<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 22, 1999
----------------
PSINet Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 0-25812 16-1353600
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
510 Huntmar Park Drive, Herndon, Virginia 20170
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 904-4100
--------------
(Former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
<PAGE>
Item 5. OTHER EVENTS
PSINet Inc. previously reported in its Form 8-K dated August 24,
1999 that it had entered into a definitive agreement to acquire Transaction
Network Services, Inc. ("TNI"). This Form 8-K includes unaudited pro forma
consolidated financial information for PSINet as of June 30, 1999 and for the
year ended December 31, 1998 and for the six months ended June 30, 1999,
which information is being filed as an Exhibit to this Form 8-K. This Form
8-K also incorporates by reference audited financial statements of TNI for
the year ended December 31, 1998 and unaudited financial statements of TNI
for the three and six months ended June 30, 1999 which are included in TNI's
Annual Report on Form 10-K for the year ended December 31, 1998 and TNI's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and June
30, 1999, respectively.
TNI was incorporated in August 1990 to build and operate a
communications network focused on the network services needs of the POS
(point-of-sale/ point-of-service) transaction processing industry through its
POS division. TNI currently operates four divisions: (1) the POS Division
which includes TNI's TransXpress network services for the POS transaction
processing industry, (2) the Telecom Services Division which includes TNI's
CARD*TEL telephone call billing validation and fraud control services and
other services targeting primarily the telecommunications industry, (3) the
Financial Services Division which provides integrated data and voice services
including the TNI FastLink Data Service in support of the Financial
Information eXchange messaging protocol and other transaction oriented
trading applications primarily to the financial services industry, and (4)
the International Systems Division which markets TNI's products and services
internationally.
Some of the information included in or incorporated by reference in
this Form 8-K may contain forward-looking statements, such as information
relating to the effects of acquisitions. 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. Another form of forward-looking
statement can be characterized by an assumption (using terminology such as "as
if" or "gives effect to") that an event occurs at the beginning of a financial
period presented, with a corresponding effect throughout the period, even though
the event had actually occurred after the beginning of such period or has not
yet actually occurred at all. Any such forward-looking statements may discuss
our future expectations or contain projections of our results of operations or
financial condition or expected benefits to us resulting from acquisitions or
other transactions. We cannot assure you that the future results indicated,
whether expressed or implied, will be achieved. For a discussion of the risk
factors that could cause our actual results to differ materially from those
contained in any forward-looking statement, you should read "Risk Factors"
included as Exhibit 99.1 to our Form 10-Q for the quarterly period ended
June 30, 1999 and our other periodic reports and documents filed with the
Securities and Exchange Commission.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) EXHIBITS.
Exhibit 23.1 Consent of Arthur Andersen LLP.
Exhibit 99.1 Financial Statements of Transaction Network Services,
Inc. for the year ended December 31, 1998.
Exhibit 99.2 Financial Statements of Transaction Network Services,
Inc. for the quarter ended March 31, 1999.
Exhibit 99.3 Financial Statements of Transaction Network Services,
Inc. for the quarter ended June 30, 1999.
Exhibit 99.4 PSINet Inc. Unaudited Pro Forma Consolidated Financial
Information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 16, 1999 PSINET INC.
By: /s/ David N. Kunkel
------------------------------------
David N. Kunkel
Executive Vice President and
General Counsel
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT NAME LOCATION
- --------------- -------------- ----------
<S> <C> <C>
23.1 Consent of Arthur Andersen LLP. Filed herewith.
99.1 Financial Statements of Transaction Network Incorporated by reference to Item 8 of
Services, Inc. for the year ended December 31, Transaction Network Services, Inc.'s Annual
1998. Report on Form 10-K for the year ended
December 31, 1998 (File No. 0-23856).
99.2 Financial Statements of Transaction Network Incorporated by reference to Item 1 of
Services, Inc. for the quarter ended March 31, Transaction Network Services, Inc.'s Quarterly
1999. Report on Form 10-Q for the quarter ended
March 31, 1999 (File No. 0-23856).
99.3 Financial Statements of Transaction Network Incorporated by reference to Item 1 of
Services, Inc. for the quarter ended June 30, Transaction Network Services, Inc.'s Quarterly
1999. Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 0-23856).
99.4 PSINet Inc. Unaudited Pro Forma Consolidated Filed herewith.
Financial Information.
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this 8-K of our reports dated February 10, 1999, included in
Transaction Network Services, Inc. Form 10-K for the year ended December 31,
1998, into PSINet Inc.'s previously filed Registration Statements on Form S-8
(Nos. 33-98314, 33-98316, 33-98318, 33-98320, 33-99464, 33-99466, 33-99470,
333-04008 and 333-82811), on Form S-4 (Nos. 333-68385, 333-51491 and
333-79351) and on Form S-3 (No. 333-48663).
/s/ ARTHUR ANDERSEN LLP
Vienna, VA
September 15, 1999
<PAGE>
Exhibit 99.4
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet as of
June 30, 1999 and the unaudited pro forma consolidated statements
of operations for the year ended December 31, 1998 and for the six months
ended June 30, 1999 ("Pro Forma Financial Information") present the pro forma
effect of certain acquisitions and a capital raising activity of PSINet Inc.
since January 1, 1998.
The objective of Pro Forma Financial Information is to provide
investors with information about the continuing impact of particular
completed or probable transactions by indicating how the transactions might
have affected historical financial statements had they occurred at an earlier
date.
On August 22, 1999, PSINet entered into a definitive agreement
("Merger Agreement") to acquire Transaction Network Services, Inc. (NYSE:
TNI). TNI will be merged with and into a wholly-owned subsidiary of PSINet.
Under the terms of the Merger Agreement, the aggregate consideration to be
paid to TNI shareholders consists of up to $351.0 million in cash and up to
7.8 million shares (assuming the exercise of approximately 2.4 million
currently exercisable TNI stock options) of PSINet common stock (which
represents an aggregate value of up to approximately $707.3 million, assuming
a price per share of PSINet common stock of $45.719); additionally, PSINet
will repay the $62.0 million of obligations outstanding under TNI's Revolving
Credit Facility (such transactions are hereinafter collectively referred to
as the "TNI merger"). The source of the cash consideration for the TNI merger
and the cash for the repayment of the TNI Revolving Credit Facility
obligation will be from cash on hand. TNI shareholders may elect to receive
cash, PSINet stock, or both cash and shares, subject to certain adjustments.
The amount of cash paid and shares of PSINet stock issued in the TNI merger
are contingent upon the ultimate number of outstanding TNI stock options
exercised prior to closing. PSINet does not believe that any change in the
consideration paid would materially impact the Pro Forma Financial
Information presented herein, and accordingly, alternative presentations have
not been included. Completion of the TNI merger is subject to a number of
conditions, including receipt of TNI shareholder approval and regulatory
approvals.
In addition to the TNI transaction, PSINet has made the following
other acquisitions subsequent to December 31, 1997 (through August 31, 1999):
<TABLE>
<CAPTION>
DATE OF
NAME OF ACQUIRED COMPANY ACQUISITION PRINCIPAL MARKET
- ------------------------ ----------- ----------------
<S> <C> <C>
Internet Prolink S.A......................................... 1/98* Switzerland
iSTAR internet inc.("iSTAR").................................. 2/98 Canada
Interactive Telephony Limited................................. 4/98* Jersey, Channel Islands
Interactive Networx GmbH ("INX").............................. 5/98 Germany
ioNET Internetworking Services ("ioNet")...................... 6/98 U.S.
LinkAge Online Limited ("LinkAge")............................ 6/98 Hong Kong
SCII-CalvaPro................................................. 6/98* Sub-Sahara Africa
INTERLOG Internet Services, Inc. ("Interlog")................. 7/98 Canada
Rimnet Corporation ("Rimnet")................................. 8/98 Japan
TWICS Co., Ltd................................................ 9/98* Japan
Hong Kong Internet & Gateway Services......................... 9/98* Hong Kong
iNet, Inc.("iNet")............................................ 9/98 Korea
Tokyo Internet Corporation ("Tokyo Internet")................. 10/98 Japan
The Unix Group B.V............................................ 10/98* Netherlands
AsiaNet Limited.............................................. 11/98* Hong Kong
Spider Net Limited............................................ 12/98* Hong Kong
Huge Net Limited.............................................. 12/98* Hong Kong
Planete.net S.A.R.L. ("Planete.net").......................... 2/99 France
Satelnet S.A. ("Satelnet").................................... 2/99 France
TeleLinx Ltd. ("TeleLinx") ................................... 2/99 U.K.
Horizontes Internet Ltda ("Horizontes")....................... 4/99 Brazil
Wavis Equipamentos de Informatica Ltda ("Openlink")........... 4/99 Brazil
Sao Paulo On-Line Ltda ("STI")................................ 5/99 Brazil
Internet de Mexico S.A. de C.V. ("Internet de Mexico")........ 5/99 Mexico
Datanet S.A. de C.V. ("Datanet").............................. 5/99 Mexico
The Internet Company ("TIC").................................. 5/99 Switzerland
Caribbean Internet Service Corp. ("Caribenet")................ 6/99 U.S. (Puerto Rico)
The Internet Access Company ("TIAC").......................... 6/99 U.S.
Argentina On-Line S.A. ("Argentina On-Line").................. 6/99* Argentina
CSO.net Telecom Services GmbH ("CSO.net")..................... 6/99* Austria
Intercomputer, S.A. and Intercomputer Soft, S.A. ("Intercomputer") 7/99 Spain
ABAFoRUM S.A.................................................. 7/99* Spain
Netwing EDV-Dienstleistungs GmbH.............................. 7/99* Austria
Netsystem S.A. ............................................... 8/99* Argentina
Domain Acesso e Servicos Internet Ltda ....................... 8/99* Brazil
Netline Communicaciones S.A. ................................. 8/99* Chile
Sinfonet, S.A. ............................................... 8/99* Panama
</TABLE>
- -----------------
<PAGE>
* Due to the immaterial nature of the acquired companies' financial position
and results of operations to PSINet's consolidated financial position and
consolidated results of operations, the following Unaudited Pro Forma
Consolidated Statements of Operations for the year ended December 31, 1998
and the six months ended June 30, 1999 do not include the pro forma effect
for these acquisitions. The results of operations from the acquisitions are
included in PSINet's historical operations from the respective dates of
acquisition, and acquisitions consummated prior to June 30, 1999 are included
in the historical balance sheet of PSINet.
During July 1999, PSINet issued $1.05 billion and euro 150.0 million
($157.6 million, using an exchange rate of $1.00: euro .9520 as of the
issuance date) aggregate principal amount of 11% senior notes due 2009 (the
"11% Senior Notes"). PSINet intends to use the net proceeds from the 11%
Senior Notes for general corporate purposes including certain capital
expenditures.
On September 10, 1998, TNI acquired from AT&T Corp. ("AT&T") the
right to provide services under certain customer service contracts and
certain related equipment relating to AT&T's Transaction Access Services
("TAS Acquisition") for approximately $64.3 million in cash, which materially
changed TNI's business. For accounting and reporting purposes, the TAS
Acquisition was considered to be an acquisition of a business.
The following Unaudited Pro Forma Consolidated Balance Sheet at June
30, 1999 presents, on a pro forma basis, PSINet's consolidated financial
position assuming each of the following had occurred on June 30, 1999: (i)
the TNI merger, (ii) PSINet's acquisition of Intercomputer, and (iii) the
issuance by PSINet of the 11% Senior Notes and the application of the net
proceeds therefrom.
The following Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1998 presents, on a pro forma basis, PSINet's
consolidated results of operations assuming each of the following had occurred
on January 1, 1998:
(1) the TNI merger;
(2) the TAS Acquisition, assuming that the TAS operations were
conducted under TNI's Communications Services Agreement with
AT&T and assuming the elimination of certain AT&T costs
allocated to TAS;
(3) PSINet's acquisitions of iSTAR, INX, ioNET, LinkAge, Interlog,
Rimnet, Inet and Tokyo Internet (the "Other 1998
Acquisitions") and the acquisitions of Planete.net, Satelnet,
TeleLinx, Horizontes, Openlink, STI, Internet de Mexico,
Datanet, TIC, Caribenet, TIAC and Intercomputer (the "Other
1999 Acquisitions" and, collectively with the Other 1998
Acquisitions, the "Other Acquisitions"); and
(4) the issuance by PSINet of the 11% Senior Notes.
The following Unaudited Pro Forma Consolidated Statement of Operations
for the six months ended June 30, 1999 presents, on a pro forma basis, PSINet's
consolidated results of operations assuming each of the following had occurred
on January 1, 1998:
(1) the TNI merger;
(2) the Other 1999 Acquisitions; and
(3) the issuance by PSINet of the 11% Senior Notes.
The acquisition of TNI will be accounted for as a purchase business
combination and, accordingly, the purchase price of TNI has been
preliminarily 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. The consolidated retained deficit reflected in the
Unaudited Pro Forma Consolidated Balance Sheet includes the non-recurring
write-off of acquired in-process research and development associated with the
acquisition of TNI. PSINet has undertaken a study by an independent third
party to determine the allocation of the total purchase price of the TNI
merger to the various assets acquired, including in-process research and
development, and the liabilities assumed, which study is not yet complete.
Based upon a preliminary valuation, the value of purchased in-process
research and development is estimated to be $35.0 million. The portion of the
purchase price allocated to in-process research and development will be
recognized as a charge against income in PSINet's financial statements for
the period in which the TNI merger closes, which is expected to be the fourth
quarter of 1999.
Each of the Other Acquisitions and TNI's acquisition of TAS were paid
for in cash and have been accounted for as purchase business combinations
and, accordingly, the purchase price has been allocated to tangible assets
acquired and liabilities assumed, based upon their respective fair values,
with the excess allocated to intangible assets to be amortized over the
estimated economic lives of the intangible assets from the respective dates
of acquisition. For the Other 1999 Acquisitions, PSINet has recorded a
preliminary purchase price allocation and management does not believe the
final allocation will be materially different.
<PAGE>
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 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. The Pro Forma Financial
Information should be read in conjunction with PSINet's Consolidated
Financial Statements and notes thereto, and TNI's Consolidated Financial
Statements and notes thereto which are incorporated by reference in this Form
8-K.
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TRANSACTION TRANSACTION
NETWORK TRANSACTION NETWORK
PSINET INC. SERVICES INC. ACCESS SERVICE SERVICES INC.
CONSOLIDATED CONSOLIDATED ACQUISITION ADJUSTMENTS
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 259,636 $ 101,906 $ 40,259 $ --
Operating costs and expenses:
Data communications and operations 199,372 68,361 24,749 --
Sales and marketing 57,026 3,895 -- --
General and administrative 45,288 8,579 -- --
Depreciation and amortization 63,424 10,783 3,402 44,737 (a)
Charge for acquired in-process R&D 70,800 -- -- --
------------------------------------------------------------------
Total operating costs and expenses 435,910 91,618 28,151 44,737
------------------------------------------------------------------
Income(loss) from operations (176,274) 10,288 12,108 (44,737)
Interest expense (63,914) (1,205) (2,566) 2,534 (b)
Interest income 19,638 1,532 -- --
Other income(expense), net 6,833 -- -- --
Non-recurring arbitration charge (49,000) -- -- --
------------------------------------------------------------------
Income(loss) before income taxes,
equity in earnings of affiliate and
minority interest (262,717) 10,615 9,542 (42,203)
Income tax benefit(expense) 848 (4,425) (3,698) 8,123 (f)
Equity in earnings of unconsolidated affiliate -- 356 -- --
Minority interest in net loss of consolidated
subsidiary -- 319 -- --
------------------------------------------------------------------
Net income(loss) (261,869) 6,865 5,844 (34,080)
Return to preferred shareholders (3,079) -- -- --
------------------------------------------------------------------
Net income(loss) available to common shareholders $(264,948) $ 6,865 $ 5,844 $(34,080)
------------------------------------------------------------------
------------------------------------------------------------------
Basic and diluted loss per share $ (5.32)
----------
----------
Shares used in computing basic and diluted
loss per share 49,806 7,800 (c)
---------- -----
---------- -----
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA FOR
TRANSACTION
NETWORK
SERVICES INC. OTHER OTHER
ACQUISITION ACQUISITIONS ADJUSTMENTS PRO FORMA
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 401,801 $ 111,276 $ -- $ 513,077
Operating costs and expenses:
Data communications and operations 292,482 67,162 -- 359,644
Sales and marketing 60,921 11,760 -- 72,681
General and administrative 53,867 28,876 -- 82,743
Depreciation and amortization 122,346 8,973 28,117 (a) 159,436
Charge for acquired in-process R&D 70,800 -- -- 70,800
------------------------------------------------------------------
Total operating costs and expenses 600,416 116,771 28,117 745,304
------------------------------------------------------------------
Income(loss) from operations (198,615) (5,495) (28,117) (232,227)
Interest expense (65,151) (3,147) (139,073)(b) (207,371)
Interest income 21,170 272 -- 21,442
Other income(expense), net 6,833 (500) -- 6,333
Non-recurring arbitration charge (49,000) -- -- (49,000)
------------------------------------------------------------------
Income(loss) before income taxes,
equity in earnings of affiliate and
minority interest (284,763) (8,870) (167,190) (460,823)
Income tax benefit(expense) 848 (1,680) -- (832)
Equity in earnings of unconsolidated affiliate 356 -- -- 356
Minority interest in net loss of consolidated
subsidiary 319 -- -- 319
------------------------------------------------------------------
Net income(loss) (283,240) (10,550) (167,190) (460,980)
Return to preferred shareholders (3,079) -- -- (3,079)
------------------------------------------------------------------
Net income(loss) available to common shareholders $(286,319) $ (10,550) $(167,190) $(464,059)
------------------------------------------------------------------
------------------------------------------------------------------
Basic and diluted loss per share $ (8.06)
---------
---------
Shares used in computing basic and diluted
loss per share 57,606
---------
---------
</TABLE>
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR
TRANSACTION TRANSACTION
NETWORK TRANSACTION NETWORK NETWORK
PSINET INC. SERVICES INC. SERVICES INC. SERVICES INC.
CONSOLIDATED CONSOLIDATED ADJUSTMENTS ACQUISITION
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 228,668 $ 80,827 $ -- $ 309,495
Operating costs and expenses:
Data communications and operations 162,341 53,827 -- 216,168
Sales and marketing 40,505 3,497 -- 44,002
General and administrative 32,469 5,523 -- 37,992
Depreciation and amortization 61,210 9,266 22,369 (d) 92,845
Impairment of assets -- 919 -- 919
--------------------------------------------------------------------
Total operating costs and expenses 296,525 73,032 22,369 391,926
--------------------------------------------------------------------
Income(loss) from operations (67,857) 7,795 (22,369) (82,431)
Interest expense (61,486) (1,925) 1,783 (e) (61,628)
Interest income 12,798 874 -- 13,672
Other income(expense), net (358) -- -- (358)
Non-recurring arbitration charge -- -- -- --
--------------------------------------------------------------------
Income(loss) before income taxes,
equity in earnings of affiliate and
minority interest (116,903) 6,744 (20,586) (130,745)
Income tax benefit(expense) 450 (2,552) 2,552 (f) 450
Equity in earnings of unconsolidated affiliate -- 93 93
Minority interest in net loss of consolidated
subsidiary -- (128) -- (128)
--------------------------------------------------------------------
Net income (loss) (116,453) 4,157 (18,034) (130,330)
Return to preferred shareholders (4,797) -- -- (4,797)
--------------------------------------------------------------------
Net income (loss) available to common shareholders $(121,250) $ 4,157 $(18,034) $(135,127)
--------------------------------------------------------------------
--------------------------------------------------------------------
Basic and diluted loss per share $ (2.10)
----------
----------
Shares used in computing basic and diluted
loss per share 57,657 7,800 (c)
---------- -------
---------- -------
</TABLE>
<TABLE>
<CAPTION>
OTHER OTHER
ACQUISITIONS ADJUSTMENTS PRO FORMA
------------------------------------------------
<S> <C> <C> <C>
Revenue $ 19,691 $ -- $ 329,186
Operating costs and expenses:
Data communications and operations 8,844 -- 225,012
Sales and marketing 1,906 -- 45,908
General and administrative 5,812 -- 43,804
Depreciation and amortization 1,534 4,590 (d) 98,969
Impairment of assets -- -- 919
------------------------------------------------
Total operating costs and expenses 18,096 4,590 414,612
------------------------------------------------
Income(loss) from operations 1,595 (4,590) (85,426)
Interest expense (410) (68,545)(e) (130,583)
Interest income 110 -- 13,782
Other income(expense), net (110) -- (468)
Non-recurring arbitration charge -- -- --
------------------------------------------------
Income(loss) before income taxes,
equity in earnings of affiliate and
minority interest 1,185 (73,135) (202,695)
Income tax benefit(expense) (803) -- (353)
Equity in earnings of unconsolidated affiliate -- -- 93
Minority interest in net loss of consolidated
subsidiary -- -- (128)
------------------------------------------------
Net income (loss) 382 (73,135) (203,083)
Return to preferred shareholders -- -- (4,797)
------------------------------------------------
Net income (loss) available to common shareholders $ 382 $(73,135) $(207,880)
------------------------------------------------
------------------------------------------------
Basic and diluted loss per share $ (3.18)
----------
----------
Shares used in computing basic and diluted
loss per share 65,457
----------
----------
</TABLE>
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 30, 1999
NOTE 1--PRO FORMA ADJUSTMENTS
The pro forma adjustments outlined below present separate adjustments
related to the acquisition of TNI 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 20 years from the
respective dates of acquisition. In conjunction with the acquisition of TNI,
PSINet has recorded $72.8 million of net deferred tax liabilities.
PSINet has recently engaged an independent third party to determine
the allocation of the total purchase price of TNI. Until the study is
complete, preliminary estimates have been used in the development of the Pro
Forma Financial Information, including an estimate of the amount of acquired
in-process research and development that will result from this acquisition.
As of the acquisition announcement date, TNI was in the process of working on
five 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 five key research and development projects include:
- NEXT GENERATION EXCEL C2 SWITCH. This is a project to develop
a major software enhancement for controlling an Excel switch.
Although TNI purchases the Excel switch, TNI is
responsible for writing the software that controls it. This
project is expected to allow TNI to enter new markets because
the software under development may allow the same piece of
hardware to process both outbound and inbound calls. The
material technology risk associated with this project is
that the product may not be capable of supporting the large
volume of business that it must be equipped to handle. This
project, under current plans, is expected to be completed in
the first quarter of 2000.
- OUTDIAL. This is a project under development in Ireland for
application in the United Kingdom. This product is designed
to give TNI's network access controllers the ability to
originate calls. This technology is designed to allow TNI to
force the host (credit card processor) to call a merchant's
terminal for batch verification rather than the merchant
remembering to dial. This project is expected to allow TNI
to enter new markets because the software allows the same
piece of hardware to receive both outbound and inbound
calls. The material technology risk associated with this
project is that the product may not be capable of supporting
the large volume of business that it must be equipped to
handle. This project, under current plans, is expected to
be completed in the first quarter of 2000.
- NEXT GENERATION TERMINAL ADAPTOR. This is a project under
development designed to increase the speed and connectivity
of an ATM terminal. This project is expected to allow TNI
to strengthen its market share by offering customers more
features from the same piece of equipment. The material
technology risk associated with the project is that the
product may not be capable of supporting the large volume
of business that it must be equipped to handle. This project,
under current plans, is expected to be completed in the
fourth quarter of 1999.
- FRAUD ENGINE UPDATE. This is a project under development
designed to update the system by which a telephone company
verifies the billability of a long distance call originating
from a pay phone. This project is expected to allow TNI to
gain more market share through the introduction of a more
reliable product to market. The material technology risk
associated with this project is that this product is based
on an entirely new design and is currently unproven. This
project, under current plans, is expected to be completed
in the first quarter of 2000.
<PAGE>
- LOCAL NUMBER PORTABILITY. This is a project that is
designed to allow TNI to house the database against which a
telephone company verifies the billability of a long distance
call originating from a pay phone in Australia. This project
is expected to open a new market for TNI. The material
technology risk associated with this project is that the
product may not be capable of supporting the large volume of
business that it must be equipped to handle. This project,
under current plans, is expected to be completed in the first
quarter of 2000.
If none of these projects is successfully developed, TNI's and, after
completing the acquisition of TNI, 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 TNI of approximately $760.7 million to other intangible assets in
accordance with the preliminary valuation; these include: existing technology
including software, patents, unpatented technology and know-how, tradenames,
customer contracts and relationships, existing workforce and goodwill, with
useful lives from five to 20 years, and $35.0 million to purchased in-process
research and development. To the extent that a portion of the purchase price
of TNI is allocated among the other intangible assets in different
proportions, the adjustment for amortization expense for the twelve months
ended December 31, 1998 and for the six months ended June 30, 1999 would be
different. For every $1.0 million change in the amount allocated to purchased
in-process research and development, annual amortization expense reflected in
the pro forma consolidated statement of operations would change by $50,000.
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 30, 1999
FOR THE YEAR ENDED DECEMBER 31, 1998
(a) Reflects the increase in 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, including software, patents, unpatented
technology and know-how) relating to the acquisitions
included herein. The assigned lives of the acquired
intangible assets range from three to 20 years.
<TABLE>
<CAPTION>
(thousands of U.S. dollars)
TNI OTHER
---------------- ---------------
<S> <C> <C>
Amortization.................................... $ 44,737 $ 28,117
---------------- ---------------
---------------- ---------------
</TABLE>
(b) Reflects the following:
<TABLE>
(thousands of U.S. dollars)
TNI OTHER
--------- --------
<S> <C> <C>
Interest expense on the 11% Senior Notes from January 1, 1998 - December
31, 1998 (assuming an average exchange rate of $1.00: Euro .8539 .......... $ -- $134,824
Amortization of deferred financing costs associated with the 11% Senior
Notes from January 1, 1998 - December 31, 1998.............................. -- 3,421
Interest expense avoided through assumed repayment of the TNI revolving
Credit facility as of January 1, 1998....................................... (2,534) --
Other............................................................................ -- 828
--------- --------
$ (2,534) $139,073
--------- --------
--------- --------
</TABLE>
(c) 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 common stock that were
outstanding during the periods presented and assumes that
the issuance of approximately 7,800,000 shares of PSINet
common stock in connection with the acquisition of TNI had
occurred on January 1, 1998. Because all common stock
equivalents are antidilutive, basic and diluted loss per
share are the same for all periods presented.
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
SIX MONTHS ENDED JUNE 30, 1999
NOTE 1--PRO FORMA ADJUSTMENTS--(CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(d) Reflects the increase in 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, including software, patents, unpatented
technology and know-how) relating to the acquisitions
included herein. The assigned lives of the acquired
intangible assets range from three to 20 years.
<TABLE>
<CAPTION>
(thousands of U.S. dollars)
TNI OTHER
------------------- ----------------
<S> <C> <C>
Amortization.................................. $ 22,369 $ 4,590
------------------- ----------------
------------------- ----------------
</TABLE>
(e) Reflects the following:
<TABLE>
<CAPTION>
(thousands of U.S. dollars)
TNI OTHER
----- -------
<S> <C>
Interest expense on the 11% Senior Notes from January 1, 1999 -
June 30, 1999 (assuming an average exchange rate of $1.00: Euro .9178)..... $ -- $66,740
Amortization of deferred financing costs associated with the 11% Senior
Notes from January 1, 1999 - June 30, 1999................................. -- 1,710
Interest expense avoided through assumed repayment of the TNI
Revolving Credit facility as of January 1, 1998................................. (1,783) --
Other........................................................................... -- 95
--------- ------
$ (1,783) $68,545
--------- -------
--------- -------
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999
(f) Reversal of tax expense recorded by TNI and TAS as a result of
availability to offset TNI and TAS taxable income with PSINet taxable
losses for the periods presented.
</TABLE>
<PAGE>
PSINET INC.
Unaudited Pro Forma Consolidated Balance Sheet
As of June 30, 1999
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
PRO FORMA FOR
TRANSACTION TRANSACTION TRANSACTION
NETWORK NETWORK NETWORK
PSINET INC. SERVICES INC. SERVICES INC. SERVICES INC.
ASSETS CONSOLIDATED CONSOLIDATED ADJUSTMENTS ACQUISITION
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 609,987 $ 13,940 $ (350,830)(a)
(62,000)(f) $ 211,097
Restricted cash and short-term investments 144,504 -- -- 144,504
Short-term investments and marketable securities 106,369 1,216 -- 107,585
Accounts receivable, net 58,596 30,049 -- 88,645
Prepaid expenses 12,361 -- -- 12,361
Other current assets 20,513 6,390 -- 26,903
----------- --------- ----------- -----------
Total current assets 952,330 51,595 (412,830) 591,095
Property, plant and equipment, net 620,687 41,568 -- 662,255
Goodwill and other intangibles, net 373,583 84,788 (84,788)(b)
760,742 (b) 1,134,325
Other assets and deferred charges 66,859 5,184 -- 72,043
----------- --------- ----------- -----------
Total assets $ 2,013,459 $ 183,135 $ 263,124 $ 2,459,718
----------- --------- ----------- -----------
----------- --------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 78,455 $ 90 $ -- $ 78,545
Trade accounts payable 82,504 5,375 -- 87,879
Accrued payroll and related expenses 18,057 1,431 -- 19,488
Other accounts payable and accrued liabilities 54,110 16,067 17,000 (c) 87,177
Accrued interest payable 29,397 180 -- 29,577
Deferred revenue 21,306 1,243 -- 22,549
----------- --------- ----------- -----------
Total current liabilities 283,829 24,386 17,000 325,215
Long-term debt 1,141,730 62,946 (62,000)(f) 1,142,676
Deferred income taxes 4,721 -- 72,793 (g) 77,514
Other liabilities 53,252 402 -- 53,654
Minority Interest -- 2,596 -- 2,596
----------- --------- ----------- -----------
Total liabilities 1,483,532 90,330 27,793 1,601,655
----------- --------- ----------- -----------
Shareholders' equity:
Convertible preferred stock, Series C 362,434 -- -- 362,434
Common stock 648 131 (131)(d)
78 (a) 726
Capital in excess of par value 823,636 62,866 (62,866)(d)
363,058 (a)(g) 1,186,694
Accumulated earnings (deficit) (548,847) 30,680 (30,680)(d)
(35,000)(e) (583,847)
Treasury stock (2,005) -- -- (2,005)
Accumulated other comprehensive income 17,672 (872) 872 (d) 17,672
Bandwidth Asset/IRU Agreement (123,611) -- -- (123,611)
----------- --------- ----------- -----------
Total shareholders' equity 529,927 92,805 235,331 858,063
----------- --------- ----------- -----------
Total liabilities and shareholders' equity $ 2,013,459 $ 183,135 $ 263,124 $ 2,459,718
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
INTERCOMPUTER OTHER
ASSETS ACQUISITION ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents
$ 124 $ 1,173,352 (h)
(25,199)(i) $ 1,359,374
Restricted cash and short-term investments -- -- 144,504
Short-term investments and marketable securities -- -- 107,585
Accounts receivable, net 2,545 -- 91,190
Prepaid expenses 2 -- 12,363
Other current assets 94 -- 26,997
-------- ----------- -----------
Total current assets 2,765 1,148,153 1,742,013
Property, plant and equipment, net 677 -- 662,932
Goodwill and other intangibles, net
67 27,982 (i) 1,162,374
Other assets and deferred charges 85 34,209 (h) 106,337
-------- ----------- -----------
Total assets $ 3,594 $ 1,210,344 $ 3,673,656
-------- ----------- -----------
-------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 14 $ -- $ 78,559
Trade accounts payable 621 -- 88,500
Accrued payroll and related expenses 225 -- 19,713
Other accounts payable and accrued liabilities 923 -- 88,100
Accrued interest payable -- -- 29,577
Deferred revenue -- -- 22,549
-------- ----------- -----------
Total current liabilities 1,783 -- 326,998
Long-term debt 39 1,207,560 (h) 2,350,275
Deferred income taxes -- -- 77,514
Other liabilities 109 4,447 (i) 58,210
Minority Interest -- -- 2,596
-------- ----------- -----------
Total liabilities 1,931 1,212,007 2,815,593
-------- ----------- -----------
Shareholders' equity:
Convertible preferred stock, Series C -- -- 362,434
Common stock
112 (112)(j) 726
Capital in excess of par value
-- -- 1,186,694
Accumulated earnings (deficit)
1,551 (1,551)(j) (583,847)
Treasury stock -- -- (2,005)
Accumulated other comprehensive income -- -- 17,672
Bandwidth Asset/IRU Agreement -- -- (123,611)
-------- ----------- -----------
Total shareholders' equity 1,663 (1,663) 858,063
-------- ----------- -----------
Total liabilities and shareholders' equity $ 3,594 $ 1,210,344 $ 3,673,656
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
NOTE 1--PRO FORMA ADJUSTMENTS
Reflects the acquisition of TNI, including:
(a) the assumed cash paid and the issuance of 7,800,000 shares of
PSINet common stock in connection with the TNI merger
assuming the acquisition had been consummated on June 30, 1999
(the shares of PSINet common stock assume a value of $45.719
per share, based on the average of the closing price of PSINet
common stock on the Nasdaq Stock Market's National Market on
August 20, 1999 and August 23, 1999, and also assume the
exercise in full of approximately 2.4 million currently
exercisable TNI stock options).
(b) the preliminary allocation of the purchase price of TNI which
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, and the
elimination of existing intangible assets of TNI.
(c) the estimated closing costs and estimated purchase liabilities
associated with the TNI merger.
(d) the elimination of the TNI common stock, capital in excess of
par value, retained earnings and accumulated other
comprehensive income.
(e) the write-off from the preliminary allocation of a portion of
the purchase price of TNI to purchased in-process research and
development.
(f) the repayment of the TNI Revolving Credit Facility in
accordance with the Merger Agreement.
(g) the net deferred tax liabilities recorded in conjunction with
the TNI merger, consisting of $206.0 million of gross
deferred tax liabilities and the reversal of $126.5 million
of valuation allowance previously recorded on PSINet's
deferred tax assets. Approximately $6.7 million of PSINet's
valuation allowance has been reversed to capital in excess of
par value arising from the deferred tax asset related to
nonqualified stock options.
Reflects other adjustments including:
(h) the issuance by PSINet of the 11% Senior Notes, after giving
effect to underwriter's discounts, commissions and other
offering expenses of $34.2 million.
(i) the cash paid by PSINet for the acquisition of Intercomputer
and the increase in goodwill and other intangible assets and
acquisition liabilities, based on a preliminary allocation.
(j) the elimination of the Intercomputer equity accounts.
PSINet has recently engaged an independent third party to determine the
allocation of the total purchase price of TNI. Until the study is complete,
preliminary estimates have been used in the development of the Pro Forma
Financial Information, including an estimate of the amount of purchased
in-process research and development that will result from this acquisition. For
purposes of this Pro Forma Financial Information, PSINet has attributed the
excess of the purchase price over the acquired net tangible assets for TNI of
$760.7 million to other intangible assets in accordance with the preliminary
valuation; these include: existing technology including software, patents,
unpatented technology and know-how, tradenames, customer contracts and
relationships, existing workforce and goodwill, with useful lives from five to
20 years, and $35.0 million to purchased in-process research and development.
To the extent that a different portion of the purchase price is
allocated to in-process research and development, a different charge against
operating results, which may be material, would be recognized in the fourth
quarter of 1999, the period in which the TNI merger is expected to be
completed, with a corresponding change in the recorded amount of goodwill.
