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As filed with the Securities and Exchange Commission on April 2, 1999
Registration No. 333 -
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
PSINET INC.
(Exact name of registrant as specified in its charter)
New York 16-1353600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.[_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities Amount to be Registered Proposed Maximum Proposed Maximum Amount of Registration
to be Registered (1) Offering Price Aggregate Offering Fee
Per Security Price (2)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value (3) (3) (3)
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Preferred Stock, $.01 par value (3) (3) (3)
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Units (3) (3) (3)
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Delayed Delivery Contracts (3) (3) (3)
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Total $1,000,000,000 (3) $1,000,000,000 (4) $278,000 (5)
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(1) The securities covered by this registration statement may be sold or
otherwise distributed separately, together or as units with other securities
covered by this registration statement. This registration statement covers
offers, sales and other distributions of the securities listed in this table
from time to time at prices to be determined, and shares of preferred stock so
offered or sold that are exchangeable for or convertible into shares of common
stock or upon the exercise of common stock warrants or rights so offered, sold
or distributed. This registration statement also covers shares of preferred
stock and shares of common stock that may be offered or sold under delayed
delivery contracts pursuant to which the counterparty may be required to
purchase such securities, as well as such contracts themselves. Such contracts
would be issued with the shares of preferred stock and shares of common stock.
(2) Estimated solely for purposes of calculating the registration fee
pursuant to the provisions of Rule 457 under the Securities Act of 1933, as
amended.
(3) Not specified as to each class of securities to be registered
hereunder pursuant to General Instruction II.D. of Form S-3.
(4) The aggregate maximum offering price of all securities issued under
this registration statement will not exceed $1,000,000,000. No separate
consideration will be received for shares of preferred stock or common stock
that are issued upon conversion or exchange of shares of preferred stock
registered hereunder.
(5) Calculated under Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.
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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED APRIL 2, 1999
PROSPECTUS
PSINET INC.
COMMON STOCK
PREFERRED STOCK
_______________________________
PSINet: THE OFFER:
. We are a leading provider of By this prospectus, we may offer,
Internet access services from time to time, in one or more
and related products to series or classes, the following
businesses. securities:
. PSINet Inc. . shares of our common stock
510 Huntmar Park Drive
Herndon, Virginia 20170 . shares of our preferred stock
(703) 904-4100
The aggregate initial offering price of these "offered securities" that we
may issue under this prospectus will not exceed $1,000,000,000.
Our common stock is listed for trading on the Nasdaq Stock Market's
National Market under the symbol "PSIX." On April 1, 1999, the last reported
sale price of our common stock was $42 3/4.
We may offer the offered securities in amounts, at prices and on terms
determined at the time of the offering. We will provide you with specific terms
of the applicable offered securities in supplements to this prospectus.
_____________________________________________
You should read this prospectus and any prospectus supplement carefully before
you decide to invest. This prospectus may not be used to consummate sales of
the offered securities unless it is accompanied by a prospectus supplement
describing the method and terms of the offering of those offered securities.
Investing in the offered securities involves risks. See "Risk Factors"
beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these offered securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
_____________________________________________
__________ ___, 1999.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
THE COMPANY................................................ 3
RISK FACTORS............................................... 4
USE OF PROCEEDS............................................ 17
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED DIVIDENDS................................. 17
DESCRIPTION OF PREFERRED STOCK TO BE OFFERED
BY PROSPECTUS SUPPLEMENT................................ 18
DESCRIPTION OF CAPITAL STOCK............................... 21
DESCRIPTION OF INDEBTEDNESS................................ 26
PLAN OF DISTRIBUTION....................................... 29
LEGAL MATTERS.............................................. 30
EXPERTS.................................................... 30
DOCUMENTS INCORPORATED BY REFERENCE........................ 30
ABOUT THIS PROSPECTUS...................................... 31
WHERE YOU CAN FIND MORE INFORMATION........................ 31
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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, with operations
organized into four geographic operating segments - the U.S., Canada, Europe and
Asia. We also offer, in addition to Internet connectivity services, services
and products to businesses that enable them to maximize utilization of the
Internet in their day-to-day operations in and outside of their workplaces.
Some of these value-added services include corporate intranets, Web hosting
services that permit customers to market themselves on the Internet without
having to invest significantly in technology infrastructure and operations
staff, remote user access services that permit customers to allow their mobile
personnel to access their corporate network and systems resources in 150
countries using the Internet, multi-currency electronic commerce services,
security services and voice-over-Internet (as opposed to standard telephone)
services. 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 serve, as of December 31, 1998, approximately 54,700 business accounts,
including 168 Internet service providers. Our technologically advanced network
is connected to over 500 sites that enable customers to connect to the Internet,
called points-of-presence, in 12 countries and is connected with other large
Internet service providers at 27 points through contractual arrangements that
permit the exchange of data communications, called peering arrangements. We
believe that our scaleable Internet Protocol-optimized network, in combination
with our highly trained, around-the-clock customer care team, enables us to
deliver superior performance and reliability.
___________________
We are a New York corporation and our principal executive offices are
located at 510 Huntmar Park Drive, Herndon, Virginia 20170. Our telephone number
is (703) 904-4100.
Additional information concerning us is incorporated by reference in this
prospectus. See "Documents Incorporated by Reference" and "Where You Can Find
More Information."
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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 December 31, 1998, our total indebtedness was $1.12 billion, representing
112% of total capitalization, and our interest expense for the twelve months
ended December 31, 1998 was $63.9 million.
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 many 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 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. 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 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.
Although we have experienced revenue growth on an annual basis with revenue
increasing from $84.4 million in 1996 to $121.9 million in 1997 to $259.6
million in 1998, we have incurred losses and experienced negative earnings
before interest expense and interest income, taxes, depreciation and
amortization, other income and expense, and charge for acquired in-process
research and development ("EBITDA") during each of such periods. We expect 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 $55.1 million, $46.0 million and $264.9 million and have incurred negative
EBITDA of $28.0 million, $21.2 million and $42.1 million for each of the years
ended December 31, 1996, 1997 and 1998,
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respectively. At December 31, 1998, we had an accumulated deficit of $427.6
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 of 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 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 our 10% senior notes and
11 1/2% senior 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
many of our debt obligations, including our 10% senior notes and 11 1/2% senior
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 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, our 10% senior
notes and 11 1/2% senior 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 December 31, 1998, our
subsidiaries had approximately $133.5 million of total liabilities, including
trade payables and accrued liabilities, to which holders of our 10% senior notes
and 11 1/2% senior notes are structurally subordinated. Under the terms of
agreements evidencing our debt obligations, some of our subsidiaries are
restricted in their ability to incur debt in the future.
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. At December 31, 1998, we were
obligated to make future payments that total $103.7 million for acquisitions of
global fiber-based telecommunications bandwidth, 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, we
currently anticipate that our capital expenditures in 1999 will be consistent
with those in 1998.
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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 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 RELATING TO
DIFFICULTIES IN INTEGRATING COMBINED OPERATIONS, INCURRENCE OF ADDITIONAL DEBT
TO FINANCE ACQUISITIONS AND OPERATIONS OF ACQUIRED BUSINESSES, POTENTIAL
DISRUPTION OF OPERATIONS AND RELATED NEGATIVE IMPACT ON EARNINGS, AND INCURRENCE
OF SUBSTANTIAL EXPENSES THAT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
Growth through acquisitions represents a principal component of our
business strategy. Over the 18 months ended March 31, 1999, we acquired 20
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 acquisitions or strategic alliances. 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 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 or strategic alliances,
we could incur
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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.
OUR GROWTH AND EXPANSION MAY STRAIN OUR ABILITY TO MANAGE OUR OPERATIONS AND OUR
FINANCIAL RESOURCES
Our rapid growth has placed a strain on our administrative, operational and
financial resources and has increased demands on our systems and controls. 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 Internet Service Provider Services business unit, as well as other
business growth, may require continued enhancements to and expansion of our
network. 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.
WE FACE RISKS ASSOCIATED WITH OUR ACQUISITIONS OF BANDWIDTH FROM NETWORK
SUPPLIERS, INCLUDING OUR STRATEGIC ALLIANCE WITH IXC COMMUNICATIONS INC.,
RELATING TO OUR DEPENDENCE ON THEIR ABILITY TO SATISFY THEIR OBLIGATIONS TO US,
THE POSSIBILITY THAT WE MAY NEED TO INCUR SIGNIFICANT EXPENSES TO UTILIZE
BANDWIDTH AND THEIR ABILITY TO BUILDOUT THEIR NETWORKS UNDER CONSTRUCTION THAT
COULD ADVERSELY AFFECT OUR ABILITY TO UTILIZE ACQUIRED BANDWIDTH
We are subject to a variety of risks relating to our recent acquisitions of
fiber-based telecommunications bandwidth from our various global network
suppliers, including our strategic alliance with IXC Communications Inc., 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;
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. 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.
We cannot assure that we will be successful in overcoming these risks or
any other problems encountered in connection with our acquisitions of bandwidth.
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 continue to
expand our international presence, there are risks inherent in doing business on
an international level. Such risks include:
. 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;
. 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 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 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,
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Harold S. Wills, our President and Chief Operating Officer, and Edward D.
Postal, our Senior Vice President and Chief Financial Officer. We have
employment agreements with Messrs. Wills and Postal. 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 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. Some 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. Moreover, any failure or delay on the part of our 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 third party suppliers of hardware components.
Although we attempt to maintain a minimum of two vendors for each required
product, some 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 hardware components and telecommunications
facilities, including delays in delivery of PRI 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.
Many of the vendors from whom we purchase telecommunications bandwidth,
including the regional bell operating companies, competitive local exchange
carriers and other local exchange carriers, currently are subject to tariff
controls and other price constraints which in the future may be changed. In
addition, recently enacted legislation will produce changes in the market for
telecommunications services. These changes may affect the prices which we are
charged by the regional bell operating companies 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
Our financing arrangements are secured by substantially all of our assets
and stock of some of our subsidiaries. These financing arrangements require that
we satisfy many 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
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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
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, could be disrupted or fail, causing an interruption or decrease in
our ability to continue our operations.
We have developed detailed plans for implementing, testing and completing
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 U.S. internal systems (e.g.,
accounting, billing, customer support and network operations) to determine the
status of their Y2K compliance. The assessment of these systems has been
completed and, while some minor changes are necessary, we believe that no
material changes or modifications to our internal systems are required to
achieve Y2K compliance. Our U.S. chief information officer has developed a test
bed of our U.S. internal systems to implement and complete testing of the
requisite minor changes. We anticipate that our U.S. internal systems will be
Y2K ready by June 30, 1999. We are in the process of completing an inventory of
our internal systems that we use in Canada, United Kingdom, Europe and Asia to
determine the status of their Y2K compliance. Each international office has
plans in place to test, upgrade or, if necessary, replace components of its
internal systems to ensure they are Y2K compliant. We anticipate that our
international operations will be Y2K compliant by the end of the third quarter
of 1999. To help ensure that our network operations and services to our
customers are not interrupted due to the Y2K problem, we have established a
network operations team that meets weekly to examine our network on a worldwide
basis. This team of operational staff have conducted inventories of our network
equipment (software and hardware) and have found no material Y2K compliance
issues. We believe that all equipment currently being purchased for use in the
PSINet network is Y2K compliant. Any existing equipment that is not Y2K
compliant is planned to be made Y2K compliant through minor changes to the
software or hardware or, in limited instances, replacement of the equipment. We
anticipate that our network will be Y2K compliant by the end of the second
quarter of 1999. In addition to administering the implementation of necessary
upgrades for Y2K compliance, our network team is developing a contingency plan
to address any potential problems that may occur with our network as we enter
the year 2000. We believe that, as a result of our detailed assessment and
completed modifications, the Y2K issue will not pose significant operational
problems for us. However, if the requisite modifications and conversions are
not made, or not completed in a timely fashion, it is possible that the Y2K
problem could have a material impact on our operations.
Our cost of addressing Y2K issues has been minor to date, less than 5% of
our information technology and network operations budgets, but this amount may
increase if additional outside consultants or personnel resources are required
or if important operational equipment must be remediated or replaced. Our
estimated total costs related to Y2K issues for 1999 is not expected to exceed
$2.0 million. These costs include equipment, consulting fees, software and
hardware upgrades, testing, remediation and, in limited instances, replacement
of equipment. 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 on hand and available from other sources and we are expensing these costs,
as appropriate. The financial impact of making all required systems changes or
other remediation efforts cannot be known precisely, 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 internal tasks to accommodate
this effort.
In addition, we have identified, prioritized and are communicating with our
suppliers, vendors, customers, lenders and other material third parties to
determine their Y2K status and any probable impact on us. To date, our
inquiries have not revealed any significant Y2K noncompliance issue affecting
our material third parties. We will continue to monitor and evaluate our long-
term relationships with our material third parties based on their responses to
our inquiries and on information learned from other sources. If any of our
material third parties are not Y2K
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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 any of our material third parties experience significant 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, U.S. and non-
U.S., to be Y2K ready in stages during 1999, we and our customers who
communicate internationally will be dependent upon the Y2K-readiness of many
non-U.S. 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 our revenues and business and that
of our customers. While many of these risks are outside our control, we have
identified and contacted our critical third party vendors and suppliers and are
establishing contingency plans to remedy any potential interruption to our
operations.
While we believe that we are adequately addressing the Y2K issue, we can
not assure that our Y2K compliance effort will prevent every potential
interruption 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 completed a contingency plan to handle a worst case
scenario. We expect to have such contingency plan in place by September 30,
1999.
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, 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' purchase of the internetMCI assets, the
Intermedia/DIGEX merger, GTE's acquisition of BBN, Global Crossing's recently
announced plans to acquire Frontier Corp. (and Frontier's acquisition of Global
Center) and AT&T's purchase of IBM's global communications
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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 recent acquisition of Netscape
Communications Corporation and related strategic alliance with Sun Microsystems
will 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.
TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS COULD RESULT IN OUR
COMPETITORS DEVELOPING OR OBTAINING ACCESS TO BANDWIDTH AND TECHNOLOGIES THAT
CARRY MORE INFORMATION FASTER THAN OUR BANDWIDTH AND TECHNOLOGY AND,
CONSEQUENTLY, RENDER OUR BANDWIDTH OR TECHNOLOGY OBSOLETE
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.
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
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technologies that could likewise render many 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,
many 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.
WE MAY BE LIABLE 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 some circumstances, be
subject to damages for copying or distributing copyrighted materials. 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 some 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 us.
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 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 some services
offered over the Internet, such as phone-to-phone Internet protocol telephony,
may be functionally 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 not assure 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
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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
certification in Colorado and Texas, has applied for competitive local exchange
carrier certification in Maryland, Virginia, California and New York, and is
considering the financial, regulatory and operational implications of becoming a
competitive local exchange carrier in 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.
An important issue for competitive local exchange carriers 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. In October 1998, the FCC
determined that dedicated Digital Subscriber Line service is an interstate
service and properly tariffed at the interstate level. In February 1999, the FCC
concluded that at least a substantial portion of dial-up Internet service
provider traffic is jurisdictionally interstate. The FCC also concluded that its
jurisdictional decision does not alter the exemption from access charges
currently enjoyed by Internet service providers. The FCC established a
proceeding to consider an appropriate compensation mechanism for interstate
Internet traffic. Pending the adoption of that mechanism, the FCC saw no reason
to interfere with existing interconnection agreements and reciprocal
compensation arrangements. The FCC order has been appealed. There can be no
assurance that any future court, state regulatory or FCC decision on this matter
will favor our position. An unfavorable result may have an adverse impact on our
potential future revenues as a competitive local exchange carrier, as well as
increasing our costs for PRIs generally.
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 to protect us against losses due to property damage
and business interruption. 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 many
services, we have also contractually limited liability to a usage 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.
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ALTHOUGH WE HAVE IMPLEMENTED NETWORK SECURITY MEASURES, OUR NETWORK MAY BE
SUSCEPTIBLE TO VIRUSES, BREAK-INS OR DISRUPTIONS
We have implemented many 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 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
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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 WILL RETAIN A SIGNIFICANT AMOUNT OF DISCRETIONARY AUTHORITY OVER THE USE OF
NET PROCEEDS OF THE OFFERING
We will retain a significant amount of discretion over the application of
the net proceeds of the offering of the securities. Because of the number and
variability of factors that determine our use of the net proceeds of the
offering, 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 offering in short-term investment grade and
government securities. See "Use of Proceeds."
THE MARKET PRICE AND TRADING VOLUME OF OUR STOCK MAY BE VOLATILE
The market price and trading volume of our common stock has been and may
continue to be highly volatile. Factors such as variations in our revenue,
earnings and cash flow and announcements of new service offerings, technological
innovations, strategic alliances and/or acquisitions involving our competitors
or price reductions by us, our competitors or providers of alternative services
could cause the market price of our common stock to fluctuate substantially. In
addition, the stock markets recently have experienced significant price and
volume fluctuations that particularly have affected technology-based companies
and resulted in changes in the market prices of the stocks of many companies
that have not been directly related to the operating performance of those
companies. Such broad market fluctuations have adversely affected and may
continue to adversely affect the market price of our common stock.
WE DO NOT ANTICIPATE THAT WE WILL PAY CASH DIVIDENDS ON OUR COMMON STOCK
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. In addition, our debt securities and credit facility contain
limitations on our ability to declare and pay cash dividends.
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 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 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
Unless otherwise described in an applicable prospectus supplement, the
proceeds from the sale of securities offered by this prospectus and each
prospectus supplement will be used to repay certain indebtedness, for general
corporate purposes and for possible acquisitions of businesses,
telecommunications bandwidth and other assets.
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED DIVIDENDS
For purposes of computing the ratio of earnings to combined fixed charges
and preferred dividends, earnings consist of losses before income taxes, equity
in loss of affiliate and fixed charges (interest charges and preferred dividend
requirements of subsidiaries, adjusted to a pretax basis). 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).
Due to operating losses, we have a deficiency of earnings to cover combined
fixed charges and preferred dividends for the periods indicated (in thousands of
U.S. dollars):
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Deficiency of earnings to cover
combined fixed charges and
preferred dividends $ (5,307) $ (52,956) $ (54,449) $ (46,489) $ (265,796)
========= ========== ========== ========== ===========
</TABLE>
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DESCRIPTION OF PREFERRED STOCK TO BE
OFFERED BY PROSPECTUS SUPPLEMENT
We may issue from time to time under the registration statement of which
this prospectus is a part shares of one or more series of our preferred stock.
The following description summarizes general terms and provisions of the
preferred stock to which any prospectus supplement may relate. The particular
terms of any series of preferred stock and the extent to which these general
provisions may apply to the series of preferred stock so offered will be
described in the prospectus supplement relating to such preferred stock. The
following summary of general provisions of the preferred stock does not purport
to be complete, and is qualified in its entirety by reference to the provisions
of our Certificate of Incorporation, including the amendment to our Certificate
of Incorporation relating to a specific series of the preferred stock, which
will be filed as an exhibit to, or incorporated by reference in, the
registration statement of which this prospectus is a part.
GENERAL
Under our Certificate of Incorporation, we have the authority to issue up
to 30,000,000 shares of our preferred stock par value $.01 per share. As of the
date of this prospectus, 1,000,000 shares of our preferred stock were designated
as Series A Junior Participating Preferred Stock in connection with our
Shareholder Rights Plan, of which none have been issued. For a description of
the relative rights, preferences, privileges and restrictions of the previously
designated series of our preferred stock, see "Description of Capital Stock -
Preferred Stock."
Our Board of Directors is authorized to issue shares of our preferred
stock, in one or more series, and to fix the rights, preferences, privileges and
restrictions of such series and such other qualifications, limitations or
restrictions as are permitted by the New York Business Corporation Law.
Our Board of Directors is authorized to determine for each series of
preferred stock, and the prospectus supplement with respect to each such series
shall set forth the following:
(1) the designation of such shares and the number of shares that
constitute such series;
(2) the dividend rate, or the method of calculation thereof, if any,
on the shares of such series and the priority as to payment of dividends
with respect to other classes or series of our capital stock;
(3) the dividend periods, or the method of calculation thereof;
(4) the voting rights of the shares;
(5) the liquidation preference and the priority as to payment upon
liquidation, dissolution or winding-up of PSINet;
(6) whether or not and on what terms the shares of such series will
be subject to redemption or repurchase at our option;
(7) whether and on what terms the shares of such series will be
convertible into or exchangeable for other debt or equity securities;
(8) whether the shares of such series of preferred stock will be
listed on a securities exchange;
(9) any special United States Federal income tax considerations
applicable to such series; and
(10) the other rights and privileges, if any, of such series.
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DIVIDENDS
Holders of shares of our preferred stock shall be entitled to receive,
when, as and if declared by our Board of Directors out of our funds legally
available therefor, dividends payable in cash or such other property and at such
dates and such rates, if any, as may be set forth in the applicable prospectus
supplement.
Unless otherwise set forth in the applicable prospectus supplement, each
series of our preferred stock will rank junior as to dividends to any shares of
our preferred stock that may be issued in the future that is expressly senior as
to dividends to such preferred stock. Unless otherwise set forth in the
applicable prospectus supplement, no dividends, other than in shares of our
common stock or other capital stock ranking junior to the preferred stock of any
series as to dividends and upon liquidation, shall be declared or paid or set
aside for payment, nor shall any other distribution be declared or made upon our
common stock, or any other shares of our capital stock ranking junior to or on a
parity with the preferred stock of such series as to dividends, nor shall any
common stock or any other shares of our capital stock ranking junior to or on a
parity with the preferred stock of such series as to dividends be redeemed,
purchased or otherwise acquired for any consideration, or any moneys be paid to
or made available for a sinking fund for the redemption of any shares of any
such stock, by us, except by conversion into or exchange for other shares of our
capital stock ranking junior to the preferred stock of such series as to
dividends, unless:
(1) if such series of preferred stock has a cumulative dividend, full
cumulative dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment of such dividends set apart for all past dividend periods
and the then current dividend period; and
(2) if such series of preferred stock does not have a cumulative
dividend, full dividends on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period;
provided, however, that any monies previously deposited in any sinking fund with
respect to any preferred stock in compliance with the provisions of such sinking
fund may thereafter be applied to the purchase or redemption of such preferred
stock in accordance with the terms of such sinking fund, regardless of whether
at the time of such application full cumulative dividends upon shares of the
preferred stock outstanding on the last dividend payment date shall have been
paid or declared and set apart for payment;
and provided, further, that any such junior or parity preferred stock or common
stock may be converted into or exchanged for shares of our stock ranking junior
to the preferred stock as to dividends.
The amount of dividends payable for the initial dividend period or any
period shorter than a full dividend period shall be computed on the basis of a
360-day year of twelve 30-day months. Accrued but unpaid dividends will not
bear interest.
DEPOSIT ACCOUNT
No series of preferred stock will be entitled to payments from a deposit
account, nor will the initial purchasers of preferred stock deposit any amounts
in a deposit account, except as set forth in the applicable prospectus
supplement.
CONVERTIBILITY
No series of preferred stock will be convertible into, or exchangeable for,
other securities or property, except as set forth in the applicable prospectus
supplement.
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REDEMPTION AND SINKING FUND
No series of preferred stock will be redeemable or receive the benefit of a
sinking fund, except as set forth in the applicable prospectus supplement.
LIQUIDATION RIGHTS
Unless otherwise set forth in the applicable prospectus supplement, in the
event of any liquidation, dissolution or winding-up of PSINet, the holders of
shares of each series of preferred stock will be entitled to receive out of our
assets available for distribution to stockholders, before any distribution of
assets is made to holders of (1) any other shares of our preferred stock ranking
junior to such series of preferred stock as to rights upon liquidation,
dissolution or winding-up and (2) shares of our common stock, liquidating
distributions per share in the amount of the liquidation preference specified in
the applicable prospectus supplement for such series of preferred stock plus any
dividends accrued and accumulated but unpaid to the date of final distribution;
but the holders of each series of preferred stock will not be entitled to
receive the liquidating distribution of, plus such dividends on, such shares
until the liquidation preference of any shares of our capital stock ranking
senior to such series of preferred stock as to the rights upon liquidation,
dissolution or winding-up shall have been paid, or a sum set aside therefor
sufficient to provide for payment, in full. If upon any liquidation,
dissolution or winding-up of PSINet, the amounts payable with respect to the
preferred stock, and any other shares of our preferred stock ranking as to any
such distribution on a parity with the preferred stock will share ratably in any
such distribution of assets in proportion to the full respective preferential
amount to which they are entitled. Unless otherwise specified in a prospectus
supplement for a series of preferred stock, after payment of the full amount of
the liquidating distribution to which they are entitled, the holders of shares
of preferred stock will not be entitled to any further participation in any
distribution of our assets. Unless otherwise specified in a prospectus
supplement for a series of preferred stock, neither our consolidation or merger
with another corporation nor a sale of securities by us shall be considered a
liquidation, dissolution or winding-up of PSINet.
VOTING RIGHTS
Holders of preferred stock will not have any voting rights, except as set
forth below or in the applicable prospectus supplement to which such Preferred
Stock relates or as otherwise from time to time required by law. Unless
otherwise set forth in the applicable prospectus supplement, holders of shares
of preferred stock will have one vote for each share held.
So long as any shares of any series of preferred stock remain outstanding,
we shall not, without the affirmative vote of holders of at least two-thirds of
the shares of such series of preferred stock outstanding at the time, voting
separately as a class with all other series of our preferred stock upon which
like voting rights have been converted and are exercisable:
(1) issue or increase the authorized amount of any series of our
capital stock ranking prior to the outstanding preferred stock as to
dividends or upon liquidation; or
(2) amend, alter or repeal the provisions of our Certificate of
Incorporation relating to such series of preferred stock, whether by
merger, consolidation or otherwise, so as to materially adversely affect
any power, preferred or special right of such series of preferred stock or
the holders thereof;
provided, however, that any increase in the amount of our authorized common
stock or authorized preferred stock or the creation and issuance of other series
of common stock or preferred stock ranking on a parity with or junior to the
preferred stock as to dividends and upon liquidation, dissolution or winding-up
shall not be deemed to materially adversely affect such powers, preferences or
special rights.
MISCELLANEOUS
The holders of preferred stock will have no preemptive rights. The
preferred stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable subject to Section 630 of the New
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York Business Corporation Law. Shares of preferred stock redeemed or otherwise
reacquired by us shall resume the status of authorized and unissued shares of
our preferred stock undesignated as to series, and shall be available for
subsequent issuance. There are no restrictions on repurchase or redemption of
the preferred stock while there is any arrearage on sinking fund installments,
except as may be set forth in an applicable prospectus supplement. Payment of
dividends on any series of the preferred stock are currently restricted by, and
may continue to be restricted by, the terms of loan agreements, indentures and
other transactions to which we are currently or may become a party. Any material
contractual restrictions on dividend payments will be described or incorporated
by reference in the applicable prospectus supplement.
NO OTHER RIGHTS
The shares of a series of preferred stock will not have any preferences,
voting powers or relative, participating, optional or other special rights
except as set forth above or in the applicable prospectus supplement, our
Certificate of Incorporation or as otherwise required by law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for each series of preferred stock will be
designated in the applicable prospectus supplement.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 250,000,000 shares of common
stock, par value $.01 per share, and 30,000,000 shares of preferred stock, par
value $.01 per share.
The following summary of our capital stock and provisions of our
Certificate of Incorporation, Amended and Restated By-laws, and Shareholders
Rights Plan does not purport to be complete and is qualified in its entirety by
reference to the provisions of or Certificate of Incorporation, Amended and
Restated By-laws, and Shareholders Rights Plan. Copies of our Certificate of
Incorporation, Amended and Restated By-laws, and Shareholders Rights Plan have
been filed with the Securities and Commission. See "Available Information."
COMMON STOCK
At March 31, 1999, approximately 56,298,800 shares of common stock were
outstanding. In addition, a total of approximately 11,288,706 shares of common
stock were reserved for issuance in connection with outstanding stock options,
50,000 shares were reserved for issuance in connection with outstanding warrants
to purchase common stock and a total of 1,755,823 additional shares were
reserved for issuance under our Executive Stock Option Plan, Executive Stock
Incentive Plan, Director's Stock Incentive Plan and Strategic Stock Incentive
Plan.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Holders of our
common stock are not entitled to cumulative voting rights with respect to the
election of directors and, as a consequence, minority shareholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any shares of preferred stock issued in
the future, holders of common stock are entitled to receive ratably such
dividends as may be declared from time to time by our Board of Directors out of
funds legally available for payment. In the event of a liquidation, dissolution
or winding up of PSINet, holders of our common stock are entitled to share
ratably in all of our assets remaining after payment of liabilities and the
liquidation preference of any then outstanding preferred stock. Holders of
common stock have no preemptive rights and no right to convert their common
stock into any other securities. There are no redemption or sinking fund
provisions applicable to our common stock. All shares of our common stock to be
outstanding upon completion of this offering will by fully paid and non-
assessable, subject to Section 630 of the New York Business Corporation Law.
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Under Section 630 of the New York Business Corporation Law, the ten largest
shareholders of PSINet may become personally liable for unpaid wages and debts
to our employees if our capital stock ceases to be listed on a national or an
affiliated securities association.
Our common stock is traded on The Nasdaq Stock Market under the symbol
"PSIX."
PREFERRED STOCK
Our Board of Directors has the authority to issue up to 30,000,000 shares
of our preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of such series, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by shareholders.
As of the date of this prospectus, 1,000,000 shares of our preferred stock were
designated as Series A Junior Participating Preferred Stock, $.01 per value per
share, in connection with our Shareholder Rights Plan, no shares of which have
been issued. Our Board of Directors may designate and authorize the issuance of
new series of our preferred stock with voting and other rights that could
adversely affect the voting power of holders of our common stock and the
likelihood that such holders will receive dividend payments and payments upon
our liquidation and could have the effect of delaying, deferring or preventing a
change in control of PSINet.
In November 1997, we issued 600,000 shares of our Series B 8% Convertible
Preferred Stock in a private placement for approximately $30.0 million. During
the first quarter of 1999, all outstanding shares of the Series B preferred
stock, which accrued dividends at an annual rate of 8%, were converted into an
aggregate of 3,000,000 shares of our common stock. As a result of this
conversion, we are no longer required to pay the 8% annual dividends under the
terms of the Series B preferred stock. Effective upon this conversion, the
formerly outstanding shares of Series B preferred stock have resumed the status
of authorized and unissued shares of our preferred stock undesignated as to
series, and are available for future issuance as described in the immediately
preceding paragraph.
For a description of general terms and provisions of one or more new series
of preferred stock which may be offered by means of a separate prospectus
supplement, see "Description of Preferred Stock To Be Offered By Prospectus
Supplement."
REGISTRATION RIGHTS
In connection with our acquisitions of InterCon Systems Corporation in June
1995 and Software Ventures Corporation in July 1995, we granted registration
rights with respect to an aggregate of approximately 1,683,819 shares of our
common stock and options to purchase 543,347 shares of our common stock issued
to former InterCon and Software Ventures shareholders. All such shares of
common stock and other securities are called the "registrable shares". Pursuant
to registration rights agreements between us and the former shareholders of
InterCon and Software Ventures, respectively, the original holders of
registrable shares or their permitted transferees are entitled to registration
rights with respect to their registrable shares. If, prior to May 8, 2000, we
propose to register any of our securities under the Securities Act of 1933, the
holders of registrable shares will be entitled to notice thereof and, subject to
restrictions, to include their registrable shares in such registration.
Furthermore, one or more holders of registrable shares may require us on up to
five occasions prior to September 30, 2006 to register their shares on Form S-3,
subject to specified conditions and limitations and provided that such holders
are not permitted to require such registration more frequently than once every
six months. The former InterCon shareholders are entitled to three demand
registrations and one Form S-3 registration; and some of the former Software
Ventures shareholders are entitled to a single demand registration and a single
Form S-3 registration, subject to specified conditions and limitations and
provided that any demand must be at an aggregate offering price to the public of
at least $1.0 million and no demand may be made within six months of a prior
demand. The right of holders of registrable shares to include their shares in
an underwritten registration is subject to the right of the underwriters to
limit the number of shares included in the offering. Subject to limitations, we
are required to bear all registration, legal (for no more than one independent
legal counsel for all selling holders of registrable shares) and other expenses
in connection with these registrations, other than underwriting discounts and
commissions, and must provide appropriate indemnification. These registration
rights rank ratably.
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In connection with the private placement of our Series B preferred stock,
we granted registration rights to the holders of our Series B preferred stock
with respect to 600,000 shares of Series B preferred stock, which were recently
converted into an aggregate of 3,000,000 shares of our common stock. These
registration rights rank ratably with and are substantially similar to those
described in the immediately preceding paragraph, except that we were required
to file a registration statement on Form S-3 with respect to the shares of
common stock issuable upon conversion of the Series B Preferred Stock pursuant
to demand registration rights exercised by the holders of the Series B Preferred
Stock, which registration statement was declared effective by the Securities and
Exchange Commission on April 24, 1998, and at any time prior to November 17,
2000 when that registration statement is not effective, the former holders of
Series B Preferred Stock may be entitled to notice and piggyback registration
rights, which are not subject to an underwriter's cutback.
In connection with the transactions contemplated by the IRU Purchase
Agreement between us and IXC, we granted registration rights to IXC with respect
to 10,165,779 shares of our common stock issued to IXC. These registration
rights rank ratably with and are substantially similar to those described in the
immediately preceding two paragraphs except that IXC is entitled to notice and
piggyback registration rights at any time, IXC may make up to three separate
demands to have us file a registration statement under the Securities Act of
1933 with respect to an underwritten public offering, and IXC is entitled to one
demand registration on Form S-3 every six months.
No holder of registration rights exercised its rights in respect of the
registration of the securities offered pursuant to this prospectus.
NEW YORK ANTI-TAKEOVER LAW, CERTAIN CHARTER AND BY-LAW PROVISIONS AND OTHER
ANTI-TAKEOVER CONSIDERATIONS
As a New York corporation, we are subject to the provisions of Section 912
of the New York Business Corporation Law and will continue to be so subject if
and for so long as we have a class of securities registered under Section 12 of
the Securities Exchange Act of 1934, at least 25% of our total employees are
employed primarily within New York or at least 250 employees are so employed and
at least 10% of our voting stock is owned beneficially by residents of the State
of New York. Section 912 provides, with certain exceptions, which include,
among others, transactions with shareholders who became interested prior to the
effective date of an amendment to the New York corporation's certificate of
incorporation providing that the corporation would be subject to Section 912 if
such corporation did not then have a class of stock registered pursuant to
Section 12 of the Exchange Act, that a New York corporation may not engage in a
"business combination" (e.g., merger, consolidation, recapitalization or
disposition of stock) with any "interested shareholder" for a period of five
years from the date that such person first became an interested shareholder
unless:
(1) the transaction resulting in a person becoming an interested
shareholder, or the business combination, was approved by the board of
directors of the corporation prior to that person becoming an interested
shareholder;
(2) the business combination is approved by the holders of a majority
of the outstanding voting stock not beneficially owned by such interested
shareholder; or
(3) the business combination meets certain valuation requirements for
the stock of the New York corporation.
An "interested shareholder" is defined as any person that:
(a) is the beneficial owner of 20% or more of the outstanding voting stock
a New York corporation; or
(b) is an affiliate or associate of the corporation that at any time
during the prior five years was the beneficial owner, directly or
indirectly, of 20% or more of the then outstanding voting stock.
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These provisions are likely to impose greater restrictions on an unaffiliated
shareholder than on the existing shareholders who will continue to own a
majority of our outstanding common stock after this offering.
Our Certificate of Incorporation and Amended and Restated By-laws contain
provisions intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and of the policies formulated by the
Board which may discourage a future unsolicited takeover of PSINet. These
provisions could have the effect of discouraging some attempts to acquire PSINet
or remove incumbent management, including incumbent members our Board of
Directors, even if some or a majority of our shareholders deemed such an attempt
to be in their best interests.
Our Certificate of Incorporation or Amended and Restated By-laws, as
applicable, among other things:
(1) provide that the number of directors will be not fewer than three
nor more than nine, with the exact number of directors to be determined
from time to time by resolution adopted by a majority of our Board of
Directors;
(2) provide for a classified Board of Directors consisting of two
classes of directors having staggered terms of two years each, with each of
the classes required to consist of at least three directors;
(3) subject to any rights of holders of our preferred stock which may
be granted by our Board of Directors in the future and except as otherwise
provided by Section 706(d) of the New York Business Corporation Law,
provide that directors may be removed only for cause;
(4) subject to any rights of holders of our preferred stock which may
be granted by our Board of Directors in the future, permit vacancies on the
Board of Directors that may occur between annual meetings and any newly
created seats to be filled only by the Board of Directors and not by the
shareholders;
(5) limit the right of shareholders to call special meetings of
shareholders;
(6) prohibit shareholders from proposing amendments to our
Certificate of Incorporation;
(7) require any shareholder who wished to bring any proposal before a
meeting of our shareholders or to nominate a person to serve as a director
to give written notice thereof and certain related information at least 60
days prior to the date one year from the date of our immediately preceding
annual meeting, if such proposal or nomination is to be submitted at an
annual meeting, and within ten days of the giving of notice to our
shareholders, if such proposal or nomination is to be submitted at a
special meeting;
(8) require the affirmative vote of at least two-thirds of our
capital stock entitled to vote to amend certain provisions of our
Certificate of Incorporation and to amend our Amended and Restated By-laws;
and
(9) provide that our Board of Directors, without action by our
shareholders, may issue and fix the rights and preferences of shares of our
preferred stock.
These provisions may have the effect of delaying, deferring or preventing a
change of control of PSINet without further action by our shareholders, may
discourage bids for our common stock at a premium over the market price of our
common stock and may adversely affect the market price of, and the voting and
other rights of the holders of, common stock.
SHAREHOLDER RIGHTS PLAN
Each outstanding share of our common stock has attached to it a preferred
stock purchase right (a "right"). The rights also attach to most future
issuances of common stock. Subject to exceptions, each right will entitle the
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registered holder to buy one one-thousandth of a share of our Series A preferred
stock at an exercise price of $75 per right.
Subject to exceptions, the right will become exercisable upon the
occurrence of the earlier of:
. an announcement that a person or group of affiliated or associated
persons (each, an "acquiring person") has acquired beneficial ownership of
20.50% or more of our outstanding common stock (other than persons who
acquire ownership pursuant to a tender offer or exchange offer which is for
all outstanding shares of our common stock, or persons who acquire
ownership directly from us, William L. Schrader, our Chairman and Chief
Executive Officer, or his or our affiliates so long as such persons
beneficially own less than 50% of our outstanding common stock); or
. an announcement or commencement of an intention to make a tender
offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 20.50% or more of the
outstanding shares of our common stock (the earlier of such dates being
called the "distribution date").
In such event, each holder of a right, other than rights beneficially owned by
the acquiring person, will thereafter have the right, subject to exceptions, to
receive upon exercise thereof a number of shares (or portions of shares) of
Series A preferred stock or, at the discretion of our Board of Directors, a
number of additional shares of common stock as set forth in the Rights Plan.
The acquisition of shares of our common stock by IXC or its controlled
affiliates pursuant to the IRU purchase agreement between IXC and us, however,
will not render it an acquiring person. In addition, Ralph J. Swett, the former
Chairman of IXC, will not become an acquiring person solely by reason of the
issuance or exercise of options, if any, granted to him in his capacity as a
director of PSINet.
All rights expire on June 5, 2006, unless the rights are earlier redeemed
or exchanged by us or expire earlier upon the consummation of certain
transactions. Shares of our Series A preferred stock purchasable upon exercise
of the rights will not be redeemable. Each share of Series A preferred stock
will be entitled, when, as and if declared, to an aggregate dividend of 1,000
times the dividend declared per share of our common stock. No dividend may be
declared on the common stock without the concurrent declaration of a dividend on
the Series A preferred stock. In the event of liquidation, holders of the
Series A preferred stock will be entitled to a minimum preferential liquidation
payment of $1,000 per share, plus any accrued but unpaid dividends, but will be
entitled to an aggregate payment of 1,000 times the payment made per share of
common stock; thereafter, holders of the Series A preferred stock and the
holders of common stock will share pari passu per share in any of our remaining
assets. Each share of our Series A preferred stock will have 1,000 votes,
voting together with our common stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of common stock are converted
or exchanged, each share of Series A preferred stock will be entitled to receive
1,000 times the amount received per share of common stock.
In the event that any person or group of affiliated or associated persons
becomes an acquiring person, each holder of a right, other than rights
beneficially owned by the acquiring person which will thereupon become void,
will thereafter have the right (the "flip-in right") to receive, upon exercise
of a right at the then current exercise price of the right, that number of one
one-thousandths of a share of Series A preferred stock or, in the discretion of
our Board of Directors, that number of shares of common stock or, in certain
circumstances, other of our securities, having a market value of two times the
exercise price of the right. The flip-in right provisions do not apply to a
merger or other business combination with a person who has acquired shares of
our common stock pursuant to certain transactions approved by our Board of
Directors (each, a "permitted offer").
In the event that, after a person or group has become an acquiring person,
we are acquired in a merger or other business combination transaction or 50% or
more of our consolidated assets or earning power are sold or transferred, except
pursuant to a permitted offer, proper provision will be made so that each holder
of a right, other than rights beneficially owned by an acquiring person which
will have become void, will thereafter have the right (the "flip-over right") to
receive, upon the exercise thereof at the then current exercise price of the
right, that number of shares of common stock of the person with which we have
engaged in the foregoing transaction (or its parent), which number of shares at
the time of such transaction will have a market value of two times the exercise
price of
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the right. The holder of a right will continue to have the flip-over right
whether or not such holder exercises or surrenders the flip-in right.
At any time prior to the earlier to occur of a person becoming an acquiring
person or the expiration of the rights, and under other specified circumstances,
we may redeem the rights at a redemption price of $.01 per right. We may, at our
option, pay the redemption price in shares of our common stock. After the date
that a person becomes an acquiring person, we may redeem the then outstanding
rights, at the redemption price, provided that such redemption is in connection
with a merger or other business combination transaction or series of
transactions involving us in which all holders of shares of common stock are
treated alike.
The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire us without conditioning
the offer on the rights being redeemed, a substantial number of rights being
acquired, or the offer being deemed a permitted offer under the Rights Plan.
However, the rights should not interfere with any merger or other business
combination in connection with a permitted offer or that is approved by us
because the rights are redeemable under specified circumstances.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York is the transfer agent and registrar
for our common stock. Its telephone number for such purposes is (201) 222-4099.
DESCRIPTION OF INDEBTEDNESS
The following summaries of our existing indebtedness 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 "Where You Can Find More Information."
CREDIT FACILITY
In September 1998, we 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 our 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.
Interest. Borrowings under the credit facility bear interest at our
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. Our obligations under the credit facility are
guaranteed by each existing and subsequently acquired or organized domestic
subsidiary of ours 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 our assets and the assets of each of our subsidiary
guarantors and by a pledge by us and each of our subsidiary guarantors of all
capital stock and other equity interests owned by us and such subsidiary
guarantors (65% in the case of equity interests in foreign subsidiaries).
Covenants. The credit facility contains covenants and provisions that
restrict, among other things, our and our subsidiaries' ability to:
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(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 us; and
(9) 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. 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 and the 11 1/2% senior
notes, the occurrence of a change in control (as defined in the credit facility)
and certain events of bankruptcy, insolvency and reorganization.
10% SENIOR NOTES
We have outstanding $600.0 million aggregate principal amount of our 10%
Senior Notes due 2005. The 10% senior notes are senior unsecured obligations
ranking equivalent 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 10% senior notes were issued
under an Indenture dated as of April 13, 1998 between us 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 our option,
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, we 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), we 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. We may not have sufficient funds or the
financial resources necessary to satisfy our obligations to repurchase the 10%
senior notes upon a change of control. Our credit facility prohibits us from
repurchasing any 10% senior notes upon a change of control unless we have paid
all amounts outstanding under the credit facility prior thereto.
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The 10% senior notes indenture contains certain financial covenants with
which we must comply relating to, among other things, the following matters:
(1) 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;
(2) limitation on our 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;
(3) limitation on our and our 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 of our subsidiaries 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 us or any of our other subsidiaries, making of
investments in us or any other of our subsidiaries, or transfer of any
properties or assets to us or any of our other subsidiaries, excluding
permitted encumbrances and restrictions;
(5) limitation on certain mergers, consolidations and sales of assets by
us or our subsidiaries;
(6) limitation on certain transactions with our affiliates;
(7) limitation on the ability of any or 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 on the same
terms as the guarantee of such indebtedness;
(8) limitation on certain sale and leaseback transactions by us or our
subsidiaries;
(9) limitation on certain issuances and sales of capital stock of our
subsidiaries; and
(10) limitation on the ability of us or our 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.
11 1/2% SENIOR NOTES
We have outstanding $350.0 million aggregate principal amount of our 11
1/2% senior notes due 2008. The 11 1/2% senior notes are our senior unsecured
obligations ranking equivalent 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 11 1/2% senior
notes were issued under an Indenture dated as of November 3, 1998, as amended,
between us and Wilmington Trust Company, as Trustee.
The 11 1/2% senior notes will mature on November 1, 2008. Interest on the
11 1/2% senior notes is payable semi-annually on May 1 and November 1 of each
year, commencing May 1, 1999. The 11 1/2% senior notes are redeemable at our
option, in whole or in part, at any time on or after November 1 of 2003, 2004,
2005 and 2006 at
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105.70%, 103.833%, 101.917% 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 November 1, 2001, we may redeem up to
35% of the original aggregate principal amount of the 11 1/2% senior notes at a
redemption price of 111.5% 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 11
1/2% senior notes remains outstanding immediately after such redemption. Upon
the occurrence of a change of control (as defined in the 11 1/2% senior notes
indenture), we will be required to make an offer to purchase all of the 11 1/2%
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. We may not
have sufficient funds or the financial resources necessary to satisfy our
obligations to repurchase the 11 1/2% senior notes upon a change of control. Our
credit facility prohibits us from repurchasing any 11 1/2% senior notes upon a
change of control unless we have paid all amounts outstanding under the credit
facility prior thereto.
The 11 1/2% senior notes indenture contains certain financial covenants
with which we must comply, which are substantially identical to those contained
in the indenture governing our 10% senior notes described above under "--10%
Senior Notes."
The events of default under the 11 1/2% senior notes indenture are
substantially identical to those contained in the indenture governing our 10%
senior notes described above under "--10% Senior Notes."
PLAN OF DISTRIBUTION
We may sell the securities to one or more underwriters pursuant to an
underwriting agreement for public offering and sale in the United States or
eligible foreign jurisdictions by them or may sell the securities to investors
directly or through agents. Any underwriter or agent involved in the offer and
sale of securities will be named in the applicable prospectus supplement. We
have reserved the right to sell securities directly to investors on our own
behalf in those jurisdictions where and in such manner as we are authorized to
do so.
Underwriters may offer and sell securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, or at negotiated prices. We also may,
from time to time, authorize dealers, acting as our agents, to offer and sell
securities upon the terms and conditions as are set forth in the applicable
prospectus supplement. In connection with the sale of securities, underwriters
may receive compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of the securities
for whom they may act as agent. Underwriters may sell securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Dealers and agents participating in
the distribution of securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the securities may be deemed to be underwriting discounts and
commissions. Underwriters, dealers and agents may be entitled, under agreements
entered into with us, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act of 1933.
If so indicated in a prospectus supplement, we will authorize dealers
acting as our agent to solicit offers by certain institutions to purchase the
securities from us at the public offering price set forth in the applicable
prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on the date or dates stated in such prospectus supplement.
Each contract will be for an amount not less than the amounts stated in the
applicable prospectus supplement. Institutions with whom contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions but will in all cases be subject to our
approval. Contracts will not be subject to any conditions except:
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(1) the purchase by the institution of the securities covered by its
contract shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject,
and
(2) if the securities are being sold to underwriters, we shall have
sold to such underwriters the total amount specified in the applicable
prospectus supplement.
A commission indicated in the applicable prospectus supplement will be paid to
underwriters and agents soliciting purchases of securities pursuant to contracts
accepted by us.
Underwriters and dealers may engage in passive market making transactions
in our common stock in accordance with Rule 103 of Regulation M of the
Securities and Exchange Commission. In general, a passive market maker may not
bid for or purchase shares of our common stock at a price that exceeds the
highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% or its average daily trading
volume in shares of our common stock during a specified two month prior period,
or 200 shares, whichever is greater. A passive market maker must identify
passive market making bids on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of our
common stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
LEGAL MATTERS
The validity of the securities 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 our common stock.
EXPERTS
The consolidated financial statements of PSINet Inc. as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998 incorporated by reference in this prospectus have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We are
incorporating by reference in this prospectus the following documents:
1. Our annual report on Form 10-K for our fiscal year ended December 31,
1998. This report contains:
. audited consolidated balance sheets for us and our subsidiaries
as of December 31, 1998 and 1997
. related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended
December 31, 1998, 1997 and 1996
2. Our current reports on Form 8-K dated
. July 31, 1997 (solely insofar as it relates to our Shareholder
Rights Agreement dated May 8, 1996, as amended)
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. August 20, 1997
3. Our registration statement on Form 8-A dated April 7, 1995, as amended
(registration no. 0-25812)
4. 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).
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-3 that we
filed with the SEC using a "shelf" registration process under the Securities Act
of 1933. Under the shelf process, we may, from time to time, sell any
combination of the offered securities described in this prospectus in one or
more offerings up to a total dollar amount of $1,000,000,000.
This prospectus and the accompanying prospectus supplement do not contain
all of the information included in the registration statement. We have omitted
parts of the registration statement as permitted by the rules and regulations of
the SEC. For further information, we refer you to the registration statement on
Form S-3, including its exhibits. Statements contained in this prospectus and
any accompanying prospectus supplement about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that any agreement or document be filed as an exhibit to the
registration statement, you should refer to that agreement or document for a
complete description of these matters. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of each document.
This prospectus provides you with a general description of the offered
securities. Each time we sell offered securities, we will provide a prospectus
supplement that will contain specific information about the term of that
offering. The prospectus supplement may also add, update or change any
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with the additional information described
under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy materials that we have file
with the SEC, including the registration statement, at the following SEC public
reference rooms:
Judiciary Plaza 7 World Trade Center Northwest Atrium Center
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<TABLE>
<S> <C> <C>
450 Fifth Street, N.W. Suite 1300 500 West Madison Street
Room 1024 New York, New York 10048 Suite 1400
Washington, DC 20549 Chicago, Illinois 60661
</TABLE>
You can also obtain copies of filed documents, at prescribed rates, by mail
from the Public Reference Section of the SEC at its Judiciary Plaza location,
listed above, or by telephone at 1-800-SEC-0330 or electronically through the
SEC's Web Site at http://www.sec.gov.
Our common stock is listed on the Nasdaq National Market under the symbol
"PSIX," and our SEC filings can also be read and obtained at the following
Nasdaq address:
The Nasdaq Stock Market
Reports Section
1735 K Street, N.W.
Washington, D.C. 20006
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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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses, other than underwriting
discounts and commissions, estimated to be incurred by us in connection with the
offering of the securities being registered hereunder. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee.
<TABLE>
<CAPTION>
Item Amount
---- ------
<S> <C>
Securities and Exchange Commission Registration Fee..$ 278,000
Nasdaq Listing Fee................................... 17,500
Blue Sky Fees and Expenses........................... 10,000
Printing and Engraving Expenses...................... 400,000
Legal Fees and Expenses.............................. 400,000
Transfer Agent and Registrar Fees and Expenses....... 10,000
Accounting Fees and Expenses......................... 75,000
Miscellaneous........................................ 309,500
----------
TOTAL................................................$1,500,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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
(1) 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,
(2) 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,
(3) 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
(4) 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.
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As permitted by Section 721 of the BCL, the registrant's By-laws provide
that the registrant shall indemnify its officers and directors, as such, to the
fullest extent permitted by applicable law, and that expenses reasonably
incurred by any such officer or director in connection with a threatened or
actual action or proceeding shall be advanced or promptly reimbursed by the
Registrant in advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if and to the extent that it is ultimately determined that such
officer or director is not entitled to indemnification.
Article EIGHTH of the registrant's Certificate of Incorporation provides
that no director of the Registrant shall be held personally liable to the
registrant or its shareholders for damages for any breach of duty in his
capacity as a director occurring after authorization of such Article EIGHTH by
the shareholders unless a judgment or other final adjudication adverse to him
establishes that:
(1) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, or
(2) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled, or
(3) his acts violated section 719 of the BCL.
The registrant has entered into Indemnity Agreements with its directors and
certain key officers pursuant to which the registrant generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
BCL as described above. The Company also has purchased directors' and officers'
liability insurance.
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as part of or to be
incorporated by reference in this Registration Statement.
1.1 Form of Underwriting Agreement.*
2.1 IRU and Stock Purchase Agreement dated as of July 22, 1997
between IXC Internet Services, Inc. and PSINet.
2.2 First Amendment to IRU and Stock Purchase Agreement dated as of
July 22, 1997 between IXC Internet Services, Inc. and PSINet.
2.3 Second Amendment to IRU and Stock Purchase Agreement dated as of
July 22, 1997 between IXC Internet Services, Inc. and PSINet.
2.4 Agreement dated as of November 10, 1997 between iSTAR internet
inc. and PSINet.
2.5 Pre-Acquisition Agreement between PSINet and iSTAR internet inc.,
dated December 23, 1997.
2.6 Share Purchase Agreement dated as of October 1, 1998 among PSINet
Japan Inc., a subsidiary of PSINet, Tokyo Internet Corporation
and Secom Co., Ltd.
3.1 Form of Certificate of Amendment for the new preferred stock.*
4.1 Form of 10% Senior Notes due 2005.
4.2 Indenture dated as of April 13, 1998 between the Company and
Wilmington Trust Company, as trustee.
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4.3 Indenture dated as of November 3, 1998 between the
Company and Wilmington Trust Company, as trustee.
4.4 First Supplemental Indenture dated as of November
12, 1998 between the Company and Wilmington Trust
Company, as Trustee.
4.5 Form of 11 1/2% Senior Notes due 2008, Series A,
as amended.
4.6 Form of 11 1/2% Senior Notes due 2008, Series B.
4.7 Form of Common Stock Certificate.
4.8 Form of Common Stock Certificate (name change).
4.9 Articles Fourth, Fifth, Sixth, Ninth and Tenth of
the Certificate of Incorporation of PSINet, as
amended.
4.10 Article I of the Amended and Restated By-laws of
PSINet, as amended.
4.11 Forms of Rights Agreement, dated as of May 8,
1996, between PSINet and First Chicago Trust
Company of New York, as Rights Agent, which
includes as Exhibit A - Certificate of Amendment;
Exhibit B - Form of Rights Certificate; and
Exhibit C - Summary of Rights to Purchase Shares
of Preferred Stock.
4.12 Amendment No. 1, dated as of July 21, 1997, to
Rights Agreement, dated as of May 8, 1996, between
PSINet and First Chicago Trust Company of New
York, as Rights Agent.
4.13 Amendment No. 2, dated as of July 31, 1997, to the
Rights Agreement dated as of May 8, 1996 between PSINet
and First Chicago Trust Company of New York, as Rights
Agent.
5.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP.*
7.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP
regarding tax matters (contained in Exhibit 5.1).*
12 Statements re: Computation of Ratios.
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP.*
23.2 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (included on signature page to
this Registration Statement on Form S-3).
* To be filed, as applicable to a particular offering of
securities, as an exhibit to a Current Report on Form 8-K
pursuant to Regulation S-K, Item 601(b).
** Not deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities
Exchange Act of 1934 and Section 323 of the Trust
Indenture Act of 1939 or otherwise subject to the
liabilities of such sections and not deemed part of any
registration statement to which such exhibit relates.
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ITEM 17. UNDERTAKINGS.
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, as amended;
(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
Securities and Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(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 (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, 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 Securities and Exchange
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, 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) That, for purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act, as amended, shall be
deemed to be a part of this registration statement as of the time it was
declared effective.
(5) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934, as amended), that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities
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offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, 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 Securities Act of 1933, as amended, 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
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Herndon, Commonwealth of Virginia on April 1, 1999.
PSINET INC.
By: /s/ William L. Schrader
-----------------------------------
William L. Schrader, Chairman
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints David N. Kunkel, Edward D. Postal, Michael
J. Malesardi and Kathleen B. Horne, and each or any of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933 and any and all amendments (including post-effective amendments) to this
registration statement and to any registration statement filed pursuant to Rule
462(b), and to file same, with all exhibits thereto and, other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
each said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or either of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William L. Schrader Chairman, Chief Executive Officer April 1, 1999
- ---------------------------- and Director (Principal Executive
William L. Schrader Officer)
/s/ Harold S. Wills President, Chief Operating Officer April 1, 1999
- ---------------------------- and Director
Harold S. Wills
/s/ David N. Kunkel Executive Vice President, General April 1, 1999
- ---------------------------- Counsel and Director
David N. Kunkel
/s/ Edward D. Postal Senior Vice President and Chief April 1, 1999
- ---------------------------- Financial Officer (Principal
Edward D. Postal Financial Officer)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Michael J. Malesardi Vice President and Controller April 1, 1999
- --------------------------------- (Principal Accounting Officer)
Michael J. Malesardi
/s/ William H. Baumer Director April 1, 1999
- ---------------------------------
William H. Baumer
/s/ Ralph J. Swett Director April 1, 1999
- ---------------------------------
Ralph J. Swett
/s/ Ian P. Sharp Director April 1, 1999
- ---------------------------------
Ian P. Sharp
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement *
2.1 IRU and Stock Purchase Agreement dated as of July Incorporated by reference from Exhibit 2.1 to
22, 1997 between IXC Internet Services, Inc. and Amendment No. 2 to PSINet's Quarterly Report on
PSINet Form 10-Q for the quarter ended June 30, 1996
located under Securities and Exchange
Commission File No. 0-25812
2.2 First Amendment to IRU and Stock Purchase Agreement Incorporated by reference from Exhibit A to
dated as of July 22, 1997 between IXC Internet PSINet's Proxy Statement on Schedule 14A dated
Services, Inc. and PSINet December 19, 1997 located under Securities and
Exchange Commission File No. 0-25812 ("December
1997 Proxy Statement")
2.3 Second Amendment to IRU and Stock Purchase Incorporated by reference from Exhibit A to the
Agreement dated as of July 22, 1997 between IXC December 1997 Proxy Statement
Internet Services, Inc. and PSINet
2.4 Agreement dated as of November 10, 1997 between Incorporated by reference from Exhibit 2 to
iSTAR internet inc. and PSINet PSINet's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 located under
Securities and Exchange Commission File No.
0-25812
2.5 Pre-Acquisition Agreement between PSINet and iSTAR Incorporated by reference from Exhibit 10.1 to
internet inc., dated December 23, 1997 PSINet's Current Report on Form 8-K dated
January 7, 1998 located under Securities and
Exchange Commission File No. 0-25812
2.6 Share Purchase Agreement dated as of October 1, Incorporated by reference from Exhibit 2.1 to
1998 among PSINet Japan Inc., a subsidiary of PSINet's Current Report on Form 8-K dated
PSINet, Tokyo Internet Corporation and Secom Co., October 16, 1998 located under Securities and
Ltd. Exchange Commission File No. 0-25812
3.1 Form of Certificate of Amendment for the new *
preferred stock
4.1 Form of 10% Senior Notes due 2005 Incorporated by reference from Exhibit 4.1 to
PSINet's Current Report on Form 8-K dated April
22, 1998 located under Securities and Exchange
Commission File No. 0-25812 ("April 22, 1998
8-K")
4.2 Indenture dated as of April 13, 1998 between PSINet Incorporated by reference from Exhibit 4.2 to
and Wilmington Trust Company, as Trustee the April 22, 1998 8-K
4.3 Indenture dated as of November 3, 1998 between Incorporated by reference from Exhibit 4.1 to
PSINet and Wilmington Trust Company, as Trustee PSINet's Current Report on Form 8-K dated
November 3, 1998 located under Securities and
Exchange Commission File No. 0-25812
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
4.4 First Supplemental Indenture dated as of November Incorporated by reference from Exhibit 4.1 to
12, 1998 between PSINet and Wilmington Trust PSINet's Quarterly Report on Form 10-Q for the
Company, as Trustee quarter ended September 30, 1998 located under
Securities and Exchange Commission File No.
0-25812 ("September 1998 10-Q")
4.5 Form of 11 1/2% Senior Notes due 2008, Series A, as Incorporated by reference from Exhibit 4.2 to
amended the September 1998 10-Q
4.6 Form of 11 1/2% Senior Notes due 2008, Series B Incorporated by reference from PSINet's
Registration Statement on Form S-4 declared
effective on February 16, 1999 located under
Securities and Exchange Commission File No.
333-68385
4.7 Form of Common Stock Certificate Incorporated by reference from Exhibit 4.1 to
the May 1995 Registration Statement
4.8 Form of Common Stock Certificate (name change) Incorporated by reference from Exhibit 4.1A to
PSINet's Registration Statement on Form S-1
declared effective on December 14, 1995 located
under Securities and Exchange Commission File
No. 33-99610
4.9 Articles Fourth, Fifth, Sixth, Ninth and Tenth of Incorporated by reference from Exhibit 4.3 to
the Certificate of Incorporation of PSINet, as PSINet's Annual Report on Form 10-K for the
amended fiscal year ended December 31, 1998 located
under Securities and Exchange Commission File
No. 0-25812 ("1998 10-K")
4.10 Article I of the Amended and Restated By-laws of Incorporated by reference from Exhibit 3.8 to
PSINet, as amended PSINet's 1998 10-K
4.11 Forms of Rights Agreement, dated as of May 8, 1996, Incorporated by reference from Exhibit 1 to
between PSINet and First Chicago Trust Company of PSINet's Registration Statement on Form 8-A
New York, as Rights Agent, which includes as dated June 3, 1996 located under Securities and
Exhibit A - Certificate of Amendment; Exhibit B - Exchange Commission File No. 0-25812
Form of Rights Certificate; and Exhibit C - Summary
of Rights to Purchase Shares of Preferred Stock
4.12 Amendment No. 1, dated as of July 21, 1997, to Incorporated by reference from Exhibit 4.1.1 to
Rights Agreement, dated as of May 8, 1996, between PSINet's Current Report on Form 8-K dated
PSINet and First Chicago Trust Company of New York, August 1, 1997 located under Securities and
as Rights Agent. Exchange Commission File No. 0-25812
4.13 Amendment No. 2, dated as of July 31, 1997, to Incorporated by reference from Exhibit 4.1.2 to
Rights Agreement, dated as of May 8, 1996, between PSINet's Current Report on Form 8-K dated
PSINet and First Chicago Trust Company of New York, August 20, 1997 located under Securities and
as Rights Agent. Exchange Commission File No. 0-25812
5.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP *
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
7.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP Contained in Exhibit 5.1
regarding tax matters
12 Statements re: Computation of Ratios Filed herewith
23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP Contained in Exhibit 5.1
23.2 Consent of PricewaterhouseCoopers LLP Filed herewith
24 Power of Attorney Included in Signature Pages to the Registration
Statement
</TABLE>
________________________________
* To be filed, as applicable to a particular offering of security as an exhibit
to a Current Report on Form 8-K pursuant to Registration S-K, Item 601(b).
-3-
<PAGE>
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
Loss before income taxes $ (5,342) $ (53,160) $ (55,256) $ (46,078) $ (262,717)
Equity in loss of affiliate 35 204 807 0 0
Interest expense 731 1,964 5,025 5,362 63,914
Interest portion of rental expense 230 692 1,200 1,359 4,183
--------- --------- --------- --------- ----------
Earnings/Loss (4,346) (50,300) (48,224) (39,357) (194,620)
Fixed charges:
Interest expense 731 1,964 5,025 5,362 63,914
Interest portion of rental expense 230 692 1,200 1,359 4,183
--------- --------- --------- --------- ----------
Total fixed charges 961 2,656 6,225 6,721 68,097
Preferred stock dividend
requirement (1) - - - 411 3,079
--------- --------- --------- --------- ----------
Total fixed charges and preferred
dividends $ 961 $ 2,656 $ 6,225 $ 7,132 $ 71,176
========= ========= ========= ========= ==========
Ratio of earnings to combined fixed charges and
preferred dividends - - - - -
--------- --------- --------- --------- ----------
Deficiency of earnings to cover combined fixed
charges and preferred dividends $ (5,307) $ (52,956) $ (54,449) $ (46,489) $ (265,796)
========= ========= ========= ========= ==========
</TABLE>
_________________
(1) We have loss carryforwards, therefore the preferred stock dividend
requirement has not been tax effected. Also, our Series B preferred stock
was issued in November 1997 and, therefore, there were no adjustments prior
to this date. During the first quarter of 1999, all outstanding shares of
our Series B preferred stock were converted into shares of our common stock.
As a result of this conversion, we are no longer required to pay the 8%
annual dividends under the terms of the Series B preferred stock.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated March 9, 1999, except as to Note 11,
which is as of March 25, 1999 appearing on page 55 of PSINet Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
April 1, 1999
