudited)...... 281
Issuance of
common stock
pursuant to
exercise of stock
options
(unaudited)...... 4,645
Issuance of
common stock and
contingent
obligation to IXC
(unaudited)......
Acceptance of
bandwidth under
IRU agreement
(unaudited)...... 27,424
Issuance of
Series B
convertible
preferred stock,
net of expenses
(unaudited)...... (11)
Return to
preferred
shareholders
(unaudited)...... (1,800)
-------------
Balance,
September 30,
1998
(unaudited)...... $ (26,633)
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PSINET INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------- ------------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(In Thousands of U.S. Dollars)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(53,160) $(55,097) $(45,602) $(31,265) $(130,071)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization.......... 14,778 28,035 28,347 20,648 37,011
Purchased R&D write
off................... -- -- -- -- 40,400
Gain on sale of
investments........... -- (2,863) (20) -- (5,647)
Gain on sale of
InterCon.............. -- -- (5,701) (5,701) --
Gain on sale of assets
to MindSpring......... -- (5,417) -- -- --
Provision for
allowances............ 724 3,130 5,426 4,956 3,807
Equity in loss of
affiliate............. 204 807 -- -- --
Intangible asset write-
down.................. 9,938 -- -- -- --
(Increase) decrease in
accounts receivable... (2,394) (14,320) 430 (1,823) (16,512)
(Increase) decrease in
notes receivable...... -- (56) (5,648) (3,277) 4,619
(Increase) decrease in
prepaid expenses and
other current assets.. (5,733) 311 296 838 (12,430)
Increase in other
assets and deferred
charges............... (779) (509) (258) (889) (474)
Increase in accounts
payable and accrued
liabilities........... 5,640 11,545 6,568 3,300 1,806
Increase in deferred
revenue............... 71 2,367 635 279 484
Decrease in deferred
taxes................. (37) (159) (476) -- --
Increase (decrease) in
other liabilities..... 655 (317) 546 (22) (1,273)
Other.................. -- -- -- (53) 1,349
-------- -------- -------- -------- ---------
Net cash used in
operating activities.. (30,093) (32,543) (15,457) (13,009) (76,931)
-------- -------- -------- -------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment, net.... (16,095) (12,814) (12,613) (9,120) (48,635)
Purchases of short-term
investments........... -- (17,167) (3,000) (3,000) (247,223)
Proceeds from maturity
or sale of
investments........... -- 15,769 7,649 4,649 200,044
Proceeds from sale of
assets to MindSpring.. -- 8,451 691 -- --
Proceeds from sale of
InterCon, net......... -- -- 20,353 20,353 --
Loan to affiliate...... -- (311) -- -- --
Capitalized software
costs................. (435) (816) -- -- --
Investments in certain
business, net of cash
acquired.............. (5,428) (69) (8,551) -- (123,797)
Change in restricted
cash and short-term
investments, net...... -- (954) (19,736) -- (106,212)
Other.................. -- 14 (353) 148 (205)
-------- -------- -------- -------- ---------
Net cash provided by
(used in) investing
activities............ (21,958) (7,897) (15,560) 13,030 (326,028)
-------- -------- -------- -------- ---------
Cash flows from
financing activities:
Net proceeds (payments)
on lines of credit.... 1,159 (1,012) 3,702 1,000 (5,603)
Proceeds from issuance
of 10% senior notes... -- -- -- -- 580,494
Proceeds from issuance
of debt............... 8,250 8,281 6,408 5,988 138,081
Repayments of debt..... (1,441) (4,654) (5,670) (5,290) (37,313)
Principal payments
under capital lease
obligations........... (4,379) (15,117) (22,071) (14,313) (24,205)
Proceeds from issuance
of Series B preferred
stock................. -- -- 29,564 -- --
Proceeds from issuance
of Series E redeemable
preferred stock....... 12,197 -- -- -- --
Proceeds from issuance
of common stock....... 52 -- -- -- --
Proceeds from initial
public offering, net.. 47,273 -- -- -- --
Proceeds from public
offering, net......... 87,390 -- -- -- --
Proceeds from exercise
of common stock
warrants.............. 400 -- 5 -- 279
Proceeds from exercise
of common stock
options............... 502 1,815 662 -- 4,645
Proceeds from repayment
of employee notes
receivable............ -- 232 -- -- --
Other.................. -- (74) (2) 409 (10)
Dividends paid to
preferred
shareholders.......... -- -- -- -- (2,140)
-------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities............ 151,403 (10,529) 12,598 (12,206) 654,228
-------- -------- -------- -------- ---------
Effect of exchange rate
changes on cash........ -- -- -- -- (2,005)
-------- -------- -------- -------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 99,352 (50,969) (18,419) (12,185) 249,264
Cash and cash
equivalents, beginning
of period.............. 3,358 102,710 51,741 51,471 33,322
-------- -------- -------- -------- ---------
Cash and cash
equivalents, end of
period................. $102,710 $ 51,741 $ 33,322 $ 39,286 $ 282,586
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations--PSINet Inc. (the "Company") was
organized in October 1989. PSINet is a leading global facilities-based provider
of Internet access services and related products to businesses. The Company
provides dedicated and dial-up Internet connectivity in 90 of the 100 largest
metropolitan statistical areas in the U.S. and in 12 of the 20 largest
international telecommunications markets. The Company also offers Internet
protocol ("IP")-based value-added services and products to businesses,
including corporate intranets, Web hosting and collocation, remote user access,
multi-currency electronic commerce and security services, that enable
businesses to maximize utilization of their corporate networks and the
Internet. Additionally, the Company provides network backbone services to other
telecommunications carriers and Internet Service Providers ("ISPs") to further
exploit its network capacity.
The Company's operations are subject to certain risks and uncertainties
including, among others, actual and prospective competition by entities with
greater financial and other resources, risks associated with the development of
the Internet market, risks associated with growth and domestic and global
expansion, risks associated with acquisitions, risks associated with limited
experience in the carrier and ISP market, technology and regulatory risks, and
dependence upon sole and limited source suppliers.
Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition--Revenue and related direct costs from customer
contracts are recognized ratably over the terms of the contracts, which are
generally three to 12 months. Cash received in advance of revenues earned is
recorded as deferred revenue. In 1995 and 1996, when the Company's offerings
included connectivity software products, revenue from the sale of software,
including sales to distributors, resellers and original equipment
manufacturers, was recognized when software products were shipped. Revenue from
separate post-contract customer support agreements was recognized over the
contract period.
Advertising and Customer Acquisition Costs--The Company expenses all
advertising and customer acquisition costs in the period incurred. Advertising
expenses (which include customer acquisition costs) were $11,993,000,
$14,312,000 and $9,153,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Advertising expenses for the nine month periods ended
September 30, 1997 and 1998 were $6,608,000 and $14,448,000, respectively
(unaudited).
Cash and Cash Equivalents--All highly liquid investments with an original
maturity of three months or less at the date of acquisition are classified as
cash equivalents.
Restricted Cash and Short-Term Investments--Restricted cash and short-term
investments represent amounts that are restricted as to their use in accordance
with capital lease obligations and other financing arrangements.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
cash and cash equivalents, short-term investments and marketable securities and
accounts and notes receivable. The Company's cash and investment policies limit
investments to short-term, investment grade instruments. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base.
F-7
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of credit risk with respect to notes receivable relate primarily
to two customers, which are monitored closely by the Company.
Property and Equipment--Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements, including labor and overhead costs of
POP installations, are amortized over the shorter of the term of the related
lease or the estimated useful lives of the assets, which is generally five
years.
Equipment Under Capital Lease--The Company finances most of its data
communications equipment and other fixed assets under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lesser of
the present value of aggregate future minimum lease payments, including
estimated bargain purchase options, or the fair value of the assets under
lease. Assets under these capital leases are depreciated over their estimated
useful lives of three to five years, which are generally longer than the terms
of the leases.
Goodwill and Other Intangibles--The Company continually reviews goodwill and
other intangibles to assess recoverability based upon undiscounted cash flow
analysis. Impairments, if any, are measured using discounted cash flow analysis
and are recognized in operating results in the period in which a permanent
diminution in value is determined. Goodwill and other intangibles are amortized
over their estimated useful lives of three to ten years.
Other Assets and Deferred Charges--Other assets and deferred charges are
principally comprised of debt issue costs, long term asset acquisition costs
associated with the acquisition of the PSINet IRUs and notes receivable. Long
term asset acquisition costs are amortized over the estimated life of the
PSINet IRUs of twenty years. Additionally in 1996, the Company held an
investment accounted for under the equity method in which the investment,
originally recorded at cost, was adjusted to recognize the Company's share of
the affiliate's net earnings or losses as they occurred. This investment was
sold in 1997 and at December 31, 1997, the Company had no equity method
investments.
Income Taxes--The Company accounts for income taxes under the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax basis of assets and liabilities. The
Company provides a valuation allowance on net deferred tax assets when it is
more likely than not that such assets will not be realized.
Stock Compensation--The Company accounts for its stock option plans under
APB Opinion No. 25, "Accounting for Stock Issued to Employees." In 1996, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," for disclosure purposes.
Foreign Currency--Gains and losses on translation of the accounts of the
Company's foreign operations where the local currency is the functional
currency are accumulated and reported as accumulated other comprehensive income
and included as a component of shareholders' equity (deficit). Transaction
gains and losses are recorded in the statement of operations.
Loss Per Share--The Company adopted SFAS No. 128, "Earnings per Share," in
1997 and accordingly has restated prior year loss per share amounts to reflect
the provisions of this new statement. Basic loss per share is computed using
the weighted average number of shares of common stock outstanding during the
year. Diluted loss per share is computed using the weighted average number of
shares of common stock, adjusted for the dilutive effect of common stock
equivalent shares of common stock options and warrants and contingently
issuable shares of common stock. Common stock equivalent shares are calculated
using the treasury stock method. All stock options and warrants outstanding
have been excluded from the computation of diluted loss per share as their
effect would be antidilutive and accordingly, there is no reconciliation
between basic and diluted loss per share for each of the years presented.
F-8
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments--The Company discloses the fair value of
its financial instruments for which it is practicable to estimate fair value.
In cases where quoted market prices are not available for identical or
comparable financial instruments, fair values are based on estimates using the
present value of estimated cash flows or other valuation techniques. The
resulting fair values can be significantly affected by the assumptions used,
including the discount rate and estimates as to the amounts and timing of
future cash flows. In this regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, therefore, the fair
values may not represent actual values of the financial instruments that could
have been realized as of year end or that will be realized in the future.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
for financial instruments:
Cash and cash equivalents. The carrying amount approximates fair value.
Restricted cash and short-term investments. The carrying amount
approximates fair value.
Short-term investments. The carrying amount approximates fair value.
Notes receivable. The fair value of notes receivable is estimated by
discounting at market interest rates the future cash flows under the notes.
Borrowings. The fair value of borrowings, including capital lease
obligations and other obligations, is estimated by discounting the future
cash flows using estimated borrowing rates at which similar types of
borrowing arrangements with the same remaining maturities could be obtained
by the Company.
Reclassifications in Financial Presentation--Certain prior year information
has been reclassified to conform to the current year presentation.
Nonmonetary Exchanges--The Company exchanges capacity on its network for
capacity on the network of another ISP. The Company records such exchange
agreement at the fair value of either the services provided or received,
whichever is more readily determinable. For the twelve months ended December
31, 1997, the Company recognized $2,400,000 of revenue and data communications
and operations expense relating to such exchange.
Comprehensive Income--In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which is
effective for the fiscal years beginning after December 15, 1997. The Statement
establishes standards for reporting and displaying comprehensive income, as
defined, and its components. The Company has adopted the Statement's disclosure
requirements in the accompanying financial statements.
Recent Pronouncements--In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for fiscal years beginning after December 15, 1997. The Statement
establishes standards for the way companies report information about operating
segments in annual and interim financial statements. Generally, the Statement
requires financial information to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company plans to adopt the Statement's disclosure
requirements in 1998 annual financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
securities. To the extent the Company begins to enter
F-9
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
into such transactions in the future, the Company will adopt the Statement's
requirements in the financial statements for fiscal year 2000. Currently, as
the Company has no derivitive instruments, the adoption of SFAS No. 133 would
have no impact on the Company's financial condition or results of operations.
Unaudited interim financial information--The consolidated condensed
financial statements at September 30, 1998 and for the nine months ended
September 30, 1997 and 1998 and the related footnote information are unaudited
and have been prepared on a basis substantially consistent with the audited
consolidated financial statements as of and for the year ended December 31,
1997. In the opinion of management, the unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) which management considers necessary to present fairly the
consolidated financial position of the Company at September 30, 1998 and the
results of its operations and cash flows for the nine months ended September
30, 1997 and 1998. The results of operations for the nine months ended
September 30, 1998 may not be indicative of the results expected for any
succeeding quarter or for the entire year ending December 31, 1998.
Note 2--Notes Receivable
Under the terms of an agreement with one of its customers, receivables from
the customer may be deferred until July 31, 1998 on amounts of up to $5,000,000
for services provided by the Company. At December 31, 1997, amounts due from
this customer totaling $4,892,000 had been deferred under this agreement and
are reflected as current notes receivable.
On June 28, 1996, the Company entered into an agreement with MindSpring
Enterprises, Inc., ("MindSpring") an ISP, pursuant to which the Company agreed
to transfer to MindSpring substantially all of its individual subscriber
accounts and related tangible and intangible assets and rights in connection
with the consumer dial-up Internet access services operated by the Company in
the United States, for $12,929,000 in cash and non-interest bearing notes
receivable through 1997 and 1998. The gain from this sale of $5,417,000 has
been recorded as other income, net in the Company's consolidated statement of
operations. The balance of the note receivable from MindSpring at December 31,
1996 and 1997 was $2,769,000 and $2,078,000, respectively.
At December 31, 1997, other notes receivable consist of an amount due from a
third party, of which $254,000 is scheduled to be repaid in 1998 and $509,000
in 1999. At December 31, 1996 and 1997, notes receivable approximated their
estimated fair value.
F-10
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
-------- --------
(In Thousands of
U.S. Dollars)
<S> <C> <C>
Data communications equipment............................ $ 24,095 $ 32,108
Purchased software....................................... 2,989 3,920
Office and other equipment............................... 3,108 4,451
Leasehold improvements................................... 6,313 9,204
-------- --------
36,505 49,683
Less accumulated depreciation and amortization........... (12,331) (28,217)
-------- --------
24,174 21,466
Leased data communications equipment..................... 60,979 96,059
Leased office and other equipment........................ 3,241 3,521
-------- --------
64,220 99,580
Less accumulated depreciation............................ (16,333) (25,427)
-------- --------
47,887 74,153
-------- --------
Property and equipment, net.............................. $ 72,061 $ 95,619
======== ========
</TABLE>
Total depreciation and leasehold amortization expense in 1995, 1996 and 1997
was $6,462,000, $16,572,000, and $25,099,000, respectively.
Note 4--Goodwill and Other Intangibles
Goodwill and other intangibles consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1996 1997 1998
------- ------- -------------
(Unaudited)
(In Thousands of
U.S. Dollars)
<S> <C> <C> <C> <C>
Goodwill................................. $12,763 $ 5,671 $ 90,786
Tradename................................ 4,050 -- 9,418
Customer relations....................... 1,155 -- 4,554
Software costs........................... 6,370 304 304
Other.................................... 2,113 757 7,009
------- ------- --------
26,451 6,732 112,071
Less accumulated amortization............ (9,778) (2,057) (8,567)
------- ------- --------
Goodwill and other intangibles, net...... $16,673 $ 4,675 $103,504
======= ======= ========
</TABLE>
Total amortization expense in 1995, 1996 and 1997 was $8,227,000,
$11,104,000 and $2,712,000, respectively.
As more fully described in Note 11, during 1997 the Company sold its
software subsidiary. Goodwill and other intangibles of $11,080,000 were offset
against the proceeds received from the sale.
In December 1995, a pretax charge of $9,938,000 was recorded related to the
permanent impairment of certain intangible assets which resulted from the
Company's plan, adopted in the first quarter of 1996, to merge
F-11
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the operations of two of the Company's acquired subsidiaries. As part of the
plan, the Company no longer marketed certain products using an acquired
tradename and certain software products were abandoned. This charge, which had
no immediate cash effect, recognized the permanent impairment in the value of
certain intangibles including a tradename, a non-compete agreement, certain
software costs and goodwill recorded in connection with the acquisitions.
Note 5--Lines of Credit
The Company has a secured revolving credit agreement with a bank under which
the Company may borrow up to a maximum principal amount of the lesser of
$5,000,000 less the aggregate face value of all letters of credit outstanding,
or 75% of qualified accounts receivable which secure the loan less 100% of the
maximum outstanding liability under any letters of credit issued, less 20% of
the aggregate principal of certain term credit advances. This revolving line of
credit agreement expires on March 31, 1998. Interest is payable monthly in
arrears at a rate of prime plus 1.5%. The maximum principal amount available to
the Company at December 31, 1997 was $4,013,000, of which $3,900,000 was
outstanding at that date at an interest rate of 10%. Letters of credit issued
and outstanding at December 31, 1997 relating to this credit agreement totaled
$987,000.
The Company also has a secured revolving agreement with a Canadian bank
under which the Company may borrow up to a maximum principal amount of
approximately $1,850,000, of which $1,748,000 was outstanding at December 31,
1997. The line of credit is repayable on demand, generally bears interest at
prime plus 0.5% and is secured by restricted cash on deposit with the bank. The
Company has an overdraft facility with a bank in the United Kingdom for
approximately $413,000. No amounts were outstanding at December 31, 1997.
On September 29, 1998, the Company entered into a new senior secured credit
facility, to replace its then existing bank credit arrangement in the United
States pursuant to which The Chase Manhattan Bank ("Chase") is acting as
administrative agent, to replace the Company's existing bank credit
arrangements in the United States (the "Credit Facility"). The Credit Facility
is in the maximum principal amount of $110 million and has a final maturity
date of September 29, 2001.
Interest. Borrowings under the Credit Facility bear interest at the
Company's option, at (i) the London interbank offered rate for deposits in U.S.
Dollars for the relevant period multiplied by the statutory reserve rate plus
the Applicable Margin ("Eurodollar Rate") or (ii) the higher of Chase's prime
rate or the Federal Funds effective rate plus 1/2 of 1%, plus the Applicable
Margin ("ABR Rate"). The Applicable Margin varies based on the Leverage Ratio
as of the most recent determination date. On September 29, 1998, the Applicable
Margin was 1.75% for ABR Rate borrowings and 2.75% for Eurodollar Rate
borrowings.
Guarantees and Security. The Company's obligations under the Credit Facility
are guaranteed by each existing and subsequently acquired or organized
significant domestic subsidiary of the Company (a subsidiary which owns or
maintains at least $1,000,000 in assets or generates at least $1,000,000 in
annual revenues) and are secured by a lien on substantially all of the assets
of the Company and each subsidiary guarantor and by a pledge by the Company and
each subsidiary guarantor of all capital stock and other equity interests it
owns (65% in the case of equity interests in foreign subsidiaries).
Covenants. The Credit Facility contains covenants and provisions that
restrict, among other things, the Company and its subsidiaries' ability to: (i)
make dividends and distributions on, and redemptions and repurchases of,
capital stock and other similar payments; (ii) make prepayments, redemptions
and repurchases of indebtedness; (iii) incur liens and enter into sale-
leaseback transactions; (iv) make certain loans and investments; (v) incur
additional indebtedness and certain contingent obligations; (vi) effect certain
mergers,
F-12
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisitions and asset sales; (vii) engage in certain transactions with
affiliates; (viii) effect certain changes in business conducted by the Company;
and (ix) amend and waive certain debt and other agreements. The Credit Facility
also requires the satisfaction of certain financial covenants, including a
minimum annual consolidated revenue test, a minimum debt-to-annualized adjusted
revenue ratio, a minimum aggregate balance of nonrestricted cash and available
borrowings and a minimum EBITDA test and requires the reduction in the maximum
amount of availability and prepayments (if required as a result of such
reduction) equal to the net proceeds received from certain asset sales greater
than $5 million and certain casualty events.
Events of Default. Events of default under the Credit Facility include
various events of default customary for such type of agreement, such as failure
to pay scheduled payments when due, cross defaults with and cross acceleration
to other indebtedness (including the $600 million aggregate principal amount of
10% Senior Notes due 2005 ("10% Senior Notes")), the occurrence of a change in
control (as defined therein) and certain events of bankruptcy, insolvency and
reorganization.
Note 6--Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1996 1997 1998
-------- -------- -------------
(Unaudited)
(In Thousands of U.S. Dollars)
<S> <C> <C> <C> <C> <C>
Notes payable with a bank,
interest at prime plus 2.5%..... $ 7,966 $ 8,864 $ --
Other notes payable at interest
rates ranging from 7.5% to
20.0%........................... 3,623 2,586 7,245
Capital lease obligations at
interest rates ranging from 5.7%
to 15.8%........................ 40,264 56,355 101,999
Senior Notes at interest rate of
10.0%........................... -- -- 600,000
Revolver at interest rate of
8.1%............................ -- -- 108,500
-------- -------- --------
51,853 67,805 817,744
Less current portion............. (24,915) (33,985) (44,746)
-------- -------- --------
Long-term portion................ $ 26,938 $ 33,820 $772,998
======== ======== ========
</TABLE>
Borrowings under the notes payable with a bank are repayable in 36 monthly
installments from the dates of issue and are secured by a lien on the equipment
purchased with the proceeds. Interest is payable monthly at a rate of prime
plus 2.5%; the interest rate was 11.00% at December 31, 1997. The notes payable
and certain capital lease obligations contain certain provisions which, among
other things, require the maintenance of certain financial ratios and restrict
the payment of dividends.
The Company has various financing arrangements accounted for as capital
leases for the acquisition of equipment and other fixed assets. During 1995,
1996 and 1997, the Company incurred capital lease obligations under these
arrangements of $29,071,000, $25,576,000 and $37,455,000, respectively, upon
the execution of leases for new data communications equipment and other fixed
assets. The Company's capital lease obligations are generally repayable in 36
monthly installments from the dates of acquisition. At December 31, 1997, the
aggregate unused portion under these arrangements totaled $24,611,000.
F-13
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under capital leases and annual maturities of
other long-term debt are as follows:
<TABLE>
<CAPTION>
Capital Other Long-
Year Ending December 31, Leases Term Debt
------------------------ ------- -----------
(In Thousands of
U.S. Dollars)
<S> <C> <C>
1998.................................................... $31,752 $ 6,665
1999.................................................... 19,743 3,734
2000.................................................... 11,863 993
2001.................................................... -- 58
2002.................................................... -- --
------- -------
63,358 $11,450
======= =======
Less amount representing interest....................... (7,003)
-------
Present value of future minimum lease payments.......... $56,355
=======
</TABLE>
During the years ended December 31, 1995, 1996 and 1997, cash paid for
interest was $1,869,000, $5,083,000 and $5,559,000, respectively.
At December 31, 1996 and 1997, the estimated fair value of the capital lease
obligations was approximately $40,730,000 and $55,565,000, respectively, and
other long-term debt was approximately $12,189,000 and $11,370,000,
respectively.
Long-Term Debt--1998 (Unaudited)
On April 13, 1998, the Company completed an offering of $600.0 million
(unaudited) aggregate principal amount of 10% Senior Notes due 2005, Series A
(the "Initial Notes"). The Initial Notes were issued and sold in accordance
with Rule 144A and Regulation S under the Securities Act of 1933, as amended
(the "Securities Act"). On June 11, 1998, the Company completed an exchange
offer of the Initial Notes for equivalent 10% Senior Notes due 2005, Series B
(the "Exchange Notes" and, together with the Initial Notes, the "Notes") which
have been registered under the Securities Act. The Notes are senior unsecured
obligations of the Company ranking equivalent in right of payment to all
existing and future unsecured and unsubordinated indebtedness of the Company
and senior in right of payment to all existing and future subordinated
indebtedness of the Company. The net proceeds of the offering, after deducting
discounts and commissions and expenses payable by the Company, were
approximately $581.0 million (unaudited).
Concurrently with the closing of the offering, the Company deposited $138.7
million (unaudited) of such net proceeds into an escrow account, which,
together with the proceeds of the investment thereof, is expected to be
sufficient to pay when due the first five semi-annual interest payments on the
Notes. Of the remaining net proceeds of the offering, $20.0 million (unaudited)
was used to repay certain indebtedness incurred primarily to finance the
Company's acquisition of iSTAR internet inc. ("iSTAR") and the balance is
expected to be used to finance capital expenditures (including, without
limitation, facilities and equipment in connection with the development and
expansion of the Company's domestic and international network) and working
capital requirements (including, without limitation, debt service obligations)
of the Company.
During the nine months ended September 30, 1998, the Company incurred
capital lease obligations of $54.9 million (unaudited) upon the execution of
leases for new equipment and other fixed assets.
F-14
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At September 30, 1998, the aggregate unused portion under the Company's
various financing arrangements for purchases of equipment and other fixed
assets was $60.4 million (unaudited). The aggregate unused portion of the
Company's operating lines of credit was $0.4 million (unaudited) at September
30, 1998.
Note 7--Capital Stock
On January 23, 1998, at a Special Meeting of Shareholders, the Company's
shareholders granted the Board of Directors authority to amend the Company's
Certificate of Incorporation to increase the number of the Company's authorized
shares of capital stock from 130,000,000 shares to 280,000,000 shares and to
increase the number of the Company's authorized shares of Common Stock from
100,000,000 shares to 250,000,000 shares. The Board of Directors has authority
to issue up to 30,000,000 shares of preferred stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof without any
further vote or action by shareholders.
Preferred Stock Rights Plan
On May 8, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan ("Rights Plan") pursuant to which preferred stock purchase rights
("Rights") were granted as a dividend to shareholders of record at the rate of
one Right for each outstanding share of common stock held of record as of the
close of business on June 5, 1996. The Rights will also be attached to certain
future issuances of common stock. Subject to certain exceptions, each Right,
when exercisable, will entitle the registered holder to buy one one-thousandth
of a share of a newly created Series A Junior Participating Preferred Stock,
par value $.01 per share, of the Company (the "Series A Junior Preferred
Stock") at an exercise price of $75 per Right.
Subject to certain exceptions, the Rights will become exercisable upon the
occurrence of certain specified events, including an announcement that a person
or group of affiliated or associated persons ("Acquiring Person") has acquired
beneficial ownership of 20% or more of the outstanding common stock. In such
event, each holder of a Right (other than Rights beneficially owned by the
Acquiring Person) will thereafter have the right, subject to certain
exceptions, to receive upon exercise thereof that number of one one-thousandths
of a share of Series A Junior Preferred Stock or, at the discretion of the
Company's Board of Directors, a number of additional shares of common stock as
set forth in the Rights Plan.
For purposes of the Rights Plan, the Company's Board of Directors has
designated 1,000,000 shares of Series A Junior Preferred Stock, which amount
may be increased or decreased by the Board of Directors. All Rights expire on
June 5, 2006, unless the Rights are earlier redeemed or exchanged by the
Company in accordance with the Rights Plan or expire earlier upon the
consummation of certain transactions as set forth in the Rights Plan.
Convertible Preferred Stock Private Placement
On November 10, 1997, the Company completed a private placement of 600,000
shares of its Series B 8% Convertible Preferred Stock ("Series B Preferred
Stock") for proceeds of $29,564,000, net of issuance costs. The Series B
Preferred Stock accrues dividends at an annual rate of 8%, payable quarterly in
cash or, at the Company's option, in Series B Preferred Stock and is non-
voting.
The Series B Preferred Stock is convertible into the Company's common stock
at $10 per share during the first year. The conversion price may be reset at
the end of the first and second anniversary dates, under certain circumstances,
to the stock's then current market value. At the third anniversary date, the
conversion price may be reset, under certain circumstances, to 95% of the
stock's then current market value. To reflect the nature of the conversion
rights, preferred stock has been reduced by $1,500,000 with a corresponding
increase to capital
F-15
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in excess of par value. Such amount will be accreted as an additional return to
preferred shareholders over a period of three years. The Company also has the
right to call the Series B Preferred Stock for redemption under certain
circumstances commencing on the third anniversary of original issuance. The
Company is subject to certain restrictions on the redemption, purchase or
acquisition of, and the payment of dividends on common stock while the Series B
Preferred Stock is outstanding. The holders were granted certain registration
rights in connection with the transaction.
Note 8--Mandatorily Redeemable Equity Securities
The Company entered into several securities purchase agreements with
investors in prior years. Pursuant to these agreements, the investors purchased
shares of convertible participating preferred stock for cash or in exchange for
shares of mandatorily redeemable common stock.
<TABLE>
<CAPTION>
Par Purchase Shares
Class Value Date Issued
----- ----- -------- ----------
<S> <C> <C> <C>
Series A........................................... $.01 1993 2,727,000
Series B........................................... $.01 1993 1,105,125
Series C........................................... $.01 1993 1,020,000
Series D........................................... $.01 1994 2,000,000
Series E........................................... $.01 1995 3,190,555
----------
10,042,680
==========
</TABLE>
Immediately prior to the completion of the Company's initial public offering
on May 1, 1995, all issued and outstanding shares of redeemable convertible
preferred stock were converted into 10,042,680 shares of common stock. In
addition, all redemption rights of the holders of redeemable common stock
(1,838,475 shares) expired upon the completion of the offering.
Activity with respect to redeemable convertible preferred and common stock
for the year ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Redeemable
Convertible Redeemable
Preferred Common
Stock Stock
----------- ----------
(In Thousands of
U.S. Dollars)
<S> <C> <C>
Balance, December 31, 1994.............................. $ 13,218 $ 399
Issuance of 3,190,555 shares of redeemable Series E
convertible preferred stock.......................... 12,197
Accretion of redeemable convertible preferred and
common stock......................................... 1,356 21
Conversion of redeemable convertible preferred stock
into common stock.................................... (26,771)
Expiration of redemption rights on redeemable common
stock................................................ (420)
-------- -----
Balance, December 31, 1995.............................. $ -- $ --
======== =====
</TABLE>
Note 9--Stock Compensation and Retirement Plans
Executive Stock Incentive Plan
The Company's Executive Stock Incentive Plan provides for a maximum of
10,000,000 shares to be available for award thereunder to employees and
consultants of the Company and its subsidiaries. Awards under the plan may be
in the form of incentive stock options, non-qualified stock options, stock
appreciation
F-16
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rights or restricted stock awards. The purchase price of shares covered by
options cannot be less than the fair value on the date of grant. Each option
granted under the plan becomes exercisable based on a schedule determined by
the Compensation Committee at the date of grant. All options expire ten years
after the date of grant. At December 31, 1997, there were 9,795,874 shares
reserved for issuance under the plan and options with respect to 5,952,108 and
1,537,091 shares of common stock were outstanding and exercisable,
respectively.
Directors Stock Incentive Plan
The Directors Stock Incentive Plan provides for awards with respect to up to
100,000 shares in the aggregate to directors of the Company and its
subsidiaries who are not also employees or consultants of the Company and who
do not serve on the Board as a representative of a shareholder. Awards under
the plan are in the form of non-qualified stock options. The purchase price of
shares covered by options cannot be less than the fair value on the date of the
grant. Options granted under the plan when a director is first elected to the
Board become exercisable quarterly over four years. Subsequent options granted
under the plan become exercisable with respect to one half of the subject
shares at each of the first and second anniversaries of the date of grant. All
options expire ten years after the date of grant. At December 31, 1997, there
were 100,000 shares reserved for issuance under the plan and options with
respect to 24,000 and 7,500 shares of common stock were outstanding and
exercisable, respectively.
Strategic Stock Incentive Plan
The Strategic Stock Incentive Plan provides for awards with respect to an
aggregate of 3,500,000 shares of the Company's common stock to employees and
consultants of the Company and its subsidiaries in connection with
acquisitions, mergers, strategic alliances and other business combinations and
transactions by the Company or its subsidiaries. Awards under the plan may be
in the form of incentive stock options, non-qualified stock options, stock
appreciation rights or restricted stock awards. The purchase price of shares
covered by options cannot be less than the fair value on the date of grant.
Each option granted under the plan becomes exercisable based on a schedule
determined by the Compensation Committee at the date of grant. All options
expire ten years after the date of grant. At December 31, 1997, there were
3,500,000 shares reserved for issuance under the plan and options with respect
to 324,141 and 167,155 shares of common stock were outstanding and exercisable,
respectively.
Executive Stock Option Plan and Other Option Plans and Grants
Prior to 1994, the Company granted non-qualified stock options to its
employees as directed by the Company's Board of Directors. In March 1994, the
Company established the 1994 Executive Stock Option Plan under which it is
authorized to grant up to 1,250,000 of either incentive stock options or non-
qualified stock options to its employees. The purchase price of shares covered
by options cannot be less than the fair value on the date of grant. Options
become exercisable over one to six years following the date of grant. All
options expire ten years after the date of grant. At December 31, 1997, there
were 1,918,546 shares reserved for issuance under the plan and under ad hoc
grants. Options with respect to 1,891,496 and 968,994 shares of common stock
were outstanding and exercisable, respectively.
In connection with the Company's acquisition of InterCon Systems Corporation
("InterCon") in June 1995, options outstanding under each of the InterCon 1992
Incentive Stock Plan and the InterCon 1994 Stock Option Plan became exercisable
(subject to original vesting schedules; generally vesting over four years) for
shares of the Company's common stock pursuant to the terms of the plans. As of
December 31, 1997, the options outstanding under the 1992 plan consist of
incentive stock options with respect to 104,569 shares of common stock and the
options outstanding under the 1994 plan consist of non-qualified stock options
with
F-17
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respect to 39,547 shares of common stock. At December 31, 1997, options with
respect to 144,116 shares were exercisable. No additional options in respect of
shares will be granted under either plan. In connection with the sale of
InterCon, vesting on options with respect to 112,229 shares was accelerated and
compensation expense of $214,000 was recognized in 1997.
In connection with the Company's acquisition of Software Ventures
Corporation ("Software Ventures") in July 1995, options outstanding under the
Software Ventures 1994 Stock Option Plan became exercisable (subject to
original vesting schedules; generally, one-half vesting after one year and one-
half over four years) for shares of the Company's common stock pursuant to the
terms of such plan. At December 31, 1997, options with respect to 25 shares
under the plan were outstanding and exercisable. No additional options in
respect of shares will be granted under the plan.
Stock Option Repricing
Effective April 5, 1996, the Company's Board of Directors approved a
repricing of certain employee stock options. Accordingly, options with respect
to 2,520,555 shares of the Company's common stock whose exercise price was
greater than $9.375, the closing market price of the Company's common stock on
that date, were cancelled and new options with respect to the same number of
shares were granted with an exercise price of $9.375. Other terms and
conditions of the options remained the same.
Fair Value of Stock Options
For disclosure purposes under SFAS No. 123, the fair value of each stock
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
stock options granted in 1995, 1996 and 1997, respectively: no annual dividends
for any year, expected volatility of 80%, 80% and 76%, risk-free interest rate
of 6.85%, 5.98% and 6.36% and expected life of 6.5 years, 5.0 years and 5.0
years. The weighted-average fair value of the stock options granted in 1995,
1996 and 1997, was $6.90, $4.89 and $4.88, respectively.
Under the above model, the total value of stock options granted in 1995,
1996 and 1997, was $10,572,000, $28,624,000 and $23,616,000, respectively,
which would be amortized on a pro forma basis over the option vesting period.
Had the Company determined compensation cost for these plans in accordance with
SFAS No. 123, the Company's pro forma loss and pro forma basic and diluted loss
per share would have been, $54,760,000 and $2.07 in 1995, $63,897,000 and $1.62
in 1996 and $53,113,000 and $1.32 in 1997. The SFAS No. 123 method of
accounting does not apply to options granted prior to January 1, 1995, and
accordingly, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Stock Warrants
The Company has issued warrants to certain investors, a lease provider and
consultants to purchase shares of the Company's common stock. Warrants issued
to certain investors and a lease provider vested immediately and vesting with
respect to warrants issued to consultants was contingent upon the performance
of services. Compensation expense recorded with respect to warrants issued to
consultants was $199,000 and $275,000 in 1995 and 1996, respectively. These
warrants expire at various dates through 2003. At December 31, 1997, there were
224,274 shares reserved for issuance under stock warrant agreements of which
warrants with respect to 224,274 shares of common stock were outstanding and
exercisable.
F-18
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option and Warrant Activity
The following table summarizes stock option and warrant activity under all
plans for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Number of Shares of Weighted
Common Stock Average
----------------------- Price per Exercise
Options Warrants Share Price
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1994....... 2,340,950 3,752,400 $ .50-$4.15 $1.72
Granted........................ 1,559,891 833 4.15-25.25 9.16
Assumed........................ 543,414 -- .01-6.13 4.18
Exercised...................... (494,719) (1,484,419) .50-6.13 1.60
Forfeited...................... (105,868) (184,307) 2.00-25.25 4.50
----------- ----------
Balance, December 31, 1995....... 3,843,668 2,084,507 .01-25.25 3.42
Granted........................ 5,853,949 167 4.15-16.75 10.81
Exercised...................... (819,256) (1,659,000) .01-9.38 2.36
Forfeited...................... (1,319,951) -- 1.60-25.25 8.72
Cancelled...................... (2,520,555) -- 9.56-25.25 13.61
----------- ----------
Balance, December 31, 1996....... 5,037,855 425,674 .05-13.50 6.24
Granted........................ 4,846,300 -- 5.38-11.25 7.36
Exercised...................... (288,529) (201,400) .05-8.13 1.83
Forfeited...................... (1,259,740) -- 2.00-13.13 8.33
----------- ----------
Balance, December 31, 1997....... 8,335,886 224,274 $.05-$13.50 $6.81
=========== ==========
Exercisable, December 31, 1995... 973,625 2,054,507 $.05-$13.88 $1.44
=========== ==========
Exercisable, December 31, 1996... 1,584,068 425,674 $.05-$10.01 $3.60
=========== ==========
</TABLE>
The following table summarizes information about the shares outstanding and
exercisable for options and warrants at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
------------------------ --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$.05-$5.88.............. 2,110,114 4.6 $ 2.62 1,295,342 $ 1.81
$6.13-6.88.............. 224,776 9.0 $ 6.46 56,754 $ 6.24
$6.94-7.00.............. 2,460,822 9.1 $ 7.00 446,649 $ 7.00
$7.25-9.38.............. 3,110,449 8.5 $ 8.77 983,074 $ 9.12
$9.56-13.50............. 653,999 8.6 $10.49 267,336 $10.39
--------- ---------
$.05-$13.50............. 8,560,160 7.7 $ 6.81 3,049,155 $ 5.76
========= =========
</TABLE>
Under the terms of the Company's Employee Retirement Savings Plan,
participants are eligible to receive discretionary Company matching
contributions each year of 100% of the first $1,000 of employee salary deferral
and 25% of amounts thereafter up to the maximum allowable deferral under IRS
regulations. All contributions to a participant's plan account are 100% vested
after two years of service with the Company. The total contributions made by
the Company under the Plan totalled $131,000, $622,000 and $525,000 during
1995, 1996 and 1997, respectively.
F-19
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Income Taxes
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1997
-------- --------
(In Thousands of
U.S. Dollars)
<S> <C> <C>
Gross deferred tax assets:
Net operating losses (domestic)........................ $ 35,755 $ 50,470
Net operating losses (foreign)......................... 3,344 7,834
Other.................................................. 1,866 1,515
-------- --------
40,965 59,819
-------- --------
Gross deferred tax liabilities:
Depreciation/amortization.............................. (6,741) (8,740)
Acquired intangibles................................... (2,377) --
-------- --------
(9,118) (8,740)
-------- --------
Net deferred tax assets.................................. 31,847 51,079
Valuation allowance...................................... (32,323) (51,079)
-------- --------
$ (476) $ --
======== ========
</TABLE>
The Company has provided a valuation allowance for net deferred tax assets
of its operations since realization of these benefits cannot be reasonably
assured. The change in the valuation allowance for net deferred tax assets was
an increase of $8,936,000, $20,948,000 and $18,756,000 in 1995, 1996 and 1997,
respectively. The changes primarily relate to additional losses in those years.
At December 31, 1997, the Company had domestic net operating loss
carryforwards of approximately $123,099,000 for income tax purposes. These net
operating loss carryforwards may be carried forward in varying amounts until
2012 and may be limited in their use in the event of significant changes in the
Company's ownership, and their use is limited to future earnings of the
Company. In addition, at December 31, 1997, the Company had net operating loss
carryforwards for tax purposes in various jurisdictions outside the United
States amounting to approximately $21,464,000. The majority of the foreign loss
carryforwards will expire in varying amounts until 2004. Some of the foreign
loss carryforwards will never expire under local country tax rule.
A capital tax loss of $807,000 resulting from the sale of one of the
Company's investments was incurred in 1997. The loss may be carried forward for
five years. The Company recognized a deferred tax benefit of $159,000 in 1996
and $476,000 in 1997.
No cash was paid for income taxes in 1995, 1996 or 1997.
Note 11--Strategic Alliances, Acquisitions and Dispositions
Agreements with IXC Internet Services, Inc.
As part of the Company's ongoing efforts to further expand and enhance its
network, on February 25, 1998, the Company closed its transaction with IXC
Internet Services, Inc. ("IXC"), an indirect subsidiary of IXC Communications,
Inc., to acquire 20-year noncancellable indefeasible rights of use ("IRUs") in
up to 10,000 equivalent route miles of fiber-based OC-48 network bandwidth (the
"PSINet IRUs") in selected portions across the IXC fiber optic
telecommunications network within the United States. The PSINet IRUs
F-20
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were acquired in exchange for the issuance to IXC of 10,229,789 shares of
common stock of the Company (representing approximately 20% of the issued and
outstanding common stock of the Company after giving effect to such issuance
and having an aggregate market value of $78,641,503 based on the closing market
price per share of the Company's common stock as reported by The Nasdaq Stock
Market on such date of $7.6875) (the "IXC Initial Shares"). If the fair market
value of the IXC Initial Shares (based on a 20 trading day volume-weighted
average share price) is less than $240,000,000 at the earlier of one year
following delivery and acceptance of the total amount of bandwidth
corresponding to the PSINet IRUs or February 25, 2002 (the "Determination
Date"), the Company will be obligated to provide IXC with additional shares of
its common stock, or at the sole option of the Company, cash or a combination
thereof equal to the shortfall (the "Contingent Payment Obligation"). The
Company has the right to accelerate the Contingent Payment Obligation to any
date prior to the Determination Date. In addition, the right of IXC to receive
additional shares of common stock and/or cash pursuant to the Contingent
Payment Obligation will terminate on such date as the fair market value of the
IXC Initial Shares (based on a 20 trading day volume-weighted average share
price) is equal to or greater than $240,000,000. The Contingent Payment
Obligation automatically terminated on January 13, 1999 as the fair market
value of the IXC Initial Shares on such date exceeded $240,000,000 (unaudited).
The IRU Purchase Agreement permits the Company to use the bandwidth acquired
from IXC for any purpose in connection with the provision of Internet services
and at a rate of DS-3 or less for non-Internet telecommunications transport,
but restricts the Company from using such bandwidth to deliver any private line
or long distance switched telephone services (based on non-Internet telephone
switching technologies) to any third party. The Company expects to incur on an
annual basis approximately $1.15 million in operations and maintenance fees
with respect to the PSINet IRUs for each 1,000 equivalent route miles of OC-48
bandwidth accepted under the agreement. The Company also signed a long-term
non-exclusive joint marketing and services agreement with IXC under which IXC
and its resellers will be able to bundle the Company's Internet access and
value added services with IXC's long distance and other telephone services to
their customers throughout the United States.
The Contingent Payment Obligation was recorded as capital in excess of par
value based on its fair value of $107.3 million. The fair value of the
Contingent Payment Obligation was determined utilizing a Black-Scholes
valuation model using an assumed term of four years, the closing market price
per share of the common stock on the date of the closing ($7.6875), an exercise
price of $23.46 (which is the price per share required in order for the
calculation of the IXC Initial Shares to result in a value equal to $240.0
million), expected volatility of 76% and an interest rate of 11%. The amount
recorded for the fair value of the Contingent Payment Obligation could be
adjusted upward in a future period under certain circumstances (unaudited).
The amount representing the initial aggregate of the fair value of the IXC
Initial Shares and the Contingent Payment Obligations, $186.0 million, was
recorded as an offset to shareholders' equity similar to a stock subscription
receivable. Such amount will be reduced, and a long-term asset relating to the
PSINet IRUs will be recorded, as each bandwidth unit corresponding to the
PSINet IRUs is accepted by the Company. The Company expects to amortize the
capitalized amount of the asset relating to the PSINet IRUs ratably over the
20-year period during which the Company has the right to utilize the bandwidth
corresponding to the PSINet IRUs (unaudited).
The bandwidth corresponding to the PSINet IRUs is contemplated to be
delivered to the Company (to the extent then available) in specified minimum
increments every six months during the two year period following closing. At
September 30, 1998, the Company had accepted from IXC 1,475 equivalent route
miles of OC-48 bandwidth and had recorded $27.4 million as an increase to fixed
assets and a decrease to "Bandwidth assets to be delivered under IRU agreement"
in shareholders' equity (unaudited).
F-21
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
iSTAR internet inc.
Between January 30, 1998 and February 12, 1998, the Company acquired
approximately 23,400,000 (or 79.7%) of the outstanding common shares of iSTAR
internet inc. ("iSTAR"), a Canadian ISP. The excess of the purchase price over
the fair values of the tangible assets acquired and liabilities assumed was
$19,500,000. This acquisition will be accounted for as a purchase business
combination and accordingly the assets and liabilities and results of
operations of iSTAR will be included in the Company's financial statements from
the date of acquisition. At December 31, 1997, the Company has a note
receivable from iSTAR in the amount of $3,526,000 which is recorded in other
assets and deferred charges. Additionally, at December 31, 1997, the Company
had a $15,400,000 letter of credit outstanding with respect to this transaction
which was secured by $17,500,000 in cash. On January 29, 1998, the Company
obtained a $20,000,000 acquisition credit facility from a bank to finance this
transaction and its letter of credit expired. This facility matures on the
earlier of the consummation of a public offering by the Company of its debt or
equity securities or July 31, 1998. The loan provides for interest on the
outstanding balance at an annual rate of prime rate plus 1.375%. Additionally,
the loan has been incorporated into the Company's existing credit facility with
the bank and is secured by substantially all of the Company's assets, including
a pledge of certain of its subsidiaries' stock (including the acquired capital
stock of iSTAR).
CalvaCom and Iprolink
In October 1997 and January 1998 a wholly-owned subsidiary of the Company
acquired all of the issued and outstanding shares of common stock of Serveur
Telematique Internet S.A., ("STI") an ISP in France and Internet Prolink S.A.
("Iprolink"), an ISP in Switzerland, for approximately $3,100,000 and
$3,500,000, respectively, in cash. The acquisition of STI included the rights
to use the tradename "CalvaCom." These transactions are or will be accounted
for as purchase business combinations and accordingly, the net assets and
results of operations are included in the Company's financial statements from
the respective dates of acquisition.
EUnet GB Limited
On July 21, 1995, the Company purchased from The University of Kent at
Canterbury all of the issued and outstanding ordinary shares of EUnet GB
Limited, an English corporation, for approximately $3,986,000 in cash and
42,011 shares of its common stock. This transaction was accounted for as a
purchase business combination. The fair value of the cash, shares of the
Company's common stock exchanged and liabilities assumed at acquisition was
approximately $7,126,000.
InterCon Systems Corporation and Software Ventures Corporation
On June 16, 1995 and July 11, 1995, the Company issued approximately 921,612
and 762,208 shares of its common stock in exchange for all of the issued and
outstanding capital stock of InterCon and Software Ventures, respectively.
These transactions were accounted for as purchase business combinations. Both
acquired companies developed and marketed standards-based connectivity software
products. The aggregate fair value of the shares of the Company's common stock
exchanged, options granted and liabilities assumed was approximately
$35,519,000.
In the first quarter of 1996, the Company merged the operations of Software
Ventures and InterCon into one Internet software subsidiary known as InterCon.
On February 1, 1997, the Company sold all of the issued and outstanding capital
stock of InterCon to Ascend Communications, Inc. ("Ascend") in exchange for
$12,000,000 in cash pursuant to a Stock Acquisition Agreement between the
Company and Ascend. In addition, in connection with the sale, the Company
received $8,500,000 in cash from Ascend as repayment of intercompany debt owed
by InterCon to the Company. The Company recognized a gain of $5,700,000 in 1997
in connection with the sale.
F-22
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PSINet Pipeline New York, Inc.
On February 7, 1995, the Company issued an aggregate of approximately
2,690,218 shares of its common stock in exchange for all of the outstanding
common stock and preferred stock of PSINet Pipeline New York, Inc. (formerly
The Pipeline Network Inc., "Pipeline"). This transaction was accounted for as a
purchase business combination. The fair value of the shares of the Company's
common stock exchanged and liabilities assumed was approximately $12,129,000.
As further described in Note 2, the Company transferred substantially all of
its individual subscriber accounts and related tangible and intangible assets
relating to the Company's consumer dial-up Internet access services including
those acquired from the acquisition of Pipeline to MindSpring in the second and
third quarters of 1996.
Note 12--Commitments and Contingencies
Commitments
The Company has guaranteed monthly usage levels of data and voice
communications with certain of its telecommunications vendors. In addition, the
Company leases certain of its facilities under non-cancelable operating leases
expiring in various years through 2006. The operating lease on one of the
office facilities includes scheduled base rent increases over the term of the
lease. The total amount of base rent is being charged to expense on the
straight-line method over the term of the lease. Total rent expense for all
operating leases amounted to $2,077,000, $3,601,000 and $4,968,000 in 1995,
1996 and 1997, respectively.
At December 31, 1997 commitments to telecommunications vendors and future
minimum lease payments under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year
Ending Telecommunications
December 31, Operating Leases
------------ -------------------
(In thousands of
U.S. dollars)
<S> <C> <C>
1998..................................................... $ 10,218 $ 4,368
1999..................................................... 7,987 4,160
2000..................................................... 5,942 3,877
2001..................................................... 4,360 3,425
2002..................................................... 2,667 3,407
Thereafter............................................... -- 2,913
--------- ---------
$ 31,174 $ 22,150
========= =========
</TABLE>
Under the terms of an agreement with one of its customers, the Company is
obligated to provide the customer with a rental facility of up to $5,000,000
for telecommunications equipment owned or leased by the PSINET INC. Company and
deployed in the customer's network. As of December 31, 1997, the Company had
provided $1,426,000 of equipment to the customer under three year operating
leases.
Contingencies
The Company is subject to certain claims and legal proceedings that arose in
the ordinary course of its business activities. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
may be decided unfavorably to the Company. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition or results of
operations of the Company.
F-23
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 19, 1996, the Company and Chatterjee Management Company
("Chatterjee") signed an agreement pursuant to which the Company and an
investment group led by Chatterjee would establish a joint venture for the
purpose of building an Internet network across Europe and provide Internet-
related services in Europe. Such investment group was to invest up to $41
million in a joint venture. No monies were invested by Chatterjee or the
investment group pursuant to the joint venture agreement nor were any other
actions undertaken to implement it. Following the signing of the agreement, the
parties acknowledged structural difficulties associated with the joint venture
as originally contemplated, which prevented its implementation. Instead, they
sought for several months to negotiate a direct investment in the Company by
Chatterjee in lieu of the initial agreement. Those negotiations were not
successful.
On November 25, 1997, Chatterjee initiated arbitration proceedings against
the Company before the International Chamber of Commerce, Court of Arbitration,
in London, England, with respect to the joint venture agreement previously
entered into by Chatterjee and the Company.
In the arbitration proceeding, Chatterjee has now alleged that the Company
breached the joint venture agreement by repudiating its obligations under the
agreement and by breaching a covenant not to compete. In the arbitration,
Chatterjee requests an award declaring that the agreement is still valid and
binding upon the parties and that the Company stands in breach of the
agreement, directing the Company to specifically perform its obligations under
the agreement or, in the alternative, awarding Chatterjee compensatory damages
in an amount not less than $25 million, awarding Chatterjee profits that the
Company has earned or stands to earn in Europe, and awarding Chatterjee the
costs of arbitration, including attorney's fees and interest on the award of
damages. The Company believes that Chatterjee's claims are without merit and
intends to vigorously defend itself in the arbitration.
Note 13--Industry Segment and Geographic Reporting
The Company operates in one principal industry segment, as a provider of
Internet solutions, and markets its services internationally through foreign
subsidiaries. The Company's services are provided primarily to corporate
customers.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1996 1997
-------- -------- --------
(In thousands of U.S.
dollars)
<S> <C> <C> <C>
Revenue:
United States................................... $ 38,029 $ 78,132 $104,254
International................................... 2,470 6,781 17,950
Eliminations.................................... (1,777) (562) (302)
-------- -------- --------
Consolidated.................................... $ 38,722 $ 84,351 $121,902
======== ======== ========
Loss from Operations:
United States................................... $(50,153) $(47,035) $(38,472)
International................................... (1,317) (8,861) (11,285)
Eliminations.................................... (1,147) (185) 171
-------- -------- --------
Consolidated.................................... $(52,617) $(56,081) $(49,586)
======== ======== ========
Identifiable Assets:
United States................................... $195,920 $169,082 $156,474
International................................... 9,307 11,314 29,770
Eliminations.................................... (3,397) (3,284) (63)
-------- -------- --------
Consolidated.................................... $201,830 $177,112 $186,181
======== ======== ========
</TABLE>
F-24
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intersegment sales and transfers are not material. Revenue is based on the
location of the entity providing services. Loss from operations represents
total revenue less operating costs and expenses, and does not include interest
(expense)/income, other (expense)/income or income taxes. Identifiable assets
of geographic areas are those tangible and intangible assets used in the
Company's operations in each area.
Note 14--Investments in and Acquisitions of Certain Businesses (Unaudited)
During the nine months ended September 30, 1998, the company acquired 12
companies. The Company also acquired an equity interest in one company. The
following table summarizes certain financial information concerning these
acquisitions or investments:
<TABLE>
<CAPTION>
Ownership
Business Name Location Acquisition Date Interest
------------- ----------------------- --------------------- ---------
<S> <C> <C> <C>
Internet Prolink S.A. .. Switzerland January 1998 100%
iSTAR internet inc.
("iSTAR").............. Canada February and May 1998 100%
Interactive Telephony
Limited................ Channel Islands, Jersey April 1998 100%
WorldPay Ltd*........... Channel Islands, Jersey April 1998 12.5%
Interactive Networx GmbH
("INX")................ Germany May 1998 100%
LinkAge Online Limited
("LinkAge")............ Hong Kong June 1998 100%
ioNET Internetworking
Services ("ioNet")..... United States June 1998 100%
SCII-CalavaPro.......... Sub-Sahara Africa June 1998 100%
INTERLOG Internet
Services, Inc.
("Interlog")........... Canada July 1998 100%
Rimnet Corporation
("Rimnet")............. Japan August 1998 100%
TWICS Co., Ltd. ........ Japan September 1998 100%
Hong Kong Internet &
Gateway Services....... Hong Kong September 1998 100%
iNet, Inc. ("iNet")..... Korea September 1998 100%
</TABLE>
- --------
* The investment in WorldPay is accounted for under the cost method.
Certain portions of the purchase prices have been retained to secure
performance by certain sellers of indemnification or other contractual
obligations.
Each of the acquisitions was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of the
acquired companies have been included in the Company's financial statements
since the acquisition dates. The purchase price of the acquisitions was
allocated to assets acquired, including intangible assets and liabilities
assumed, based on their respective fair values at the acquisition dates. The
excess of the purchase price over the fair value of the net tangible assets of
the acquisitions is being amortized over periods up to 15 years from the dates
of acquisition.
In connection with these acquisitions, the Company recorded a $40.4 million
charge in the nine months ended September 30, 1998 for acquired in-process
research and development. This represents the value of purchased in-process
technology on projects that have not yet reached technological feasibility and
have no alternative future use. The charge is comprised of $7.0 million in the
first quarter of 1998 relating to the acquisition of iSTAR, $20.0 million in
the second quarter relating to the acquisitions of INX, ioNet and LinkAge, and
$13.4 million in the third quarter relating to the acquisitions of Interlog,
Rimnet and Inet.
The amount of purchase price allocated to in-process research and
development was determined using appropriate valuation techniques, including
percentage-of-completion which utilizes the key milestones to estimate the
stage of development of each in-process research and development project at the
date of acquisition, estimating cash flows resulting from the expected revenues
generated from such projects, and discounting the net cash flows back to their
present value. The discount rate includes a factor that takes into account the
uncertainty surrounding the successful development of the purchased in-process
technology.
F-25
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the allocated values by technology/project is as follows
(in thousands of U.S. dollars):
<TABLE>
<CAPTION>
R&D
Company Technology/Project Value Cost to complete Remaining tasks
------- ------------------ ----- ---------------- ---------------
<C> <S> <C> <C> <C>
iSTAR . Corporate--
ADSL/ATM/Fax on
Demand/Web Hosting $4,270 $1,930 System verification and testing
. Dial-up--Widespan 2,600 2,199 System verification and testing
. iCommerce 70 42 System verification and testing
INX . Access technologies 3,600 1,460 System verification and testing
. ATM and Internet
ioNet services 8,500 2,210 System verification and testing
LinkAge . VPN technology 2,900 200 Network architecture development
. Website tools 2,600 1,325 Improve system stability
. IP Telephony 1,800 200 Transmission quality improvement
Interlog . DSL 2,700 320 Operations support system development,
resolution of provisioning issues
. E-commerce 500 70 Software development and testing
. Website Design 300 50 Systems verification and integration
Rimnet . Wireless local loop 2,300 135 Network interconnection and security issues
. Universal Messaging 300 70 Network integration and testing
. IP Telephony 1,500 320 Database development, increasing system scalability
iNet . Frame Relay 5,000 125 Network management system software development,
network reconfiguration
. E-commerce 350 70 Development of database management system
. Website Hosting 450 85 Software development and testing
</TABLE>
A description of the acquired in-process technologies for each of the
acquisitions is set forth below:
iSTAR
Corporate--Asymmetric Digital Subscriber Line/ATM/Fax on Demand/Web Hosting
iSTAR is developing four concurrent technology projects relating to
Corporate Internet access, an asymmetric digital subscriber line ("ADSL")
technology to provide high-speed Internet access, a proprietary implementation
of an ATM network to provide high-bandwidth backbone service to customers, a
data conversion project to provide fax services over the Internet and a
proprietary website hosting service that will be built on an NT platform. As
of the acquisition date, these projects had not reached technological
feasibility.
Material risks still exist with these projects, however, management expects
these projects will begin to generate revenues in late 1998 or early 1999.
Dial-up--Webspan
iSTAR is developing a proprietary service management interface that would
allow customers to seamlessly select and manage a wide variety of services. As
of the acquisition date, this project had not reached technological
feasibility.
Material risks still exist with this project, however, management expects
these projects will begin to generate revenues in late 1998 or early 1999.
iCommerce System
iSTAR is developing several new electronic commerce applications that will
enable content providers to charge users a nominal fee to access information
and facilitate point of terminal sales. As of the acquisition date,
development for these applications was ongoing, and the technology had not yet
reached technological feasibility.
F-26
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Material risks still exist with these projects, however,management expects
these projects will begin to generate revenues in early 1999.
INX
Access Technologies
INX is developing proprietary implementations of wireless local loop and
digital subscriber line technologies to provide high-speed Internet access in
metropolitan Germany. As of the acquisition date, these projects had not
reached technological feasibility. Material risks remain with these projects,
but management expects the projects will begin successfully generating revenues
in early 1999. INX began its technology efforts in January 1997.
ioNet
ATM and ISP Services
ioNet is developing two concurrent technology projects, a proprietary
implementation of an ATM network for use by businesses in the Oklahoma region,
and a wholesale system that will enable external service providers to use
ioNet's network. As of the acquisition date, these systems had not reached
technological feasibility.
Material risks still exist with these projects, however, management expects
these projects will begin to generate revenues in early 1999. ioNet began its
technology efforts in January 1997 and expects to conclude its efforts in early
1999.
LinkAge
Virtual Private Networking
LinkAge is developing a proprietary version of a virtual private network
("VPN") system based around a telecommunications link from Hong Kong to
mainland China. As of the acquisition date, this system had not yet achieved
technological feasibility. Management expects the system will begin generating
revenues by early 1999. LinkAge began its VPN technology efforts in February
1997 and expects to conclude its efforts by early 1999.
IP Telephony
LinkAge is developing a proprietary IP telephony system for use in overseas
communications. As of the acquisition date, this system was still under
development and was not yet technologically feasible. Material risks still
exist in the development of the system, however, management expects the system
will begin generating revenues in early 1999. LinkAge began its IP telephony
efforts in February 1997 and expects to conclude its efforts in early 1999.
Website Mirroring
LinkAge is developing proprietary technology that will enable it to provide
website mirroring in multiple countries. As of the acquisition date,
development of the system was still ongoing, and technological feasibility had
not yet been achieved. Material risks still exist with the development of the
system, however, management expects the system will begin generating revenues
in early 1999. The company began its website mirroring efforts in February 1997
and expects to conclude its effort in early 1999.
F-27
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interlog
Digital Subscriber Line Technology
Interlog is developing a digital subscriber line ("DSL") network with
proprietary operations support systems. As of the acquisition date, the system
had not yet reached technological feasibility.
While material risks exist, management expects that the DSL system will be
successfully developed, with revenue generation beginning by early 1999 and
full service beginning in the third quarter of 1999. This project comprises a
material portion of Interlog's expected revenues going forward. The company
began its DSL efforts in July 1996.
Corporate E-commerce
Interlog is designing a proprietary e-commerce system that will enable small
businesses to manage credit-card based transactions over the Internet. As of
the acquisition date this system was still under development and had not yet
been proven to be technologically feasible.
Material risks still exist with the development of Interlog's e-commerce
system, however, management expects that revenue generation will begin
successfully in early 1999. Interlog began its e-commerce project in December
1996.
Webpage Design Systems
Interlog is developing a new webpage design system that will enable it to
design low-cost corporate websites capable of supporting its e-commerce
technology. Development of this design system was still ongoing as of the
acquisition date, and had not yet been proven to be technologically feasible.
Although material risks still exist with the system, management expects revenue
generation to begin in early 1999. This project was initiated in December 1996.
Rimnet
Wireless Local Loop
Rimnet is developing proprietary technology to allow corporate customers to
securely access wireless local loop services in the Tokyo region. As of the
acquisition date, development of this system was incomplete and the technology
was not yet technologically feasible.
While material risks exist, management expects that the project will be
successfully developed and begin generating revenues in the second quarter of
1999. The company began its wireless local loop efforts in December 1997 and
expects to conclude them in April 1999.
Universal Messaging
Rimnet is developing proprietary software that will convert a new universal
messaging system for Japanese-language use. This system is being designed to
integrate voicemail, e-mail, and facsimile applications on one platform. As of
the acquisition date, this technology had not yet reached technological
feasibility.
Material risks still exist with the development of this system, but
management expects it will begin successfully generating revenues in early
1999. The company began this project in February 1997 and plans to begin full
commercial service in early 1999.
F-28
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
IP Telephony
Rimnet is developing a proprietary Internet Protocol ("IP") telephony system
for domestic and international service. As of the acquisition date, this system
had not yet reached technological feasibility. There are material risks
associated with the development of this system, but management expects revenue
generation to begin successfully in the second quarter of 1999. This project
began in August 1996 and is expected to be complete in early 1999.
iNet
Frame Relay Network
iNet is developing and integrating a frame relay network with a proprietary
network management system optimized to lower service costs for transoceanic
data traffic. As of the acquisition date, the system had not yet been
determined to be technologically feasible and its performance and technological
sufficiency remained untested.
While material risks exist, management expects that the frame relay project
will be successfully developed, with revenue generation beginning in the second
quarter of 1999. iNet began its frame relay efforts in August 1996 and expects
to complete the system in early 1999.
E-commerce System
iNet is creating a new electronic commerce micropayment system that will
enable content providers such as Korean newspapers to charge users a nominal
fee to access information. As of the acquisition date, software and database
development for this system was ongoing, and the technology had not yet reached
technological feasibility.
Developmental risks remain with the system, however, management expects that
the e-commerce system will begin successful revenue generation in early 1999.
iNet began its e-commerce efforts in July 1998.
Webhosting Services
iNet is developing a proprietary website hosting platform that will enable
it to automate the daily operations of websites on the system. As of the
acquisition date, software development for this system was not complete, and
the technology was not yet technologically feasible.
Material risks remain with the development of this system, however,
management expects the project will begin successful revenue generation
beginning approximately one month after the acquisition date. iNet began its
webhosting technology development in March 1998.
The value of the in-process projects was adjusted to reflect the relative
value and contribution of the acquired research and development. In doing so,
consideration was given, as appropriate, to the stage of completion, the
complexity of the work completed to date, the difficulty of completing the
remaining development, costs already incurred, and the projected cost to
complete the projects. The value assigned to purchased in-process technology
was based on the following assumptions.
The estimated revenue associated with the respective business enterprise
valuations assumed five-year compound annual revenue growth rates of between
22% to 45%. Revenue growth rates for each technology were developed
considering, among other things, the current and expected industry trends,
acceptance of the
F-29
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
technologies and historical growth rates for similar industry products.
Estimated total revenue from the purchased in-process technology projects
generally peak in the year 2003 and decline through 2007 as other new products
are expected to be introduced. These revenue projections were based on
management's estimates of market size and growth, expected trends in technology
and the expected timing of new product introductions. The estimated net cash
flows were discounted back to their present value using a discount rate of
between 17.0% and 27.5%, which represents a premium to the Company's cost of
capital. The estimated percentage-of-completion of the various in-process
research and development projects ranged from 50% to 85% complete.
The resulting net cash flows from such projects were based on the Company's
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes associated with such
projects.
If none of these projects is successfully developed, the Company's sales and
profitability may be adversely affected in future periods. However, the failure
of any particular individual project in-process would not have a material
impact on the Company's financial condition or its results of operations.
Additionally, the failure of any particular individual project in-process could
impair the value of other intangible assets acquired. The Company expects to
begin to benefit from the purchased in-process technology in late 1998 or early
1999.
All of the companies acquired are Internet service providers ("ISPs"), or
data transmission companies, offering a wide range of Internet-protocol based
solutions for businesses, institutions and small-office/home-office users.
Depending on the particular business activities of the company acquired,
revenue may also be derived from service to consumer users, network
integration, web hosting, managed co-location, as well as vertical market
Internet services, including comprehensive banking, medical and
telecommunications Internet solutions.
The purchase price relating to one transaction may be increased by up to $8
million pursuant to an earnout provision in the event the acquired company
achieves certain levels of operating results in the period following the
acquisition. Such amount will be recorded as additional cost of the acquired
company and reflected as additional purchased goodwill when it becomes probable
that the amount will be paid.
In connection with the acquisition of these companies, liabilities assumed
were as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
Fair
Value Cash Paid
of for the
Assets Capital Liabilities
Company Acquired Stock Assumed
------- -------- --------- -----------
<S> <C> <C> <C>
iSTAR..................................... $ 41,508 $ (19,490) $22,018
INX....................................... 11,747 (9,395) 2,352
ioNet..................................... 28,382 (22,215) 6,167
LinkAge................................... 19,153 (11,800) 7,353
Rimnet.................................... 47,575 (31,980) 15,595
Other acquisitions........................ 75,224 (48,949) 26,275
-------- ---------- -------
$223,589 $ (143,829) $79,760
======== ========== =======
</TABLE>
The following presents the unaudited pro forma results of operations of the
Company for the nine month periods ended September 30, 1997 and 1998 as if all
of the companies acquired since the beginning of 1998 in business combinations
accounted for under the purchase method had been consummated at the beginning
of the periods presented. The pro forma results of operations include certain
pro forma adjustments, including the amortization of intangible assets relating
to the acquisitions. The pro forma results of operations are prepared
F-30
<PAGE>
PSINET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for comparative purposes only and do not necessarily reflect the results that
would have occurred had the acquisitions occurred at the beginning of the
periods presented or the results which may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 30, September 30,
1997 1998
------------- -------------
(In Millions of U.S.
Dollars, Except Per Share
Amounts)
<S> <C> <C>
Revenue.......................................... $154.6 $ 201.6
Net loss......................................... $(79.7) $(150.8)
Basic and diluted loss per share................. $(1.98) $ (3.07)
</TABLE>
In August 1998, the Company entered into an agreement with a group of
leading global telecommunications companies to build an undersea cable system,
called the Japan-US Cable Network, that will connect from the United States to
Japan. Under the agreement, PSINet will have the right to 22 STM-1s (each
equivalent to an OC-3, or 155 MBPS) along with additional rights as the system
is upgraded. The system is scheduled for completion by the second quarter of
2000. PSINet's portion of the total investment in this facility, including
equipment and local interconnection, is expected to be in excess of $100
million over the 25 year term of the agreement. It is currently anticipated
that this expenditure will be financed through a combination of capital leases
and a portion of the net proceeds from the Company's recently completed 10%
Senior Notes offering along with other sources of financing over the term of
the agreement.
Note 15--Subsequent Events (unaudited)
Acquisitions of Tokyo Internet and IXE
In October 1998, the Company acquired two additional Internet service
providers, Tokyo Internet Corporation ("Tokyo Internet") in Japan and Internet
Exchange Europe, B.V./Unix Support Netherland B.V. in The Netherlands. The
aggregate amount of the purchase prices and related payments for these
acquisitions was approximately $140.1 million and $8.3 million, respectively,
exclusive of indebtedness assumed in connection with such acquisitions. The
Company borrowed $108.5 million under its Credit Facility to finance a portion
of the purchase price of Tokyo Internet.
11.5% Senior Notes Due 2008
On November 3, 1998, the Company completed an offering of $200,000,000
principal amount of 11.5% senior notes due 2008 (the "October 11.5% Notes").
The October 11.5% Notes were sold at par, before giving effect to the initial
purchasers' discounts and commissions, and are unsecured and junior in ranking
to secured obligations and to liabilities of the Company's subsidiaries. The
indenture governing the October 11.5% Notes contains certain financial and
other covenants which, among other things, will restrict the Company's ability
to incur further indebtedness and sell assets.
On November 13, 1998, the Company completed an offering of $150,000,000
principal amount of 11.5% senior notes due 2008 (the "November 11.5% Notes").
The November 11.5% Notes were sold at 102% of par, before giving effect to the
initial purchasers' discounts and commissions, and are unsecured and junior in
ranking to secured obligations and to the liabilities of the Company's
subsidiaries. The indenture governing the October 11.5% Notes also governs the
November 11.5% Notes, and contains certain financial and other covenants which,
among other things, will restrict the Company's ability to incur further
indebtedness and sell assets.
Prior to the closing of the October 11.5% Notes, the Company repaid the
$108.5 million of borrowings outstanding under its Credit Facility.
F-31
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
ISTAR INTERNET INC.
Years Ended May 31, 1997 and 1996
F-32
<PAGE>
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of iSTAR internet inc. as at
May 31, 1997 and 1996 and the consolidated statements of operations and deficit
and changes in financial position for the years ended May 31, 1997 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at May 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for the years then ended in accordance with Canadian generally
accepted accounting principles.
Significant differences between Canadian and United States generally
accepted accounting principles are quantified and explained in Note 20 to the
financial statements.
KPMG LLP
Chartered Accountants
Ottawa, Canada
July 10, 1997, except for notes 12, 18, 19 and 20 which are as at December 5,
1997
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the Company's ability to continue as a going concern, such
as those described in Note 19 to the financial statements which is as at
December 5, 1997. Canadian reporting standards do not permit a reference to
such events and conditions in the auditor's report when these are adequately
disclosed in the financial statements.
KPMG LLP
Chartered Accountants
Ottawa, Canada
December 5, 1997
F-33
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED BALANCE SHEETS
May 31, 1996 and 1997
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and marketable securities (note 3)................... $ 16,733 $ 12,073
Accounts receivable (note 4).............................. 8,595 10,027
Inventory................................................. 284 371
Other assets (note 5)..................................... 731 606
-------- --------
26,343 23,077
Property and equipment (note 6)............................. 12,640 16,343
Customer lists and goodwill (notes 2 and 7)................. 16,497 --
-------- --------
$ 55,480 $ 39,420
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 8)................................ $ -- $ 3,500
Accounts payable and accrued liabilities.................. 10,310 14,829
Deferred revenue.......................................... 1,858 1,630
Current portion of capital lease obligations.............. 1,999 3,139
-------- --------
14,167 23,098
-------- --------
Capital lease obligations (note 9).......................... 1,730 4,540
Deferred leasehold inducements.............................. 321 710
Shareholders' equity:
Share capital (note 10)................................... 55,656 83,015
Share purchase warrants (note 10(d))...................... 2,013 218
Contributed surplus (note 10(e)).......................... 2,871 2,871
Deficit................................................... (21,278) (75,032)
-------- --------
39,262 11,072
-------- --------
Commitments (note 11).......................................
Contingencies (note 12)..................................... $ 55,480 $ 39,420
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Years Ended May 31, 1996 and 1997
(in thousands of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Sales...................................................... $ 19,405 $ 34,043
Cost of sales.............................................. 13,596 30,558
-------- --------
Gross margin............................................... 5,809 3,485
Selling, general and administration expenses............... 22,147 32,624
-------- --------
Operating loss before undernoted items..................... (16,338) (29,139)
Depreciation and amortization.............................. 2,947 6,519
Interest and bank charges, net (note 9).................... (546) 113
-------- --------
Operating loss before non-recurring charges................ (18,739) (35,771)
Integration costs.......................................... 1,699 585
Write-off of customer lists and goodwill (note 7).......... -- 17,398
-------- --------
Net loss................................................... $(20,438) $(53,754)
Deficit, beginning of year................................. (840) (21,278)
-------- --------
Deficit, end of year....................................... $(21,278) $(75,032)
======== ========
Net loss per share (note 14)............................... $ (1.70) $ (2.42)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years Ended May 31, 1997 and 1996
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Cash provided by (used in):
Operations:
Net loss.................................................. $(20,438) $(53,754)
Add non-cash items:
Depreciation and amortization........................... 2,947 6,519
Write-off of customer lists and goodwill................ -- 17,398
Non-cash operating working capital........................ (381) 3,286
-------- --------
(17,872) (26,551)
Financing:
Common shares and warrants issued, net of issue costs..... 57,245 25,564
Capital lease obligations, net............................ 3,457 3,950
Due from related parties.................................. (373) --
Payments on long-term debt, net........................... (578) --
Contributed surplus....................................... 2,871 --
-------- --------
62,622 29,514
Investing:
Purchase of property and equipment........................ (10,158) (8,635)
Acquisition of companies and businesses................... (17,921) (2,488)
-------- --------
(28,079) (11,123)
-------- --------
Increase (decrease) in cash position........................ 16,671 (8,160)
Cash position, beginning of year............................ 62 16,733
-------- --------
Cash position, end of year.................................. $ 16,733 $ 8,573
======== ========
</TABLE>
Cash position is defined as cash and marketable securities less bank
indebtedness.
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 1996 and 1997
(all tabular amounts in thousands of Canadian dollars)
iSTAR internet inc. provides advanced Internet services for businesses,
institutions, and individuals. The Company provides customers with a range of
networking expertise and Web-based products and services including business
solutions with high-speed connection to the Internet through a national
backbone network.
1. Summary of Significant Accounting Policies:
(a) Basis of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated on consolidation.
(b) Marketable securities:
Marketable securities are stated at cost, which approximates market
value.
(c) Inventory:
Inventory is stated at the lower of cost and net realizable value.
(d) Property and equipment:
Property and equipment is stated at cost. Depreciation and amortization
are provided on the straight-line basis using the following annual rates:
<TABLE>
<CAPTION>
Asset Type Rate
---------- ------
<S> <C>
Computer and network equipment.................................... 33%
Computer software................................................. 50%
Furniture and equipment........................................... 20%
Leasehold improvements............................................ 16.67%
Trade show equipment.............................................. 50%
</TABLE>
(e) Customer lists and goodwill:
Customer lists and goodwill represent the excess of the purchase price
of acquired companies and businesses over the fair value assigned to the
identifiable net assets acquired. Customer lists and goodwill are being
amortized on a straight-line basis over a 12 year period. On an ongoing
basis management reviews the valuation and amortization of customer lists
and goodwill, taking into consideration any events and circumstances which
might have impaired fair value. The amount of customer lists or goodwill
impairment, if any, is measured based on management's estimate of fair
value.
(f) Leases:
Leases are classified as either capital or operating in nature. Capital
leases are those which substantially transfer the benefits and risks of
ownership to the lessee. Assets acquired under capital leases are
depreciated at the same rates as those described in note 1(d). Obligations
recorded under capital leases are reduced by rental payments net of imputed
interest.
(g) Deferred leasehold inducements:
The Company amortizes deferred leasehold inducements on a straight-line
basis over the terms of the respective leases.
F-37
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
(h) Revenue recognition:
Revenues from dial-up access, direct connect, consulting and training
services are recognized at the time services are rendered. Billings in
advance of services are recorded as deferred revenue and recognized at the
time services are rendered. Revenue from the sale of software, including
sales to distributors and resellers, is recognized when the products are
installed.
2. Acquisitions of Companies and Businesses:
On August 10, 1995, the Company amalgamated with NSTN Incorporated (NSTN),
an Internet service provider operating primarily in Eastern Canada. This
transaction has been accounted for by the purchase method with the results of
operations of NSTN included in the Company's financial statements from the date
of amalgamation.
During fiscal 1996, the Company acquired eight other companies and
businesses engaged in providing Internet services. These acquisitions have been
accounted for by the purchase method and the results of operations have been
included from the respective dates of acquisition.
The total consideration provided by the Company in exchange for all the
issued and outstanding shares of the companies and business assets acquired is
as follows:
<TABLE>
<CAPTION>
May 31,
1996
-------
<S> <C>
Net identifiable assets acquired:
Non-cash current assets........................................... $ 2,001
Property, plant & equipment....................................... 3,241
Bank indebtedness................................................. (295)
Due to related parties............................................ (373)
Current liabilities............................................... (3,789)
Long term debt.................................................... (613)
-------
172
Customer lists and goodwill......................................... 17,454
-------
$17,626
=======
Consideration provided:
Cash.............................................................. $ 8,094
Common shares (3,507,976.5 shares)................................ 4,648
Contributed surplus............................................... 2,871
Performance warrants.............................................. 2,013
-------
$17,626
=======
</TABLE>
During 1997, additional common shares and share warrants in the amount of
$2,089,606 were recorded for these acquisitions. At May 31, 1996, this
consideration was contingent on certain events that were resolved during 1997.
The additional consideration was recorded as an increase to customer lists and
goodwill.
F-38
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
3. Cash and Marketable Securities:
Cash and marketable securities includes marketable securities of $6,281,663
(1996--$14,676,792). The marketable securities mature within 30 days and bear
interest at rates ranging from 2.75% to 3.05% (1996--4.75% to 5.05%).
4. Accounts Receivable:
Included in accounts receivable is an allowance for doubtful accounts of
$1,902,251 (1996--$1,139,095).
5. Other Assets:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Prepaid expenses................................................... $520 $495
Employee loans..................................................... 211 111
---- ----
$731 $606
==== ====
</TABLE>
6. Property and Equipment:
<TABLE>
<CAPTION>
Accumulated 1996 1997
Depreciation Net Net
and Book Book
Cost Amortization Value Value
------- ------------ ------- -------
<S> <C> <C> <C> <C>
Property under capital leases:
Computer equipment................... $10,510 $2,359 $ 3,597 $ 8,151
Furniture and equipment.............. 536 107 536 429
Computer and network equipment......... 8,908 3,894 6,497 5,014
Computer software...................... 1,862 649 445 1,213
Furniture and equipment................ 1,170 342 757 828
Leasehold improvements................. 803 167 634 636
Trade show equipment................... 204 132 174 72
------- ------ ------- -------
$23,993 $7,650 $12,640 $16,343
======= ====== ======= =======
</TABLE>
Cost and accumulated depreciation and amortization at May 31, 1996 amounted
to $15,398,828 and $2,759,034, respectively.
7. Customer Lists and Goodwill:
Management has evaluated that there has been a permanent impairment in the
fair value of customer lists and goodwill in that the future benefit is
unlikely. This is due to many factors including the evolution of the Company
from a provider of primarily access-related products to a provider of business
solutions products and services. Therefore, the entire balance of $17,398,250
has been written off.
8. Bank Indebtedness:
Bank indebtedness comprises an operating loan in the amount of $3,500,000
that was repaid in June 1997 (see note 18(b)).
F-39
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
9. Capital Lease Obligations:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
1997......................................................... $2,294 $ --
1998......................................................... 1,485 3,676
1999......................................................... 200 3,345
2000......................................................... 145 1,757
2001......................................................... 83 67
------ ------
Total minimum lease payments................................. 4,207 8,845
Less amount representing interest at an average rate of
9.3%........................................................ 478 1,166
------ ------
Present value of minimum lease payments...................... 3,729 7,679
Current portion of obligations under capital leases.......... 1,999 3,139
------ ------
$1,730 $4,540
====== ======
</TABLE>
Included in interest and bank charges is interest on capital lease
obligations of $276,254 (1996--$202,119).
10. Share Capital:
The number of shares and amounts per share in these financial statements
have been retroactively adjusted to give effect to a 2.5 for 1 share split,
pursuant to articles of amendment filed on November 9, 1995.
(a) Authorized:
The Company has an unlimited number of authorized common shares.
(b) Issued:
The Company's common share transactions are as follows:
<TABLE>
<CAPTION>
Number
of Shares Amount
------------ -------
<S> <C> <C>
Issued for cash....................................... 1,818,787.5 $ 424
Balance, May 31, 1995................................. 1,818,787.5 424
------------ -------
Issued:
For cash in initial public offering, net of issue
costs.............................................. 3,275,980.0 35,508
On conversion of special warrants, net of issue
costs.............................................. 6,000,000.0 11,078
For acquisitions.................................... 3,507,976.5 4,648
For cash............................................ 2,661,212.5 3,156
On conversion of options............................ 300,000.0 600
To employees, directors............................. 1,295,814.0 242
Balance, May 31, 1996................................. 18,859,770.5 55,656
------------ -------
Issued:
For cash in public and private offerings, net of
issue costs........................................ 5,290,918.0 23,720
On conversion of share purchase warrants............ 289,853.5 2,008
On conversion of performance and litigation
warrants........................................... 174,437.0 1,631
------------ -------
Balance, May 31, 1997................................. 24,614,979.0 $83,015
============ =======
</TABLE>
F-40
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
On May 29, 1997, the Company issued 2,220,869 common shares in exchange for
all of the outstanding shares of a corporation in which two of the Company's
directors were shareholders. The only asset of this corporation is 2,220,869
iSTAR internet inc. common shares issued in previous periods. As a result of
this transaction the Company indirectly holds iSTAR internet inc. shares.
These shares have been removed from the transaction summary provided above.
(c) Stock options:
At May 31, 1997, 2,070,537 options exercisable between $2.20 and $12.00
were outstanding. These options may be exercised between one month and 5
years from the date of grant.
(d) Warrants:
On September 24, 1996, the Company issued 366,750 warrants in connection
with a private offering. At May 31, 1997, 48,107 warrants are outstanding
and exercisable at a price of $4.10 per warrant until September 28, 1998.
On October 29, 1996, the Company issued 1,450,000 warrants in connection
with the public offering. At May 31, 1997, these warrants are outstanding
and exercisable at a price of $6.75 until November 12, 1997.
At May 31, 1997, the Company has warrants outstanding and exercisable
into 46,940 common shares relating to 1996 acquisitions.
(e) Contributed surplus:
The statutory amalgamation on August 10, 1995 of the Company and NSTN
Incorporated resulted in contributed surplus of $2,871,199.
11. Commitments:
The Company is committed to payments under operating leases for office
space and office equipment. Annual payments are: 1998--$923,478; 1999--
$929,662; 2000--$932,802; 2001--$865,675; 2002--$655,186; and $2,138,236
thereafter.
The Company is also committed to payments under operating leases for
computer and network equipment. Annual payments are: 1998--$3,420,247; 1999--
$3,230,011; and 2000--$2,383,576.
12. Contingencies:
(a) The Company is the defendant and counter-claimant in a claim arising
from the normal course of business. Since this claim is in its early stages,
legal counsel cannot determine what the outcome will be. However, management
expects that the financial impact arising from this claim will not be
material.
On November 26, 1997, the plaintiff accepted a settlement offer from the
Company in the amount of $750,000, which will be recorded in the financial
statements of the Company for the second quarter ended November 30, 1997.
(b) The Company has $2,875,000 of letters of credit outstanding in favour
of three of its major suppliers.
F-41
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
During the second quarter of fiscal 1998 all letters of credit were released
by suppliers in exchange for renegotiated equipment leasing arrangements that
included accelerated lease payments.
13. Income Taxes:
The Company has income tax losses of approximately $58,600,000 (1996--
$21,400,000) which include tax losses acquired on the acquisition of certain
subsidiaries. These losses are generally available to reduce future taxable
income up to 2004. The benefit of these losses has not been recognized in these
financial statements.
14. Net Loss Per Share:
The net loss per share figures are calculated based on the weighted average
number of common shares outstanding of 22,224,230 shares (1996--12,053,453
shares).
The potential exercise of stock options and warrants would not have a
dilutive impact on the net loss per common share.
15. Related Party Transactions:
During the year ended May 31, 1997, the Company purchased $1,003,740 (1996--
$1,814,829) of software, hardware and management services from a corporation in
which a Company director is a shareholder.
The Company paid consulting fees of $244,549 (1996--$517,904) to a
corporation in which two of the Company's directors are shareholders.
During the year, the Company purchased $982,374 (1996--$618,278) of software
and hardware from a corporation in which one of the corporation's shareholders
is a director of the Company.
During the year, the Company purchased $63,036 (1996--$Nil) of financial
services from a corporation that is a shareholder and holds a seat on the board
of directors of the Company. The Company also sold $252,688 (1996--$Nil) of
services to this same corporation.
Included in accounts receivable as at May 31, 1997 are amounts due from
related parties of $168,465 (1996--$81,456). Included in accounts payable and
accrued liabilities as at May 31, 1997 are amounts due to related parties of
$473,198 (1996--$828,705).
16. Segmented Information:
Management has determined that the Company operates in one dominant industry
segment, being commercially-focused Internet products, and in one dominant
geographic segment, being Canada.
17. Financial Instruments:
The carrying values of cash and marketable securities, accounts receivable,
bank indebtedness, accounts payable and accrued liabilities and capital lease
obligations approximate their fair values.
F-42
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
18. Subsequent Events:
(a) Special warrants:
On July 31, 1997, the Company issued 4,500,000 special warrants at a price
of $2.00 each for proceeds of $9,000,000. Each special warrant was convertible
without further payment into common shares of the Company on a one-for-one
basis. The proceeds from the issuance of the special warrants were held in
escrow until a receipt was issued by the appropriate Canadian securities
regulatory authorities for a final prospectus qualifying the issue of the
underlying common shares. The receipt was issued on September 10, 1997 and the
proceeds released from escrow on September 16, 1997. The warrants were
converted into common shares on September 18, 1997.
(b) Credit facility:
On August 1, 1997, the Company entered into a loan agreement with The Bank
of Nova Scotia, Jefferson Partners Capital Limited and Jefferson Partners
Holdco Inc. for up to $4,000,000. As at August 8, 1997, $2,000,000 was advanced
and another $2,000,000 was advanced upon execution of the Network Provisioning
Agreement (note 19). The principal portion of the fees payable to the lenders
for this facility was 200,000 warrants convertible into common shares for no
additional consideration. This credit facility is secured by existing security
in favour of The Bank of Nova Scotia and by a general assignment of book debts
in favour of Jefferson Partners Capital Limited. The proceeds of the Special
Warrants (note 18(a)) was used to repay the amount outstanding under this
facility and the warrants were converted into common shares on September 18,
1997.
19. Network Provisioning Agreement, Proposed Sale of Business and the Going
Concern Assumption:
On August 29, 1997, the Company signed a network provisioning agreement
(NPA) with Bell Sygma Inc. (Bell) to supply the Company with telecommunications
facilities and services over five years. The fees for certain services
performed by Bell between July 1, 1997 and June 30, 1999, up to $20,000,000, do
not have to be paid prior to July 1, 1999 and are interest free. After this
date, Bell has the right to demand repayment of the deferred fees on an
interest free basis over the next three years in equal monthly installments.
The Company is obligated to pay Fonorola Inc. an amount which has not been
finally determined but which is anticipated by the Company to be no more than
$1,800,000, resulting from the early termination of the Company's supply
agreement with Fonorola Inc. Under the NPA, Bell Sygma Inc. has agreed to pay
50% of this amount, which it will include in invoices to the Company in equal
monthly amounts over the next five years.
The implementation schedule of the NPA contemplated that Bell and the
Company would complete the migration of the Company's network to Bell's network
over a period of time ending on December 31, 1997. During the course of the
migration, the Company expected it would realize increasing levels of deferral
of its telecommunication costs with the full benefit of the NPA being achieved
once the migration was completed.
In mid-October, the Company learned that there were significant delays in
the migration of the Company's network to the Bell system. This impacted the
anticipated cash benefits of the NPA during the first six months of the 1998
fiscal year and into the third quarter. At that time the Company continued to
focus on maintaining adequate capital resources until the full financial
benefit of the NPA could be realized. As a result of the significant delays in
the migration, the Company has used its cash resources to fund operating losses
through
F-43
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
the second quarter of fiscal 1998 and into the third quarter. The Company
anticipates it will continue to generate operating losses over the next several
quarters and will require additional amounts of capital to fund these operating
losses.
As a result of the demand on cash, the Company explored various options
including seeking a purchaser. In late October 1997 the Company entered into
discussions with PSINet Inc. (PSINet) and on November 10, 1997, PSINet, a
United States internet service provider and iSTAR internet inc. announced that
PSINet plans to acquire the Company and to merge it with its privately held
Canadian subsidiary, PSINet Limited.
Under the merger arrangement, the Company's shareholders will be entitled to
receive, for each common share of the Company, one $1.206, 8% exchangeable
redeemable preference share (an "Amalco Non-voting Exchangeable Share") in the
company ("Amalco") continuing from the amalgamation of iSTAR with PSINet
Limited. Dividends will accrue daily and will compound quarterly on the Amalco
Non-voting Exchangeable Shares. Each Amalco Non-voting Exchangeable Share is
exchangeable at certain times into US$0.86 of PSINet Common Stock valued at the
ten day weighted average market price of PSINet Common Stock at the time of
exchange plus a cash payment equal to all accrued and unpaid dividends. Up to
33 1/3% of the aggregate number of Amalco Non-voting Exchangeable Shares issued
may be exchanged at the holder's option on April 1, 1998. Up to 66 2/3% of the
aggregate number of Amalco Non-voting Exchangeable Shares issued (less any
shares exchanged on April 1, 1998) may be exchanged at the holder's option on
July 1, 1998. Any Amalco Non-voting Exchangeable Shares which remain
outstanding on January 1, 1999 may be exchanged, at the holders' option, on or
after that date. The shares will be automatically exchanged into shares of
PSINet Common Stock in certain circumstances.
The agreement also includes the immediate credit facility of $5,000,000
working capital from PSINet Limited to the Company. The transaction is expected
to be completed by January 31, 1998. The offer is subject to certain closing
conditions including government and regulatory approvals. The offer is also
conditional upon a satisfactory arrangement with Bell, regarding the Network
Provisioning Agreement.
The Company expects the purchase by PSINet to be completed by January 31,
1998. If this sale is not completed the Company will be obligated to repay to
PSINet any amounts borrowed however, the Company currently does not have any
other available sources of financing.
These consolidated financial statements have been prepared on a going
concern basis in accordance with generally accepted accounting principles. The
going concern basis of presentation assumes the Company will continue its
operation for the foreseeable future and be able to realize its assets and
discharge its liabilities in the normal course of business. These consolidated
financial statements do not give effect to the adjustments to the carrying
value of assets and liabilities and to the reported revenues and expenses, and
the balance sheet classifications used that would be necessary should the
Company be unable to find new sources of financing to operate in the ordinary
course of business.
20. United States Accounting Principles:
This financial statement note has been prepared because the consolidated
financial statements of the Company will be included in a proxy statement to be
issued to the shareholders of PSINet Inc.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP) which in the
case of the Company differ in the following material respects from those
generally accepted in the United States (U.S. GAAP).
F-44
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
(a) Statements of operations:
If U.S. GAAP were employed, the net loss and loss per share would be
adjusted as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net loss under Canadian GAAP............................ $20,438 $53,754
Adjustments:
Compensation element of: stock options issued to
employees and; contingent consideration paid to
acquire companies and businesses..................... 10,727 2,062
Customer lists and goodwill amortization and write-
off.................................................. 97 (67)
------- -------
Net loss under U.S. GAAP................................ $31,262 $55,749
======= =======
Net loss per share under U.S. GAAP...................... $ (2.59) $ (2.51)
======= =======
</TABLE>
(b) Balance sheets:
The cumulative effect of the adjustments on the consolidated assets,
liabilities and shareholders' equity is as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Total assets under Canadian GAAP..................... $ 55,480 $ 39,420
Adjustments:
Restricted cash.................................... 455 --
Customer lists and goodwill........................ 686 --
-------- --------
Total assets under U.S. GAAP......................... $ 56,621 $ 39,420
======== ========
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Total shareholders' equity under Canadian GAAP....... $ 39,262 $ 11,072
Adjustments:
Issue of common shares and stock options to acquire
companies and businesses.......................... 11,965 12,819
Selling, general and administration expenses....... (10,727) (12,789)
Customer lists and goodwill amortization and write-
off............................................... (97) (30)
-------- --------
Total shareholders' equity under U.S. GAAP........... $ 40,403 $ 11,072
======== ========
</TABLE>
F-45
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Years Ended May 31, 1996 and 1997
(All Tabular Amounts in Thousands of Canadian Dollars)
(c) Statements of changes in financial position:
Under U.S. GAAP, financing and investing activities not involving a
receipt or outlay of cash are excluded from the consolidated statements of
changes in financial position. Accordingly, the following investing and
financing activities would not be presented in the consolidated statement
of changes in financial position for the years ended May 31, 1997 and 1996
but would be shown supplementally:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Financing activities under Canadian GAAP............. $ 62,622 $ 29,514
Adjustments:
Common shares and warrants issued and contributed
surplus established on acquisition of companies
and businesses.................................... (9,531) (1,844)
Additional capital lease obligations on acquisition
of property and equipment......................... (4,757) (5,566)
Increase in bank indebtedness...................... -- 3,500
-------- --------
Financing activities under U.S. GAAP................. $ 48,334 $ 25,604
======== ========
Investing activities under Canadian GAAP............. $(28,079) $(11,123)
Adjustments:
Acquisition of companies and businesses through the
issue of shares and warrants...................... 9,531 1,844
Property and equipment purchases financed through
capital leases.................................... 4,757 5,566
-------- --------
Investing activities under U.S. GAAP................. $(13,791) $ (3,713)
======== ========
</TABLE>
21. Subsequent Events (unaudited)
On December 24, 1997, the Company and PSINet Inc. ("PSINet"), a United
States Internet service provider, announced an amendment to the terms of their
November 10, 1998 announcement whereby PSINet planned to acquire the Company
and to merge it with its privately held Canadian subsidiary, PSINet Limited.
The new terms provide that PSINet will offer Cdn $.75 cash for each of the
outstanding common shares of iSTAR by way of a take-over bid to be mailed to
shareholders of the Company on or before January 7, 1998. Subsequently, PSINet
extended the expiry of the offer and between January 30, 1998 and February 12,
1998, PSINet acquired approximately 23,900,000 (or 81.4%) of the outstanding
common shares of iSTAR.
The NPA agreement with Bell Sygma Inc. was terminated on March 28, 1998.
During the period from July 1, 1997 to March 28, 1998, approximately $7.3
million of telecommunication services had been provided by Bell Sygma Inc. Upon
termination of the NPA, the company was obligated to pay Bell Sygma Inc. $7.3
million for the services provided through to the termination date. In addition,
as per the agreement, a $1.3 million early termination fee had been recorded at
the termination date.
Additionally, due to the termination of the NPA agreement, the Company
continued receiving telecommunications facilities under the supply agreement
with Fonorola Inc. and therefore the early termination penalty with Fonorola
was not incurred.
F-46
<PAGE>
ISTAR INTERNET INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended February 28, 1997 and eight months ended January 31, 1998
F-47
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
February 28, January 31,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and marketable securities....................... $ 14,857 $ 3,616
Accounts receivable.................................. 8,254 8,408
Inventory............................................ 802 266
Prepaid expenses and other........................... 2,103 2,299
-------- --------
26,016 14,589
Property and equipment................................. 10,983 12,196
Goodwill............................................... 15,439 --
-------- --------
$ 52,438 $ 26,785
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank indebtedness.................................... $ -- $ 8,999
Accounts payable and accrued liabilities............. 12,885 18,427
Deferred revenue..................................... 1,363 1,851
Current portion of capital lease obligations......... 1,692 4,336
-------- --------
15,940 33,613
Capital lease obligations.............................. 767 1,026
Deferred leasehold inducements......................... 817 608
-------- --------
Total liabilities...................................... 17,524 35,247
-------- --------
Shareholders' (deficit) equity:
Share capital........................................ 81,663 91,675
Share purchase warrants.............................. 16
Contributed surplus.................................. 2,871 2,871
Deficit.............................................. (21,278) (75,033)
Current period loss.................................. (28,342) (27,991)
-------- --------
34,914 (8,462)
-------- --------
$ 52,438 $ 26,785
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-48
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(in thousands of Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Eight Months
Ended Ended
February 28, January 31,
1997 1998
------------ ------------
<S> <C> <C>
Sales................................................. $ 23,950 $ 27,460
Cost of sales......................................... 22,441 22,875
-------- ---------
Gross profit.......................................... 1,509 4,585
Selling, general and administration expenses.......... 25,010 24,757
-------- ---------
Operating loss before under noted items............... (23,501) (20,172)
Depreciation and amortization......................... 4,831 6,116
Net interest expense.................................. 23 1,703
Income tax (recovery)................................. (13) --
-------- ---------
Net loss.............................................. (28,342) (27,991)
Deficit, beginning of period.......................... (21,278) (75,033)
-------- ---------
Deficit, end of period................................ $(49,620) $(103,024)
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-49
<PAGE>
ISTAR INTERNET INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(in thousands of Canadian dollars)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Eight Months
Ended Ended
February 28, January 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss............................................ $(28,342) $(27,991)
Adjustments:
Depreciation and amortization..................... 4,831 6,116
Non-cash operating working capital................ 1,028 3,748
-------- --------
Net cash used in operating activities............. (22,483) (18,127)
-------- --------
Cash flows from investing activities
Purchase of property and equipment................ (2,033) (1,969)
Acquisition of companies and businesses........... (83) --
-------- --------
Net cash used in investing activities............. (2,116) (1,969)
-------- --------
Cash flows from financing activities
Common shares and special warrants issued......... 23,994 8,458
Capital lease obligation.......................... (1,271) (2,318)
-------- --------
Net cash provided by financing activities......... 22,723 6,140
-------- --------
Net decrease in cash and cash equivalents........... (1,876) (13,956)
Cash and cash equivalents (net of bank
indebtedness), beginning of period................. 16,733 8,573
-------- --------
Cash and cash equivalents, end of period............ $ 14,857 $ (5,383)
======== ========
Cash and cash equivalents, end of period comprised
of:
Cash and cash equivalents......................... $ 14,857 $ 3,616
Bank indebtedness................................. -- (8,999)
-------- --------
$ 14,857 $ (5,383)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-50
<PAGE>
ISTAR INTERNET INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended February 28, 1997 and Eight Months Ended January 31, 1998
(all tabular amounts in thousands of Canadian dollars)
1. Background and Basis of Presentation:
iSTAR Internet Inc. (the "Company") provides advanced Internet services for
businesses, institutions, and individuals. The Company provides customers with
a range of networking expertise and Web-based products and services including
business solutions with high-speed connection to the Internet through a
national backbone network.
These financial statements for the nine months ended February 28, 1997 and
the eight months ended January 31, 1998 and the related footnote information
are unaudited and have been prepared on a basis substantially consistent with
the audited financial statements of iSTAR internet inc. (the "Company") as of
May 31, 1997 previously filed with the Securities and Exchange Commission in a
proxy statement dated December 19, 1997 filed by PSINet Inc. These financial
statements should be read in conjunction with the audited financial statements
and the related notes to financial statements of the Company as of May 31,
1997. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring adjustments)
which management considers necessary to present fairly the financial position
of the Company at February 28, 1997 and January 31, 1998 and the results of its
operations and the changes in its financial position for the nine months ended
February 28, 1997 and the eight months ended January 31, 1998.
2. Subsequent Event--Sale of Business:
In late October 1997 the Company entered into discussions with PSINet Inc.
(PSINet) regarding the potential sale of the Company. On November 10, 1997,
PSINet, a United States Internet service provider, announced that it planned to
acquire the Company and to merge it with its privately held Canadian
subsidiary, PSINet Limited.
On December 24, 1997, the Company and PSINet announced an amendment to the
terms of their November 10, 1997 announcement whereby PSINet planned to acquire
the Company and to merge it with its privately held Canadian subsidiary, PSINet
Limited. Between February and May 1998, PSINet completed its acquisition of all
of the outstanding capital shares of the Company. No adjustments to the
carrying amounts of the Company's assets and liabilities have been reflected in
the accompanying unaudited consolidated financial statements as of January 31,
1998, for the purchase of the Company by PSINet.
3. United States Accounting Principles:
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP) which in the
case of the Company differ in the following material respects from those
generally accepted in the United States (U.S. GAAP).
(a) Consolidated statements of operations and deficit:
If U.S. GAAP were employed, the net loss would be adjusted as follows:
<TABLE>
<CAPTION>
Nine Months Eight Months
Ended Ended
February 28, January 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss under Canadian GAAP......................... $(28,342) $(27,991)
Adjustments:
Compensation element of stock options issued to
employees and contingent consideration paid to
acquire companies and businesses.................. 2,062 --
Customer lists and goodwill amortization and write-
off............................................... (67) --
-------- --------
Net loss under U.S. GAAP............................. $(30,337) $(27,991)
======== ========
</TABLE>
F-51
<PAGE>
(b) Consolidated balance sheets:
The cumulative effect of the adjustments on the consolidated total assets
and shareholders' (deficit) equity are as follows:
<TABLE>
<CAPTION>
February 28, January 31,
1997 1998
------------ ------------
<S> <C> <C>
Total assets under Canadian GAAP..................... $52,438 $26,785
Total assets under U.S. GAAP......................... $52,438 $26,785
======= =======
The cumulative effect of the adjustments on the consolidated assets and
shareholders' (deficit) equity is as follows:
<CAPTION>
February 28, January 31,
1997 1998
------------ ------------
<S> <C> <C>
Total shareholders' (deficit) equity under Canadian
GAAP................................................ $34,914 $(8,462)
Adjustments:
Issue of stock options and common shares to acquire
companies and businesses.......................... 12,819 --
Selling, general and administration expenses....... (12,789) --
Customer lists and goodwill amortization and write-
off............................................... (30) --
------- -------
Total shareholders' (deficit) equity under U.S.
GAAP................................................ $34,914 $(8,462)
======= =======
(c) Consolidated statements of changes in financial position:
<CAPTION>
Nine Months Eight Months
Ended Ended
February 28, January 31,
1997 1998
------------ ------------
<S> <C> <C>
Financing activities under Canadian GAAP............. $22,723 $ 6,140
Adjustment:
Increase in loans payable.......................... -- 5,499
------- -------
Financing activities under U.S. GAAP................. $22,723 $11,639
======= =======
</TABLE>
Under U.S. GAAP, cash and cash equivalents does not include bank
indebtedness which is reflected as a financing activity.
F-52
<PAGE>
TOKYO INTERNET CORPORATION
FINANCIAL STATEMENTS
For the Years Ended March 31, 1996, 1997 and 1998
F-53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Tokyo Internet Corporation
We have audited the accompanying balance sheets of Tokyo Internet
Corporation (the "Company") as of March 31, 1996, 1997 and 1998 and the related
statements of operations and undisposed deficit for the years then ended, all
expressed in Japanese yen. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
1996, 1997 and 1998 and the results of its operations for the years then ended,
in conformity with accounting principles generally accepted in Japan applied on
a consistent basis.
Accounting principles generally accepted in Japan vary in certain important
respects from accounting principles generally accepted in the United States.
The application of the latter would have affected the determination of the net
loss expressed in Yen for each of the two years in the period ended March 31,
1998 and the determination of shareholders' equity and financial position also
expressed in Yen at March 31, 1997 and 1998 to the extent summarized in Note 4
to the financial statements.
/s/ Price Waterhouse, Tokyo
September 30, 1998
F-54
<PAGE>
TOKYO INTERNET CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
As of March 31,
------------------------------------------
1996 1997 1998
------------ ------------ --------------
(In Thousands of Yen)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash on hand and in banks......... (Yen) 78,462 (Yen) 72,339 (Yen) 136,605
Accounts receivable--trade........ 138,899 492,681 893,692
Accounts receivable--other........ -- -- 19,565
Merchandise....................... 1,080 5,128 --
Advance payment................... -- 35,440 28,358
Prepaid expenses.................. 9,676 10,712 11,333
Other current assets.............. 6,984 3,608 1,566
Bad debt reserve.................. (9,180) (25,411) (154,607)
------------ ------------ --------------
Total current assets.............. 225,921 594,497 936,512
------------ ------------ --------------
Fixed assets:
Tangible fixed assets--net
Building and facilities........... 13,984 33,954 44,202
Machinery......................... -- 27,251 27,385
------------ ------------ --------------
Total tangible fixed assets--net.. 13,984 61,205 71,587
------------ ------------ --------------
Intangible fixed assets:
Telephone rights.................. 60,235 122,396 133,225
Software assets................... -- 17,868 36,003
Goodwill.......................... -- 59,051 44,288
------------ ------------ --------------
Total intangible fixed assets..... 60,235 199,315 213,516
------------ ------------ --------------
Investments & other assets:
Investment securities............. -- -- 25,000
Lease deposits.................... 16,599 40,112 41,185
Long-term prepaid expenses........ 18,598 53,515 7,109
------------ ------------ --------------
Total investments & other assets.. 35,197 93,627 73,294
------------ ------------ --------------
Total fixed assets................ 109,416 354,147 358,397
------------ ------------ --------------
Deferred assets:
Stock issue expenses.............. 1,232 616 2,436
Business commencement expenses.... 30,091 20,060 10,030
Organization expenses............. 804 536 268
------------ ------------ --------------
Total deferred assets............. 32,127 21,212 12,734
------------ ------------ --------------
Total assets...................... (Yen)367,464 (Yen)969,856 (Yen)1,307,643
============ ============ ==============
LIABILITIES
Current liabilities:
Short-term borrowings............. (Yen) -- (Yen)869,000 (Yen) 800,000
Accounts payable--other........... 116,378 176,135 219,265
Income tax payable................ 483 816 3,239
Consumption tax payable........... -- 51,728 93,750
Accrued expenses.................. 17,812 44,331 23,646
Advance received.................. 2,440 8,229 5,567
Deposit received.................. 8,930 17,274 6,565
------------ ------------ --------------
Total current liabilities......... 146,043 1,167,513 1,152,032
------------ ------------ --------------
Non-current liabilities:
Guarantee deposit received........ 1,296 8,363 1,296
Accrued severance indemnities..... 75 249 676
------------ ------------ --------------
Total non-current liabilities..... 1,371 8,612 1,972
------------ ------------ --------------
Total liabilities................. 147,414 1,176,125 1,154,004
============ ============ ==============
SHAREHOLDERS' EQUITY
Capital stock...................... 480,000 730,000 1,204,500
------------ ------------ --------------
Deficit:
Undisposed deficit................ (259,950) (936,269) (1,050,861)
(Net loss for the year included in
the line above).................. (208,084) (676,319) (114,592)
------------ ------------ --------------
Total shareholders' equity
(deficit)........................ 220,050 (206,269) 153,639
------------ ------------ --------------
Total liabilities and
shareholders' equity............. (Yen)367,464 (Yen)969,856 (Yen)1,307,643
============ ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
TOKYO INTERNET CORPORATION
STATEMENTS OF OPERATIONS AND UNDISPOSED DEFICIT
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------
1996 1997 1998
------------ -------------- --------------
(in thousands of Yen)
<S> <C> <C> <C>
Ordinary income and expenses:
Operating income and expenses--
Operating income:
Net sales....................... (Yen)774,059 (Yen)3,173,672 (Yen)5,348,391
Operating expenses:
Cost of sales................... 506,579 2,551,528 4,033,904
Selling, general and
administrative expenses........ 465,427 1,291,929 1,291,251
------------ -------------- --------------
972,006 3,843,457 5,325,155
------------ -------------- --------------
Operating (profit) loss........ 197,947 669,785 (23,236)
------------ -------------- --------------
Non-operating income and expenses--
Non-operating income:
Interest income and dividends.... 308 121 389
Other............................ 1,492 11,267 22,084
------------ -------------- --------------
1,800 11,388 22,473
------------ -------------- --------------
Non-operating expenses:
Interest expense................. 349 5,988 7,905
Amortization of deferred assets.. 10,914 10,914 12,132
Other............................ 140 188 9,848
------------ -------------- --------------
11,403 17,090 29,885
------------ -------------- --------------
Ordinary (profit) loss......... 207,550 675,487 (15,824)
------------ -------------- --------------
Special gain and loss--
Provision for bad debts........... -- -- 127,176
------------ -------------- --------------
Loss before income taxes......... 207,550 675,487 111,352
Corporate and inhabitant taxes... 534 832 3,240
------------ -------------- --------------
Net loss for the year............ 208,084 676,319 114,592
Accumulated deficit brought
forward......................... 51,866 259,950 936,269
------------ -------------- --------------
Undisposed deficit............. (Yen)259,950 (Yen) 936,269 (Yen)1,050,861
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS
The balance sheets and the statements of operations and undisposed deficit
are prepared in conformity with accounting principles generally accepted in
Japan.
1. Significant Accounting Policies:
(1) The valuation basis and valuation method of inventories--
Merchandise is stated at cost determined by the first-in first-out
method.
(2) The method of depreciation--
Tangible fixed assets are depreciated based on the declining-balance
method in accordance with the Japanese corporate tax regulations.
Intangible fixed assets are amortized based on the straight-line method
in accordance with the Japanese corporate tax regulations over useful lives
of up to six years.
Deferred assets are amortized based on the straight-line method in
accordance with the Japanese Commercial Code.
(3) The basis for recognition of provisions--
In order to provide for expected future losses, bad debt reserve is
provided for the expected uncollectable amount of individual receivable
balances plus the maximum deductible amount allowed under the Japanese
corporate tax regulations.
Accrued severance indemnities are provided for the maximum deductible
amount allowed under the Japanese corporate tax regulations in order to
provide for expected future retirement benefit payments.
(4) Matters related to restriction of dividends--
The excess prescribed in Paragraph 4, Clause 1, Article 290 of the
Commercial Code amounts to (Yen)10,030 thousand--1998, ((Yen)30,090
thousand--1996, (Yen)20,060 thousand--1997).
2. Notes To the Balance Sheets:
Accumulated depreciation of tangible fixed assets is (Yen)2,803 thousand,
(Yen)10,943 thousand and (Yen)32,558 thousand as of March 31, 1996, 1997 and
1998, respectively.
(1) Balances with the Company's majority shareholder--
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- -----------
(In Thousands of Yen)
<S> <C> <C> <C>
Accounts receivable--trade......................... (Yen)34 (Yen)911 (Yen)28,685
Other current assets............................... 62 -- 167
Lease deposits..................................... 50 50 50
Short-term borrowings.............................. -- 869,000 800,000
Accounts payable--other............................ 11,376 24,271 17,203
</TABLE>
(2) Net loss per share--
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- -------------
(In Yen)
<S> <C> <C> <C>
(Yen)29,936.57 (Yen)60,077.02 (Yen)5,475.88
</TABLE>
F-57
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Notes to the Statements of Operations and Undisposed Deficit:
Transactions with the Company's majority shareholder--
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
(In Thousands of Yen)
<S> <C> <C> <C>
Sales.................................... (Yen)2,834 (Yen)1,543 (Yen)27,985
Purchases................................ 71,698 10,762 1,909
Transactions other than operating
activities (interest expense)........... -- 12,817 19,755
</TABLE>
4. Summary of Principal Differences Between Generally Accepted Accounting
Principles in Japan and the United States:
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in Japan ("Japanese GAAP"), which in
the case of the Company differ in the following material respects from those
generally accepted in the United States ("U.S. GAAP"). The principal
differences applicable to the financial statements and their effects on net
loss, assets, liabilities and shareholders' equity are summarized below.
(1) Statement of cash flows--
Under Japanese GAAP, a statement of cash flows is not required as part of
the basic financial statements.
Under U.S. GAAP, a statement of cash flows is required as part of the basic
financial statements, and cash and cash equivalents include highly liquid
investments that generally have original maturities at the time of purchase of
three months or less.
(2) Valuation of inventories--
Under Japanese GAAP, inventories can be stated at cost, the policy followed
by the Company, or at the lower of cost or market.
U.S. GAAP requires all inventories to be valued at the lower of cost or
market.
(3) Valuation of securities--
Under Japanese GAAP, investments in marketable securities, as well as non-
marketable securities, can be stated at cost. The Company's non-marketable
security is stated at cost. However, when significant impairment of value has
been deemed permanent, cost is appropriately reduced.
Under U.S. GAAP, investments in debt securities and equity securities that
have readily determinable fair values, except for investments accounted for
using the equity method, are to be classified in three categories and accounted
for as follows:
(a) Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Unrealized holdings gains and losses are
not reported in the financial statements until realized or until a decline
in fair value below cost is deemed to be other than temporary.
(b) Debt and marketable equity securities that are acquired and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings.
F-58
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(c) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity.
(4) Deferred assets--
The Company has deferred stock issue expenses, business commencement
expenses and organization expenses which are amortized over five years as
permitted under Japanese GAAP.
Under U.S. GAAP, startup costs such as business commencement expenses and
organization expenses are to be expensed as incurred under the circumstances
that future gross profit sufficient to absorb these startup costs is not
anticipated. Stock issue costs are to be netted against the stock issuance
proceeds.
(5) Accounting for income taxes
Under Japanese GAAP, income taxes are principally provided for based on
taxable income for the period, determined in accordance with applicable tax
laws. Deferred tax accounting may be applied only in consolidated financial
statements; however, it is not mandatory and has not been adopted by the
Company.
U.S. GAAP requires that deferred income taxes be recognized for temporary
differences between the tax basis of the assets or liabilities and the reported
amount in the financial statements and for tax loss carry-forwards which are
permitted to be carried forward to offset taxable income over the next five
years under Japanese Income Tax Law. A valuation allowance is provided for the
deferred tax assets if it is more likely than not that these assets will not be
realized.
(6) Capital leases--
Under Japanese GAAP, for finance leases where ownership is not deemed to be
transferred from lessor to lessee, the lessee may choose not to capitalize the
leased asset and may account for the lease in a manner similar to operating
leases. The Company's policy is to account for such leases in a manner similar
to operating leases.
U.S. GAAP requires leases which transfer essentially all the risks and
rewards of ownership in the leased assets from the lessor to lessee to be
capitalized.
(7) Accrued compensated absences--
Under Japanese GAAP, accrued compensated absences are normally not
recognized for future absences due to the fact that such accruals do not meet
the conditions for provisions. The Company does not recognize such accrued
compensated absences.
U.S. GAAP requires that accrued compensated absences be recognized as earned
by employees.
(8) Accrued severance indemnities--
The Company maintains a severance indemnity plan which provides for payments
to certain employees upon termination of employment. This defined benefit plan
is not funded. The Company has recorded a liability, as allowed under Japanese
GAAP, equal to 40% of the amount which would be paid if all eligible employees
terminated their employment on the balance sheet date.
U.S. GAAP requires pension costs to be actuarially computed and charged to
expense as stipulated by Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions." Due to the small number of employees and
short average service period of employees, the Company's liability for
severance indemnities under U.S. GAAP would not be significantly different from
the amount recorded under Japanese GAAP.
F-59
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(9) Accounting for business combinations--
At the time of its November 1996 business combination with Secom Internet
K.K., both the Company and Secom Internet K.K. were controlled by Secom
Corporation. The Company has accounted for this business combination under
purchase accounting, which is allowed by Japanese GAAP.
Under U.S. GAAP, such a transfer of ownership among companies under common
control is accounted for at historical cost in a manner similar to that in
pooling of interests accounting.
(10) Accrued consumption tax reversal--
In fiscal 1998, the Company reversed an accrual for consumption taxes in the
amount of (Yen)17,294,290 which was recorded as other non-operating income.
This accrual had been set-up in error in fiscal 1997 as the Company was not
subject to consumption taxes. Under U.S. GAAP, such reversal would be treated
as a correction of an error and prior year financial statements would be
restated.
If U.S. GAAP as indicated above were employed by the Company, the net loss,
loss per share, assets, liabilities and shareholders' equity would be adjusted
as follows:
(a) Statement of operations:
<TABLE>
<CAPTION>
For the Year For the Year
Ended March Ended March
31, 1997 31, 1998
-------------- --------------
(in thousands of Yen)
<S> <C> <C>
Net loss under Japanese GAAP.................... (Yen) 676,319 (Yen) 114,592
Adjustments:
Deferred assets............................... (10,914) (12,132)
Leases capitalized as assets.................. 2,947 873
Deferred tax assets........................... (364,670) (57,440)
Valuation allowance for deferred tax assets... 364,670 57,440
Accrued compensated absences.................. 636 (70)
Accrued consumption tax reversal.............. (17,294) 17,294
Accounting for business combinations.......... (21,887) (14,763)
-------------- --------------
Net loss under U.S. GAAP.................... (Yen) 629,807 (Yen) 105,794
============== ==============
<CAPTION>
(in Yen)
<S> <C> <C>
Net loss per share under U.S. GAAP.............. (Yen)55,948.03 (Yen) 5,045.01
============== ==============
(b) Balance sheet:
<CAPTION>
As of As of
March 31, 1997 March 31, 1998
-------------- --------------
(in thousands of Yen)
<S> <C> <C>
Total assets under Japanese GAAP................ (Yen) 969,856 (Yen)1,307,643
Adjustments:
Deferred assets............................... (21,212) (12,734)
Deferred tax assets........................... 507,263 449,823
Valuation allowance for deferred tax assets... (507,263) (449,823)
Goodwill...................................... (59,051) (44,288)
Tangible fixed assets--net.................... 780,184 969,711
Unrealized loss on marketable securities...... -- (13,285)
-------------- --------------
Total assets under U.S. GAAP................ (Yen)1,669,777 (Yen)2,207,047
============== ==============
</TABLE>
F-60
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
As of As of
March 31, March 31,
1997 1998
------------- -------------
(in thousands of Yen)
<S> <C> <C>
Total shareholders' equity (deficit) under
Japanese GAAP................................... (Yen)(206,269) (Yen) 153,639
Adjustments:
Deferred assets................................ (21,212) (12,734)
Goodwill....................................... (59,051) (44,288)
Tangible fixed assets--net..................... (4,806) (5,679)
Deferred tax assets............................ 507,263 449,823
Valuation allowance for deferred tax assets.... (507,263) (449,823)
Accrued compensated absences................... (1,114) (1,044)
Accrued consumption tax reversal............... 17,294 --
Unrealized loss on marketable securities....... -- (13,285)
------------- -------------
Total shareholders' equity (deficit) under
U.S. GAAP................................... (Yen)(275,158) (Yen) 76,609
============= =============
</TABLE>
(11) Statements of cash flows under U.S. GAAP--
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1997 1998
------------- -------------
(in thousands of Yen)
<S> <C> <C>
Cash flow from operating activities:
Net loss under U.S. GAAP....................... (Yen)(629,807) (Yen)(105,794)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization................. 176,315 336,869
Loss on disposal of intangible assets......... -- 15,097
Provision for bad debts....................... 16,175 129,196
Increase in accounts receivable............... (343,280) (401,011)
(Increase) decrease in inventories............ (4,048) 5,128
Decrease (increase) in prepaid expenses and
other current assets......................... 25,430 (11,062)
Increase in accounts payable--other........... 59,757 43,130
Increase in other current liabilities......... 71,406 27,613
Decrease in non-current liabilities........... (7,554) (6,640)
------------- -------------
Net cash provided by (used for) operating activi-
ties............................................ (635,606) 32,526
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment............. (55,409) (32,005)
Purchase of investment securities.............. -- (25,000)
Cash arising from acquisition of Secom Internet
K.K........................................... 118,985 --
Purchase of telephone rights................... (61,841) --
Capitalized software development costs......... (52,559) --
Increase in lease deposits..................... (23,513) --
Other.......................................... -- 1,272
------------- -------------
Net cash used for investing activities........... (Yen) (74,337) (Yen) (55,733)
------------- -------------
</TABLE>
F-61
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1997 1998
------------- -------------
(in thousands of Yen)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from short-term borrowings........... (Yen) 869,000 (Yen) 181,000
Repayment of short-term borrowings............ -- (250,000)
Principal payments under capital lease
obligations.................................. (165,180) (314,373)
Issuance of common stock...................... -- 470,846
------------- -------------
Net cash provided by financing activities....... 703,820 87,473
------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................... (6,123) 64,266
Cash and cash equivalents at beginning of
period......................................... 78,462 72,339
------------- -------------
Cash and cash equivalents at end of period...... (Yen) 72,339 (Yen) 136,605
============= =============
Supplemental schedule of non-cash investing and
financing activities
Increase in lease assets and obligations under
capital lease arrangements..................... (Yen) 504,773 (Yen) 672,181
============= =============
</TABLE>
(12) Statements of changes in shareholders' equity (deficit) under U.S. GAAP--
<TABLE>
<CAPTION>
Capital Stock
-------------------------- -------
Unrealized Total
Loss on Shareholders'
Outstanding Undisposed Marketable Equity
Shares Value Deficit Securities (Deficit)
----------- -------------- --------------- ------------ -------------
(in thousands of Yen)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1996................... 9,600 (Yen) 478,152 (Yen) (292,565) (Yen) -- (Yen) 185,587
------ -------------- --------------- ------------ -------------
Issuance of common
stock for acquisition
of Secom Internet
K.K.................. 5,000 169,062 -- -- 169,062
Net loss.............. -- -- (629,807) -- (629,807)
------ -------------- --------------- ------------ -------------
Balance, March 31,
1997................... 14,600 647,214 (922,372) -- (275,158)
------ -------------- --------------- ------------ -------------
Issuance of common
stock................ 9,490 470,846 -- -- 470,846
Unrealized loss on
marketable
securities........... (13,285) (13,285)
Net loss.............. -- -- (105,794) -- (105,794)
------ -------------- --------------- ------------ -------------
Balance, March 31,
1998................... 24,090 (Yen)1,118,060 (Yen)(1,028,166) (Yen)(13,285) (Yen) 76,609
====== ============== =============== ============ =============
</TABLE>
F-62
<PAGE>
TOKYO INTERNET CORPORATION
FINANCIAL STATEMENTS
For the Six Months Ended September 30, 1997 and 1998
F-63
<PAGE>
TOKYO INTERNET CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
As of
September 30, 1998
---------------------
(In thousands of yen)
<S> <C>
ASSETS
Current assets:
Cash on hand and in banks............................... (Yen) 84,444
Accounts receivable--trade.............................. 915,955
Accounts receivable--other.............................. 1,370
Merchandise............................................. --
Advance payment......................................... --
Prepaid expenses........................................ 30,916
Other current assets.................................... 969
Bad debt reserve........................................ (578,672)
------------
Total current assets.................................... 454,982
------------
Fixed assets:
Tangible fixed assets--net
Building and facilities................................. 47,834
Machinery............................................... 22,796
------------
Total tangible fixed assets--net........................ 70,630
------------
Intangible fixed assets--
Telephone rights........................................ 139,499
Software assets......................................... 37,035
Goodwill................................................ 36,907
------------
Total intangible fixed assets........................... 213,441
------------
Investments & other assets--
Investment securities................................... 25,000
Lease deposits.......................................... 40,948
Long-term prepaid expenses.............................. 4,796
------------
Total investments & other assets........................ 70,744
------------
Total fixed assets...................................... 354,815
------------
Deferred assets:
Stock issue expenses.................................... 1,827
Business commencement expenses.......................... 5,015
Organization expenses................................... 134
------------
Total deferred assets................................... 6,976
------------
Total assets............................................ (Yen)816,773
============
LIABILITIES
Current liabilities:
Short-term borrowings................................... (Yen)899,000
Accounts payable--other................................. 214,941
Income tax payable...................................... 1,620
Consumption tax payable................................. 20,596
Accrued expenses........................................ 76,580
Advance received........................................ 33,217
Deposit received........................................ 5,738
------------
Total current liabilities............................... 1,251,692
------------
Non-current liabilities:
Guarantee deposit received.............................. 1,297
Accrued severance indemnities........................... 0
------------
Total non-current liabilities........................... 1,297
------------
Total liabilities....................................... 1,252,989
------------
SHAREHOLDERS' EQUITY
Capital stock............................................ 1,204,500
------------
Deficit:
Undisposed deficit...................................... (1,640,716)
[Net loss for the six months included in the line
above]................................................. [589,855]
------------
Total shareholders' equity (deficit).................... (436,216)
------------
Total liabilities and shareholders' equity.............. (Yen)816,773
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
TOKYO INTERNET CORPORATION
STATEMENTS OF OPERATIONS AND UNDISPOSED DEFICIT
<TABLE>
<CAPTION>
For the six months ended
September 30
-----------------------------
1997 1998
-------------- --------------
(In thousands of yen)
<S> <C> <C>
Ordinary Income and Expenses:
Operating Income and Expenses--
Operating Income:
Net sales...................................... (Yen)2,544,545 (Yen)2,598,414
Operating Expenses:
Cost of sales.................................. 1,979,890 2,132,004
Selling, general and administrative expenses... 753,268 628,021
-------------- --------------
2,733,158 2,760,025
-------------- --------------
Operating loss................................ 188,613 161,611
-------------- --------------
Non-operating Income and Expenses--
Non-operating Income:
Interest income and dividends................... 18 1,889
Other........................................... 20,507 12,475
-------------- --------------
20,525 14,364
-------------- --------------
Non-operating Expenses:
Interest expense................................ 7,905 6,486
Amortization of deferred assets................. 5,882 5,758
Other........................................... 4,208 4,679
-------------- --------------
17,995 16,923
-------------- --------------
Ordinary loss................................. 186,083 164,170
-------------- --------------
Special gain and loss--
Provision for bad debts.......................... 62,955 424,065
-------------- --------------
Loss before income taxes........................ 249,038 588,235
Corporate and inhabitant taxes.................. 1,624 1,620
-------------- --------------
Net loss for the period......................... 250,662 589,855
Accumulated deficit brought forward............. 936,268 1,050,861
-------------- --------------
Undisposed deficit............................ (Yen)1,186,930 (Yen)1,640,716
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Notes to the Balance Sheets:
(1) Accumulated depreciation of tangible fixed assets is (Yen)20,156
thousand and (Yen)42,314 thousand as of September 30, 1997 and 1998,
respectively.
(2) Balances with the Company's majority shareholder--
<TABLE>
<CAPTION>
September 30,
-----------------
1997 1998
-------- --------
(in thousands of
Yen)
<S> <C> <C>
Accounts receivable--trade................................ (Yen) 20 (Yen) 20
Other current assets...................................... 2,030 266
Lease deposits............................................ 50 50
Short-term borrowings..................................... 850,000 899,000
Accounts payable--other................................... 28,623 35,488
</TABLE>
(3) Net loss per share--
<TABLE>
<CAPTION>
September 30,
-----------------------------
1997 1998
-------------- --------------
(in Yen)
<S> <C> <C>
(Yen)14,111.17 (Yen)24,485.46
</TABLE>
2. Notes to the Statements of Operations and Undisposed Deficit:
Transactions with the Company's majority shareholder--
<TABLE>
<CAPTION>
September 30,
-------------------
1997 1998
-------- ----------
(in thousands
of Yen)
<S> <C> <C>
Sales.................................................. (Yen)343 (Yen)3,789
Purchases.............................................. 664 1,243
Transactions other than operating activities (interest
expense).............................................. 7,905 6,486
</TABLE>
3. Summary of Principal Differences Between Generally Accepted Accounting
Principles in Japan and the United States:
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in Japan ("Japanese GAAP") which in
the case of the Company differ in the following material respects from those
generally accepted in the United States ("U.S. GAAP"). The principal
differences applicable to the financial statements and their effects on net
loss, assets, liabilities and shareholders' equity are summarized below. This
discussion is intended only as a descriptive summary and does not include a
complete analysis or listing of all possible differences. Further, no attempt
has been made to identify future differences between Japanese GAAP and U.S.
GAAP as a result of prescribed changes in accounting standards. Regulatory
bodies that promulgate Japanese GAAP and U.S. GAAP have significant projects
ongoing that could affect future comparisons such as this one. Finally, no
attempt has been made to identify all future differences between Japanese GAAP
and U.S. GAAP that may affect the financial statements as a result of
transactions or events that may occur in the future.
(1) Statement of cash flows--
Under Japanese GAAP, a statement of cash flows is not required as part of
the basic financial statements.
Under U.S. GAAP, a statement of cash flows is required as part of the basic
financial statements, and cash and cash equivalents include highly liquid
investments that generally have original maturities at the time of purchase of
three months or less.
F-66
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Valuation of inventories--
Under Japanese GAAP, inventories can be stated at cost, the policy followed
by the Company, or at the lower of cost or market.
U.S. GAAP requires all inventories to be valued at the lower of cost or
market.
(3) Valuation of securities--
Under Japanese GAAP, investments in marketable securities, as well as non-
marketable securities, can be stated at cost. The Company's non-marketable
security is stated at cost. However, when significant impairment of value has
been deemed permanent, cost is appropriately reduced.
Under U.S. GAAP, investments in debt securities and equity securities that
have readily determinable fair values, except for investments accounted for
using the equity method, are to be classified in three categories and accounted
for as follows:
(a) Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Unrealized holdings gains and losses are
not reported in the financial statements until realized or until a decline
in fair value below cost is deemed to be other than temporary.
(b) Debt and marketable equity securities that are acquired and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity.
(4) Deferred assets--
The Company has deferred stock issue expenses, business commencement
expenses and organization expenses which are amortized over five years as
permitted under Japanese GAAP.
Under U.S. GAAP, startup costs such as business commencement expenses and
organization expenses are to be expensed as incurred under the circumstances
that future gross profit sufficient to absorb these startup costs is not
anticipated. Stock issue costs are to be netted against the stock issuance
proceeds.
(5) Accounting for income taxes--
Under Japanese GAAP, income taxes are principally provided for based on
taxable income for the period, determined in accordance with applicable tax
laws. Deferred tax accounting may be applied only in consolidated financial
statements; however, it is not mandatory and has not been adopted by the
Company.
U.S. GAAP requires that deferred income taxes be recognized for temporary
differences between the tax basis of the assets or liabilities and the reported
amount in the financial statements and for tax loss carry-forwards which are
permitted to be carried forward to offset taxable income over the next five
years under Japanese Income Tax Law. A valuation allowance is provided for the
deferred tax assets if it is more likely than not that these assets will not be
realized.
F-67
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Capital leases--
Under Japanese GAAP, for finance leases where ownership is not deemed to be
transferred from lessor to lessee, the lessee may choose not to capitalize the
leased asset and may account for the lease in a manner similar to operating
leases. The Company's policy is to account for such leases in a manner similar
to operating leases.
U.S. GAAP requires leases which transfer essentially all the risks and
rewards of ownership in the leased assets from the lessor to lessee to be
capitalized.
(7) Accrued compensated absences--
Under Japanese GAAP, accrued compensated absences are normally not
recognized for future absences due to the fact that such accruals do not meet
the conditions for provisions. The Company does not recognize such accrued
compensated absences.
U.S. GAAP requires that accrued compensated absences be recognized as earned
by employees.
(8) Accrued severance indemnities--
The Company maintains a severance indemnity plan which provides for payments
to certain employees upon termination of employment. This defined benefit plan
is not funded. The Company has recorded a liability, as allowed under Japanese
GAAP, equal to 40% of the amount which would be paid if all eligible employees
terminated their employment on the balance sheet date.
U.S. GAAP requires pension costs to be actuarially computed and charged to
expense as stipulated by Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions." Due to the small number of employees and
short average service period of employees, the Company's liability for
severance indemnities under U.S. GAAP would not be significantly different from
the amount recorded under Japanese GAAP.
(9) Accounting for business combinations--
At the time of its November 1996 business combination with Secom Internet
K.K., both the Company and Secom Internet K.K. were controlled by Secom
Corporation. The Company has accounted for this business combination under
purchase accounting, which is allowed by Japanese GAAP.
Under U.S. GAAP, such a transfer of ownership among companies under common
control is accounted for at historical cost in a manner similar to that in
pooling of interests accounting.
(10) Accrued Consumption Tax Reversal--
For the six months ended September 30, 1997, the Company reversed an accrual
for consumption taxes in the amount of (Yen)17,284,000 which was recorded as
other non-operating income. This accrual had been set-up in error in the prior
year as the company was not subject to consumption taxes. Under U.S. GAAP, such
a reversal would be treated as a correction of an error and prior year
financial statements would be restated.
F-68
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
If U.S. GAAP as indicated above were employed by the Company, the net loss,
loss per share, assets, liabilities and shareholders' equity would be adjusted
as follows:
(a) Statement of operations:
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
-------------------------------
1997 1998
--------------- --------------
(in thousands of Yen)
<S> <C> <C>
Net loss under Japanese GAAP.................. (Yen) 250,662 (Yen) 589,855
Adjustments:
Deferred assets............................. (5,882) (5,758)
Leases capitalized as assets................ 948 3,761
Deferred tax assets......................... (132,221) (327,868)
Valuation allowance for deferred tax
assets..................................... 132,221 327,868
Accrued compensated absences................ 101 127
Accrued consumption tax reversal............ 17,284 --
Accounting for business combinations........ (7,206) (7,381)
Devaluation of marketable securities........ -- 13,285
--------------- --------------
Net loss under U.S. GAAP.................. (Yen) 255,907 (Yen) 593,889
=============== ==============
<CAPTION>
(in Yen)
<S> <C> <C>
Net loss per share under U.S. GAAP............ (Yen) 14,406.46 (Yen)24,652.93
=============== ==============
(b) Balance sheet:
<CAPTION>
As of September 30,
-------------------------------
1997 1998
--------------- --------------
(in thousands of Yen)
<S> <C> <C>
Total assets under Japanese GAAP.............. (Yen)1,206,719 (Yen) 816,773
Adjustments:
Deferred assets............................. (18,984) (6,976)
Deferred tax assets......................... 639,484 777,691
Valuation allowance for deferred tax
assets..................................... (639,484) (777,691)
Goodwill.................................... (51,845) (36,907)
Tangible fixed assets--net.................. 890,732 954,654
Unrealized loss on marketable securities.... (13,285) --
Devaluation of marketable securities........ -- (13,285)
--------------- --------------
Total assets under U.S. GAAP.............. (Yen) 2,013,337 (Yen)1,714,259
=============== ==============
Total shareholder's equity (deficit) under
Japanese GAAP: (Yen) 17,570 (Yen) (436,216)
Adjustments:
Deferred assets............................. (18,984) (6,976)
Goodwill.................................... (51,845) (36,907)
Tangible fixed assets--net.................. (5,755) (9,440)
Deferred tax assets......................... 639,484 777,691
Valuation allowance for deferred tax
assets..................................... (639,484) (777,691)
Accrued compensated absences................ (1,215) (1,171)
Unrealized loss on marketable securities.... (13,285) --
Devaluation of marketable securities........ -- (13,285)
--------------- --------------
Total shareholders' equity (deficit) under
U.S. GAAP................................ (Yen) (73,514) (Yen) (503,995)
=============== ==============
</TABLE>
F-69
<PAGE>
TOKYO INTERNET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(11) Statements of cash flows under U.S. GAAP--
<TABLE>
<CAPTION>
For the Six Months Ended
September 30
----------------------------
1997 1998
------------- -------------
(in thousands of Yen)
<S> <C> <C>
Cash flow from operating activities:
Net loss under U.S. GAAP....................... (Yen)(255,907) (Yen)(593,889)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization................ 151,324 247,574
Provision for bad debts...................... 69,955 424,065
Increase in accounts receivable.............. (242,036) (22,263)
Decrease in inventories...................... 1,283 --
(Increase) decrease in prepaid expenses and
other current assets........................ (45,307) 27,567
Decrease (increase) in accounts payable--
other....................................... 15,100 (4,324)
Increase in other current liabilities........ 34,094 5,110
Increase (decrease) in non-current
liabilities................................. 215 (676)
------------- -------------
Net cash provided by (used for) operating
activities...................................... (271,279) 83,164
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment............. (5,450) (23,307)
Purchase of investment securities.............. (25,000) --
Purchase of telephone rights................... (7,060) --
Other.......................................... (3,773) (747)
------------- -------------
Net cash used for investing activities........... (41,283) (24,054)
------------- -------------
Cash flows from financing activities:
Proceeds from short-term borrowings............ 181,000 130,000
Repayment of short-term borrowings............. (200,000) (31,000)
Principal payments under capital lease
obligations................................... (140,890) (210,271)
Issuance of common stock....................... 470,846 --
------------- -------------
Net cash provided by financing activities........ 310,956 (111,271)
------------- -------------
Net decrease in cash and cash equivalents........ (1,606) (52,161)
Cash and cash equivalents at beginning of
period.......................................... 72,339 136,605
------------- -------------
Cash and cash equivalents at end of period....... (Yen) 70,733 (Yen) 84,444
============= =============
Supplemental schedule of non-cash investing and
financing activities
Increase in lease assets and obligations under
capital lease arrangements.................... (Yen) 252,387 (Yen) 198,975
============= =============
</TABLE>
F-70
<PAGE>
Annex A
Letter of Transmittal
PSINET INC.
Offer To Exchange Its
New 11 1/2 % Senior Notes Due 2008, Series B
Which Have Been Registered Under The Securities Act of 1933
For Any And All Of Its Outstanding
11 1/2 % Senior Notes Due 2008, Series A
Pursuant To The Prospectus
Dated __________, 1999
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ________,
1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR
====
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
If you desire to accept the Exchange Offer (as defined below), this Letter of
Transmittal should be completed, signed, and submitted to:
WILMINGTON TRUST COMPANY, as Exchange Agent
By Registered or Certified Mail By Hand:
or Overnight Courier: Wilmington Trust Company
Wilmington Trust Company Attn: Corporate Trust Operations
Attn: Kristin Long c/o c/o Harris Trust Co. of New York as
Corporate Trust Agent
Operations 88 Pine Street, 19th Floor
1100 North Market Street Wall Street Plaza
Rodney Square North New York, New York 10005
Wilmington, DE 19890-0001
By Facsimile:
(For Eligible Institutions Only)
Wilmington Trust Company
(302) 651-1079
Confirm by telephone:
(302) 651-1562
Kristin Long
Delivery of this Letter of Transmittal to an address other than as set forth
above or transmission of this Letter of Transmittal via facsimile to a number
other than as set forth above does not constitute a valid delivery.
The instructions contained herein should be read carefully before this Letter
of Transmittal is completed.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
A-1
<PAGE>
This Letter of Transmittal is to be completed by holders of Initial Notes (as
defined below) either if Initial Notes are to be forwarded herewith or if
tenders of Initial Notes are to be made by book-entry transfer to an account
maintained by the Exchange Agent (as defined below) at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in "The Exchange Offer--
Procedures for Tendering Initial Notes" in the Prospectus and an "Agent's
Message" (as defined below) is not delivered. Tenders by book-entry transfer
may also be made by delivering an Agent's Message in lieu of this Letter.
Holders of Initial Notes whose certificates (the "Certificates") for such
Initial Notes are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent on or prior
to the Expiration Date (as defined in the Prospectus) or who cannot complete the
procedures for book-entry transfer on a timely basis, must tender their Initial
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Initial Notes" in the Prospectus. See
Instruction 1 hereto. Delivery of documents to DTC does not constitute delivery
to the Exchange Agent.
Ladies and Gentlemen:
The undersigned hereby tenders to PSINet Inc., a New York corporation (the
"Company"), the aggregate principal amount of the Company's outstanding 11 1/2 %
Senior Notes due 2008, Series A (the "Initial Notes") described in Box 1 below,
in exchange for a like aggregate principal amount of the Company's new 11 1/2 %
Senior Notes due 2008, Series B (the "Exchange Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
upon the terms and subject to the conditions set forth in the Prospectus dated
__________, 1999 (as the same may be amended or supplemented from time to
time, the "Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitutes the "Exchange
Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Initial Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Initial Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
Wilmington Trust Company as Exchange Agent (the "Exchange Agent") as its agent
and attorney-in-fact (with full knowledge that the Exchange Agent is also acting
as agent of the Company in connection with the Exchange Offer) with respect to
the tendered Initial Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest),
subject only to the right of withdrawal described in the Prospectus, to (i)
deliver Certificates for Initial Notes to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent, of
the Exchange Notes to be issued in exchange for such Initial Notes, (ii) present
Certificates for such Initial Notes for transfer, and to transfer the Initial
Notes on the books of the Company, and (iii) receive for the account of the
Company all benefits and otherwise exercise all rights of beneficial ownership
of such Initial Notes, all in accordance with the terms and conditions of the
Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, sell, assign and transfer the Initial
Notes tendered hereby and that, when the same are accepted for exchange, the
Company will acquire good, marketable and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances, and that the Initial
Notes tendered hereby are not subject to any adverse claims or proxies. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Company or the Exchange Agent to be necessary or desirable to
A-2
<PAGE>
complete the exchange, assignment and transfer of the Initial Notes tendered
hereby, and the undersigned will comply with its obligations under the
Registration Rights Agreements. The undersigned has read and agrees to all of
the terms of the Exchange Offer.
The name(s) and address(es) of the registered holder(s) of the Initial Notes
tendered hereby should be printed in Box 1 below, if they are not already set
forth therein, as they appear on the Certificates representing such Initial
Notes. The Certificate number(s) and the aggregate principal amount of Initial
Notes that the undersigned wishes to tender should also be indicated in Box 1
below.
If any tendered Initial Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Initial Notes than are
tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Initial Notes will be returned (or, in the case of Initial Notes
tendered by book-entry transfer, such Initial Notes will be credited to an
account maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Initial Notes pursuant to any one
of the procedures described under "The Exchange Offer--Procedures for Tendering
Initial Notes" in the Prospectus and in the instructions hereto will, upon the
Company's acceptance for exchange of such tendered Initial Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer-Conditions." The undersigned
recognizes that as a result of these conditions (which may be waived by the
Company, in whole or in part, in the reasonable discretion of the Company), as
more particularly set forth in the Prospectus, the Company may not be required
to exchange any of the Initial Notes tendered hereby and, in such event, the
Initial Notes not exchanged will be returned to the undersigned at the address
shown in Box 1.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the Exchange
Notes be issued in the name(s) of the undersigned or, in the case of a book-
entry transfer of Initial Notes, that such Exchange Notes be credited to the
account indicated below maintained at DTC. If applicable, substitute
Certificates representing Initial Notes not exchanged or not accepted for
exchange will be issued to the undersigned or, in the case of a book-entry
transfer of Initial Notes, will be credited to the account indicated below
maintained at DTC. Similarly, unless otherwise indicated herein in the box
entitled "Special Delivery Instructions" below (Box 8), the undersigned hereby
directs that the Exchange Notes be delivered to the undersigned at the address
shown below the undersigned's signature.
THE EXCHANGE OFFER IS NOT BEING MADE TO ANY BROKER-DEALER WHO PURCHASED
INITIAL NOTES DIRECTLY FROM THE COMPANY FOR RESALE PURSUANT TO RULE 144A UNDER
THE SECURITIES ACT OR ANY PERSON THAT IS AN "AFFILIATE" OF THE COMPANY WITHIN
THE MEANING OF RULE 405 UNDER THE SECURITIES ACT. THE UNDERSIGNED UNDERSTANDS
AND AGREES THAT THE COMPANY RESERVES THE RIGHT NOT TO ACCEPT TENDERED INITIAL
NOTES FROM ANY TENDERING HOLDER IF THE COMPANY DETERMINES, IN ITS REASONABLE
DISCRETION, THAT SUCH ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE
SECURITIES LAWS.
By tendering Initial Notes and executing this Letter of Transmittal, the
undersigned hereby represents and agrees that (i) the undersigned is not an
"affiliate" of the Company (within the meaning of
A-3
<PAGE>
Rule 405 under the Securities Act), (ii) any Exchange Notes to be received by
the undersigned are being acquired in the ordinary course of its business, (iii)
the undersigned has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
Exchange Notes to be received in the Exchange Offer, and (iv) if the undersigned
is not a broker-dealer, the undersigned is not engaged in, and does not intend
to engage in, a distribution (within the meaning of the Securities Act) of such
Exchange Notes. By tendering Initial Notes pursuant to the Exchange Offer and
executing this Letter of Transmittal, a holder of Initial Notes that is a
broker-dealer additionally represents and agrees, consistent with certain
interpretive letters issued by the staff of the Division of Corporation Finance
of the Securities and Exchange Commission to third parties described under "The
Exchange Offer--Registration Rights" in the Prospectus, that such Initial Notes
were acquired by such broker-dealer for its own account as a result of market-
making activities or other trading activities (such a broker-dealer tendering
Initial Notes is herein referred to as a "Participating Broker-Dealer") and it
will deliver the Prospectus (as amended or supplemented from time to time)
meeting the requirements of the Securities Act in connection with any resale of
such Exchange Notes (provided that, by so acknowledging and by delivering a
Prospectus, such Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act).
The Company has agreed that, subject to the provisions of the Registration
Rights Agreements, the Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Initial Notes, where such
Initial Notes were acquired by such Participating Broker-Dealer for its own
account as a result of market-making activities or other trading activities, for
a period ending one year after the Expiration Date or, if earlier, when all such
Exchange Notes have been disposed of by such Participating Broker-Dealer. In
that regard, each Participating Broker-Dealer, by tendering such Initial Notes
and executing this Letter of Transmittal, agrees to notify the Company prior to
using the Prospectus in connection with the sale or transfer of Exchange Notes
and acknowledges and agrees that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in the Prospectus untrue in any material
respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading or of the occurrence of
certain other events specified in the Registration Rights Agreements, such
Participating Broker-Dealer will suspend the sale of Exchange Notes pursuant to
the Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to the Participating Broker-Dealer or the Company has
given notice that the sale of the Exchange Notes may be resumed, as the case may
be.
EACH PARTICIPATING BROKER-DEALER SHOULD CHECK THE BOX HEREIN UNDER THE CAPTION
"PARTICIPATING BROKER-DEALER" (BOX 5 HEREOF) IN ORDER TO RECEIVE ADDITIONAL
COPIES OF THE PROSPECTUS, AND ANY AMENDMENTS AND SUPPLEMENTS THERETO, FOR USE IN
CONNECTION WITH RESALES OF THE EXCHANGE NOTES, AS WELL AS ANY NOTICES FROM THE
COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY TENDERING ITS INITIAL
NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH PARTICIPATING BROKER-DEALER
AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY THE COMPANY OR THE EXCHANGE
AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES. IF NO PARTICIPATING BROKER-
DEALERS CHECK SUCH BOX, OR IF ALL PARTICIPATING BROKER-DEALERS WHO HAVE CHECKED
SUCH BOX SUBSEQUENTLY NOTIFY THE COMPANY OR THE EXCHANGE AGENT THAT ALL THEIR
EXCHANGE NOTES HAVE BEEN SOLD, THE COMPANY WILL NOT BE REQUIRED TO MAINTAIN THE
EFFECTIVENESS OF THE EXCHANGE OFFER REGISTRATION STATEMENT OR
A-4
<PAGE>
TO UPDATE THE PROSPECTUS AND WILL NOT PROVIDE ANY HOLDERS WITH ANY NOTICES TO
SUSPEND OR RESUME USE OF THE PROSPECTUS.
Each Exchange Note will bear interest from the most recent date on which
interest has been paid or duly provided for on the Initial Note surrendered in
exchange for such Exchange Note or, if no such interest has been paid or duly
provided for on such Initial Note, from November 3, 1998. Holders of Initial
Notes whose Initial Notes are accepted for exchange will not receive accrued
interest on such Initial Notes for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such
Initial Notes prior to the original issue date of the Exchange Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Initial Notes, and will be deemed to have waived the right to
receive any interest on such Initial Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after November 3, 1998.
The undersigned understands that the delivery and surrender of the Initial
Notes is not effective, and the risk of loss of the Initial Notes does not pass
to the Exchange Agent, until receipt by the Exchange Agent of this Letter of
Transmittal, or a manually signed facsimile hereof, properly completed and duly
executed, with any required signature guarantees, together with all accompanying
evidences of authority and any other required documents in form satisfactory to
the Company. All questions as to form of all documents and the validity
(including time of receipt) and acceptance of tenders and withdrawals of Initial
Notes will be determined by the Company, in its sole discretion, which
determination shall be final and binding.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights as set forth in the Prospectus, this tender is
irrevocable.
Please read this entire Letter of Transmittal carefully before completing the
boxes below and follow the instructions included herewith.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF INITIAL NOTES BE
ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING
OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF
SUCH JURISDICTION.
Your bank or broker can assist you in completing this form. The instructions
included with this Letter of Transmittal must be followed. Questions and
requests for assistance or for additional copies of the Prospectus, this Letter
of Transmittal and the Notice of Guaranteed Delivery may be directed to the
Exchange Agent, whose address and telephone number appear on the front cover of
this Letter of Transmittal. See Instruction 8 below.
A-5
<PAGE>
All Tendering Holders Complete This Box 1:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF INITIAL NOTES TENDERED
(See Instructions 3 and 4 Below)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
If Blank, Please Print Certificate Number(s) Aggregate Principal Aggregate Principal
Name(s) And Address(es) of Amount Represented By Amount of Initial Notes
Of Registered Holder(s), Initial Notes Certificates* Being Tendered**
Exactly As Name(s)
Appear(s) On Initial Note
Certificate(s)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders (see below).
** The minimum permitted tender is $1,000 in principal amount. All tenders
must be in integral multiples of $1,000 in principal amount. The aggregate
principal amount of all Initial Notes Certificates identified in this Box 1, or
delivered to the Exchange Agent herewith, shall be deemed tendered unless a
lesser number is specified in this column. See Instruction 4.
- --------------------------------------------------------------------------------
BOX 2
BOOK-ENTRY TRANSFER
(See Instruction 1 Below)
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution _______________________________________________
DTC Account Number __________________________________________________________
Transaction Code Number _____________________________________________________
- --------------------------------------------------------------------------------
Holders of Initial Notes may tender Initial Notes by book-entry
transfer by crediting the Initial Notes to the Exchange Agent's account at the
DTC in accordance with the DTC's Automated Tender Offer Program ("ATOP") and by
complying with applicable ATOP procedures with respect to the Exchange Offer.
DTC participants that are accepting the Exchange Offer should transmit their
acceptance to DTC,
A-6
<PAGE>
which will edit and verify the acceptance and execute a book-entry delivery to
the Exchange Agent's account at DTC. DTC will then send a computer-generated
message (an "Agent's Message") to the Exchange Agent for its acceptance in which
the holder of the Initial Notes acknowledges and agrees to be bound by the terms
of, and makes the representations and warranties contained in, this Letter of
Transmittal, the DTC participant confirms on behalf of itself and the beneficial
owners of such Initial Notes all provisions of this Letter of Transmittal
(including any representations and warranties) applicable to it and such
beneficial owner as fully as if it had completed the information required herein
and executed and transmitted this Letter of Transmittal to the Exchange Agent.
Delivery of the Agent's Message by DTC will satisfy the terms of the Exchange
Offer as to execution and delivery of a Letter of Transmittal by the participant
identified in the Agent's Message. DTC participants may also accept the Exchange
Offer by submitting a Notice of Guaranteed Delivery through ATOP.
A-7
<PAGE>
- --------------------------------------------------------------------------------
BOX 3
NOTICE OF GUARANTEED DELIVERY
(See Instruction 1 Below)
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) ________________________________________________
Window Ticket Number (if any) _______________________________________________
Date of Execution of Notice of Guaranteed Delivery __________________________
Name of Institution which Guaranteed Delivery _______________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution _______________________________________________
DTC Account Number __________________________________________________________
Transaction Code Number _____________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOX 4
RETURN OF NON-EXCHANGED INITIAL NOTES
TENDERED BY BOOK-ENTRY TRANSFER
(See Instructions 4 and 6 Below)
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED INITIAL
NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
A-8
<PAGE>
- --------------------------------------------------------------------------------
BOX 5
PARTICIPATING BROKER-DEALER
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE INITIAL NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN ADDITIONAL COPIES OF THE
PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO, AS WELL AS
ANY NOTICES FROM THE COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY
TENDERING ITS INITIAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, EACH
PARTICIPATING BROKER-DEALER AGREES TO USE ITS REASONABLE BEST EFFORTS TO NOTIFY
THE COMPANY OR THE EXCHANGE AGENT WHEN IT HAS SOLD ALL OF ITS EXCHANGE NOTES.
(IF NO PARTICIPATING BROKER-DEALERS CHECK THIS BOX, OR IF ALL PARTICIPATING
BROKER-DEALERS WHO HAVE CHECKED THIS BOX SUBSEQUENTLY NOTIFY THE COMPANY OR THE
EXCHANGE AGENT THAT ALL THEIR EXCHANGE NOTES HAVE BEEN SOLD, THE COMPANY WILL
NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS OF THE EXCHANGE OFFER REGISTRATION
STATEMENT OR TO UPDATE THE PROSPECTUS AND WILL NOT PROVIDE ANY NOTICES TO ANY
HOLDERS TO SUSPEND OR RESUME USE OF THE PROSPECTUS).PROVIDE THE NAME OF THE
INDIVIDUAL WHO SHOULD RECEIVE, ON BEHALF OF THE HOLDER, ADDITIONAL COPIES OF THE
PROSPECTUS, AND AMENDMENTS AND SUPPLEMENTS THERETO, AND ANY NOTICES TO SUSPEND
AND RESUME USE OF THE PROSPECTUS.
Name: ________________________________________________
Address: ________________________________________________
Telephone No.: ________________________________________________
Facsimile No.: ________________________________________________
- --------------------------------------------------------------------------------
A-9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
BOX 6
TENDERING HOLDER SIGNATURE
(See Instructions 1 and 5)
In Addition, Complete Substitute Form W-9
- --------------------------------------------------------------------------------------------
<S> <C>
X Signature Guarantee
X (If required by Instruction 5)
(Signature of registered holder(s) or
Authorized Signatory(ies)) Authorized Signature
Note: The above lines must be signed
by the registered holder(s) of X ________________________________________
Initial Notes as their name(s)
appear(s) on the Initial Notes or by Name: ____________________________________
person(s) authorized to become (please print)
registered holder(s) (evidence of
which authorization must be Title: ___________________________________
transmitted with this Letter of
Transmittal). If signature is by a Name of Firm: ____________________________
trustee, executor, administrator, (Must be an Eligible Institution as defined
guardian, attorney-in-fact, officer, in Instruction 1)
or other person acting in a fiduciary
or representative capacity, such Address: _________________________________
person must set forth his or her full
title below. See Instruction 5. __________________________________________
Name(s):
__________________________________________
Capacity: (include Zip Code)
Street Address: Area Code and Telephone Number:
(include Zip Code) __________________________________________
Area Code and Telephone Number: Dated: ___________________________________
Tax Identification or Social Security
Number:
- --------------------------------------------------------------------------------------------
</TABLE>
A-10
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ---------------------------------------------------------------
<S> <C>
BOX 7 BOX 8
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 5 and 6 Below) (See Instructions 1, 5 and 6 Below)
To be completed ONLY if Certificates for the Initial To be completed ONLY if Certificates for the Initial
Notes not exchanged and/or Certificates for the Notes not exchanged and/or Certificates for the
Exchange Notes are to be issued in the name of Exchange Notes are to be sent to someone other than the
someone other than the registered holder of the Initial registered holder of the Initial Notes whose name(s)
Notes whose name(s) appear(s) above. appear(s) above, or to such registered holder(s) at an
Name: address other than that shown above.
(Please Print) Name:
(Please Print)
Address:
Address:
(Include Zip Code)
(Include Zip Code)
(Tax Identification or Social Security Number)
(Tax Identification or Social Security Number)
- ----------------------------------------------------------- ---------------------------------------------------------------
</TABLE>
A-11
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
BOX 9
- ---------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: WILMINGTON TRUST COMPANY
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
SUBSTITUTE Name (if joint names, list first and circle the name of the person or
entity whose number you enter in Part 1 below. See instructions if your
name has changed)
-------------------------------------------------------------------------
Form W-9 Address
-------------------------------------------------------------------------
Department of the Treasury City, State and Zip Code
Internal Revenue Service -------------------------------------------------------------------------
List account number(s) here (optional)
-------------------------------------------------------------------------
Part 1 - PLEASE PROVIDE YOUR TAXPAYER Social Security Number
IDENTIFICATION NUMBER ("TIN") IN THE BOX AT or
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. TIN
-------------------------------------------------------------------------
Part 2 - Check the box if you are NOT subject to backup withholding
under the provisions of section 3406(a)(1)(C) of the Internal Revenue
Code because (1) you have not been notified that you are subject to
backup withholding as a result of failure to report all interest or
dividends or (2) the Internal Revenue Service has notified you that
you are no longer subject to backup withholding.
[ ] Not subject to withholding
- ---------------------------------------------------------------------------------------------------------------
Payor's Request for TIN CERTIFICATION - UNDER THE PENALTIES OF Part 3 --
PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT, Awaiting TIN [ ]
AND COMPLETE.
Signature: ___________________ Date:
__________________
- ---------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO
YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W - 9" FOR ADDITIONAL DETAILS.
</TABLE>
A-12
<PAGE>
- --------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the Exchange Notes shall be retained
until I provide a taxpayer identification number to the Exchange Agent and that,
if I do not provide my taxpayer identification number within 60 days, such
retained amounts shall be remitted to the Internal Revenue Service as backup
withholding and 31% of all reportable payments made to me thereafter will be
withheld and remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature: _________________________________________________________________
Date: ______________________________________________________________________
- --------------------------------------------------------------------------------
A-13
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Initial Notes directly to the Company.
Your Initial Note Certificates, together with your signed and completed Letter
of Transmittal and any required supporting documents, should be mailed in the
enclosed addressed envelope, or otherwise delivered, to the Exchange Agent, at
either of the addresses indicated on the first page hereof. The method of
delivery of Certificates, this Letter of Transmittal and all other required
documents is at the option and sole risk of the tendering holder and the
delivery will be deemed made only when actually received by the Exchange Agent.
If delivery is by mail, registered mail with return receipt requested, properly
insured, or overnight delivery service is recommended. In all cases, sufficient
time should be allowed to ensure timely delivery.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed by holders of Initial Notes
(which term, for purposes of the Exchange Offer, includes any participant in DTC
whose name appears on a security position listing as the holder of such Initial
Notes) if either (a) Certificates for such Initial Notes are to be forwarded
herewith or (b) tenders are to be made pursuant to the procedures for tender by
book-entry transfer set forth in "The Exchange Offer--Procedures for Tendering
Initial Notes" in the Prospectus, and an Agent's Message is not delivered.
Tenders by book-entry transfer may also be made by delivering an Agent's Message
in lieu of this Letter. The term "Agent's Message" means a message, transmitted
by DTC to and received by the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgement from
the tendering Participant, which acknowledgement states that such Participant
has received and agrees to be bound by, and makes the representations and
warranties contained in, this Letter of Transmittal and that the Company may
enforce this Letter of Transmittal against such Participant. Certificates
representing the tendered Initial Notes, or timely confirmation of a book-entry
transfer of such Initial Notes into the Exchange Agent's account at DTC, as well
as a properly completed and duly executed copy of this Letter of Transmittal, or
a facsimile hereof (or, in the case of a book-entry transfer, an Agent's
Message), a substitute Form W-9, and any other documents required by this Letter
of Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to 5:00 p.m., New York City time, on the Expiration Date, or
the tendering holder must comply with the guaranteed delivery procedures set
forth below. Initial Notes may be tendered in whole or in part in the principal
amount of $1,000 and integral multiples of $1,000.
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available or (ii) who cannot deliver their Initial Notes,
this Letter of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who cannot complete the
procedures for delivery by book-entry transfer on a timely basis, may tender
their Initial Notes by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for Tendering Initial Notes" in the Prospectus
and by completing Box 3 hereof. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution (as defined below); (ii) a
properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, must be received by the
A-14
<PAGE>
Exchange Agent on or prior to the Expiration Date; and (iii) the Certificates
(or a book-entry confirmation (as defined in the Prospectus)) representing all
tendered Initial Notes of such holder, in proper form for transfer, together
with a Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees (or, in the case of a book-
entry transfer, an Agent's Message) and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of such Notice of
Guaranteed Delivery, all as provided in "The Exchange Offer--Procedures for
Tendering Initial Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Initial Notes to
be properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein, "Eligible Institution" means a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as "an eligible guarantor
institution," including (as such terms are defined therein) (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchange Medallion Program.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC whose
name appears on a security position listing as the owner of the Initial Notes)
of Initial Notes tendered herewith, unless such holder(s) has (have) completed
either the box entitled "Special Exchange Instructions" (Box 7) or the box
entitled "Special Delivery Instructions" (Box 8) above; or
(ii) such Initial Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
in Box 6 on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Initial Notes"
is inadequate, the Certificate number(s) and/or the principal amount of Initial
Notes and any other required information should be listed on a separate, signed
schedule and attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Initial Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all the Initial Notes
evidenced by any Certificate submitted are to be tendered,
A-15
<PAGE>
fill in the principal amount of Initial Notes which are to be tendered in Box 1
under the column "Aggregate Principal Amount of Initial Notes Being Tendered."
In such case, new Certificate(s) for the remainder of the Initial Notes that
were evidenced by the Initial Notes Certificate(s) will be sent to the holder of
the Initial Notes, promptly after the Expiration Date. All Initial Notes
represented by Certificates delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective, a written or facsimile transmission of such notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth above on or prior to the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Initial Notes to be
withdrawn (the "Depositor"), (ii) identify the Initial Notes to be withdrawn
(including the Certificate number(s) and principal amount of such Initial Notes,
or, in the case of Initial Notes transferred by book-entry transfer, the name
and number of the account at DTC to be credited), (iii) be signed by the Initial
Holder in the same manner as the original signature on the Letter of Transmittal
by which such Initial Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee register the transfer of such Initial Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Initial Notes
are to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time or receipt) of such
notices will be determined by the Company, whose determination shall be final
and binding on all parties. If Initial Notes have been tendered pursuant to the
procedures for book-entry transfer set forth in the Prospectus under "The
Exchange Offer--Procedures for Tendering Initial Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Initial Notes, in which case a notice of withdrawal will
be effective if delivered to the Exchange Agent by written or facsimile
transmission. Initial Notes properly withdrawn will not be deemed validly
tendered for purposes of the Exchange Offer. Withdrawals of tenders of Initial
Notes may not be rescinded, but such Initial Notes may be retendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described in the Prospectus under "The Exchange Offer--Procedures for
Tendering Initial Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give such notification. Any Initial Notes which have been tendered
but which are withdrawn will be returned to the holder thereof without cost to
such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Initial Notes tendered hereby, the signature(s) must correspond with the name(s)
as written on the face of the Certificate(s) without alteration, addition or any
change whatsoever.
If any of the Initial Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Initial Notes are registered in different names on several
Certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
A-16
<PAGE>
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company, must
submit proper evidence satisfactory to the Company, in its sole discretion, of
such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Initial Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless Exchange Notes are to be issued in
the name of a person other than the registered holder(s). However, if Exchange
Notes are to be issued in the name of a person other than the registered
holder(s), signature(s) on such Certificate(s) or bond power(s) must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Initial Notes listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also must
be accompanied by such opinions of counsel, certifications and other information
as the Company or the Trustee for the Initial Notes may require in accordance
with the restrictions on transfer applicable to the Initial Notes. Signatures on
such Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If Exchange Notes are to be issued in the name of a person other than the
signer of this Letter of Transmittal, or if Exchange Notes are to be sent to
someone other than the signer of this Letter of Transmittal or to an address
other than that shown above, the appropriate boxes on this Letter of Transmittal
should be completed (Boxes 7 and 8). Certificates for Initial Notes not
exchanged will be returned by mail or, if tendered by book-entry transfer, by
crediting the account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Initial Notes, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any and all tenders determined by it not to be in proper form or
the acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under "The Exchange Offer--Conditions" or any conditions or
irregularity in any tender of Initial Notes of any particular holder whether or
not similar conditions or irregularities are waived in the case of other
holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Initial Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliates or assigns of the Company,
the Exchange Agent, nor any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
A-17
<PAGE>
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 (Box 9 of this
Letter of Transmittal), and to certify, under penalty of perjury, that such
number is correct and that he or she is not subject to backup withholding. If
the Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Initial Notes
exchanged pursuant to the Exchange Offer, or with respect to Exchange Notes
following the Exchange Offer, may be subject to 31% backup withholding.
Part 3 of the Substitute Form W-9 (Box 9) may be checked if the tendering
holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If Part 3 is checked, the holder or other payee
must also complete the Certificate of Awaiting Taxpayer Identification Number
following Substitute Form W-9 in order to avoid backup withholding.
Notwithstanding that Part 3 is checked and the Certificate of Awaiting Taxpayer
Identification Number is completed, the Exchange Agent will withhold 31% of all
payments made prior to the time a properly certified TIN is provided to the
Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Initial Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Initial Notes. If the Initial Notes are registered in
more than one name or are not in the name of the actual owner, consult the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which number to report.
If the tendering holder is a nonresident alien or foreign entity not
subject to backup withholding, such holder must give the Company a completed
Form W-8, Certificate of Foreign Status. A copy of the Form W-8 may be obtained
from the Exchange Agent. Please consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather,
the U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Initial Notes have been lost, destroyed
or stolen, the holder should promptly notify the Exchange Agent. The holder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been completed.
A-18
<PAGE>
11. SECURITY TRANSFER TAXES
Holders who tender their Initial Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Initial Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Initial Notes in connection
with the Exchange Offer, then the amount of any such tax (whether imposed on the
registered holder or any other persons) is payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such taxes will be
billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
A-19
<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF
11 1/2 % SENIOR NOTES DUE 2008, SERIES A
OF
PSINET INC.
The undersigned hereby acknowledges receipt of the Prospectus dated
__________, 1999 (the "Prospectus") of PSINet Inc., a New York corporation
(the "Company"), and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer") to exchange $1,000 in principal amount of its 11 1/2 % Senior Notes due
2008, Series B (the "Exchange Notes") for each $1,000 in principal amount of its
outstanding 11 1/2 % Senior Notes due 2008, Series A (the "Initial Notes").
Capitalized terms used but not defined herein have the meanings ascribed to them
in the Prospectus.
This will instruct you, the registered holder, as to the action to be taken
by you relating to the Exchange Offer with respect to the Initial Notes held by
you for the account of the undersigned.
The aggregate face amount of the Initial Notes held by you for the account
of the undersigned is (fill in amount):
$________________________ of the 11 1/2 % Senior Notes due 2008,
Series A.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] To TENDER the following Initial Notes held by you for the account of
the undersigned (insert principal amount of Initial Notes to be
tendered*, if any):
$________________________ of the 11 1/2 % Senior Notes due 2008, Series A.
* The minimum permitted tender is $1,000 in
principal amount of Initial Notes. All other
tenders must be in integral multiples of $1,000
of principal amount.
[ ] NOT to TENDER any Initial Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Initial Notes held by you
for the account of the undersigned, it is understood that you are authorized (a)
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in the
Letter of Transmittal that are to be made with respect to the undersigned as a
Beneficial Owner (as defined in the Letter of Transmittal), including but not
limited to representations to the effect that (i) the undersigned's principal
residence is in the state of (fill in state)_______________________________,
(ii) the undersigned is acquiring the Exchange Notes in the ordinary course of
business of the undersigned, (iii) the undersigned is not participating, does
not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution (within the meaning of the Securities
Act) of the Exchange Notes, (iv) except as otherwise disclosed in writing
herewith, the undersigned acknowledges that any person participating in the
Exchange Offer with the intention or for the purpose of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale of the
Exchange Notes acquired by such person and cannot rely on the position of the
Staff of the Securities and Exchange Commission set forth in the no-action
letters that are discussed in the section of the Prospectus entitled "The
Exchange Offer -- Resale of the Exchange Notes"; (b) to make such agreements,
representations and warranties on behalf of the undersigned, as set forth in the
Letter of Transmittal; and (c) to take such other action as may be necessary
under the Prospectus or the Letter of Transmittal to effect the valid tender of
such Initial Notes.
SIGN HERE
Name of Beneficial Owner(s):__________________________________________________
Signature(s):___________________________________________________________________
Name(s) (please print):_________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
Telephone Number:_______________________________________________________________
Taxpayer Identification or Social Security Number:______________________________
Date:___________________________________________________________________________
A-20
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their social
security number. Refer to the following chart to determine the appropriate
number:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY OR
EMPLOYER IDENTIFICATION NUMBER
OF:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1. Individual The individual
Two or more individuals The actual owner of the account or, if combined
(joint account) funds, the first individual on the account (1)
Custodian account of a minor (Uniform Gift to The minor (2)
Minors Act)
a. Revocable savings trust (grantor is also trustee) The grantor-trustee (1)
b. So-called trust account that is not a legal or valid
trust under State law The actual owner (1)
Sole proprietorship
A valid trust, estate or pension trust The owner (3)
Corporate Legal entity (4)
Association, club, religious, charitable, educational The corporation
or other tax exempt organization The organization
Partnership
A broker or registered nominee The partnership
Account with the Department of Agriculture The broker or nominee
The public entity
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
B. EXEMPT PAYEES--The following lists exempt payees. If you are exempt, you must
nonetheless complete the form and provide your TIN in order to establish that
you are exempt. Check the box in Part 3 of the form, sign and date the form.
For this purpose, Exempt Payees include: (1) a corporation; (2) an
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) the United States
or any of its agencies or instrumentalities; (4) a state, the District of
Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) a foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) an international
organization or any of its agencies or instrumentalities; (7) a foreign central
bank of issue; (8) a dealer in securities or commodities required to register in
the U.S. or a possession of the U.S.; (9) a real estate investment trust; (10)
an entity or person registered at all times during the tax year under the
Investment
A-21
<PAGE>
Company Act of 1940; (11) a common trust fund operated by a bank under section
584(a); and (12) a financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form SS-
4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be given the numbers whether or not payees are required to file
tax returns. Payers must generally withhold 31% of taxable interest, dividend
and certain other payments to a payee who does not furnish a taxpayer
identification number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail
to include any portion of an includable payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
A-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Sections 721 through 725 of the Business Corporation Law of the
State of New York (the "BCL"), the Registrant has broad powers to indemnify its
directors, officers and other employees. These sections (i) provide that the
statutory indemnification and advancement of expenses provision of the BCL are
not exclusive, provided that no indemnification may be made to or on behalf of
any director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action as adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled, (ii) establish
procedures for indemnification and advancement of expenses that may be contained
in the certificate of incorporation or by-laws, or, when authorized by either of
the foregoing, set forth in a resolution of the shareholders or directors of an
agreement providing for indemnification and advancement of expenses, (iii) apply
a single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful and (iv) permit the advancement
of litigation expenses upon receipt of an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification or to the extent the expenses advanced exceed the
indemnification to which the director or officer is entitled. Section 726 of the
BCL permits the purchase of insurance to indemnify a corporation or its officers
and directors to the extent permitted.
As permitted by Section 721 of the BCL, the Registrant's By-laws
provide that the Registrant shall indemnify its officers and directors, as such,
to the fullest extent permitted by applicable law, and that expenses reasonably
incurred by any such officer or director in connection with a threatened or
actual action or proceeding shall be advanced or promptly reimbursed by the
Registrant in advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if and to the extent that it is ultimately determined that such
officer or director is not entitled to indemnification.
Article EIGHTH of the Registrant's Certificate of Incorporation
provides that no director of the Registrant shall be held personally liable to
the Registrant or its shareholders for damages for any breach of duty in his
capacity as a director occurring after authorization of such Article EIGHTH by
the shareholders unless a judgment or other final adjudication adverse to him
establishes that (1) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, or (2) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled, or (3) his acts violated section 719 of the BCL. The Registrant has
entered into Indemnity Agreements with its directors and certain key officers
pursuant to which the Registrant generally is obligated to indemnify its
directors and such officers to the full extent permitted by the BCL as described
above. PSINet also has purchased directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all exhibits filed as part of this
Registration Statement.
3.1 Certificate of Incorporation, as amended.
3.2 Certificate of Amendment of Certificate of Incorporation dated
April 25, 1995.
3.3 Certificate of Amendment of Certificate of Incorporation, dated
May 5, 1995.
3.4 Certificate of Amendment of Certificate of Incorporation, dated
November 11, 1995.
II-1
<PAGE>
3.5 Certificate of Amendment of Certificate of Incorporation dated May
18, 1996.
3.6 Certificate of Amendment of Certificate of Incorporation dated
as of November 6, 1997.
3.7 Certificate of Amendment of Certificate of Incorporation dated
February 5, 1998.
3.8 Amended and Restated By-laws of PSINet.
4.1 Form of 10% Senior Notes due 2005.
4.2 Indenture dated as of April 13, 1998 between PSINet and Wilmington
Trust Company, as trustee.
4.3 Form of 11 1/2 Senior Notes due 2008, Series A.
4.4 Indenture dated as of November 3, 1998 between PSINet and
Wilmington Trust Company, as trustee.
4.5 Fist Supplemental Indenture dated as of November 12, 1998 between
PSINet and Wilmington Trust Company, as trustee.
4.6 Form of 11 1/2% Senior Notes due 2008, Series A, as amended.
4.7 Form of 11 1/2% Senior Notes due 2008, Series B.
5 Opinion of Nixon, Hargrave, Devans & Doyle LLP.
7 Opinion of Nixon, Hargrave, Devans & Doyle LLP regarding tax
matters (contained in Exhibit 5).
10.1 Lease Agreement dated July 1, 1990 between PSINet and Rensselaer
Polytechnic Institute, amended by Lease, Renewal Agreement dated
as of July 1, 1993, Letter Agreement, dated November 14, 1994 and
Letter Agreement dated February 1, 1995.
10.2 Lease Agreement dated February 8, 1995 between PSINet and
Rensselaer Polytechnic Institute.
10.3 Amendment to Lease Agreement dated July 1, 1995 between PSINet and
Rensselaer Polytechnic Institute.
10.4 Lease Agreement dated as of April 30, 1993 by and between
Vingarden Limited Partnership and PSINet.
10.5 Lease Agreement dated April 1995 by and between Brit Limited
Partnership.
II-2
<PAGE>
10.6 Sublease dated September 20, 1995 by and between The Medical
Sciences Research Institute and PSINet and Lease Agreement dated
October 6, 1993 by and between Vingarden Associates Limited
Partnership and The Medical Sciences Research Institute.
10.7 Lease Agreement dated October 31, 1995 between Oakfern Properties
Limited and PSINet.
10.8 Amendment to Deed of 460 Spring Park Technology Center dated as
of June 12, 1997 between JBG/Spring Park Limited Partnership and
PSINet.
10.9 Sublease Agreement dated as of June 2, 1997 between Lucas
Industries, Inc. and PSINet and Office Lease Agreement between 3B
Limited Partnership and Lucas Industries Inc. dated as of
September 12, 1989.
10.10 Sublease Agreement dated January 22, 1998 between PSINet and
Unisys Corporation, as amended.
10.11 Lease Agreement dated February 20, 1998 between PSINet and
CarrAmerica Realty Corporation.
10.12 Lease Agreement dated October 1994 between PSINet and Cascade
Communications, Inc.
10.13 Master Lease Agreement dated July 19, 1994 between PSINet and
Technology Credit Corporation.
10.14 Lease Agreement dated as of July 9, 1993 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.15 Lease Agreement dated as of February 10, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.16 Lease Agreement dated as of March 14, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.17 Lease Agreement dated as of June 9, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.18 Lease Agreement dated as of September 21, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.19 Master Equipment Lease Agreement dated as of June 23, 1995
between PSINet and Forsythe/McArthur Associates, Inc. ("FMA").
10.20 Master Lease Line Commitment Agreement dated as of June 23, 1995
between PSINet and FMA.
10.21 Amendment Agreement dated as of August 1, 1995 between PSINet and
Technology Credit Corporation.
10.22 Master Equipment Lease Agreement No. 620-0004602-000 dated
November 1995 between PSINet and Siemens Credit Corporation.
II-3
<PAGE>
10.23 Amendment to Master Lease Agreement No. 1753 dated January 26,
1996 between PSINet and Technology Credit Corporation.
10.24 Master Equipment Lease Agreement dated December 15, 1995 between
PSINet and Financing for Science International, Inc.
10.25 Security Agreement dated as of March 20, 1996 between PSINet and
USL Capital Corporation.
10.26 Master Software/Equipment Lease Agreement dated as of September
20, 1996 between PSINet and LPI Software Funding Group, Inc.
10.27 Master Lease Agreement dated as of January 27, 1997 between
Cascade Communications Corp. and PSINet.
10.28 Master Equipment/Software Rental Agreement dated as of September
11, 1997 between PSINet and Earthlink Network, Inc. and Change
Order Amendment Master Equipment dated as of September 22, 1997.
10.29 Equipment lease dated as of June 30, 1997 between Royal Bank of
Canada and PSINet Limited.
10.30 Master Lease Agreement dated as of October 10, 1997 between Cisco
Systems Capital Corporation and PSINet.
10.31 Master Lease Agreement No. A212 dated as of October 30, 1997
between 3Com Credit Corporation and PSINet, as amended.
10.32 Master Lease of Personal Property No. 3402, dated December 12,
1997 between PSINet and Charter Financial, Inc., as amended.
*10.33 Executive Stock Option Plan of PSINet.
*10.34 Executive Stock Incentive Plan of PSINet, as amended.
*10.35 Directors Stock Incentive Plan of PSINet, as amended.
*10.36 Strategic Stock Incentive Plan of PSINet.
*10.37 1996 Performance Bonus Plan of PSINet.
*10.38 InterCon Systems Corporation 1992 Incentive Stock Plan.
*10.39 InterCon Systems Corporation 1994 Stock Option Plan.
*10.40 Software Ventures Corporation 1994 Stock Option Plan.
*10.41 Employment Agreement dated June 21, 1995 between PSINet and David
N. Kunkel.
*10.42 Employment Agreement dated February 9, 1996 between PSINet and
Mary-Ann Carolan.
II-4
<PAGE>
*10.43 Employment Agreement dated February 13, 1996 between PSINet
and Mitchell Levinn.
*10.44 Employment Agreement dated April 3, 1996 between PSINet and
Harold S. Wills.
*10.45 Employment Agreement dated October 1, 1996 between PSINet and
Edward D. Postal.
*10.46 Employment Agreement dated October 9, 1996 between PSINet and
Richard R. Frizalone.
*10.47 Employment Agreement dated February 12, 1997 between PSINet and
David L. Hudson.
*10.48 Employment Agreement dated July 1, 1997 between PSINet and
Michael Malesardi.
*10.49 Employment Agreement dated August 2, 1997 between PSINet and
Anthony Aveta.
*10.50 Employment Agreement dated August 4, 1997 between PSINet and
Harry Hobbs.
*10.51 Employment Agreement dated January 8, 1998 between PSINet
and William Cripe.
*10.52 Employment Agreement dated January 18, 1998 between PSINet and
Kathleen B. Horne.
*10.53 Employment Agreement dated February 16, 1998 between PSINet and
John Muleta.
10.54 Form of Indemnification Agreement.
10.55 Registration Rights Agreement dated as of June 16, 1995 among
PSINet and Stockholders of InterCon Systems Corporation.
10.56 Registration Rights Agreement dated as of July 11, 1995 among
PSINet and Stockholders of Software Ventures Corporation.
10.57 Registration Rights Agreement made as of September 19, 1996 by
and between PSINet and The Chatterjee Management Company.
10.58 Registration Rights Agreement dated as of November 11, 1997
between PSINet and the purchasers of Series B 8% Convertible
Preferred Stock.
10.59 Registration Rights Agreement dated as of February 25, 1998
between PSINet and IXC Internet Services, Inc.
10.60 Credit Agreement dated September 29, 1998 among PSINet, the
Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as Syndication Agent,
and The Bank of New York, as Documentation Agent.
II-5
<PAGE>
10.61 Guarantee Agreement dated September 29, 1998 among each of the
subsidiaries of PSINet party thereto and The Chase Manhattan
Bank.
10.62 Pledge Agreement dated September 29, 1998 among PSINet, each
subsidiary of PSINet party thereto and The Chase Manhattan
Bank.
10.63 Security Agreement dated September 29, 1998 among PSINet, each
subsidiary of PSINet party thereto and The Chase Manhattan Bank.
10.64 First Amendment dated as of October 27, 1998 to the Credit
Agreement, dated as of September 29, 1998, among PSINet, the
Lenders party thereto, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as Syndication Agent,
and The Bank of New York, as Documentation Agent.
10.65 Warrant to purchase up to 25,000 shares of the Series B Preferred
of PSINet, at an exercise price of $1.60 per share, registered in
the name of William H. Baumer.
10.66 Warrant to purchase up to 25,000 shares of the Series B Preferred
of PSINet, at an exercise price of $1.60 per share, registered in
the name of William H. Baumer.
10.67 Joint Venture Agreement dated as of September 19, 1996 between
PSINet and Chatterjee Management Company.
10.68 Stock Acquisition Agreement, dated as of February 1, 1997,
between Ascend Communications, Inc., a Delaware corporation, and
PSINet, a New York corporation, with respect to all outstanding
capital stock of InterCon Systems Corporation, a Delaware
corporation and a wholly-owned subsidiary of PSINet.
10.69 Asset Purchase Agreement dated as of June 28, 1996 between PSINet
and MindSpring Enterprises, Inc.
10.70 Amendment No. 1 to Asset Purchase Agreement and Network Services
Agreement entered into as of June 28, 1996 by and between PSINet
and MindSpring Enterprises, Inc.
10.71 Amendment No. 2 to Asset Purchase Agreement entered into as of
September 1, 1996 by and between PSINet and MindSpring
Enterprises, Inc.
10.72 Amendment No. 3 to Asset Purchase Agreement and Amendment No. 1
to Convertible Note entered into as of January 24, 1997 by and
between PSINet and MindSpring Enterprises, Inc.
10.73 Amendment No. 2 to Network Services Agreement entered into as of
January 1, 1997 by and between PSINet and MindSpring Enterprises,
Inc.
10.74 IRU and Stock Purchase Agreement dated as of July 22, 1997
between IXC Internet Services, Inc. and PSINet.
II-6
<PAGE>
10.75 First Amendment to IRU and Stock Purchase Agreement dated as of
July 22, 1997 between IXC Internet Services, Inc. and PSINet.
10.76 Second Amendment to IRU and Stock Purchase Agreement dated as
of July 22, 1997 between IXC Internet Services, Inc. and
PSINet.
10.77 Joint Marketing and Services Agreement dated as of July 22, 1997
between IXC Internet Services Inc. and PSINet.
10.78 Stock Purchase Agreement dated as of November 11, 1997 between
the Company and the Purchasers of Series B 8% Convertible
Preferred Stock.
10.79 Agreement dated as of November 10, 1997 between iSTAR internet
inc. and PSINet.
10.80 Pre-Acquisition Agreement between PSINet and iSTAR internet
inc., dated December 23, 1997.
10.81 Security Agreement and Assignment dated as of February 25, 1998
between PSINet and IXC Internet Services, Inc.
10.82 Collocation and Interconnection Agreement between PSINet and
IXC Internet Services, Inc.
10.83 Escrow Agreement, dated as of April 13, 1998, among Wilmington
Trust Company (as escrow agent and trustee) and PSINet.
10.84 Registration Rights Agreement dated as of April 13, 1998 among
PSINet and Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Chase
Securities Inc.
10.85 First Amendment to Sublease dated as of March 23, 1998 between
Unisys Corporation and PSINet.
10.86 Share Purchase Agreement dated as of October 1, 1998 among
PSINet Japan Inc., a subsidiary of PSINet, Tokyo Internet
Corporation and Secom Co., Ltd.
10.87 Registration Rights Agreement dated as of November 3, 1998 among
PSINet and Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities, Inc. and Morgan Stanley & Co. Incorporated.
*10.88 Employment Agreement dated June 17, 1998 between PSINet and
William A. Opet.
*10.89 Employment Agreement dated July 2, 1998 between PSINet and Robert
D. Leahy.
*10.90 Employment Agreement dated September 1, 1998 between PSINet and
Chi H. Kwan.
*10.91 Employment Agreement dated September 8, 1998 between PSINet and
James A. Haid.
II-7
<PAGE>
*10.92 Employment Agreement dated September 30, 1998 between PSINet and
Sandy L. Blaisdell.
*10.93 Employment Agreement dated October 12, 1998 between PSINet and
Geoffrey E. Axton.
*10.94 Employment Agreement dated October 14, 1998 between PSINet and
Edward Arnold Davis.
10.95 Registration Rights Agreement, dated as of November 13, 1998,
among PSINet and Donaldson, Lufkin & Jenrette Securities
Corporation, Chase Securities Inc. and Morgan Stanley & Co.
Incorporated.
10.96 Second Amendment dated as of November 9, 1998, to the Credit
Agreement, dated as of September 29, 1998, among PSINet, the
Lenders party thereto, the Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as Syndication Agent,
and The Bank of New York, as Documentation Agent.
*10.97 Amendment to Employment Agreement dated October 1, 1998 between
PSINet and Harry Hobbs.
*10.98 Employment Agreement dated November 2, 1998 between PSINet and
David J. Kramer.
*10.99 Employment Agreement dated November 6, 1998 between PSINet and
John Walpuck.
*10.100 Employment Agreement dated November 12, 1998 between PSINet and
Lawrence Winkler.
10.101 Master Lease Agreement between PSINet and Technology Credit
Corporation No. 1788 dated June 20, 1998.
10.102 Master Lease Agreement between PSINet and Technology Credit
Corporation No. 1789 dated June 20, 1998.
10.103 Master Loan and Security Agreement No. 3963 between PSINet and
Charter Financial Inc. dated September 28, 1998.
11.1 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares for the Year Ended December 31, 1997.
11.2 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares for the Year Ended December 31, 1996.
11.3 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares for the Year Ended December 31, 1995.
11.4 Calculation of Basic and Diluted Loss Per Share and Weighted
Average Shares Used in Calculation for the Nine Months Ended
September 30, 1998.
12 Statements re Computation of Ratios.
21 Subsidiaries of PSINet.
II-8
<PAGE>
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of KPMG LLP.
23.4 Consent of Price Waterhouse.
23.5 Consent of Arthur Anderson LLP.
23.6 Consent of Chuo Audit Corporation.
23.7 Consent of Ernst & Young.
23.8. Consent of Price Waterhouse GmbH.
24 Power of Attorney.
25 Statement of Eligibility on Form T-1 of Wilmington Trust
Company.
99.1 Form of Notice of Guaranteed Delivery.
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(a)(3).
FINANCIAL STATEMENTS AND SCHEDULE:
Financial Statements:
Financial Statements filed as a part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
Financial Statement Schedules:
II-Valuation and Qualifying Accounts for each of the three years in the
period ended December 31, 1997.
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-9
<PAGE>
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of
this section do not apply if the registration statement is on
Form S-3, Form S-8 or Form F-3, and the information required
to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or
furnished to the SEC by the registrant pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to
include any financial statements required by ss. 210.3-19 of
this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act
need not be furnished, provided that the registrant includes
in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph
(a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as
the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include
financial statements and information required by Section
10(a)(3) of the Act or ss.210.3-19 of this chapter if such
financial statements and information are contained in periodic
reports filed with or furnished to the SEC by the registrant
pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference on the
Form F-3.
(c) The undersigned Registrant hereby undertakes :
(1) To deliver or cause to be delivered with the prospectus,
to each person to whom the prospectus is sent or given, the
latest annual report to security holders that is incorporated
by
II-10
<PAGE>
reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities and Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of
regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that
is specifically incorporated by reference in the prospectus to
provide such interim information.
(2) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day
of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means.
This includes information contained in documents filed
subsequent to the effective date of the Registration Statement
through the date of responding to the request.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
Amendment No. 1 to registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Herndon, Commonwealth of
Virginia on February 11, 1999.
PSINet Inc.
By: /s/ William L. Schrader
---------------------------------------
William L. Schrader, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to registration statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William L. Schrader Chairman, Chief Executive Officer February 11, 1999
- -------------------------- and Director (Principal Executive
William L. Schrader Officer)
* President, Chief Operating Officer February 11, 1999
- -------------------------- and Director
Harold S. Wills
* Executive Vice President, General February 11, 1999
- -------------------------- Counsel and Director
David N. Kunkel
/s/ Edward D. Postal Senior Vice President and Chief February 11, 1999
- -------------------------- Financial Officer (Principal Financial
Edward D. Postal Officer)
/s/ Michael J. Malesardi Vice President and Controller February 11, 1999
- -------------------------- (Principal Accounting Officer)
Michael J. Malesardi
* Director February 11, 1999
- --------------------------
William H. Baumer
* Director February 11, 1999
- --------------------------
Ralph J. Swett
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
* Director February 11, 1999
- --------------------------
Ian P. Sharp
</TABLE>
*By: /s/ Edward D. Postal
- --------------------------
Edward D. Postal
Attorney-in-fact
II-13
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 11-VALUATION ACCOUNTS AND RESERVES
Additions
---------------------------------------------
Balance at Charged to Balances Deductions Balance at
beginning costs and of acquired ---------- at end of
of period expenses subsidiaries period
---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
(In thousands of U.S. dollars)
Year ended December 31, 1995
Allowances for doubtful accounts and returns..... $ 127 $724 $ 252 $ (228) $ 875
Deferred tax valuation allowance................. 2,439 8,936 - - 11,375
Year ended December 31, 1996
Allowances for doubtful accounts and returns..... 875 3,130 - (2,096) 1,909
Deferred tax valuation allowance................. 11,375 20,948 - - 32,323
Year ended December 31, 1997
Allowances for doubtful accounts and returns..... 1,909 5,424 16 (5,248) 2,101
Deferred tax valuation allowance................. 32,323 18,756 - - 51,079
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended Incorporated by reference from Exhibit 3.1 to
the Company's Registration Statement on Form
S-1 declared effective on May 1, 1995 located
under Securities and Exchange Commission File
No. 33-90154 ("May 1995 Registration
Statement")
3.2 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation dated April 25, 1995 the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 located
under Securities Exchange Commission File No.
0-25812 ("June 1995 10-Q")
3.3 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.2 to
Incorporation Dated May 5, 1995 the June 1995 10-Q
3.4 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation Dated November 11, 1995 the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995
located under Securities Exchange Commission
File No. 0-25812 ("September 1995 10-Q")
3.5 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3 to
Incorporation, dated May 18, 1996 the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996 located
under Securities Exchange Commission File No.
0-25812 ("June 1996 10-Q")
3.6 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation dated as of November 6, 1997 the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997
located under the Securities and Exchange
Commission File No. 0-25812 ("September 1997
10-Q")
3.7 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.7 to
Incorporation dated February 5, 1998 the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997
located under Securities Exchange Commission
File No. 0-25812 ("1997 Form 10-K")
3.8 Amended and Restated By-laws of the Company Incorporated by reference from Exhibit 3.5 to
the September 1995 10-Q
4.1 Form of 10% Senior Notes due 2005, Series B Incorporated by reference from Exhibit 4.1 to
the Company's Current Report on Form 8-K dated
April 22, 1998 located under Securities
Exchange Commission File No. 0-25812 ("April
22, 1998 8-K")
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
4.2 Indenture dated as of April 13, 1998 between Incorporated by reference from Exhibit 4.2
the Company and Wilmington Trust Company to the April 22, 1998 8-K
4.3 Form of 11 1/2% Senior Notes due 2008, Series A Incorporated by reference from Exhibit 4.2 to
the Company's Current Report on Form 8-K dated
November 3, 1998 located under Securities
Exchange Commission File No. 0-25812 ("November
10, 1998 8-K")
4.4 Indenture dated as of November 3, 1998 between Incorporated by reference from Exhibit 4.1
the Company and Wilmington Trust Company to the November 10, 1998 8-K
4.5 First Supplemental Indenture dated as of Incorporated by reference from Exhibit 4.1
November 12, 1998 between the Company and to the Company's Quarterly Report on Form
Wilmington Trust Company, as trustee 10-Q for the quarter ended September 30, 1998
located under Securities Exchange Commission
File No. 0-25812 ("September 1998 10-Q")
4.6 Form of 11 1/2% Senior Notes due 2008, Series Incorporated by reference from Exhibit 4.2
A, as amended to the September 1998 10-Q
4.7 Form of 11 1/2% Senior Notes due 2008, Series B Previously filed
5 Opinion of Nixon, Hargrave, Devans & Doyle LLP. Previously filed
7 Opinion of Nixon, Hargrave, Devans & Doyle LLP Previously filed
regarding tax matters
10.1 Lease Agreement dated July 1, 1990 between the Incorporated by reference from Exhibit 10.1
Company and Rensselaer Polytechnic Institute, to the May 1995 Registration Statement
amended by Lease, Renewal Agreement dated as of
July 1, 1993, Letter Agreement, dated November
14, 1994 and Letter Agreement dated February 1, 1995
10.2 Lease Agreement dated February 8, 1995 between Incorporated by reference from Exhibit 10.2
the Company and Rensselaer Polytechnic to the May 1995 Registration Statement
Institute
10.3 Amendment to Lease Agreement dated July 1, Incorporated by reference from Exhibit 10.2A
1995 between the Company and Rensselaer to the Company's Registration Statement
Polytechnic Institute on Form S-1 declared effective on December 14,
1995 located under Securities and Exchange
Commission File No. 33-99610 ("December 1995
Registration Statement")
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.4 Lease Agreement dated as of April 30, 1993 by Incorporated by reference from Exhibit 10.3
and between Vingarden Limited Partnership and to the May 1995 Registration Statement
the Company
10.5 Lease Agreement dated April 1995 by and Incorporated by reference from by Exhibit 10.3A
between Brit Limited Partnership and the to the December 1995 Registration Statement
Company
10.6 Sublease dated September 20, 1995 by and between Incorporated by reference from Exhibit 10.3B
The Medical Sciences Research Institute and the to the December 1995 Registration Statement
Company and Lease Agreement dated October 6,
1993 by and between Vingarden Associates Limited
Partnership and The Medical Sciences Research
Institute
10.7 Lease Agreement dated October 31, 1995 between Incorporated by reference from Exhibit 10.4A
Oakfern Properties Limited and the Company to the December 1995 Registration Statement
10.8 Amendment to Deed of 460 Spring Park Technology Incorporated by reference from Exhibit 10.1 to
Center dated as of June 12, 1997 between JBG/ the September 1997 Form 10-Q
Spring Park Limited Partnership and the Company
10.9 Sublease Agreement dated as of June 2, 1997 Incorporated by reference from Exhibit 10.2 to
between Lucas Industries, Inc. and the Company the September 1997 10-Q
and Office Lease Agreement between 3B Limited
Partnership and Lucas Industries Inc. dated as
of September 12, 1989
10.10 Sublease Agreement dated January 22, 1998 Incorporated by reference from
between the Company and Unisys Corporation, as Exhibit 10.9 to the 1997 Form 10-K
amended
10.11 Lease Agreement dated February 20, 1998 between Incorporated by reference from Exhibit 10.11
the Company and CarrAmerica Realty Corporation to the 1997 Form 10-K
10.12 Lease Agreement dated October 1994 between the Incorporated by reference from
Company and Cascade Communications, Inc. Exhibit 10.4 to the May 1995 Registration
Statement
10.13 Master Lease Agreement dated July 19, 1994 Incorporated by reference from Exhibit 10.5 to
between the Company and Technology Credit the May 1995 Registration Statement
Corporation
10.14 Lease Agreement dated as of July 9, 1993 between Incorporated by reference from Exhibit 10.6 to
Applied Telecommunications Technologies, Inc. the May 1995 Registration Statement
and the Company
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.15 Lease Agreement dated as of February 10, 1994 Incorporated by reference from Exhibit 10.7F
between Applied Telecommunications Technologies, to the December 1995 Registration Statement
Inc. and the Company
10.16 Lease Agreement dated as of March 14, 1994 Incorporated by reference from Exhibit 10.7G
between Applied Telecommunications Technologies, to the December 1995 Registration Statement
Inc. and the Company
10.17 Lease Agreement dated as of June 9, 1994 between Incorporated by reference from Exhibit 10.7H
Applied Telecommunications Technologies, Inc. to the December 1995 Registration Statement
and the Company
10.18 Lease Agreement dated as of September 21, 1994 Incorporated by reference from Exhibit 10.7 to
between Applied Telecommunications Technologies, the May 1995 Registration Statement
Inc. and the Company
10.19 Master Equipment Lease Agreement dated as of Incorporated by reference from Exhibit 10.1 to
June 23, 1995 between the Company and the September 1995 10-Q
Forsythe/McArthur Associates, Inc. ("FMA")
10.20 Master Lease Line Commitment Agreement dated as Incorporated by reference from Exhibit 10.2 to
of June 23, 1995 between the Company and FMA the September 1995 10-Q
10.21 Amendment Agreement dated as of August 1, 1995 Incorporated by reference from Exhibit 10.8 to
between the Company and Technology Credit the September 1995 10-Q
Corporation
10.22 Master Equipment Lease Agreement No. Incorporated by reference from Exhibit 10.44A
620-0004602-000 dated November 1995 between the to the December 1995 Registration Statement
Company and Siemens Credit Corporation
10.23 Amendment to Master Lease Agreement No. 1753 Incorporated by reference from Exhibit 10.77
dated January 26, 1996 between the Company and to the Company's Annual Report on Form 10-K
Technology Credit Corporation for the fiscal year ended December 31, 1995
located under the Securities Exchange
Commission File No. 0-25812 ("1995 Form 10-K")
10.24 Master Equipment Lease Agreement dated December Incorporated by reference from Exhibit 10.78
15, 1995 between the Company and Financing for to the 1995 Form 10-K
Science International, Inc.
10.25 Security Agreement dated as of March 20, 1996 Incorporated by reference from Exhibit 10.79
between the Company and USL Capital Corporation to the 1995 Form 10-K
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.26 Master Software/Equipment Lease Agreement dated Incorporated by reference from Exhibit 10.4 to
as of September 20, 1996 between the Company and the Company's Quarterly Report on Form 10-Q
LPI Software Funding Group, Inc. for the quarter ended September 30, 1996
located under Securities Exchange Commission
File No. 0-25812 ("September 1996 10-Q")
10.27 Master Lease Agreement dated as of January 27, Incorporated by reference from Exhibit 10.77
1997 between Cascade Communications Corp. and to the Company's Annual Report on Form 10-K
the Company for the fiscal year ended December 31, 1996
located under Securities and Exchange
Commission File No. O-25812 ("1996 Form 10-K")
10.28 Master Equipment/Software Rental Agreement dated Incorporated by reference from Exhibit 10.3 to
as of September 11, 1997 between PSINet and the September 1997 10-Q
Earthlink Network, Inc. and Change Order
Amendment Master Equipment dated as of September
22, 1997
10.29 Equipment lease dated as of June 30, 1997 Incorporated by reference from Exhibit 10.4 to
between Royal Bank of Canada and PSINet Limited the September 1997 10-Q
10.30 Master Lease Agreement dated as of October 10, Incorporated by reference from Exhibit 10.4 to
1997 between Cisco Systems Capital Corporation the September 1997 Form 10-Q
and the Company
10.31 Master Lease Agreement No. A212 between 3Com Incorporated by reference from dated as of
Credit Corporation and the Company, as amended October 30, 1997 Exhibit 10.31 to the 1997
Form 10-K
10.32 Master Lease of Personal Property No. 3402, Incorporated by reference from Exhibit 10.32
dated December 12, 1997 between the Company and to the 1997 Form 10-K
Charter Financial, Inc., as amended
10.33* Executive Stock Option Plan ofthe Company Incorporated by reference from Exhibit 10.10
to the May 1995 Registration Statement
10.34* Executive Stock Incentive Plan of the Company, Incorporated by reference from Exhibit 10.12
as amended to the December 1995 Registration Statement
10.35* Directors Stock Incentive Plan of the Company, Incorporated by reference from Exhibit 10.13
as amended to the December 1995 Registration Statement
10.36* Strategic Stock Incentive Plan of the Company Incorporated by reference from Exhibit 10 to
the June 1995 10-Q
10.37* 1996 Performance Bonus Plan of the Company Incorporated by reference from Exhibit 10.25
to the 1996 Form 10- K
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.38* InterCon Systems Corporation 1992 Incentive Incorporated by reference from Exhibit 99.1 to
Stock Plan the Company's Registration Statement on Form
S-8 which became effective on October 18, 1995
located under Securities Exchange Commission
File No. 33-98316 ("S-8 No. 16")
10.39* InterCon Systems Corporation 1994 Stock Option Incorporated by reference from Exhibit 99.2 to
Plan the S-8 No. 16
10.40* Software Ventures Corporation 1994 Stock Option Incorporated by reference from Exhibit 99 to
Plan the Company's Registration Statement on Form
S-8 which became effective on October 18, 1995
located under Securities Exchange Commission
File No. 33-98314 ("S-8 No. 14")
10.41* Employment Agreement dated June 21, 1995 between Incorporated by reference from Exhibit 10.26
the Company and David N. Kunkel to the December 1995 Registration Statement
10.42* Employment Agreement dated February 9, 1996 Incorporated by reference from Exhibit 10.42
between the Company and Mary-Ann Carolan to the 1995 Form 10-K
10.43* Employment Agreement dated February 13, 1996 Incorporated by reference from Exhibit 10.19
between the Company and Mitchell Levinn to the 1995 10-K
10.44* Employment Agreement dated April 3, 1996 between Incorporated by reference from Exhibit 10.2 to
the Company and Harold S. Wills the June 1996 10-Q.
10.45* Employment Agreement dated October 1, 1996 Incorporated by reference from Exhibit 10.2 to
between theCompany and Edward D. Postal the September 1996 10-Q
10.46* Employment Agreement dated October 9, 1996 Incorporated by reference from Exhibit 10.3 to
between theCompany and Richard R. Frizalone the September 1996 10-Q
10.47* Employment Agreement dated February 12, 1997 Incorporated by reference from Exhibit 10.78
between theCompany and David L. Hudson to the 1996 Form 10-K
10.48* Employment Agreement dated July 1, 1997 between Incorporated by reference from Exhibit 10.5 to
the Company and Michael Malesardi the September 1997 10-Q
10.49* Employment Agreement dated August 2, 1997 Incorporated by reference from Exhibit 10.6 to
between the Company and Anthony Aveta the September 1997 10-Q
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.50* Employment Agreement dated August 4, 1997 Incorporated by reference from Exhibit 10.7 to
between the Company and Harry Hobbs the September 1997 10-Q
10.51* Employment Agreement dated January 8, 1998 Incorporated by reference from Exhibit 10.52
between the Company and William Cripe to the 1997 Form 10-K
10.52* Employment Agreement dated January 18, 1998 Incorporated by reference from Exhibit 10.53
between the Company and Kathleen B. Horne to the 1997 Form 10-K
10.53* Employment Agreement dated February 16, 1998 Incorporated by reference from Exhibit 10.54
between the Company and John Muleta to the 1997 Form 10-K
10.54 Form of Indemnification Agreement Incorporated by reference from Exhibit 10.21
to the May 1995 Registration Statement
10.55 Registration Rights Agreement dated as of June Incorporated by reference from Exhibit 10.39
16, 1995 among the Company and Stockholders of to the December 1995 Registration Statement
InterCon Systems Corporation
10.56 Registration Rights Agreement dated as of July Incorporated by reference from Exhibit 10.40
11, 1995 among the Company and Stockholders of to the December 1995 Registration Statement
Software Ventures Corporation
10.57 Registration Rights Agreement made as of Incorporated by reference from Exhibit 10.1
September 19, 1996 by and between the Company to the September 1996 10-Q
and The Chatterjee Management Company
10.58 Registration Rights Agreement dated as of Incorporated by reference from Exhibit 10.10
November 11, 1997 between the Company and the to the September 1997 10-Q
purchasers of Series B 8% Convertible Preferred
Stock
10.59 Registration Rights Agreement dated as of Incorporated by reference from Exhibit 10.62
February 25, 1998 between the Company and IXC to the 1997 Form 10-K
Internet Services, Inc.
10.60 Credit Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.2 to
the Company, the Lenders party thereto, The the Company's Current Report on Form 8-K dated
Chase Manhattan Bank, as Administrative Agent, October 16, 1998 located under the Securities
Fleet National Bank, as Syndication Agent, and Exchange Commission File No. 0-25812 ("October
The Bank of New York as Documentation Agent 16, 1998 8-K")
10.61 Guarantee Agreement dated September 29, 1998 Incorporated by reference from Exhibit 2.3 to
among each of the subsidiaries of the Company the October 16, 1998 8-K
party thereto and The Chase Manhattan Bank
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.62 Pledge Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.4 to
the Company, each subsidiary of the Company the October 16, 1998 8-K
party thereto and The Chase Manhattan Bank
10.63 Security Agreement dated September 29, 1998 Incorporated by reference from Exhibit 2.5 to
among the Company, each subsidiary of the the October 16, 1998 8-K
Company party thereto and The Chase Manhattan
Bank
10.64 First Amendment dated as of October 27, 1998 to Incorporated by reference from Exhibit 10.2 to
the Credit Agreement dated as of September 29, the November 10, 1998 8-K
1998, among the Company, the Lenders party
thereto, The Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and the Bank of New York, as
Documentation Agent
10.65 Warrant to purchase up to 25,000 shares of the Incorporated by reference from Exhibit 10.39
Series B Preferred of the Company, at an to the May 1995 Registration Statement
exercise price of $1.60 per share, registered in
the name of William H. Baumer
10.66 Warrant to purchase up to 25,000 shares of the Incorporated by reference from Exhibit 10.40
Series B Preferred of the Company, at an to the May 1995 Registration Statement
exercise price of $1.60 per share, registered in
the name of William H. Baumer
10.67 Joint Venture Agreement dated as of September Incorporated by reference from Exhibit 2 to
19, 1996 between the Company and Chatterjee Amendment No. 1 to the Company's Quarterly
Management Company Report on Form 10-Q for the quarter ended
September 30, 1996 located under Securities
Exchange Commission File No. 0-25812
("September 1996 10-Q/A1")
10.68 Stock Acquisition Agreement, dated as of Incorporated by reference from Exhibit 2 to
February 1, 1997, between Ascend Communications, the Company's Current Report on Form 8-K dated
Inc., a Delaware corporation, and the Company, a February 14, 1997 located under Securities
New York corporation, with respect to all Exchange Commission File No. 0-25812
outstanding capital stock of InterCon Systems
Corporation, a Delaware corporation and a
wholly-owned subsidiary of the Company
10.69 Asset Purchase Agreement dated as of June 28, Incorporated by reference from Exhibit 2 to
1996 between the Company and MindSpring the June 1996 10-Q
Enterprises, Inc.
10.70 Amendment No. 1 to Asset Purchase Agreement and Incorporated by reference from Exhibit 2 to
Network Services Agreement entered into as of the September 1996 10-Q
June 28, 1996 by and between the Company and
MindSpring Enterprises, Inc.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.71 Amendment No. 2 to Asset Purchase Agreement Incorporated by reference from Exhibit 10.8 to
entered into as of September 1, 1996 by and the September 1996 10-Q
between the Company and MindSpring Enterprises,
Inc.
10.72 Amendment No. 3 to Asset Purchase Agreement and Incorporated by reference from Exhibit 10.74
Amendment No. 1 to Convertible Note entered to the 1996 Form 10-K
into as of January 24, 1997 by and between the
Company and MindSpring Enterprises, Inc.
10.73 Amendment No. 2 to Network Services Agreement Incorporated by reference from Exhibit 10.75
entered in as of January 1, 1997 by and between to the 1996 Form 10-K
the Company and MindSpring Enterprises, Inc.
10.74 IRU and Stock Purchase Agreement dated as of Incorporated by reference from Exhibit 2.1 to
July 22, 1997 between IXC Internet Services, Amendment No. 2 to the Company's Quarterly
Inc. and the Company Report on Form 10-Q for the quarter ended June
30, 1997 located under Securities Exchange
Commission File No. 0-25812 ("June 1997 10-Q/A2")
10.75 First Amendment to IRU and Stock Purchase Incorporated by reference from Exhibit A to
Agreement dated as of July 22, 1997 between IXC the Company's Proxy Statement on Schedule 14A
Internet Services, Inc. and the Company dated December 19, 1997 located under
Securities Exchange Commission File No.
0-25812 ("December 1997 Proxy Statement")
10.76 Second Amendment to IRU and Stock Purchase Incorporated by reference from Exhibit A to
Agreement dated as of July 22, 1997 between IXC the December 1997 Proxy Statement
Internet Services, Inc. and the Company
10.77 Joint Marketing and Services Agreement dated as Incorporated by reference from Exhibit 10.1 to
of July 22, 1997 between IXC Internet Services the June 1997 10-Q/A1
Inc. and the Company
10.78 Stock Purchase Agreement dated as of November Incorporated by reference from Exhibit 10.9 to
11, 1997 between the Company and the Purchasers the September 1997 10-Q
of Series B 8% Convertible Preferred Stock
10.79 Agreement dated as of November 10, 1997 between Incorporated by reference from Exhibit 2 to
iSTAR internet inc. and the Company the September 1997 10-Q
10.80 Pre-Acquisition Agreement between the Company Incorporated by reference from Exhibit 10.1
and iSTAR internet inc., dated December 23, 1997 to the Company's Current Report on Form 8-K dated
January 7, 1998 located underSecurities Exchange
CommissionFile No. 0-25812 ("January 7,1998 8-K")
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.81 Security Agreement and Assignment dated as of Incorporated by reference from Exhibit 10.95
February 25, 1998 between the Company and IXC to the 1997 Form 10-K
Internet Services, Inc.
10.82 Collocation and Interconnection Agreement Incorporated by reference from Exhibit 10.96
between the Company and IXC Internet Services, to the 1997 Form 10-K
Inc.
10.83 Escrow Agreement, dated as of April 13, 1998, Incorporated by reference from Exhibit 10.2 to
among Wilmington Trust Company (as escrow agent the April 22, 1998 8-K
and trustee) and the Company.
10.84 Registration Rights Agreement dated as of Incorporated by reference from Exhibit 10.1 to
April 13, 1998 among the Company and Donaldson, the April 22, 1998 8-K
Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Chase Securities, Inc.
10.85 First Amendment to Sublease dated as of March Incorporated by reference from Exhibit 10.99
23, 1998 between Unisys Corporation and the to the Company's Registration Statement on
Company Form S-4 declared effective on May 7, 1998
located under the Securities and Exchange
Commission File No. 333-51491 ("May 1998
Registration Statement")
10.86 Share Purchase Agreement dated as of October 1, Incorporated by reference from Exhibit 2.1 to
1998, among PSINet Japan Inc., a subsidiary of the October 16, 1998 8-K
the Company, Tokyo Internet Corporation and
Secom Co., Ltd.
10.87 Registration Rights Agreement dated as of Incorporated by reference from Exhibit 10.1 to
November 3, 1998 among the Company and the November 10, 1998 8-K
Donaldson, Lufkin and Jenrette Securities
Corporation, Chase Securities, Inc. and Morgan
Stanley & Co. Incorporated
10.88* Employment Agreement dated June 17, 1998 between Incorporated by reference from Exhibit 10.1 to
the Company and William A. Opet the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 located under
Securities Exchange Commission File No. 0-25812
("June 1998 10-Q")
10.89* Employment Agreement dated July 2, 1998 between Incorporated by reference from Exhibit 10.2 to
the Company and Robert D. Leahy the June 1998 10-Q
10.90* Employment Agreement dated September 1, 1998 Incorporated by reference from Exhibit 10.8 to
between the Company and Chi H. Kwan the September 1998 10-Q
10.91* Employment Agreement dated September 8, 1998 Incorporated by reference from Exhibit 10.5 to
between the Company and James A. Haid the September 1998 10-Q
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
10.92* Employment Agreement dated September 30, 1998 Incorporated by reference from Exhibit 10.3 to
between the Company and Sandy L. Blaisdell the September 1998 10-Q
10.93* Employment Agreement dated October 12, 1998 Incorporated by reference from Exhibit 10.2 to
between the Company and Geoffrey E. Axton the September 1998 10-Q
10.94* Employment Agreement dated October 14, 1998 Incorporated by reference from Exhibit 10.4 to
between the Company and Edward Arnold Davis the September 1998 10-Q
10.95 Registration Rights Agreement, dated as of Incorporated by reference from Exhibit 4.3 to
November 13, 1998, among the Company and the September 1998 10-Q
Donaldson Lufkin & Jenrette Securities
Corporation, Chase Securities Inc. and Morgan
Stanley & Co. Incorporated
10.96 Second Amendment dated as of November 9, 1998, Incorporated by reference from Exhibit 10.1 to
to the Credit Agreement, dated as of September the September 1998 10-Q
29, 1998, among the Company, the Lenders party
thereto, the Chase Manhattan Bank, as
Administrative Agent, Fleet National Bank, as
Syndication Agent, and The Bank of New York, as
Documentation Agent
10.97* Amendment to Employment Agreement dated October Incorporated by reference from Exhibit 10.6 to
1, 1998 between the Company and Harry Hobbs the September 1998 10-Q
10.98* Employment Agreement dated November 2, 1998 Incorporated by reference from Exhibit 10.7 to
between the Company and David J. Kramer the September 1998 10-Q
10.99* Employment Agreement dated November 6, 1998 Incorporated by reference from Exhibit 10.9 to
between the Company and John Walpuck the September 1998 10-Q
10.10* Employment Agreement dated November 12, 1998 Incorporated by reference from Exhibit 10.10
between the Company and Lawrence Winkler to the September 1998 10-Q
10.101 Master Lease Agreement between the Company and Incorporated by reference from Exhibit 10.11
Technology Credit Corporation No. 1788 dated to the September 1998 10-Q
June 20, 1998
10.102 Master Lease Agreement between the Company and Incorporated by reference from Exhibit 10.12
Technology Credit Corporation No. 1789 dated to the September 1998 10-Q
June 20, 1998
10.103 Master Loan and Security Agreement No. 3963 Incorporated by reference from Exhibit 10.13
between the Company and Charter Financial Inc. to the September 1998 10-Q
dated September 28, 1998
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------- ----------- --------
<S> <C> <C>
11.1 Calculation of Basic and Diluted Loss Per Share Incorporated by reference from Exhibit 11.1 to
and Weighted Average Shares for the Year Ended the 1997 Form 10-K
December 31, 1997
11.2 Calculation of Basic and Diluted Loss Per Share Incorporated by reference from Exhibit 11.2 to
and Weighted Average Shares for the Year Ended the 1997 Form 10-K
December 31, 1996
11.3 Calculation of Basic and Diluted Loss Per Share Incorporated by reference from Exhibit 11.3 to
and Weighted Average Shares for the Year Ended the 1997 Form 10-K
December 31, 1995
11.4 Calculation of Basic and Diluted Loss per Share Incorporated by reference from Exhibit 11.2 to
and Weighted Average Shares Used in Calculation the September 1998 10-Q
for the Nine Months Ended September 30, 1998
12 Statements re Computation of Ratios Previously filed
21 Subsidiaries of the Company Previously filed
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP Previously filed
23.2 Consent of PricewaterhouseCoopers LLP Filed herewith
23.3 Consent of KPMG LLP Filed herewith
23.4 Consent of Price Waterhouse Filed herewith
23.5 Consent of Arthur Andersen LLP Filed herewith
23.6 Consent of Chuo Audit Corporation Filed herewith
23.7 Consent of Ernst & Young Filed herewith
23.8 Consent of Price Waterhouse GmbH Filed herewith
24 Power of Attorney Previously filed
25 Statement of Eligibility on Form T-1 of Previously filed
Wilmington Trust Company
99.1 Form of Notice of Guaranteed Delivery Previously filed
</TABLE>
________________________
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 14(a)(3).
12
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 of PSINet Inc. of our
report dated February 6, 1998, except as to paragraphs 1, 2 and 6 of Note 11,
which are as of February 25, 1998, relating to the consolidated financial
statements of PSINet Inc., which appears in such Prospectus. We also consent to
the application of such report to the Financial Statement Schedule for each of
the three years in the period ended December 31, 1997 listed under Item 21 of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial and Operating
Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Consolidated Financial and Operating Data."
/s/ PricewaterhouseCoopers LLP
Washington D.C.
February 11, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 of our report dated
July 10, 1997, except for notes 12, 18, 19 and 20 which are as at December 5,
1997, relating to the consolidated financial statements of iSTAR internet inc.
as of May 31, 1997 and 1996 and for each of the two years in the period ended
May 31, 1997. We also consent to the reference to our firm under the heading
"Experts" in the Prospectus.
/s/ KPMG LLP
Chartered Accountants
Ottawa, Canada
February 11, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to the Registration
Statement on Form S-4 of PSINet Inc. of our report dated September 30, 1998
relating to the financial statements of Tokyo Internet Corporation which appears
in such Prospectus. We also consent to the references to us under the heading
"Experts."
/s/ Price Waterhouse
Tokyo, Japan
February 11, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated May 29, 1998, with
respect to the financial statements of ioNET, Inc. contained in the Current
Report on Form 8-K of PSINet, Inc. filed on September 15, 1998 and to all
references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
February 11, 1999
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Amendment No. 1 to the
registration statement of PSINet Inc. on Form S-4 of our report dated August 25,
1998 (September 7, 1998 as to Note 4), on our audit of the financial statements
of RIMNET CORPORATION as of August 31, 1997 and for the year then ended, which
report is included in the Current Report on Form 8-K of PSINet Inc.
/s/ Chuo Audit Corporation
Tokyo, Japan
February 9, 1999
<PAGE>
Exhibit 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference in this Amendment No. 1 to the registration statement
of PSINet Inc. on Form S-4 for the registration of $350,000,000 11 1/2% Senior
Notes due 2008, of our report dated June 22, 1998, except for Note 17 as to
which the date is September 7, 1998, with respect to the financial statements of
Linkage Online Limited included in the Current Report (Form 8-K) of PSINet Inc.
filed with the Securities and Exchange Commission on September 15, 1998.
/s/ ERNST & YOUNG
Hong Kong
February 11, 1999
<PAGE>
Exhibit 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 1 to the Registration Statement on Form
S-4 of PSINet Inc. of our auditors? opinion dated September 4, 1998, with
respect to the financial statements as of and for the period ended December 31,
1997 of INTERACTIVE NETWORX Gesellschaft zur Entwicklung und Vermarktung
interaktiver Online- und Netzwerk Dienste mbH, Berlin, contained in the Current
Report on Form 8-K of PSINet Inc. filed with the Securities and Exchange
Commission on September 15, 1998.
Price Waterhouse GmbH
Wirtschaftspruefungsgesellschaft
/s/ A. Slotta /s/ P.G/ Stern
Wirtschaftspruefer Wirtschaftspruefer
Berlin, Germany
February 11, 1999
