<PAGE>
As filed with the Securities and Exchange Commission on October 19, 1999
Registration No. 333-88325
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
AMENDMENT NO.1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
PSINet Inc.
(Exact name of registrant as specified in its charter)
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New York 4813 16-1353600
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) 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.
Vice Chairman and Executive Vice President
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 Peabody LLP Arent Fox Kintner Plotkin & Kahn, PLLC John J. McDonnell, III
437 Madison Avenue 1050 Connecticut Avenue, N.W. General Counsel and Secretary
New York, New York 10022 Washington D.C. 20036 Transaction Network Services, Inc.
Attention: Richard F. Langan, Jr., Esq. Attention: Jeffrey E. Jordan, Esq. 1939 Roland Clarke Place
Telephone No.: (212) 940-3140 Telephone No.: (202) 857-6473 Reston, Virginia 20191
Facsimile No.: (212) 940-9940 Facsimile No.: (202) 857-6395 Telephone No.: (703) 453-8300
Facsimile No.: (703) 453-8397
_____________
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger referred to herein have been satisfied or waived.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
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CALCULATION OF REGISTRATION FEE
-----------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Securities to Amount to be Offering Price Aggregate Offering Amount of
be Registered Registered Per Security Price Registration Fee
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Common Stock, par value $.01 per share 7,804,546 shares (1) (1) $64,005(2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act, and calculated pursuant to
Rule 457(f) under the Securities Act. Pursuant to Rule 457(f)(1) under the
Securities Act, the proposed maximum aggregate offering price of the
registrant's common stock to be issued in connection with the merger of a
wholly-owned subsidiary of registrant and Transaction Network Services, Inc.
("TNI") was calculated in accordance with Rule 457(c) under the Securities
Act as: (a) $37.25, the average of the high and low prices per share of TNI
common stock on October 14, 1999 as reported on the New York Stock
Exchange, multiplied by (b)15,609,091, the aggregate number of shares of TNI
common stock and outstanding TNI options to be received by the registrant or
canceled in the merger, less (ii) $351,204,570, the maximum amount of cash
consideration to be paid by the registrant in exchange for shares of TNI
common stock to be converted into cash (which equals $45.00 times
7,804,546).
(2) Of this amount, $70,981 was previously paid on October 1, 1999. Accordingly,
no additional fee is due at this time.
____________________
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION OCTOBER 19, 1999
TRANSACTION NETWORK SERVICES, INC. LOGO
October 22, 1999
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Transaction Network Services, Inc. (TNI) on Tuesday November 23, 1999, at 9:00
a.m., local time, at 1939 Roland Clarke Place, Reston, Virginia.
At the special meeting, you will be asked to vote on the merger of TNI and
PSINet Inc. If the merger is approved, in exchange for each share of TNI common
stock, you will have the option to receive $45.00 in cash or a share of PSINet
common stock, or a combination of cash and PSINet common stock, subject to the
restriction that half of all TNI shares must be converted into cash and half
into PSINet common stock. You can choose to convert some of your TNI shares
into cash and others into PSINet shares.
If TNI stockholders owning more than half of all TNI shares elect to
receive cash, the number of TNI shares that will be converted into cash in the
merger will be less than the number elected. Similarly, if TNI stockholders
owning more than half of the TNI shares elect to receive PSINet shares, the
number of TNI shares that will be converted into PSINet shares will be less than
the number elected. In either case, the reduction will be prorated among all
stockholders making the excess election based upon the number of shares as to
which the excess election was made.
This prospectus/proxy statement contains answers to frequently asked
questions and a summary description of the merger (beginning on page 1),
followed by a more detailed discussion of the merger and other related matters.
You should also consider the matters discussed under "Risk Factors Relating to
the Merger" commencing on page 18 of the enclosed prospectus/proxy statement.
We urge you to review carefully the entire prospectus/proxy statement.
Sincerely,
John J. McDonnell, Jr
President and Chief Executive Officer
Your vote is important.
Please cast your vote by telephone, over the Internet or by completing,
signing, dating and returning your proxy in the enclosed envelope.
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Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the merger described in the
prospectus/proxy statement or the PSINet common stock to be issued in connection
with the merger, or determined if the prospectus/proxy statement is accurate or
adequate. Any representation to the contrary is a criminal offense.
This prospectus/proxy statement is dated October 22, 1999,
and is first being mailed to stockholders on or about October 22, 1999.
<PAGE>
REFERENCES TO ADDITIONAL INFORMATION
This prospectus/proxy statement incorporates important business and
financial information about PSINet and TNI from documents that are not included
in or delivered with this prospectus/proxy statement. This information is
available to you without charge upon your written or oral request. You can
obtain documents incorporated by reference in this prospectus/proxy statement by
requesting them in writing or by telephone from the appropriate company at the
following addresses and telephone numbers:
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<S> <C>
PSINet Inc. Transaction Network Services, Inc.
510 Huntmar Park Drive 1939 Roland Clarke Place
Herndon, Virginia 20170 Reston, Virginia 20191
Attention: Corparate Secretary Attention: Karen Kazmark
Telephone: (703) 904-4100 Telephone: (703) 453-8406
</TABLE>
See also "Where You Can Find More Information" beginning on page 108. If
you would like to request documents, please do so by November 16, 1999 in order
to receive them before the TNI special meeting.
<PAGE>
TRANSACTION NETWORK SERVICES, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 23, 1999
To the Stockholders of Transaction Network Services, Inc:
We will hold a special meeting of the stockholders of Transaction Network
Services, Inc., also referred to as TNI, on Tuesday, November 23, 1999, at
9:00 a.m., local time, at 1939 Roland Clarke Place, Reston, Virginia, for the
following purpose:
To consider and vote upon a proposal to adopt the agreement and plan of
merger, as amended, among PSINet Inc., PSINet Shelf I Inc. (a wholly-owned
subsidiary of PSINet Inc.) and Transaction Network Services, Inc., and to
approve the transactions contemplated in that agreement.
We will transact no other business at the special meeting, except such
business as may properly be brought before the special meeting or any
adjournment of it by the TNI board of directors.
Only holders of record of shares of TNI common stock at the close of
business on October 22, 1999, the record date for the special meeting, are
entitled to notice of, and to vote at, the special meeting and any adjournments
or postponements of it. TNI and PSINet cannot complete the merger unless the
holders of a majority of the outstanding shares of TNI common stock vote to
adopt the merger agreement.
For more information about the merger, please review the accompanying
prospectus/proxy statement and the copy of the merger agreement attached as
Annex 1.
Please do not send any stock certificates at this time.
After careful consideration, TNI's board of directors has unanimously
approved the merger agreement and determined that the merger is fair to you and
in your best interests and unanimously recommends that you vote for the adoption
of the merger agreement.
By Order of the Board of Directors,
John J. McDonnell, III
Secretary
Reston, Virginia
October 22, 1999
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Whether or not you plan to attend the special meeting, please cast your
vote by telephone, over the Internet or by completing, signing and dating the
enclosed proxy and returning it promptly in the enclosed postage-paid envelope.
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<PAGE>
TABLE OF CONTENTS
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Page
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QUESTIONS AND ANSWERS ABOUT THE MERGER............................................. 4
SUMMARY............................................................................ 6
Summary Unaudited Pro Forma Consolidated Financial Information.................... 14
PSINet Summary Consolidated Financial and Operating Data.......................... 15
TNI Summary Consolidated Financial and Operating Data............................. 17
RISK FACTORS....................................................................... 18
THE COMPANIES...................................................................... 42
Transaction Network Services, Inc................................................. 42
PSINet Inc........................................................................ 43
PSINet Shelf I Inc................................................................ 44
THE SPECIAL MEETING................................................................ 45
Date, Time and Place.............................................................. 45
Purpose of Special Meeting........................................................ 45
Record Date; Stock Entitled to Vote; Quorum....................................... 45
Votes Required.................................................................... 45
Voting by TNI Directors and Executive Officers.................................... 45
Voting of Proxies................................................................. 46
Revocability of Proxies........................................................... 46
Solicitation of Proxies........................................................... 46
THE MERGER......................................................................... 48
Background to the Merger.......................................................... 48
TNI's Reasons for the Merger and Board of Directors Recommendation................ 50
PSINet's Reasons for the Merger................................................... 53
Opinion of Morgan Stanley & Co. Incorporated...................................... 54
Interests of TNI Directors and Management in the Merger........................... 62
Tax Treatment..................................................................... 67
Form of the Merger................................................................ 67
Merger Consideration.............................................................. 67
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares.. 68
Effective Time of the Merger...................................................... 69
Listing of PSINet Common Stock on The Nasdaq Stock Market......................... 69
Delisting and Deregistration of TNI Common Stock.................................. 69
Material United States Federal Income Tax Consequences of the Merger.............. 69
Accounting Treatment.............................................................. 74
Regulatory Matters................................................................ 74
Appraisal Rights.................................................................. 75
Continuation of TNI Employee Benefits............................................. 75
Effect on Options Awards Outstanding under TNI Stock Plans........................ 76
Resale of PSINet Common Stock..................................................... 76
THE MERGER AGREEMENT............................................................... 77
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION............................. 84
PRO FORMA CAPITALIZATION OF PSINET AND TNI......................................... 95
DESCRIPTION OF PSINET CAPITAL STOCK................................................ 96
COMPARISON OF RIGHTS OF HOLDERS OF COMMON STOCKOF PSINET AND TNI................... 102
LEGAL MATTERS...................................................................... 107
EXPERTS............................................................................ 107
STOCKHOLDER PROPOSALS.............................................................. 108
OTHER MATTERS...................................................................... 108
WHERE YOU CAN FIND MORE INFORMATION................................................ 108
DOCUMENTS INCORPORATED BY REFERENCE................................................ 110
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.................................. 111
</TABLE>
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<PAGE>
Annexes
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Annex 1 Agreement and Plan of Merger and Amendment No.1 to Agreement and Plan of
Merger.
Annex 2 Opinion of Morgan Stanley & Co. Incorporated
Annex 3 Section 262 of the Delaware General Corporation Law
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<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are PSINet and TNI proposing to merge?
A: PSINet is the leading independent global provider of Internet solutions to
businesses, providing Internet connectivity and Web hosting services in 90
of the 100 largest U.S. metropolitan areas and 16 of the 20 largest global
telecommunications markets and is currently operating in 21 countries.
PSINet also offers a suite of value-added products and services that are
designed to enable its customers to maximize utilization of the Internet to
communicate more efficiently with its customers, suppliers, business
partners and remote office locations. TNI is the leading worldwide provider
of eCommerce data communications and transports more than 19 million point-
of-sale/point-of-service transactions daily. We anticipate that the merger
will create the leading provider of global eCommerce and Internet solutions
to businesses.
Q: What will happen in the merger?
A: TNI will become a direct subsidiary of PSINet by merging into PSINet Shelf I
Inc., a wholly-owned subsidiary of PSINet.
Q: What will TNI stockholders receive?
A: In exchange for each of their TNI shares TNI stockholders may elect to
receive (i) $45.00 in cash, (ii) a share of PSINet common stock, or (iii) a
combination of cash and PSINet common stock, subject to limitations
described in the next answer.
Please read the more detailed description of the consideration to be issued
in the merger on page 67.
Q: Will I receive the specific amounts of cash and stock that I elect?
A: Due to a requirement contained in the merger agreement that half of the TNI
shares must be converted into cash and half must be converted into PSINet
common stock, the amounts of cash and stock you receive may be different
from the amounts you elect. For example, if TNI stockholders owning more
than half of TNI shares elect to receive cash, the number of TNI shares
converted into cash will be less than the number elected. Similarly, if TNI
stockholders owning more than half of TNI shares elect to receive PSINet
common stock, the number of TNI shares converted into PSINet common stock
will be less than the number elected.
PSINet will not issue any fractional shares in the merger. Instead, you will
receive cash for any fractional shares that you would otherwise receive.
If you hold outstanding and unexercised TNI stock options, these options are
fully vested. They will be assumed by PSINet and become exercisable for
shares of PSINet common stock.
Please read the more detailed description of the allocation procedures on
pages 67 and 68.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
prospectus/proxy statement, please cast your vote. You may vote by
telephone, over the Internet or by completing and signing your proxy and
returning it in the enclosed return envelope as soon as possible, so that
your shares may be represented at the special meeting. If you sign and send
in your proxy and do not indicate how you want to vote, we will count your
proxy as a vote in favor of adoption of the merger agreement.
The special meeting will take place on November 23, 1999. You may attend the
special meeting and vote your shares in person, rather than providing your
proxy.
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<PAGE>
Q: Can I change my vote after I have provided my proxy?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second, you
can complete and submit a new proxy. If you choose either of these two
methods, you must submit your notice of revocation to the Secretary of TNI
at the address set forth below or submit your new proxy in the same way you
submitted your prior proxy. Third, you can attend the special meeting and
vote in person.
Q: If my TNI shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: Your broker will vote your TNI shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Without
instructions, your shares will not be voted and will therefore have the
effect of a no vote.
Q: Should I send in my stock certificates now?
A: No. You should continue to hold your stock certificates until we send you a
form of election that you can use to indicate your preference as to the type
of payment you would like to receive in the merger. You will receive this
form, along with written instructions on how to exchange your shares, within
30 days prior to the effective time of the merger. Please read the more
detailed description of the election procedure on pages 67 through 69.
Q: When do you expect the merger to be completed?
A: We are working to complete the merger as quickly as possible. We expect to
complete the merger during the fourth quarter of 1999.
Q: Assuming I receive PSINet shares in the merger, will my rights as a TNI
stockholder change as a result of the merger?
A. Yes. For a summary of material differences between the rights of TNI
stockholders and the rights of PSINet shareholders, see pages 102 through
106.
Q: Are TNI stockholders entitled to appraisal rights?
A. Yes. Holders of TNI common stock are entitled to appraisal rights in
connection with the merger. We describe the procedures for exercising
appraisal rights on page 75 and are attaching the provision of Delaware
law that governs appraisal rights as Annex 3.
Q: What are my tax consequences as a result of the merger?
A. With respect to any inherent gain in your TNI stock, you will not be taxed
at all, will be fully taxed, or will be partially taxed, depending upon
whether you receive PSINet common stock, cash or a combination of both in
the merger. We describe the material U.S. federal income tax consequences of
the merger in more detail beginning on page 69, although your tax
consequences will depend upon the facts of your own situation. You should
consult your own tax advisor for a full understanding of the consequences of
the merger on your tax position.
Q: Who can help answer my questions?
A: If you have any questions about the merger or if you need additional copies
of this prospectus/proxy statement or the enclosed proxy, you should
contact:
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, Virginia 20191
Attention: Karen Kazmark
Telephone: (703) 453-8406
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<PAGE>
SUMMARY
This summary highlights selected information from this prospectus/proxy
statement and does not contain all of the information that is important to you.
To understand the merger fully and for a more complete description of the terms
of the merger, you should carefully read this entire prospectus/proxy statement
and the other documents to which we have referred you. See "Where You Can Find
More Information" on page 109. We have included page references parenthetically
to direct you to a more complete description of the topics presented in this
summary. (As used in this prospectus/proxy statement, "we" and "our" refers to
TNI).
The Companies
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, Virginia 20191
Attention: Karen Kazmark
Telephone: (703) 453-8406
TNI was incorporated in August 1990 to build and operate a communications
network focused on the network services needs of the POS (point-of-sale/point-
of-service) transaction processing industry through its POS division. TNI
currently operates four divisions: (1) the POS Division which includes TNI's
TransXpress(R) network services for the POS transaction processing industry, (2)
the Telecom Services Division which includes TNI's CARD*TEL(R) telephone call
billing validation and fraud control services and other services targeting
primarily the telecommunications industry, (3) the Financial Services Division
which provides integrated data and voice services including the TNI FastLink(R)
Data Service in support of the Financial Information eXchange messaging protocol
and other transaction oriented trading applications primarily to the financial
services industry, and (4) the International Systems Division which markets
TNI's products and services internationally.
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 22070
Attention: Corporate Secretary
Telephone: (703) 904-4100
PSINet is the leading independent global provider of Internet solutions to
businesses. PSINet provides Internet connectivity and Web hosting services to
customers in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 17 of the 20 largest global telecommunications markets and is currently
operating in 22 countries. In addition to these services, the Company also
offers a suite of value-added products and services that are designed to enable
its customers to maximize utilization of the Internet to communicate more
efficiently with its customers, suppliers, business partners and remote office
locations. PSINet conducts its business through operations organized into four
geographic operating segments--North America, Latin America, Europe and
Asia/Pacific. The Company's services and products include access services that
offer dedicated, dial-up, wireless and digital subscriber line or xDSL
connections, Web hosting services, intranets, virtual private networks or VPNs,
electronic commerce or e-commerce, voice-over-IP, e-mail and managed security
services. PSINet also provides wholesale and private label network connectivity
and related services to other Internet service providers, known as ISPs, and
telecommunications carriers to further utilize its network capacity.
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<PAGE>
PSINet Shelf I Inc.
c/o PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 22070
PSINet Shelf I Inc. is a wholly-owned subsidiary of PSINet Inc., formed
under the laws of the State of Delaware. TNI will merge with and into PSINet
Shelf I Inc. which will be the surviving corporation. It will change its name
to "Transaction Network Services, Inc." upon the merger.
The Special Meeting (page 45)
The special meeting of TNI stockholders will be held on Tuesday, November
23, 1999 at 9:00 a.m., local time, at 1939 Roland Clarke Place, Reston,
Virginia. At the special meeting, we will ask you to vote upon a proposal to
adopt the merger agreement.
Record Date; Voting Power
TNI stockholders are entitled to vote at the special meeting if they owned
TNI shares as of the close of business on October 22, 1999, which is known as
the record date.
On the record date, there were 14,190,581 shares of TNI common stock
entitled to vote at the special meeting. Stockholders will have one vote at the
special meeting for each share of TNI common stock that they owned on the record
date.
Vote Required
The affirmative vote of a majority of the shares of TNI common stock
outstanding on the record date is required to adopt the merger agreement.
Voting by TNI Directors and Executive Officers
On the record date, TNI directors and executive officers and their
affiliates owned and were entitled to vote 2,192,934 shares of TNI common stock,
or approximately 15.5% of the shares of TNI common stock outstanding on the
record date. TNI directors and executive officers owning or controlling
approximately 14.1% of TNI's outstanding common stock have agreed to vote "for"
adoption of the merger agreement.
The Merger (page 48)
The merger agreement is attached as Annex 1 to this prospectus/proxy
statement. We encourage you to read the merger agreement. It is the principal
document governing the merger.
Structure of the Merger
Subject to the terms and conditions of the merger agreement, TNI will merge
with and into PSINet Shelf I Inc., a wholly-owned subsidiary of PSINet. At the
effective time of the merger, the separate corporate existence of TNI will end.
PSINet's subsidiary will be the surviving corporation in the merger and will
continue its corporate existence as a wholly-owned subsidiary of PSINet under
the name "Transaction Network Services, Inc."
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<PAGE>
What TNI Stockholders Will Receive in the Merger (page 67)
The merger agreement provides that, at the effective time of the merger,
each issued and outstanding share of TNI common stock will, at the election of
each holder, but subject to proration as described on pages 67 and 68, be
converted into the right to receive:
. 1 share of PSINet common stock; or
. $45.00 in cash; or
. a combination of PSINet common stock and cash.
Ownership of PSINet Following the Merger
Based on the number of outstanding TNI shares and options to acquire TNI
shares on the record date and assuming the exercise of all outstanding options,
we anticipate that TNI stockholders will receive approximately 7,804,546 shares
of PSINet common stock in the merger. Based on that number and on the number of
outstanding shares of PSINet common stock on the record date, following the
merger former TNI stockholders will own approximately 12% of the outstanding
shares of PSINet common stock.
Appraisal Rights (page 75)
TNI stockholders will have appraisal rights in connection with the merger.
Material United States Federal Income Tax Consequences of the Merger
(page 69)
The merger is intended to qualify as a reorganization within the meaning of
the Internal Revenue Code of 1986. It is a condition to the completion of the
merger that TNI receive an opinion from Arent Fox Kintner Plotkin & Kahn, PLLC
and PSINet receive an opinion from Nixon Peabody LLP, in each case stating that
the merger will qualify for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code. Assuming the merger qualifies as a reorganization within the
meaning of Section 368(a)(2)(D) of the Internal Revenue Code, holders of TNI
common stock will not recognize gain or loss for United States federal income
tax purposes as a result of the exchange of their TNI common stock for PSINet
common stock in the merger, except for cash received instead of fractional
shares of PSINet common stock. In general, however, TNI stockholders will
recognize any taxable gain (but not taxable loss) to the extent they receive
cash in the merger.
Tax matters are very complicated and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your own
tax advisors for a full understanding of the tax consequences of the merger to
you.
Regulatory Matters (page 74)
United States antitrust laws prohibit PSINet and TNI from completing the
merger until after they have furnished specified information and materials to
the Antitrust Division of the Department of Justice and the Federal Trade
Commission and a required waiting period has ended. PSINet and TNI each filed
the required notification and report forms with the Antitrust Division and the
Federal Trade Commission on August 30, 1999, and the Federal Trade Commission
has granted early termination of the waiting period.
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<PAGE>
Board of Directors Recommendation to Stockholders (page 50)
The TNI board of directors believes that the terms of the merger and the
merger agreement are fair to and in the best interests of TNI and its
stockholders and unanimously recommends that the stockholders vote "for" the
adoption of the merger agreement.
To review the background and reasons for the merger in greater detail, as
well as certain risks related to the merger, see pages 48, 50 and 18,
respectively.
Fairness Opinion of TNI's Financial Advisor (page 54)
In deciding to approve the merger, the TNI board of directors considered,
among other things, the opinion of its financial advisor, Morgan Stanley & Co.
Incorporated, as to the fairness from a financial point of view of the
consideration to be paid in the merger to TNI stockholders. This opinion is
attached as Annex 2 to this prospectus/proxy statement. We encourage you to read
this opinion carefully.
Interests of TNI Directors and Management in the Merger (page 62)
TNI stockholders should note that a number of directors and officers of TNI
have interests in the merger as directors or officers that are different from,
or in addition to, those of a stockholder. For a description of these
differences see pages 62 through 67.
The Merger Agreement
Conditions to the Merger
PSINet and TNI will complete the merger only if they satisfy or, in some
cases, waive several conditions, including the following:
. holders of a majority of the outstanding shares of TNI common stock must
adopt the merger agreement
. the waiting period required under the Hart-Scott-Rodino Act must
expire or be terminated (which was terminated on September 9, 1999) and
any other required material consents from governmental entities and
other third parties must be received
. no legal restraints, injunctions or prohibitions may exist which prevent
the completion of the merger
. the registration statement must have been declared effective by the
SEC and must remain effective
. TNI's $75 million revolving credit facility ($62.0 million of which was
outstanding at September 30, 1999) must be paid prior to the
effectiveness of the merger
. PSINet common stock issuable to TNI stockholders in the merger must
have been approved for listing on the Nasdaq National Market
. Arent Fox Kintner Plotkin & Kahn, PLLC must deliver an opinion to TNI,
and Nixon Peabody LLP must deliver an opinion to PSINet, in each case
stating that the merger will
-9-
<PAGE>
qualify as a reorganization within the meaning of Section 368(a)(2)(D)
of the Internal Revenue Code
. PSINet, PSINet Shelf I Inc. and TNI must satisfy the representations,
warranties and covenants contained in the merger agreement in all
material respects.
Termination of the Merger Agreement
The merger agreement may be terminated for the following reasons:
1. PSINet and TNI can agree by mutual written consent to terminate the
merger agreement at any time without completing the merger.
2. PSINet or TNI can terminate the merger agreement if:
. the merger is not consummated on or before February 29, 2000
(provided that the terminating party is not otherwise in material
breach under the merger agreement)
. the holders of a majority of the outstanding shares of TNI common stock
do not adopt the merger agreement at the special meeting
. any court issues any order or takes other legal action which
permanently enjoins or prohibits the completion of the merger and,
after reasonable efforts by PSINet and TNI, the court's action is final
and nonappealable
. the other party breached in any material respect any of its
representations, warranties or obligations under the merger agreement
which is incapable of being satisfied by February 29, 2000
3. Before the special meeting, TNI can terminate the merger agreement if
the TNI board of directors receives an unsolicited proposal by a third party to
acquire TNI on terms determined by the TNI board of directors to be more
favorable to TNI stockholders than the terms of the merger with PSINet provided
that PSINet has been afforded the opportunity to negotiate and make such
adjustments to the terms of the merger agreement to enable PSINet to proceed
with the merger.
4. PSINet can also terminate the merger agreement if TNI's board of
directors withdraws or adversely modifies its approval or approves or recommends
an unsolicited third party proposal.
Termination Fees (page 80)
TNI must pay PSINet a termination fee of $15 million if:
1. a third party makes an acquisition proposal for TNI and
. the holders of a majority of the outstanding shares of TNI common
stock do not adopt the merger agreement at the special meeting, TNI
or PSINet terminates the merger agreement, and within 12 months of
that termination TNI enters into a definitive agreement with any
third party with respect to an acquisition proposal or an
acquisition proposal is consummated.
-10-
<PAGE>
. any court issues an order or takes other legal action described in
the third bullet under paragraph 2 above, TNI intentionally and
materially breaches any material obligation in the merger agreement
and does not cure that breach, TNI or PSINet terminates the merger
agreement, and within 12 months of that termination TNI enters into
a definitive agreement with any third party with respect to an
acquisition proposal or an acquisition proposal is consummated.
. TNI intentionally and materially breaches any material obligation
in the merger agreement and does not cure that breach, the breach
would prevent the consummation of the merger by February 29, 2000,
PSINet terminates the merger agreement, and within 12 months of that
termination TNI enters into a definitive agreement with any third
party with respect to an acquisition proposal or an acquisition
proposal is consummated.
. the merger is not consummated by February 29, 2000, TNI
intentionally and materially breaches any material obligation in the
merger agreement and does not cure that breach, PSINet terminates
the merger agreement but is not otherwise in material breach, and
within 12 months of that termination TNI enters into a definitive
agreement with any third party with respect to an acquisition
proposal or an acquisition proposal is consummated.
. the TNI board of directors withdraws or adversely modifies its
approval of the merger or approves or recommends an unsolicited
third party proposal, TNI intentionally and materially breaches any
material obligation in the merger agreement and does not cure that
breach, PSINet terminates the merger agreement, and within 12 months
of that termination TNI enters into a definitive agreement with any
third party with respect to an acquisition proposal or an
acquisition proposal is consummated.
2. TNI terminates the merger agreement in order to accept a more favorable
proposal as described in paragraph 3 above.
3. PSINet terminates the merger agreement because the TNI board of
directors approves or recommends an unsolicited third party proposal.
Comparative Per Share Market Price and Dividend Information
PSINet common stock is listed for trading on the Nasdaq National Market
under the trading symbol "PSIX" and TNI common stock is listed on the New York
Stock Exchange under the trading symbol "TNI." Prior to June 7, 1999, TNI's
common stock was listed on the Nasdaq National Market under the symbol "TNSI."
The following table shows the closing prices for PSINet and TNI shares on
August 20, 1999, the last full trading day before the public announcement of the
proposed merger and on October 19, the most recent date for which quotations
were available prior to the printing of this prospectus/proxy statement.
<TABLE>
<CAPTION>
Equivalent price
per share
PSINet TNI of TNI
Date common stock common stock common stock
- ---- ------------ ------------ -----------------
<S> <C> <C> <C>
August 20, 1999........................ $45.56 $34.25 $
October 19, 1999....................... $ $ $
</TABLE>
-11-
<PAGE>
Neither TNI nor PSINet has ever declared or paid any cash dividends on its
common stock. Except as required with respect to PSINet's preferred stock,
PSINet currently intends to retain all of its earnings, if any, for use in its
business and does not anticipate paying any cash dividends on its common stock
in the foreseeable future. In addition, under the terms of PSINet's existing
credit facility, the payment of cash dividends is prohibited without the
lender's consent, and under the terms of PSINet's debt securities, the payment
of cash dividends is subject to limitations.
The following table sets forth, for the periods indicated, the high and low
bid prices per share of PSINet common stock on the Nasdaq National Market and
the high and low sales prices of TNI common stock on the New York Stock Exchange
and the Nasdaq National Market. For current price information, stockholders are
urged to consult publicly available sources.
<TABLE>
<CAPTION>
PSINet TNI
Common Stock Common Stock
------------ ------------
Calendar Period High Low High Low
- --------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
First Quarter......................... $13.38 $ 6.75 $14.63 $ 9.63
Second Quarter........................ 9.25 5.50 16.50 9.88
Third Quarter......................... 9.75 7.38 18.38 13.00
Fourth Quarter........................ 9.50 4.25 22.50 15.13
Year Ended December 31, 1998:
First Quarter......................... $17.31 $ 4.94 $21.75 $16.00
Second Quarter........................ 15.19 10.00 24.00 15.06
Third Quarter......................... 21.81 10.13 33.75 14.00
Fourth Quarter........................ 24.94 8.38 32.25 12.00
Year Ending December 31, 1999:
First Quarter......................... $45.94 $21.00 $20.68 $15.25
Second Quarter........................ 73.00 41.38 29.25 12.81
Third Quarter......................... 65.38 33.50 46.56 26.75
Fourth Quarter........................
(through October 19, 1999)
</TABLE>
-12-
<PAGE>
Unaudited Pro Forma Comparative Per Share Information
We have summarized below information concerning earnings, cash dividends
and book value per share for:
. PSINet on a historical basis
. TNI on a historical basis
. the combination of PSINet and TNI on a pro forma basis
. the equivalent of one TNI share
The pro forma data are based on the assumed conversion of 50% of the shares
of TNI common stock into an equivalent number of PSINet common shares and 50% of
the shares of TNI common stock into cash at $45.00 per TNI share. The equivalent
information is based on the exchange ratio of one share of PSINet common stock
for each share of TNI common stock.
You should read the information set forth below in conjunction with the
respective audited and unaudited financial statements of TNI and PSINet
incorporated by reference in this prospectus/proxy statement and the unaudited
pro forma consolidated financial information and related notes presented
elsewhere in this prospectus/proxy statement. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
PSINet TNI Equivalent of
Historical Historical Pro Forma One TNI Share
---------- ---------- -------- -------------
Fiscal year ended December 31, 1998:
<S> <C> <C> <C> <C>
Basic earnings per share................. $(5.32) $0.54 $(8.06) $(8.06)
Diluted earnings per share............... (5.32) 0.52 (8.06) (8.06)
Cash dividends declared per share........
Book value per share..................... (2.31) 6.57 3.47 3.47
Six months ended June 30, 1999:
Basic earnings per share................. (2.10) 0.32 (3.18) (3.18)
Diluted earnings per share............... (2.10) 0.30 (3.18) (3.18)
Cash dividends declared per share........ -- -- -- --
Book value per share..................... 8.19 7.07 11.84 11.84
</TABLE>
-13-
<PAGE>
Summary Unaudited Pro Forma Consolidated Financial Information
(In thousands of U.S. dollars, except per share amounts)
The following Summary Unaudited Pro Forma Consolidated Financial
Information gives pro forma effect to the merger as well as to other
acquisitions and transactions, as more fully discussed under "Unaudited Pro
Forma Consolidated Financial Information", as if they had occurred on the dates
indicated.
If PSINet had actually completed the merger in prior periods, TNI might
have performed differently. You should not rely on the pro forma financial
information as an indication of the results that PSINet would have achieved if
the merger had taken place earlier or of the future results that the companies
will achieve after completion of the merger. For further information concerning
the following summary pro forma financial information, including the adjustments
made in preparing it, please refer to "Unaudited Pro Forma Consolidated
Financial Information."
<TABLE>
<CAPTION>
Pro Forma
------------------------------------
Year Ended Six Months Ended
December 31, 1998 June 30, 1999
----------------- ----------------
<S> <C> <C>
Statement of Operations Data:
Revenue....................................................................................... $ 513,077 $ 329,186
Operating costs and expenses:
Data communications and operations........................................................... 359,644 225,012
Sales and marketing.......................................................................... 72,681 45,908
General and administrative................................................................... 82,743 44,723
Depreciation and amortization................................................................ 159,436 98,969
Charge for acquired in-process R&D........................................................... 70,800 --
--------- ---------
Total operating costs and expenses.......................................................... 745,304 414,612
--------- ---------
Loss from operations.......................................................................... (232,227) (85,426)
Interest expense.............................................................................. (207,371) (130,583)
Interest income............................................................................... 21,442 13,782
Other income (expense), net................................................................... 6,333 (468)
Non-recurring arbitration charge.............................................................. (49,000) --
--------- ---------
Loss before income taxes, equity in
earnings of affiliate and minority interest................................................. (460,823) (202,695)
Income tax expense............................................................................ (832) (353)
Equity in earnings of unconsolidated affiliate................................................ 356 93
Minority interest in net loss (income) of consolidated subsidiary............................. 319 (128)
--------- ---------
Net loss...................................................................................... (460,980) (203,083)
Return to preferred shareholders.............................................................. (3,079) (4,797)
--------- ---------
Net loss available to common shareholders..................................................... $(464,059) $(207,880)
========= =========
Basic and diluted loss per share.............................................................. $(8.06) $(3.18)
========= =========
Shares used in computing basic and diluted loss per share..................................... 57,606 65,457
========= =========
Pro Forma
As of June 30, 1999
----------------------------
Balance Sheet Data:
Cash, cash equivalents, short-term
investments and marketable securities....................................................... $1,466,959
Restricted cash and short-term investments.................................................... 144,504
Total assets.................................................................................. 3,673,656
Current portion of debt....................................................................... 78,559
Long-term debt, less current portion.......................................................... 2,350,275
Shareholders' equity.......................................................................... 858,063
</TABLE>
-14-
<PAGE>
PSINet Summary Consolidated Financial and Operating Data
(In thousands of U.S. dollars, except per share, ratio and operating data)
The following table sets forth for the periods indicated summary
consolidated financial and operating data for PSINet. The consolidated balance
sheet data and consolidated statement of operations data as of and for the years
ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
PSINet's audited consolidated financial statements and as of and for the six
months ended June 30, 1998 and 1999 have been derived from PSINet's unaudited
consolidated financial statements. The following summary consolidated financial
and operating data should be read in conjunction with PSINet's more detailed
consolidated financial statements and related notes incorporated by reference to
this prospectus/proxy statement.
EBITDA is used in the Internet services industry as one measure of a
company's operating performance and historical ability to service debt. EBITDA
is not determined in accordance with generally accepted accounting principles,
is not indicative of cash used by operating activities and should not be
considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles. PSINet defines EBITDA as earnings (losses) before
interest expense and interest income, taxes, depreciation and amortization,
other non-operating income and expense, and charges for intangible asset write-
down and acquired in-process research and development. PSINet's definition of
EBITDA may not be comparable to similarly titled measures used by other
companies.
In July 1999, PSINet issued $1.2 billion aggregate principal amount of its
11% senior notes due 2009, consisting of $1.05 billion aggregate principal
amount of 11% senior notes due 2009 and Euro 150 million aggregate principal
amount of 11% senior notes due 2009, pursuant to Securities and Exchange
Commission Rule 144A and Regulation S. The aggregate net proceeds of the
offering of the 11% senior notes, after giving effect to discounts and
commissions and other offering expenses, was approximately $1.17 billion.
-15-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
U. S........................................ $15,159 $ 36,252 $ 77,571 $103,952 $ 156,048 $ 68,888 $ 111,547
International............................... 55 2,470 6,780 17,950 103,588 29,294 117,121
------- -------- -------- -------- --------- --------- ---------
15,214 38,722 84,351 121,902 259,636 98,182 228,668
Other income, net........................... -- -- 5,417 -- -- -- --
------- -------- -------- -------- --------- --------- ---------
15,214 38,722 89,768 121,902 259,636 98,182 228,668
------- -------- -------- -------- --------- --------- ---------
Operating costs and expenses:
Data communications and operations.......... 9,489 32,124 70,102 94,363 199,372 78,609 162,341
Sales and marketing......................... 3,599 23,930 27,064 25,831 57,026 23,219 40,505
General and administrative.................. 3,605 10,569 20,648 22,947 45,288 17,872 32,469
Depreciation and amortization............... 3,183 14,778 28,035 28,347 63,424 22,354 61,210
Charge for acquired in-process research and
development................................ -- -- -- -- 70,800 27,000 --
Intangible asset write-down................. -- 9,938 -- -- -- -- --
------- -------- -------- -------- --------- --------- ---------
Total operating costs and expenses.......... 19,876 91,339 145,849 171,488 435,910 169,054 296,525
------- -------- -------- -------- --------- --------- ---------
Loss from operations......................... (4,662) (52,617) (56,081) (49,586) (176,274) (70,872) (67,857)
Interest expense............................. (731) (1,964) (5,025) (5,362) (63,914) (19,471) (61,486)
Non-recurring arbitration charge............. -- -- -- -- (49,000) -- --
Loss before income taxes..................... (5,342) (53,160) (55,256) (46,078) (262,717) (82,695) (116,903)
Net loss..................................... (5,342) (53,160) (55,097) (45,602) (261,869) (82,724) (116,453)
Return to preferred shareholders............. -- -- -- (411) (3,079) (1,545) (4,797)
Net loss available to common shareholders.... $(5,342) $(53,160) $(55,097) $(46,013) $(264,948) $ (84,269) (121,250)
======= ======== ======== ======== ========= ========= =========
Basic and diluted loss per share............. $(0.42) $(2.01) $(1.40) $(1.14) $(5.32) $(1.76) $(2.10)
======= ======== ======== ======== ========= ========= =========
Shares used in computing basic and diluted 12,805 26,485 39,378 40,306 49,806 47,854 57,657
loss per share (in thousands).............. ======= ======== ======== ======== ========= ========= =========
Other Financial Data:
EBITDA:
U. S........................................ $ (772) $(26,930) $(20,563) $(13,071) $ (26,170) $ (12,139) $ (12,735)
International............................... (707) (971) (7,483) (8,168) (15,880) (9,379) 6,088
------- -------- -------- -------- --------- --------- ---------
$(1,497) $(27,901) $(28,046) $(21,239) $ (42,050) $ (21,518) $ (6,647)
======= ======== ======== ======== ========= ========= =========
Capital expenditures......................... $ 5,009 $ 45,166 $ 38,390 $ 50,074 $ 303,550 $ 79,024 $ 215,400
Cash Flow Data:
Cash flows used in operating activities...... $(1,097) $(30,093) $(32,543) $(15,568) $ (87,586) $ (20,730) $(139,325)
Cash flows used in investing activities...... (1,937) (21,958) (7,897) (15,560) (783,877) (451,312) (27,770)
Cash flows provided by (used in) financing
activities................................ 4,527 151,403 (10,529) 12,598 874,246 563,317 721,683
Operating Data:
Number of POPs............................... 82 241 350 350 500 400 600
Number of business accounts.................. 4,220 8,200 17,800 26,400 54,700 38,700 73,400
<CAPTION>
December 31, June 30,
---------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- --------- -------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, short-term
investments and marketable securities............ $ 3,358 $102,710 $ 56,390 $ 33,322 $ 322,508 $370,553 $ 716,356
Restricted cash and short-term investments......... -- -- 954 20,690 162,469 143,154 144,504
Total assets....................................... 17,055 201,830 177,112 186,181 1,284,231 794,774 2,013,459
Current portion of debt............................ 3,369 16,643 26,915 39,633 59,968 46,667 78,455
Long-term debt, less current portion............... 4,397 24,130 26,938 33,820 1,064,633 659,559 1,141,730
Shareholders' equity (deficit)..................... (8,283) 143,230 89,783 73,429 (120,174) (1,108) 529,927
</TABLE>
-16-
<PAGE>
TNI Summary Consolidated Financial and Operating Data
(in thousands, except per share data and transaction data)
The following table sets forth for the periods indicated selected
consolidated financial and operating data for TNI. The consolidated balance
sheet data and consolidated statement of operations data as of and for the years
ended December 31, 1994, 1995, 1996, 1997, and 1998 have been derived from TNI's
audited consolidated financial statements and as of and for the six months ended
June 30, 1998 and 1999 have been derived from TNI's unaudited consolidated
financial statements. The following summary consolidated financial and operating
data should be read in conjunction with TNI's more detailed consolidated
financial statements and related notes incorporated by reference in this
prospectus/proxy statement.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------- ------------------
1994(1) 1995 1996 1997 1998(2) 1998 1999
--------- ------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues..................................... $26,526 $41,365 $52,291 $63,344 $101,906 $38,510 $80,827
Cost of network services..................... 14,200 21,819 28,771 35,322 62,796 21,874 50,900
--------- ------- ------- ------- ---------- -------- --------
Gross profit................................. 12,326 19,546 23,520 28,022 39,110 16,636 29,927
--------- ------- ------- ------- ---------- -------- --------
Other operating expenses:
Engineering & development................... 1,575 2,241 2,692 3,431 5,565 2,168 2,927
Selling, general & administrative........... 3,842 5,697 7,491 7,941 12,474 5,185 9,020
Depreciation................................ 1,830 3,081 4,068 4,793 6,693 2,987 5,080
Amortization of intangibles................. 566 1,138 1,485 1,570 4,090 1,092 4,186
Reserve for AMNEX assets..................... -- -- -- -- -- -- 919
--------- ------- ------- ------- ---------- -------- --------
Total other operating expenses.............. 7,813 12,157 15,736 17,735 28,822 11,432 22,132
--------- ------- ------- ------- ---------- -------- --------
Income from operations....................... 4,513 7,389 7,784 10,287 10,288 5,204 7,795
Interest income/(expense) net................ 220 918 1,670 1,939 327 856 (1,051)
--------- ------- ------- ------- ---------- -------- --------
Income before income taxes................... 4,733 8,307 9,454 12,226 10,615 6060 6,744
Provision for income taxes................... 1,491 3,157 3,640 4,840 4,425 2,395 2,552
Equity in earnings of unconsolidated
affiliate................................... -- -- -- -- 356 81 93
Minority interest in net (income)/loss of
consolidated subsidiary..................... -- -- -- -- 319 -- (128)
--------- ------- ------- ------- ---------- -------- --------
Net income................................... $ 3,242 $ 5,150 $ 5,814 $ 7,386 $ 6,865 $ 3,746 $ 4,157
======== ======== ======= ======= ========== ======== ========
Diluted earnings per common share............ $0.33 $0.45 $0.46 $0.59 $0.52 $0.29 $0.30
======= ======= ======= ======= ======== ======= =======
Weighted average shares-diluted.............. 9,947 11,534 12,591 12,619 13,279 13,123 13,692
======= ======= ======= ======= ======== ======= =======
POS Transaction Volume (in millions)......... 824 1,218 1,900 2,386 3,696 1,280 2,965
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ ----------------
1994(1) 1995 1996 1997 1998(2) 1998 1999
---------- ------ ------ ------ --------- ------ ------
Balance Sheet Data:
Cash and cash equivalents...................... $ 7,313 $18,681 $14,735 $18,516 $ 12,339 $ 6,579 $ 13,940
Working capital................................ 7,749 25,779 34,851 33,230 21,212 18,993 27,209
Total assets................................... 30,835 61,348 68,551 76,109 174,859 88,643 183,135
Long term debt................................. 18 -- -- -- 59,325 -- 62,946
Total stockholders' equity..................... 24,733 54,593 62,191 68,475 84,177 78,408 92,805
</TABLE>
- --------------------------
(1) Includes the results of Fortune Telecommunications, Inc. from June 6, 1994,
the closing date of its acquisition by TNI, through December 31, 1994.
(2) Includes the results of TNI's SunTech, OmniLink and TAS acquisitions from
the closing dates of February 27, 1998, July 1, 1998 and September 10,
1998.
-17-
<PAGE>
RISK FACTORS
In addition to the other information included and incorporated by reference
in this prospectus/proxy statement, TNI stockholders should consider carefully
the matters described below in determining whether to adopt the merger
agreement.
Risk Factors Relating to the Merger
The exchange ratio for TNI common stock to be acquired in the merger is fixed
and will not be adjusted if there is any change in stock price
Under the merger agreement, each share of TNI common stock will be
converted into the right to receive one share of PSINet common stock or $45.00
in cash or a combination of stock and cash. This exchange ratio is a fixed
number and will not be adjusted if there is any increase or decrease in the
price of PSINet common stock or TNI common stock. The prices of PSINet common
stock and TNI common stock at the closing of the merger may vary from their
respective prices on the date of this prospectus/proxy statement and on the date
of the special meeting. These prices may vary because of changes in the
business, operations or prospects of PSINet or TNI, market assessments of the
likelihood that the merger will be completed, the timing of the completion of
the merger, the prospects of post-merger operations, regulatory considerations,
general market and economic conditions and other factors. Because the date that
the merger is completed may be later than the date of the special meeting, the
prices of PSINet common stock and TNI common stock on the date of the special
meeting may not be indicative of their respective prices on the date the merger
is completed. We urge TNI stockholders to obtain current market quotations for
PSINet common stock and TNI common stock in connection with their determination
as to which election of merger consideration they desire to make.
PSINet may face difficulties in integrating TNI's business into PSINet's
business
PSINet and TNI entered into the merger agreement with the expectation that
integrating TNI's eCommerce business with PSINet's technology with Internet
connectivity, Web hosting and a suite of value-added products and services
designed to maximize utilization of the Internet will present a significant
opportunity to create a combined organization that will be a leader in providing
global eCommerce and Internet solutions to businesses. PSINet's ability to
create such a combined organization will be subject to risks associated with
acquisitions relating to difficulties in integrating combined operations, the
potential disruption of operations and the related negative impact on earnings
and the incurrence of substantial expenses that could adversely affect its
financial condition. PSINet intends to integrate TNI's business into PSINet.
Achieving the anticipated benefits of the merger will depend in large part upon
whether the integration of TNI's business into PSINet is accomplished in an
efficient and effective manner. The integration of TNI's business into PSINet
will require, among other things, integration of the products and services,
technologies, distribution channels, management information systems and key
personnel of TNI's business into PSINet. There can be no assurance that the
integration of TNI's business will be accomplished in an efficient and effective
manner, if at all. If significant difficulties are encountered in the
integration, it could have a material adverse effect on the business, results of
operations and financial condition of PSINet.
The integration of operations and technologies following the merger will
require the dedication of management and other personnel which may distract
their attention from the day-to-day business of PSINet, development or
acquisition of new products, services and technologies, and the pursuit of other
business acquisition opportunities. The difficulties of integrating PSINet and
TNI may be increased by the necessity of coordinating organizations with
distinct cultures and widely disbursed operations. Successful integration of
the two companies' sales and marketing organizations will require the sales and
marketing personnel of
-18-
<PAGE>
each company to learn about the often technically-complex products, services and
technologies of the other company.
In addition, successful combination of the PSINet and TNI businesses will
be dependent at least in part on the retention and integration of the key
management, sales, marketing and engineering and other technical employees of
TNI's business into PSINet. Competition for qualified personnel in the
eCommerce industry is intense and competitors often use aggressive tactics to
recruit key employees during the period leading up to a merger and during the
integration phase following a merger. While each of PSINet and TNI is engaged
in ongoing efforts to retain key employees, it may be more difficult for PSINet
to retain such employees after the merger. In particular, in connection with
the signing of the merger agreement, unvested stock options held by employees of
TNI immediately vested. The acceleration of these options could potentially
reduce the retention incentive provided by the options. Neither PSINet nor TNI
can assure you that TNI employees will remain with PSINet. The loss of services
of any key employees of TNI could have a material adverse effect on the
business, results of operations and financial condition of PSINet.
The price of PSINet common stock may be affected by factors different from those
affecting the price of TNI common stock
Upon completion of the merger, many holders of TNI common stock will become
holders of PSINet common stock. PSINet's business differs from that of TNI, and
PSINet's results of operations, as well as the price of PSINet common stock, may
be affected by factors different from those affecting the price of TNI common
stock. For a discussion of PSINet's and TNI's businesses and other factors to
consider in connection with the businesses, see PSINet's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, and TNI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, which are incorporated by
reference in this prospectus/proxy statement.
It is possible that the merger will not be consummated because of a failure to
qualify as a reorganization for tax purposes
The consummation of the merger is contingent upon the receipt by each of
PSINet and TNI of an opinion from their attorneys that the merger will be
treated as a reorganization within the meaning of Section 368(a)(2)(D) of the
Internal Revenue Code (the "Code"). It is intended that the merger qualify as a
reorganization under Section 368(a)(2)(D) of the Code. To qualify as a
reorganization, among other requirements, the merger must satisfy a "continuity
of interest" test, under which the TNI stockholders must receive a meaningful
ownership interest in PSINet after the merger. Generally, this test will be
considered satisfied if TNI stockholders in the aggregate exchange a substantial
part of their TNI common stock for PSINet common stock in the merger. The
merger has been structured with the intent that 50% of the consideration
provided in the merger will consist of PSINet common stock. It is possible,
however, that the value of the PSINet common stock issued at the time of the
merger could fall below this 50% threshold. Arent Fox Kinter Plotkin & Kahn,
PLLC, counsel to TNI, and Nixon Peabody LLP, counsel to PSINet, will issue
opinions that the "continuity of interest" requirement as specified in Treas.
Reg. sec. 1.368-1(b) and as interpreted in certain Internal Revenue Service
rulings and federal judicial decisions will be satisfied if the amount of stock
received by TNI stockholders is at least 40% (and the amount of cash received is
no more than 60%) of the aggregate merger consideration (including payments to
dissenters and payments in lieu of fractional shares). Arent Fox Kinter Plotkin
& Kahn, PLLC, and Nixon Peabody LLP, will not issue opinions that the continuity
of interest requirement will be met if the amount of stock received by TNI
stockholders is less than 40% (and the amount of cash received is more than 60%)
of the aggregate merger consideration (including payments to
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dissenters and payments in lieu of fractional shares). The last reported sales
price of PSINet common stock on October 18, 1999 was $32.31. In order for the
stock received by TNI stockholders to be less than 40% of the aggregate merger
consideration (including payments to dissenters and payments in lieu of
fractional shares), the trading price per share of PSINet common stock would
generally have to decline to below $30.00.
Even if Arent Fox and Nixon Peabody opine that the "continuity of interest"
requirement is met, those opinions are not binding and neither PSINet nor TNI
can assure you that the Service or a court would ultimately determine that the
continuity of interest requirement has been met (and that the merger qualifies
as a reorganization) if the amount of stock consideration received by TNI
stockholders is less than 50% of the aggregate merger consideration (including
payments to dissenters and payments in lieu of fractional shares).
If the merger of TNI into PSINet Shelf I Inc. is not treated as a
reorganization for federal income tax purposes, the merger would be deemed a
sale of assets by TNI, and TNI would recognize gain in an amount equal to the
excess of the fair market value of the merger consideration over the adjusted
basis of the assets transferred to PSINet Shelf I Inc. Any such tax liability
could have a material adverse effect on either or both of the consolidated
financial position or the results of operations of PSINet. A merger of PSINet
Shelf I Inc. into TNI would not qualify as a reorganization and would be
considered a taxable sale of stock by the TNI stockholders to PSINet. If the
merger is not treated as a tax-free reorganization, each stockholder of TNI
would generally be required to recognize gain on the exchange of the
stockholder's TNI common stock for the stockholder's share of the merger
consideration in the amount of the excess of any cash received plus the value at
the time of the merger of the PSINet common stock received over his or her basis
in the TNI common stock.
Risk Factors Relating to PSINet
PSINet has significant indebtedness and may not be able to meet its obligations
PSINet is highly leveraged and has significant debt service requirements.
As of June 30, 1999, after giving pro forma effect to the issuance in July 1999
of $1.2 billion aggregate principal amount of 11% senior notes, PSINet's total
indebtedness would have been $2.4 billion, representing 82% of total
capitalization. For the three and six months ended June 30, 1999, PSINet's
interest expense was $31.9 million and $61.5 million, respectively. After giving
pro forma effect to the 11% senior notes offering, PSINet's interest expense,
including amortization of deferred financing costs for the three and six months
ended June 30, 1999 would have been $66.2 million and $130.1 million,
respectively. As a result of the completion of the 11% senior notes offering,
PSINet's annual interest expense on its outstanding 11% senior notes, 10% senior
notes and 11 1/2% senior notes will be $241.5 million, assuming an exchange rate
of Euro 0.92 to U.S $1.00, which was the average exchange rate for the period
from January 1 to June 30, 1999. PSINet will have additional interest expense
attributable to its revolving credit facility and equipment lease arrangements.
PSINet's high level of indebtedness could have several important effects on
its future operations, which, in turn, could have important consequences for the
holders of its securities, including the following:
. a substantial portion of PSINet's cash flow from operations must be used to
pay interest on its indebtedness and, therefore, will not be available for
other business purposes;
. covenants contained in the agreements evidencing PSINet's debt obligations
require PSINet to meet many financial tests, and other restrictions limit
its ability to borrow additional funds or to dispose of assets and may
affect its flexibility in planning for, and reacting to, changes in its
business, including possible acquisition activities and capital
expenditures; and
. PSINet's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or
other purposes may be impaired.
PSINet's ability to meet its debt service obligations and to reduce its
total indebtedness depends on its future operating performance and on economic,
financial, competitive, regulatory and other factors
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affecting its operations. Many of these factors are beyond PSINet's control and
PSINet's future operating performance could be adversely affected by some or all
of these factors. PSINet historically has been unable to generate sufficient
cash flow from operations to meet its operating needs and has relied on equity,
debt and capital lease financings to fund its operations. However, based on
PSINet's 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 its presently
anticipated future requirements for working capital, capital expenditures and
scheduled payments of interest on its debt. PSINet cannot assure you, however,
that its business will generate sufficient cash flow from operations or that
future working capital borrowings will be available in an amount sufficient to
enable PSINet to service its debt, or to make necessary capital expenditures. In
addition, PSINet cannot assure you that it will be able to raise additional
capital for any refinancing of its debt in the future.
PSINet has experienced continuing losses, negative cash flow and fluctuations in
operating results
PSINet's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, PSINet must, among other things, respond to
competitive developments, continue to attract and retain qualified persons,
continue to upgrade its management and financial systems, and continue to
upgrade its technologies and commercialize its network services incorporating
its technologies. PSINet cannot assure you that it will be successful in
addressing these risks, and the failure to do so could have a material adverse
effect on its business, financial condition, results of operations and ability
to pay when due principal, interest and other amounts due on its debt. Although
PSINet has 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
and $228.7 million for the first six months of 1999, it has incurred losses and
experienced negative EBITDA during those periods. PSINet may continue to operate
at a net loss and may experience negative EBITDA as PSINet continues its
acquisition program and the expansion of its global network operations. PSINet
has incurred net losses available to common shareholders of $55.1 million in
1996, $46.0 million in 1997, $264.9 million in 1998 and $121.3 million for the
first six months of 1999. PSINet has incurred negative EBITDA of $28.0 million,
$21.2 million and $42.1 million and $6.8 million for each of the years ended
December 31, 1996, 1997 and 1998 and the three months ended March 31, 1999,
respectively, and had positive EBITDA of $0.2 million for the three months ended
June 30, 1999. At June 30, 1999, PSINet had an accumulated deficit of $548.8
million. PSINet cannot assure you that it will be able to achieve or sustain
profitability or sustain positive EBITDA. PSINet's operating results have
fluctuated in the past and may fluctuate significantly in the future as a result
of a variety of factors, some of which are outside PSINet's 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 its network;
. the introduction of new services by PSINet or its competitors;
. the mix of services sold and the mix of channels through which those services
are sold;
. pricing changes and new product introductions by PSINet and its competitors;
. delays in obtaining sufficient supplies of sole or limited source equipment
and telecom facilities; and
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. potential adverse regulatory developments.
As a strategic response to a changing competitive environment, PSINet may
elect from time to time to make pricing, service or marketing decisions that
could have a material adverse effect on its business, results of operations and
cash flow.
PSINet will depend on the cash flows of its subsidiaries in order to satisfy its
debt obligations
PSINet is an operating entity which also conducts a significant portion of
its business through its subsidiaries. PSINet's operating cash flow and
consequently its ability to service its debt is therefore partially dependent
upon its subsidiaries' earnings and their distributions of those earnings to
PSINet. It may also be dependent upon loans, advances or other payments of
funds to PSINet by those subsidiaries. PSINet's subsidiaries are separate legal
entities and have no obligation, contingent or otherwise, to pay any amount due
under to PSINet's senior notes or to make any funds available for that purpose.
PSINet's subsidiaries' ability to make payments may be subject to the
availability of sufficient surplus funds, the terms of the subsidiaries'
indebtedness, applicable laws and other factors.
PSINet may not be able to fund the expansion it will need to remain competitive
In order to maintain its competitive position and continue to meet the
increasing demands for service quality, availability and competitive pricing,
PSINet expects to make significant capital expenditures. At September 30, 1999,
PSINet was obligated to make future cash payments that total $200.7 million for
acquisitions of global fiber-based telecommunications bandwidth, including
indefeasible rights of use or other rights. PSINet also expects that there will
be additional costs, such as connectivity and equipment charges, in connection
with taking full advantage of the acquired bandwidth and indefeasible rights of
use. PSINet currently believes that its capital expenditures in 1999 will be
greater than those in 1998 and that as a result of its completion of the recent
debt and equity offerings, its capital expenditures will be accelerated. This
may occur as PSINet continues to execute its expansion strategy in the 20
largest global telecommunications markets and beyond.
PSINet historically has been unable to generate sufficient cash flow from
operations to meet its operating needs and has relied on equity, debt and
capital lease financings to fund its operations. However, PSINet believes that
it will have a reasonable degree of flexibility to adjust the amount and timing
of capital expenditures in response to market conditions, competition, its then
existing financing capabilities and other factors. PSINet also believes that
working capital generated from the use of acquired bandwidth, together with
other existing working capital from existing credit facilities, from capital
lease financings, from the proceeds of its recent debt and equity offerings and
from proceeds of future equity or debt financings will be sufficient to meet the
presently anticipated working capital and capital expenditure requirements of
its operations. PSINet cannot assure you, however, that it will have
sufficient additional capital or obtain financing on satisfactory terms to
enable it to meet its capital expenditures and working capital requirements.
PSINet 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, PSINet may need to raise additional
funds to develop new products or otherwise respond to changing business
conditions or unanticipated competitive pressures. PSINet cannot assure you
that it will be able to raise additional funds on favorable terms. If it is
unable to obtain additional funds on acceptable terms, PSINet may determine not
to enter into various expansion opportunities.
PSINet faces risks associated with acquisitions and strategic alliances and
investments relating to difficulties in integrating combined operations,
incurrence of additional debt to finance acquisitions
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and operations of acquired businesses, potential disruption of operations and
related negative impact on earnings, and incurrence of substantial expenses that
could adversely affect its financial condition
Growth through acquisitions represents a principal component of PSINet's
business strategy. Over the 24 months ended September 30, 1999, PSINet acquired
47 ISPs primarily in 16 of the 20 largest global telecommunications markets.
PSINet expects to continue to acquire assets and businesses principally relating
to or complementary to its current operations. PSINet may also seek to develop
strategic alliances and investments (including venture capital investments) both
domestically and internationally. Any such future acquisitions or strategic
alliances and investments would be accompanied by the risks commonly encountered
in acquisitions, strategic alliances or investments. Those risks include, among
other things:
. the difficulty of integrating the operations and personnel of the companies,
particularly in non-U.S. markets;
. the potential disruption of its ongoing business;
. the inability of management to maximize its financial and strategic position
by the successful incorporation of licensed or acquired technology and
rights into its 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.
PSINet cannot assure you that it will be successful in overcoming these
risks or any other problems encountered in connection with such acquisitions,
strategic alliances or investments. PSINet believes that after eliminating
redundant network architecture and administrative functions and taking other
actions to integrate the operations of acquired companies it will be able to
realize cost savings. However, it cannot assure you that its integration of
acquired companies' operations will be successfully accomplished. PSINet's
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 its business, financial condition and results of
operations. In addition, as PSINet proceeds with acquisitions in which the
consideration consists of cash, a substantial portion of its available cash will
be used to consummate such acquisitions.
As with each of PSINet's recent acquisitions, the purchase price of many of
the businesses that might become attractive acquisition candidates for PSINet
likely will significantly exceed the fair values of the tangible 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. generally
accepted accounting principles, as presently in effect, must be expensed
immediately upon acquisition. Those expenses, in addition to the financial
impact of the acquisitions, could have a material adverse effect on PSINet's
business, financial condition and results of operations and could cause
substantial fluctuations in its quarterly and yearly operating results.
Furthermore, in connection with acquisitions or strategic alliances, PSINet
could incur substantial expenses, including the expenses of integrating the
business of the acquired company or the strategic alliance with its existing
business.
PSINet expects that competition for appropriate acquisition candidates may
be significant. PSINet may compete with other telecommunications companies with
similar acquisition strategies, many of which may be larger and have greater
financial and other resources than PSINet has. Competition for Internet
companies is based on a number of factors including price, terms and conditions,
size and access to capital,
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ability to offer cash, stock or other forms of consideration and other matters.
PSINet cannot assure you that it will be able to successfully identify and
acquire suitable companies on acceptable terms and conditions.
PSINet's growth and expansion may strain its ability to manage its operations
and its financial resources
PSINet's rapid growth has placed a strain on its administrative,
operational and financial resources and has increased demands on its systems and
controls. PSINet has approximately 600 points-of-presence and plans to continue
to expand the capacity of existing points-of-presence as customer-driven demand
dictates. In addition, PSINet has completed a number of acquisitions of
companies and telecommunications bandwidth during 1998 and the first half of
1999 and plans to continue to do so. PSINet anticipates that it may be
required to make continued enhancements to and expansion of its network. The
process of consolidating the businesses and implementing the strategic
integration of these acquired businesses with its existing business may take a
significant amount of time. It may also place additional strain on PSINet's
resources and could subject the company to additional expenses. PSINet cannot
assure you that it will be able to integrate these companies successfully or in
a timely manner. In addition, PSINet cannot assure you that its existing
operating and financial control systems and infrastructure will be adequate to
maintain and effectively monitor future growth.
PSINet's continued growth may also increase its need for qualified
personnel. PSINet cannot assure you that it will be successful in attracting,
integrating and retaining qualified personnel. PSINet's inability to accomplish
the following factors associated with its growth could have a material adverse
effect on its business, results of operations and financial condition:
. to continue to upgrade its networking systems or operating and financial
control systems;
. to recruit and hire necessary personnel or to successfully integrate new
personnel into its operations;
. to successfully integrate the operations of acquired companies or to manage
its growth effectively; or
. to adequately respond to the emergence of unexpected expansion difficulties.
PSINet faces risks associated with its acquisitions of bandwidth from network
suppliers, including its strategic alliance with IXC Communications Inc.,
relating to its dependence on their ability to satisfy their obligations to
PSINet, the possibility that PSINet may need to incur significant expenses to
utilize bandwidth and their ability to buildout their networks under
construction that could adversely affect PSINet's ability to utilize acquired
bandwidth
PSINet is subject to a variety of risks relating to its recent acquisitions
of fiber-based telecommunications bandwidth from its various global network
suppliers, including its strategic alliance with IXC Communications Inc., and
the delivery, operation and maintenance of that bandwidth. Those risks include,
among other things, the following:
. the risk that financial, legal, technical or other matters may adversely
affect suppliers' ability to perform their respective operation, maintenance
and other services relating to the bandwidth, which may adversely affect
PSINet's use of the bandwidth;
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. the risk that PSINet will not have access to sufficient additional capital
or financing on satisfactory terms to enable it to make the necessary
capital expenditures to take full advantage of the bandwidth;
. the risk that such suppliers may not continue to have the necessary
financial resources to enable them to complete, or may otherwise elect not
to complete, their contemplated buildout of the respective fiber optic
telecommunications systems; and
. the risk that the buildout may be delayed or otherwise adversely affected by
presently unforeseeable legal, technical or other factors.
In addition, IXC Communications Inc. has recently entered into an agreement
to be acquired by Cincinnati Bell. If the conditions to completion of the
transaction are satisfied and IXC is acquired, PSINet may face risks associated
in conducting business with a company which is undergoing a business
combination. These risks include, but are not limited to, the need for PSINet
to establish a good working relationship with the senior management and other
personnel of Cincinnati Bell and the potential disruption of IXC's ongoing
business. Although PSINet believes that it will be able to maintain a good
working relationship with IXC and that the business combination will not be
unduly disruptive, PSINet cannot assure you that it will be successful in
overcoming these risks or any other problems encountered in connection with its
acquisitions of bandwidth.
Continued international expansion is a key component of PSINet's business
strategy and, if PSINet is unable to complete this expansion, its financial
condition may be adversely affected
A key component of PSINet's business strategy is its continued expansion
into international markets. Revenue from PSINet's non-U.S. operations continues
to increase as a percentage of consolidated results, comprising 51% of revenue
in the second quarter of 1999. By comparison, PSINet's non-U.S. operations
comprised 31% of revenue in the second quarter of 1998 and 40% for all of 1998.
PSINet may need to enter into joint ventures or other strategic relationships
with one or more third parties in order to conduct its foreign operations
successfully. However, PSINet cannot assure you that it will be able to obtain
the permits and operating licenses required for it to operate, to hire and train
employees or to market, sell and deliver high quality services in these markets.
In addition to the uncertainty as to PSINet's ability to continue to expand its
international presence, there are risks inherent in doing business on an
international level. Those 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;
. the introduction of free ISP services for consumer customers;
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. 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 PSINet's international operations.
PSINet cannot assure you that these factors will not have an adverse effect
on its future international operations and, consequently, on its business,
financial condition and results of operations. In addition, PSINet cannot
assure you that laws or administrative practice relating to taxation, foreign
exchange, foreign ownership or other matters of countries within which it
operates will not change. Any of these changes could have a material adverse
effect on its business, financial condition and results of operations.
Countries in which PSINet operates may also experience economic
difficulties and uncertainties. These economic difficulties and uncertainties
could have a material adverse effect on PSINet's business, financial condition
and results of operations.
PSINet's financial results and its financial position may be adversely affected
by currency and exchange risks.
During the year ended December 31, 1998 and the six months ended June 30,
1999, 40% and 51%, respectively, of PSINet's revenue was derived from operations
outside the United States and at June 30, 1999, 30% of its assets were in
operations outside of the United States. PSINet anticipates that a significant
percentage of its future revenue and operating expenses will continue to be
generated from operations outside the United States and expects to continue to
invest in non-U.S. businesses. Consequently, a substantial portion of PSINet's
revenue, operating expenses, assets and liabilities will be subject to
significant foreign currency and exchange risks. Obligations of customers and of
PSINet in foreign currencies will be subject to unpredictable and indeterminate
fluctuations if those currencies change in value relative to U.S. dollars.
Furthermore, those customers and PSINet may be subject to exchange control
regulations which might restrict or prohibit the conversion of the currencies
into U.S. dollars. Although PSINet has not entered into hedging transactions to
limit its foreign currency risks, as a result of the increase in its foreign
operations, PSINet may implement those practices in the future. PSINet cannot
assure you that the occurrence of any of these factors will not have a material
adverse effect on its business, financial position or results of operations.
PSINet depends 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
qualified personnel with the combination of skills and attributes required to
carry out PSINet's strategies is often lengthy. PSINet's success depends to a
significant degree upon its ability to attract and retain qualified management,
technical, marketing and sales personnel and upon their continued contributions.
In particular, PSINet's success is highly dependent upon the personal abilities
of its senior executive management, including William L. Schrader, its Chairman
of the Board and Chief Executive Officer and the founder of PSINet, Harold S.
Wills, its President and Chief Operating Officer, and Edward D. Postal, its
Executive Vice President and Chief Financial Officer. PSINet has employment
agreements with Messrs. Wills and Postal. The loss of the services of any one
of them could have a material adverse effect on PSINet's business, financial
condition or results of operations.
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PSINet depends on suppliers and could be affected by changes in suppliers or
delays in delivery of their products and services
PSINet has few long-term contracts with its suppliers. PSINet is dependent
on third party suppliers for its leased-line connections or bandwidth. Some of
these suppliers are or may become competitors of PSINet, and these suppliers are
not subject to any contractual restrictions upon their ability to compete with
PSINet. If these suppliers change their pricing structures, PSINet may be
adversely affected. Moreover, any failure or delay on the part of PSINet's
network providers to deliver bandwidth to PSINet or to provide operations,
maintenance and other services with respect to bandwidth in a timely or adequate
fashion could adversely affect PSINet.
PSINet is also dependent on third party suppliers of hardware components.
Although PSINet attempts to maintain a minimum of two vendors for each required
product, some components used by PSINet in providing its networking services are
currently acquired or available from only one source. PSINet has 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 its network.
A failure by a supplier to deliver quality products on a timely basis, or
PSINet's inability to develop alternative sources if and as required, could
result in delays which could have a material adverse effect on PSINet. PSINet's
remedies against suppliers who fail to deliver products on a timely basis are
limited by contractual liability limitations contained in supply agreements and
purchase orders and, in many cases, by practical considerations relating to
PSINet's desire to maintain good relationships with the suppliers. As PSINet's
suppliers revise and upgrade their equipment technology, PSINet may encounter
difficulties in integrating the new technology into its network.
Many of the vendors from whom PSINet purchases 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 PSINet
is charged by the regional Bell operating companies and other carriers, which
could have a material adverse effect on PSINet's business, financial condition
and results of operations. Moreover, PSINet is subject to the effects of other
potential regulatory actions which, if taken, could increase the cost of
PSINet's telecommunications bandwidth through, for example, the imposition of
access charges.
The terms of PSINet's financing arrangements may restrict its operations
PSINet's financing arrangements are secured by substantially all of its
assets and stock of some of its subsidiaries. These financing arrangements
require that PSINet satisfy many financial covenants. PSINet's ability to
satisfy these financial covenants may be affected by events beyond its control
and, as a result, PSINet cannot assure you that it will be able to continue to
satisfy such covenants. These financing arrangements also currently prohibit
PSINet from paying dividends and repurchasing its capital stock without the
lender's consent. PSINet's failure to comply with the covenants and restrictions
in these financing arrangements could lead to a default under the terms of these
agreements. If PSINet defaults under the financing arrangements, PSINet's
lenders would be entitled to accelerate the outstanding indebtedness and
foreclose upon the assets securing the 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 PSINet's
securities. In addition, the collateral security arrangements under PSINet's
existing financing arrangements may adversely affect its ability to obtain
additional borrowings.
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PSINet's financial condition may be adversely affected if its systems and those
of its suppliers fail because of Year 2000 problems
The commonly referred to Year 2000 or Y2K problem results from the fact
that many existing computer programs and systems use only two digits to identify
the year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not
corrected, computer applications that use a two-digit format could fail or
create erroneous results in any computer calculation or other processing
involving the Year 2000 or a later date. PSINet has 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 PSINet's 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 PSINet's ability to
continue its operations.
PSINet has developed detailed plans for implementing, testing and
completing any necessary modifications to its key computer systems and equipment
with embedded chips to ensure that they are Y2K compliant. PSINet engaged a
third party consultant to perform an assessment of its U.S. internal systems
(e.g., accounting, billing, customer support and network operations) to
determine the status of its Y2K compliance. The assessment of these systems has
been completed and, while some minor changes were necessary, PSINet believes
that no material changes or modifications to its internal systems are required
to achieve Y2K compliance. PSINet's U.S. chief information officer has developed
a test bed of its U.S. internal systems to implement and complete testing of the
requisite minor changes. PSINet believes that its U.S. internal systems are
presently Y2K ready. PSINet has completed an inventory of its internal systems
that it uses outside of the United States 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. PSINet anticipates that its international operations will be Y2K
compliant during the fourth quarter of 1999. To help ensure that its network
operations and services to its customers are not interrupted due to the Y2K
problem, PSINet has established a network operations team that meets weekly to
examine its network on a worldwide basis. This team of operational staff have
conducted inventories of PSINet's network equipment (software and hardware) and
have found no material Y2K compliance issues. PSINet believes that all equipment
currently being purchased for use in the PSINet network is Y2K compliant. Any
existing equipment that is not Y2K compliant is in the process of being made Y2K
compliant through minor changes to the software or hardware or, in limited
instances, replacement of the equipment. PSINet believes that its network is
presently Y2K compliant.. In addition to administering the implementation of
necessary upgrades for Y2K compliance, its network team has developed a
contingency plan to address any potential problems that may occur with its
network as it enters the year 2000. PSINet believes that, as a result of its
detailed assessment and completed modifications, the Y2K issue will not pose
significant operational problems for the company. 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
PSINet's operations.
PSINet's cost of addressing Y2K issues has been minor to date, less than 5%
of its 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.
PSINet's 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 PSINet
include,
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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 PSINet's operations. The total cost of Y2K assessments and remediation
is funded through cash on hand and available from other sources. PSINet is
expensing these costs, as appropriate. The financial impact of making all
required systems changes or other remediation efforts cannot be known precisely,
but PSINet does not expect the impact to be material to PSINet's financial
position, results of operations, or cash flows. PSINet has not canceled any
principal information technology projects as a result of its Y2K effort,
although PSINet has rescheduled some internal tasks to accommodate this effort.
In addition, PSINet has identified, prioritized and is communicating with
its suppliers, vendors, customers, lenders and other material third parties to
determine their Y2K status and any probable impact on the company. To date,
PSINet's inquiries have not revealed any significant Y2K noncompliance issue
affecting its material third parties. PSINet will continue to monitor and
evaluate its long-term relationships with its material third parties based on
their responses to its inquiries and on information learned from other sources.
If any of PSINet's material third parties are not Y2K ready and their non-
compliance causes a material disruption to any of their respective businesses,
PSINet's 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 receive and transfer funds;
. an interruption in delivery of supplies from vendors;
. a loss of voice and data connections;
. a loss of power to PSINet's facilities; and
. other interruptions in the normal course of PSINet's operations, the nature
and extent of which PSINet cannot foresee.
PSINet will continue to evaluate the nature of these risks, but at this
time PSINet is unable to determine the probability that any of the risks will
occur, or if any does occur, what the nature, length or other effects, if any,
such risks may have on the company. If any of PSINet's material third parties
experience significant failures in their computer systems or operations due to
Y2K non-compliance, it could affect PSINet's ability to process transactions or
otherwise engage in similar normal business activities. For example, while
PSINet expects its internal systems, U.S. and non-U.S., to be Y2K ready in
stages during 1999, PSINet and its 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, PSINet and its customers may not be able to send
and receive data and other electronic transmissions, which would have a material
adverse effect on its revenues and business and that of its customers. While
many of these risks are outside its control, PSINet has identified and contacted
its critical third party vendors and suppliers and is establishing contingency
plans to remedy any potential interruption to its operations.
While PSINet believes that it is adequately addressing the Y2K issue,
PSINet cannot assure you that its Y2K compliance effort will prevent every
potential interruption or that the cost and liabilities associated with the Y2K
issue will not materially adversely impact its business, prospects, revenues or
financial position. PSINet is uncertain as to its most reasonably likely worst
case Y2K scenario and, although PSINet has completed a contingency plan to
handle reasonably forseeable interruptions resulting from the Y2K
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problem, PSINet cannot assure you that its contingency plan will be capable of
adequately addressing every potential interruption that may occur.
PSINet faces a high level of competition in the Internet services industry
The market for Internet connectivity and related services is extremely
competitive. PSINet anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
established businesses from different industries.
PSINet's current and prospective competitors include other national,
regional and local ISPs, long distance and local exchange telecommunications
companies, cable television, direct broadcast satellite, wireless communications
providers and on-line service providers. PSINet believes that its network,
products and customer service distinguish it from these competitors. However,
some of these competitors have significantly greater market presence, brand
recognition and financial, technical and personnel resources than PSINet does.
PSINet competes with all of the major long distance companies, also known as
interexchange carriers, including AT&T, MCI WorldCom, 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.
PSINet believes that there is a move toward horizontal integration through
acquisitions of, joint ventures with, and the wholesale purchase of connectivity
from ISPs 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 prior acquisition of Global Center, Qwest
Communication's recently announced plans to acquire US West, AT&T's purchase
of IBM's global communications network and MCI Worldcom's recently announced
plans to merge with Sprint are indicative of this trend. Accordingly, PSINet
expects 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. This bundling of services may have an adverse
effect on PSINet's ability to compete effectively with the telecommunications
providers and may result in pricing pressure on PSINet that could have a
material adverse effect on its 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 and
Microsoft Network, have all entered the Internet access business by engineering
their current proprietary networks to include Internet access capabilities.
PSINet competes to a lesser extent with these on-line service providers.
However, America Online's 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 PSINet.
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
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consumer. However, it is likely that their target markets will expand to
encompass business customers, which is PSINet's target market. This expansion
could adversely affect the pricing of PSINet's service offerings. Moreover,
there has recently been introduced a number of free ISP services, particularly
in non-U.S. markets, and some ISPs are offering free personal computers to their
subscribers. While these services have been offered primarily to dial-up
consumer customers, they could be extended to dial-up business customers as
well. These trends could have a material adverse effect on PSINet's business,
financial condition and results of operations.
As a result of the increase in the number of competitors and the vertical
and horizontal integration in the industry, PSINet currently encounters and
expects to continue to encounter significant pricing pressure and other
competition. Advances in technology as well as changes in the marketplace and
the regulatory environment are constantly occurring, and PSINet cannot predict
the effect that ongoing or future developments may have on it or on the pricing
of its products and services. Increased price or other competition could result
in erosion of PSINet's market share and could have a material adverse effect on
PSINet's business, financial condition and results of operations. PSINet cannot
assure you that it will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully.
As PSINet continues to expand its operations outside the United States, it
will encounter new competitors and competitive environments. In some cases,
PSINet 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 PSINet's business. PSINet
cannot assure you that it will be able to purchase such services at a reasonable
price or at all. In addition to the risks associated with PSINet's 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. PSINet
cannot assure you that it can obtain similar levels of local knowledge. Failure
to obtain that knowledge could place PSINet at a significant competitive
disadvantage.
Technology trends and evolving industry standards could result in PSINet's
competitors developing or obtaining access to bandwidth and technologies that
carry more information faster than PSINet's bandwidth and technology and,
consequently, render PSINet's bandwidth or technology obsolete
PSINet's products and services are targeted toward users of the Internet,
which has experienced rapid growth. The market for Internet access and related
services is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product and service
introductions. PSINet's future success will depend, in part, on its ability to
effectively use and develop leading technologies.
PSINet cannot assure you that it will be successful in responding to
changing technology or market trends. In addition, services or technologies
developed by others may render PSINet's services or technologies uncompetitive
or obsolete. Furthermore, changes to PSINet's services in response to market
demand may require the adoption of new technologies that could likewise render
many of PSINet's assets technologically uncompetitive or obsolete. As PSINet
accepts bandwidth from IXC and its other existing global network suppliers or
acquires bandwidth or equipment from other suppliers that may better meet its
needs than existing bandwidth or equipment, many of its assets could be
determined to be obsolete or excess. The disposition of obsolete or excess
assets could have a material adverse effect on its business, financial condition
and results of operations.
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Even if PSINet does respond successfully to technological advances and
emerging industry standards, the integration of new technology may require
substantial time and expense, and PSINet cannot assure you that it will succeed
in adapting its network infrastructure in a timely and cost-effective manner.
PSINet may be liable for information disseminated through its network
The law relating to liability of ISPs for information carried on or
disseminated through their networks is not completely settled. A number of
lawsuits have sought to impose 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 ISP was protected by a provision of the Communications
Decency Act from liability for material posted on its system. However, the
findings in that particular case may not be applicable in other circumstances
with differing facts. Other courts have held that online service providers and
ISPs may, under some circumstances, be subject to damages for copying or
distributing copyrighted materials. However, in an effort to protect qualified
ISPs, the Digital Millennium Copyright Act was signed into law in October 1998.
Under some circumstances, this Act may provide qualified ISPs with a "safe
harbor" from liability for copyright infringement if the ISP does not have
knowledge of any transfer of potentially infringing material. PSINet cannot
assure you that it would be protected by the terms, provisions and
interpretations of this Act. 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. PSINet is unable to predict the
outcome of this case at this time. The imposition upon ISPs or web server hosts
of potential liability for materials carried on or disseminated through their
systems could require PSINet to implement measures to reduce its exposure to
that liability. Those measures may require that PSINet spend substantial
resources or discontinue some product or service offerings. Any of these
actions could have a material adverse effect on PSINet's business, operating
results and financial condition.
PSINet carries 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 PSINet 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 PSINet's business,
financial condition and results of operations.
The law relating to the regulation and liability of ISPs in relation to
information carried or disseminated also is undergoing a process of development
in other countries. For example a recent court decision in England held an ISP
liable for certain allegedly defamatory content carried through its network
under factual circumstances in which the ISP had been notified by the
complainant about the offending message which the ISP had failed to delete when
asked to do so by the complainant. 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 PSINet.
One particular area of uncertainty in this regard results from the entry
into effect of European Union Directive 95/46/EC on the protection of
individuals with regard to the processing of personal data and on the free
movement of such data ("EU Directive"). That Directive imposes obligations in
connection with the protection of personal data collected or processed by third
parties. Under some circumstances, PSINet may be regarded as subject to the EU
Directive's requirements. The United States and the European Union currently
are negotiating the application of the EU Directive to U.S. companies.
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FCC regulations may limit the services PSINet can offer
Consistent with PSINet's growth and acquisition strategy, PSINet is now
engaged in, or will soon be engaged in, activities that subject it 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.
PSINet's 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. PSINet is 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 its business.
PSINet cannot assure you 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 the company. Although the FCC has recently decided not to
allow local telephone companies to impose per-minute access charges on Internet
service providers, and that decision has been upheld by the reviewing court,
further regulatory and legislative consideration of this issue is likely. In
addition, some telephone companies are seeking relief through state regulatory
agencies. Such rules, if adopted, would affect PSINet's costs of serving dial-
up customers and could have a material adverse effect on its business, financial
condition and results of operations.
In addition to PSINet's Internet activities, PSINet has recently focused
attention on acquiring telecommunications assets and facilities, which is a
regulated activity. PSINet's wholly-owned subsidiary, PSINetworks Company, has
received an international Section 214 authorization from the FCC to provide
global facilities-based and global resale telecommunications services. PSINet's
wholly-owned subsidiary, PSINet Telecom UK Limited, has received an
international facilities license from DTI and OFTEL, the responsible
telecommunications regulatory bodies in the United Kingdom. Currently, the FCC
and OFTEL do not closely regulate the charges or practices of non-dominant
carriers, such as PSINet's subsidiaries. Nevertheless, these regulatory
agencies have the power to impose more stringent regulatory requirements on
PSINet and to change its regulatory classification, which may adversely affect
its business.
PSINet's subsidiaries have also received competitive local exchange
carrier, or CLEC, certification in New York, Virginia, Colorado and Texas, and
have applied for CLEC certification in Maryland and California. PSINet 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, PSINet could become subject to further regulation by the FCC and/or
another regulatory agency, including state and local entities.
An important issue for CLECs is the right to receive reciprocal
compensation for the transport and termination of Internet traffic. Most states
have required incumbent local exchange carriers to pay competitive local
exchange carriers 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 ISP traffic is jurisdictionally
interstate. The FCC also concluded that its jurisdictional decision does not
alter the exemption from access charges currently enjoyed by ISPs. 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
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compensation arrangements. The FCC order has been appealed and briefing is
expected to be completed in September 1999.
In light of the FCC's order, state commissions that previously addressed
this issue and required reciprocal compensation to be paid for ISP traffic, may
reconsider and may modify their prior rulings. Several incumbent local exchange
carriers are seeking to overturn prior orders, or seek refunds of, or authority
to escrow, payments that they claim are inconsistent with the FCCs' February
1999 order. In response to these and other challenges, some state commissions
have opened inquiries as to the appropriate compensation mechanisms in the
context of ISP traffic. Of the state commissions that have considered the issue
since the FCC's February 1999 order, the majority of these states have upheld
the requirement to pay reciprocal compensation for ISP traffic. PSINet cannot
assure you that any future court, state regulatory or FCC decision on this
matter will favor PSINet's position. An unfavorable result may have an adverse
impact on PSINet's potential future revenues as a CLEC, as well as increasing
its costs for PRIs generally.
If PSINet experiences system failure or shutdown, it may not be able to deliver
services
PSINet's success depends upon its ability to deliver reliable, high-speed
access to the Internet and upon the ability and willingness of its
telecommunications providers to deliver reliable, high-speed telecommunications
service through their networks. PSINet's network, and other networks providing
services to PSINet, 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. PSINet has designed its network to minimize the risk of such
system failure, for instance, with redundant circuits among POPs to allow
traffic rerouting. In addition, PSINet performs lab and field testing before
integrating new and emerging technology into the network, and engages in
capacity planning. Nonetheless, PSINet cannot assure you that it will not
experience failures or shutdowns relating to individual POPs or even
catastrophic failure of the entire network.
PSINet carries business personal property insurance at both scheduled
locations and unscheduled locations to protect the company against losses due to
property damage and business interruption. That coverage, however, may not be
adequate or available to compensate PSINet for all losses that may occur. In
addition, PSINet generally attempts to limit its liability to customers arising
out of network failures by contractually disclaiming all such liability. With
respect to many services, PSINet has also contractually limited liability to a
usage credit based upon the amount of time that the system was not operational.
PSINet cannot assure you, however, that those contracted limitations will be
enforceable. In any event, significant or prolonged system failures or
shutdowns could damage PSINet's reputation and result in the loss of customers.
Although PSINet has implemented network security measures, its network may be
susceptible to viruses, break-ins or disruptions
PSINet has implemented many network security measures, such as limiting
physical and network access to its routers. Nonetheless, PSINet's network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by its customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to its customers. Furthermore,
inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of PSINet's customers. This could, in turn, deter potential customers
and adversely affect PSINet's 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
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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 PSINet.
The security services that PSINet offers in connection with its customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although PSINet attempts to limit contractually its
liability in those instances, the occurrence of problems may result in claims
against PSINet or liability on PSINet's part. These kinds of claims, regardless
of their ultimate outcome, could result in costly litigation and could have a
material adverse effect on PSINet's business or reputation or on its ability to
attract and retain customers for its products. Moreover, until more consumer
reliance is placed on security technologies available, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry and PSINet's customer base and revenues.
PSINet depends on its technology and proprietary rights
PSINet's success and ability to compete is dependent in part upon its
technology and technical expertise and, to a lesser degree, on its proprietary
rights. In order to establish and protect its technology, PSINet relies on a
combination of copyright, trademark and trade secret laws and contractual
restrictions. Nevertheless, PSINet cannot assure you that these laws and
restrictions are adequate to protect PSINet's proprietary technology. It may be
possible for a third party to copy or otherwise obtain and use PSINet's products
or technology without authorization or to develop similar technology
independently. In addition, PSINet's products may be licensed or otherwise
utilized in foreign countries where laws may not protect PSINet's proprietary
rights to the same extent as do laws in the United States. It is PSINet's
policy to require employees and consultants and, when obtainable, suppliers to
execute confidentiality agreements upon the commencement of their relationships
with PSINet. Nonetheless, PSINet cannot assure you that these precautions will
be adequate to prevent misappropriation of its technology or that its
competitors will not independently develop technologies that are substantially
equivalent or superior to PSINet's technology.
In addition, PSINet is also subject to the risk of adverse claims and
litigation alleging infringement by PSINet of the intellectual property rights
of others. From time to time, PSINet has received claims that it has infringed
other parties' proprietary rights. While PSINet does not believe that its has
infringed the proprietary rights of other parties, PSINet cannot assure you that
third parties will not assert infringement claims in the future with respect to
its current or future products. Those claims may require that PSINet enter into
license arrangements or may result in protracted and costly litigation,
regardless of the merits of the claims. PSINet cannot assure you that any
necessary licenses will be available or that, if available, the licenses can be
obtained on commercially reasonable terms.
PSINet has 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 PSINet's business, financial condition and results
of operations. If PSINet introduces new or enhanced services with reliability,
quality or compatibility problems, it could significantly delay or hinder market
acceptance of those services, which could adversely affect PSINet's ability to
attract new customers and subscribers. PSINet's services may contain undetected
errors or defects when first introduced or as enhancements are introduced.
Despite testing by PSINet or its customers, PSINet cannot assure you that errors
will not be found in new services after commencement of commercial deployment.
These errors could result in additional development costs, loss of or delays in
market acceptance, diversion of technical and other resources from PSINet's
other development efforts and the loss of credibility with PSINet's customers
and subscribers, any of which could have a material adverse effect on PSINet's
business, financial condition and results of operations.
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Additionally, if PSINet is unable to match its network capacity to customer
demand for its services, its network could become congested during periods of
peak customer demand. That congestion could adversely affect the quality of
service PSINet is able to provide. Conversely, due to the high fixed cost
nature of PSINet's infrastructure, if PSINet's network is under-utilized, it
could adversely affect PSINet's ability to provide cost-efficient services.
PSINet's failure to match network capacity to demand could have a material
adverse effect on its business, financial condition or results of operations.
The market price and trading volume of PSINet's stock may be volatile
The market price and trading volume of PSINet's common stock and
convertible preferred stock has been and may continue to be highly volatile.
Factors such as variations in PSINet's revenue, earnings and cash flow and
announcements of new service offerings, technological innovations, strategic
alliances or acquisitions involving PSINet's competitors or price reductions by
PSINet, PSINet's competitors or providers of alternative services could cause
the market price of PSINet's common stock and convertible preferred 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. The broad market fluctuations have
adversely affected and may continue to adversely affect the market price of
PSINet's common stock and convertible preferred stock.
PSINet does not anticipate that it will pay cash dividends on its common stock
PSINet has never declared or paid any cash dividends on its common stock
and does not anticipate paying cash dividends on its common stock in the
foreseeable future. In addition, PSINet's debt securities and credit facility
contain limitations on its ability to declare and pay cash dividends.
Risk Factors Relating to TNI
TNI's expansion of its "800" backbone and access capacity involves higher
network costs that could adversely affect its business and operating results
TNI has expanded, and continues to expand, its "800" backbone and access
network capacity to ensure adequate capacity and appropriate network
architecture for the significant increases in network traffic primarily related
to TNI's acquisition from AT&T Corp. of the right to provide services under
customer service contracts relating to AT&T's Transaction Access Service
business, but also to accommodate increasing volumes from its base business.
The costs of establishing an "800" access service are expected to negatively
impact gross margins until the installation costs are offset by an increase in
transaction volumes transported using TNI's own "800" access service. After a
particular transaction volume level, TNI believes, but neither TNI nor PSINet
can assure you, that gross margins will increase due to a significant lower
variable cost per transaction from TNI's own "800" access service versus the
variable cost charged by third party service providers including AT&T. TNI's
own "800" access service also reduces TNI's reliance upon these third party
service providers. The ultimate impact on TNI's gross margin percentage will
primarily depend upon the timing and success of the roll-out of TNI's own "800"
access service and the transition of customers from "800" services purchased
from third parties to TNI's "800" access service. The increased costs of
network services relating to the expansion of TNI's "800" access service could
have a material adverse effect on TNI's business, results of operations and
financial condition.
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TNI derives a substantial portion of its revenue from a small number of
customers
For the year ended December 31, 1998, approximately 44% of TNI's total
revenues were derived from its five largest customers, and for the six months
ended June 30, 1999, approximately 47% of TNI's total revenues were derived from
these customers. The loss of any one or more of these customers would have a
material adverse effect on TNI's business, operating results and financial
condition. TNI has multi-year contracts with these customers. These contracts
expire between June 2000 and May 2002. Neither TNI nor PSINet can assure you
that these contracts will be renewed.
TNI depends on market expansion and on its expansion into new markets
Although TNI has grown rapidly since it became operational in June 1991,
TNI's future growth and profitability will depend in part on:
. the further expansion of:
. the point of sale/point of service transaction network services
market;
. the telecommunications services market;
. the financial services market;
. the emergence of other markets for:
. electronic transaction network services;
. services for automated teller machine processing;
. services for healthcare claims processing;
. services for electronic benefits transfer; and
. TNI's ability to penetrate these markets both domestically and
internationally.
Further market expansion depends on the continued growth in the number of
transactions and the continued automation of traditional paper-based processing
systems. Neither TNI nor PSINet can assure you that markets for the TNI network
and telecommunications services will continue to expand and develop or that TNI
will succeed in penetrating new markets.
TNI faces significant competition
The point of sale/point of service transaction network services market and
the telecommunications services market are highly competitive, and TNI expects
competition in each of these businesses to increase. TNI may be unable to
compete successfully for the following reasons.
TNI's competitors include public data networks, major interexchange
carriers such as MCI/ WorldCom, Sprint and AT&T, and customers who may decide to
perform network services in-house. Several of TNI's competitors have recently
introduced new products that compete with TNI's products. Increased competition
has resulted in price reductions and reduced margins. Increased competition
could result in additional price reductions, reduced margins and loss of market
share, all of which could materially and adversely affect TNI's business,
operating results and financial condition. Many of TNI's current and
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potential competitors have significantly greater financial, technical, marketing
and other resources than TNI has. As the point of sale/point of service
transaction network services market and the telecommunications services market
continue to grow, TNI's competitors may devote greater resources to the
development and marketing of new competitive services and the marketing of
existing competitive services. Recent federal legislation relaxes current
regulations that restrict the regional Bell operating companies from competing
in this industry. Neither TNI nor PSINet can assure you that TNI will be able to
compete successfully with existing or new competitors or that competitive
pressure that TNI faces will not materially and adversely affect TNI's business,
operating results and financial condition.
If TNI does not successfully respond to technological change, TNI's business
could be adversely affected
The markets for TNI's services are characterized by rapidly changing
technology and frequent new service offerings that can render existing services
obsolete or unmarketable. TNI's future success will depend on TNI's ability to
enhance existing services and to develop and introduce, on a timely and cost
effective basis, new services that keep pace with technological developments and
that address increasingly sophisticated customer requirements. Neither TNI nor
PSINet can assure you that TNI will successfully identify, develop and market
service enhancements or new services that respond to technological change or
that TNI's service enhancements and new services will adequately meet
marketplace requirements and achieve market acceptance. Also, TNI may experience
difficulties that could delay or prevent TNI's successful development,
introduction and marketing of service enhancements or new services. TNI's
business, operating results and financial condition could be materially and
adversely affected if TNI were to fail to develop and market in a timely and
cost effective manner service enhancements or new services.
TNI depends on key personnel; TNI may not be able to attract and retain highly-
skilled personnel
TNI's success depends largely on a number of key employees including John
J. McDonnell, Jr., its president and chief executive officer. Several of TNI's
senior management employees have recently joined TNI. If TNI loses the services
of any of its key employees, TNI's business may be adversely affected.
TNI's success also depends largely on its ability to attract and retain
highly-skilled technical, managerial, sales and marketing personnel. TNI
believes that it needs to hire additional technical personnel to enhance its
existing services and to develop new services. Competition for highly skilled
personnel is intense in TNI's industry. This competition means that there are
fewer qualified people available to hire and the costs of hiring and retaining
them are high. While TNI employees enter into confidentiality agreements, they
generally do not enter into non-competition agreements. In addition, in
connection with the signing of the merger agreement, unvested stock options held
by employees of TNI immediately vested. The acceleration of these options could
potentially reduce the retention incentive provided by the options. If TNI is
unable to hire and retain the necessary personnel, TNI's development of service
enhancements and new services likely would be adversely affected. Neither TNI
nor PSINet can assure you that TNI will succeed in retaining its key personnel
and in attracting and retaining the personnel it requires to continue its growth
strategy.
TNI may be unable to protect its proprietary technology and others could
independently develop equal or superior technologies
TNI may not be able to protect sufficiently its proprietary technology on
which its success heavily depends. TNI relies principally on copyright and trade
secret laws and contractual provisions to protect its proprietary technology.
TNI enters into confidentiality or license agreements with its employees,
distributors, customers and potential customers, and TNI limits access to and
distribution of its software, documentation and other proprietary information.
These measures may not be adequate to prevent
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misappropriation of TNI's technology. In addition, the laws of some foreign
countries provide less protection of intellectual property rights than the laws
of the United States. Further, neither TNI nor PSINet can assure you that TNI's
competitors will not independently develop technologies that are substantially
equivalent or superior to TNI's technology.
TNI may face claims of infringement of proprietary rights
There is a risk that third parties may assert claims that TNI is infringing
their proprietary rights. If infringement claims are asserted against TNI, it
could incur significant costs in defending those claims. TNI may be required to
discontinue using and selling any infringing technology and services. TNI may
also be required to expend resources to develop non-infringing technology or to
purchase licenses or pay royalties for other technology. TNI may not be able to
acquire licenses for the other technology on reasonable commercial terms or at
all.
TNI may not be able to acquire licenses that it may need
TNI believes that it has all licenses that it needs to conduct its
business. But TNI may need to acquire additional licenses in the future. If
additional licenses are required, TNI may not be able to acquire them on
reasonable commercial terms or at all.
TNI depends on a limited number of suppliers and does not have supply contracts
Some key components used in the TNI network are currently available only
from a limited number of suppliers. TNI does not have long-term supply contracts
with these or any other limited source vendors, and TNI purchases network
equipment on a purchase order basis. If TNI is unable to obtain sufficient
quantities of limited source equipment that it may require or to develop
alternate sources as required in the future, its development and deployment of
network equipment could be delayed or reduced. If TNI experiences those delays
or reductions, its business could be adversely affected.
Telecommunications legislation and FCC rules may result in increased network
costs and additional competition, and TNI may face burdensome government
regulation
Federal and state regulations can affect the costs of business for TNI and
its competitors by changing the rate structure for access services purchased
from local exchange carriers to originate and terminate calls. Under the
Telecommunications Act of 1996, the Federal Communications Commission
implemented rules and regulations known as Access Charge Reform to reform the
system of interstate access charges. While the first, second and third phases of
Access Charge Reform resulted in decreases in some components of TNI's variable
cost per transaction, the second and third phases, which were implemented in
January and July 1998, increased TNI's fixed charges that more than offset the
reduction in variable costs per transaction. Future phases of Access Charge
Reform, scheduled to be implemented in 1999 and 2000, may result in TNI
incurring increased network costs.
The 1996 Telecommunications Act also removed some restrictions on the
ability of the regional Bell operating companies to provide enhanced services,
specifically including credit card verification services, between local access
transport areas. Under the legislation, the regional Bell operating companies
ultimately will be permitted to provide long distance telecommunications between
local access transport areas, out-of-region immediately and in-region after
satisfaction of network unbundling and related requirements. As a result, TNI
and its telecommunications services customers likely will face additional
competition.
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In addition, TNI is considering expanding its services into markets that
may involve providing voice-grade or data common carrier telecommunications
services. If TNI provides those services, TNI will be required to comply with
applicable FCC and state authorization and tariffing regulations, which could be
burdensome.
TNI's business is seasonal and TNI experiences fluctuations in quarterly results
Merchant credit card transactions account for a major percentage of the
transaction volume processed by TNI's customers. TNI expects the volume of those
transactions on its network to be greater in the fourth quarter holiday season
than during the rest of the year. Consequently, revenues and earnings from
merchant credit card transactions in the first quarter generally are expected to
be lower than revenues and earnings from merchant credit card transactions in
the fourth quarter of the immediately preceding year. Although the financial
services, healthcare claims processing and electronic benefits transfer markets,
as well as other potential markets that TNI has targeted for future expansion,
are anticipated to be less seasonal, TNI expects that its operating results in
the foreseeable future will be significantly affected by seasonal trends in the
merchant credit card transaction market. Quarterly results also can be affected
by a number of other factors, including costs incurred for network expansion,
the impact of Access Charge Reform on network costs, general economic
conditions, acquisitions, weather and changes in pricing policy by TNI and its
competitors.
TNI may not succeed in effectively managing its growth
TNI has been experiencing a period of rapid growth and expansion. In 1996
through 1999, TNI formed or acquired interests of 50% or more in businesses in
Ireland, Sweden, the United Kingdom, France, Japan and Australia. In 1998 TNI
acquired AT&T's Transaction Access Service business and selected assets and
selected technology of SunTech Processing Systems, LLC and OmniLink
Communications Corporation. In January 1999 TNI acquired TransLine
Communications, Inc. TNI's growth and profitability depend on its ability to
successfully integrate acquired businesses and assets into its existing
operations and to successfully expand internationally, which TNI may not
accomplish. Some of TNI's key employees have not had experience in managing
companies of TNI's size or larger. In addition, some of TNI's senior management
personnel have recently joined TNI. TNI's ability to manage growth successfully
will require it to continue to improve its operational, management and financial
systems and controls. If TNI's management is unable to manage growth
effectively, TNI's business, results of operations and financial condition could
be materially and adversely affected.
Problems relating to the year 2000 issue could materially affect TNI's business
TNI believes that its networks and computer systems that execute its
primary business processes are year 2000 compatible, which means that the
products or services will accurately receive, process and provide date data
between the years 1999 and 2000 and make leap year calculations if all other
products used in or in combination with the product or service properly exchange
data with it. But TNI may not have identified every factor or component that may
render its products or services not year 2000 compatible. The technology TNI
uses in its information technology systems and in its non-information technology
systems may contain undetected errors or defects associated with year 2000 date
functions. Errors or defects in TNI's products or service offerings could result
in delay or loss of revenue, diversion of development resources, damage to its
reputation, or increased service and warranty costs, any of which could impair
TNI's business, operating results and financial condition.
Disruptions involving the computer systems of vendors or customers, which
are outside TNI's control, could impair TNI's ability to obtain services or
conduct business. TNI's revenues and financial condition could be materially
adversely affected if any of its significant vendors or customers are not year
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2000 compatible or TNI fails to identify or replace non-compatible equipment or
software and the non-compatibility causes a material disruption to TNI's
business.
TNI's goal was to have the mission-critical networks, applications and
systems within its control year 2000 compatible by August 31, 1999. TNI has
largely completed the deployment of necessary software to its networks,
applications and systems, though some testing continues. TNI expects to receive
a corrective software patch from one vendor in October and will deploy that
patch promptly following receipt. Based upon the deployment and testing
performed to date, TNI believes that the portions of its mission-critical
networks, applications and systems within its control will be year 2000
compatible by October 31, 1999. TNI cannot assure you, however, that the
actions it takes with respect to its network, computer systems, products,
services or embedded systems will eliminate the numerous and varied risks
associated with the year 2000 date change. Further, TNI cannot assure you that
TNI will not be adversely affected by any year 2000-related difficulties
encountered by vendors or customers or any downturn or disruption in the economy
in general resulting from year 2000-related problems. The extent of the
potential impact of the year 2000 issue generally is not known and neither TNI
nor PSINet can assure you that the year 2000 issue will not have a material
adverse effect on its business, operating results and financial condition. TNI
has not yet fully developed a comprehensive contingency plan to address
situations that may result if it is unable to achieve year 2000 readiness of its
mission-critical networks, applications and systems, but it expects to complete
a comprehensive year 2000 contingency plan by October 31, 1999.
Forward-looking statements
Some of the information contained in this prospectus/proxy statement may
contain forward-looking statements. The 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 PSINet's future
expectations or contain projections of PSINet's results of operations or
financial condition or expected benefits to PSINet resulting from acquisitions
or transactions. PSINet cannot assure you that the future results indicated,
whether expressed or implied, will be achieved. The risk factors noted in this
section and other factors noted throughout, including risks and uncertainties,
could cause PSINet's actual results to differ materially from those contained in
any forward-looking statement.
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THE COMPANIES
Transaction Network Services, Inc.
TNI was incorporated in August 1990 to build and operate a communications
network focused on the network services needs of the POS (point-of-sale/point-
of-service) transaction processing industry through its POS division. TNI
currently operates four divisions: (1) the POS Division which includes TNI's
TransXpress(R) network services for the point-of-sale/point-of-service
transaction processing industry, (2) the Telecom Services Division which
includes TNI's CARD*TEL(R) telephone call billing validation and fraud control
services and other services targeting primarily the telecommunications industry,
(3) the Financial Services Division which provides integrated data and voice
services including the TNI FastLink(R) Data Service in support of the Financial
Information eXchange messaging protocol and other transaction oriented trading
applications primarily to the financial services industry, and (4) the
International Systems Division which markets TNI's products and services
internationally.
In September 1998, TNI significantly expanded its POS Division through a
$64.3 million acquisition of the rights to provide services under certain
customer service contracts relating to AT&T Corp.'s Transaction Access Service.
AT&T's Transaction Access Service provided services similar to TNI's point-of-
sale/point-of-service network services. Additionally, in 1998, TNI expanded the
service offerings of its POS Division through the acquisitions of certain assets
of SunTech Processing Systems, LLC and of OmniLink Communications Corporation.
SunTech's proprietary host-interface processing technology allows for leased
line automated teller machines to be converted into dial-up automated teller
machines. OmniLink develops, manufactures and markets modems and ISDN terminal
adaptors for electronic commerce, Internet access, telecommuting and advance
office communications. TNI has transferred its dial-up modem technology
acquired from SunTech to OmniLink.
In June 1994, TNI acquired Fortune Telecommunications, Inc. of Ft.
Lauderdale, Florida and formed TNI's Telecom Services Division. The Telecom
Services Division provides customers in the telecommunications industry with
telephone call fraud control, billing validation, Signaling System No. 7
services and other services.
In March 1997, the Financial Services Division was created to serve the
data communications needs of the financial services industry. TNI's financial
services network provides a secure, independent, Internet Protocol Extranet for
transacting securities trading orders and associated data electronically between
brokerage firms and financial institutions. In January 1999, TNI acquired
TransLine Communications, Inc. TransLine's core business is comprised of
managed private, secure voice and data services provided to financial
institutions for futures, options and commodities trading.
In June 1996, TNI formed Transaction Network Services Limited, a majority-
owned subsidiary. TNSL provides point-of-sale/point-of-service network services
in Ireland and serves as TNI's European technology and marketing center to
support current and future European operations. In October 1997, through TNSL,
TNI acquired a majority interest in Pronoma Systems AB which has been renamed
Transaction Network Services TNS AB and operates as a TNSL subsidiary located in
Stockholm, Sweden. In April 1998, the Company, through TNSL, acquired a 50%
interest in ATOS Ireland Limited. Atos has been renamed Switchtran Limited and
provides processing services, primarily for cash withdrawals, for a network of
automated teller machines located throughout Ireland. In September 1998, TNI
entered into a 60% owned joint venture in the United Kingdom. The joint venture
is named Transaction Network Services UK Limited and operates as a TNI
subsidiary located in Sheffield, England. In November 1998, TNI, through TNSL,
formed Transaction Network Services, Societe Anonyme. TNSSA operates as a TNI
subsidiary located in Paris, France. In April 1999, TNI acquired the other 50%
interest in Switchtran and
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also acquired a 50.001% interest in Transaction Network Services (Australia) Pty
Limited. In July 1999, TNI acquired a 60% interest in Transaction Network
Services (Japan) KK, and, in August 1999, acquired the minority interest in
Transaction Network Services (UK). TNSL, TNSAB, TNSUK, Switchtran and TNSSA
utilize TNI's network technology to provide point-of-sale/point-of-service and
other transaction services in their respective countries.
The majority of TNI's revenues are derived from the transmission of point-
of-sale/point-of-service transactions (predominantly credit and debit card
transactions) which are processed electronically by a small number of third
party point-of-sale/point-of-service transaction processors. TNI's TransXpress
network services utilize proprietary technology that provides a fast
communications link between the merchant site and the transaction processor at a
cost generally lower than current alternatives. TNI was the first provider of
"950" service to third party point-of-sale/point-of-service transaction
processors and currently provides "950" service in 170 local access transport
areas, which cover approximately 98% of the United States population. In June
1991, TNI transmitted its first point-of-sale/point-of-service transaction, and
since then has increased its average daily transaction volume from approximately
17,000 in the third quarter of 1991 to more than 17.4 million in the second
quarter of 1999. TNI markets its TransXpress network services directly to third
party point-of-sale/point-of-service transaction processors, who in turn resell
TNI's network services as a part of the processors' own services. Of the ten
leading third party point-of-sale/point-of-service transaction processors in the
nation, eight (First Data Corporation, Electronic Payment Services, Inc.,
Alliance Data Systems, Paymentech Inc., National Data Corporation, American
Express, NOVUS Services, Inc. and Vital Processing Services) purchase TNI's
network services.
PSINet Inc.
PSINet is the leading independent global provider of Internet solutions to
businesses. PSINet provides Internet connectivity and Web hosting services to
customers in 90 of the 100 largest metropolitan statistical areas in the U.S.
and in 17 of the 20 largest global telecommunications markets and is currently
operating in 22 countries. In addition to these services, PSINet also offers a
suite of value-added products and services that are designed to enable its
customers to maximize utilization of the Internet to communicate more
efficiently with its customers, suppliers, business partners and remote office
locations. PSINet conducts its business through operations organized into four
geographic operating segments--North America, Latin America, Europe and
Asia/Pacific. PSINet's services and products include:
. Access services that offer dedicated, dial-up, wireless and digital
subscriber line, or xDSL, connections that link its customers' networks
to the Internet;
. Web hosting services that provide cost-effective solutions for the
management and maintenance of its customers' Web sites and Web-based
applications;
. Intranets and virtual private networks, or VPNs, that allow its
customers to provide secure and seamless wide area networks, or WANs,
connecting their remote offices and employees, customers and suppliers;
. E-commerce services designed to enable its customers to securely
transact business over the Internet;
. Voice-over-Internet protocol services that enable companies with
multiple business locations to transmit voice conversations over the
PSINet network at a significant savings to traditional long-distance
calling;
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. E-mail services that allow its customers to outsource to PSINet the day-
to-day management and maintenance of their internal message systems; and
. Managed security services designed to protect, monitor and maintain the
integrity of its customers' networks.
PSINet also provides wholesale and private label network connectivity and
related services to other Internet service providers, known as ISPs, and
telecommunications carriers to further utilize its network capacity.
PSINet operates one of the largest global commercial data communications
networks. Its Internet-optimized network has a footprint that extends around
the globe and is connected to approximately 600 sites, called points of presence
or POPs, situated throughout North America, Latin America, Europe and Asia that
enable our customers to connect to the Internet. PSINet's network reach allows
its customers' employees to access their corporate network and systems resources
through local calls in over 150 countries. PSINet's network architecture
consists of high capacity frame relay switches and routers designed to deliver
superior Internet connections, reliable packet control and intelligent data
traffic routing and is compatible with all of the most widely deployed
transmission technologies. PSINet further expands the reach of its network by
connecting with other large ISPs at 137 points through 67 contractual
arrangements, called peering agreements, that permit the exchange of information
between its network and the networks of its peering partners. PSINet has
recently opened four global Internet hosting facilities in the U.S.,
Switzerland, Canada and London containing a total of approximately 125,000
square feet and currently anticipates opening additional Internet hosting
facilities in New York and Los Angeles in October 1999 and November 1999,
respectively, containing a total of approximately 55,000 square feet. PSINet
also has two network operating centers that monitor and manage network traffic
24-hours per day, seven-days per week.
PSINet's mission is to build a premier Internet protocol-based
communications company. PSINet has grown by using multiple sales channels,
including direct sales and resellers, and by acquiring other ISPs and related
businesses in key markets. It has increased revenues by providing services and
products that enhance its customers' business processes by helping them to
effectively use the Internet and related tools. As of June 30, 1999, PSINet
served approximately 73,400 business accounts, including 364 ISPs.
PSINet was incorporated in New York in 1988. Additional information
regarding PSINet is contained in PSINet's filings with the Securities and
Exchange Commission. See "Where You Can Find More Information" on
page 109.
PSINet Shelf I Inc.
PSINet Shelf Inc. I is a Delaware corporation and a wholly-owned subsidiary
of PSINet, formed by PSINet in June 1999, will act solely for the purpose of
completing the merger with TNI.
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THE SPECIAL MEETING
We are furnishing this prospectus/proxy statement to stockholders of TNI as
part of the solicitation of proxies by the TNI board of directors for use at the
special meeting.
Date, Time and Place
The TNI board of directors is soliciting proxies in the form accompanying
this prospectus/proxy statement for use at the special meeting of TNI
stockholders. The special meeting will be held at 1939 Roland Clarke Place,
Reston, Virginia at 9:00 a.m., local time, on Tuesday, November 23, 1999.
Purpose of Special Meeting
At the special meeting, we are asking holders of TNI common stock to adopt
the merger agreement. The TNI board of directors has determined that the merger
is fair to, and in the best interests of, TNI stockholders. The Board has
unanimously approved the merger agreement and the merger and unanimously
recommends that TNI stockholders vote "for" adoption of the merger agreement.
Record Date; Stock Entitled to Vote; Quorum
The TNI board of directors has fixed the close of business (5:00 p.m. local
time) on October 22, 1999 as the record date. Only holders of record of TNI
common stock at the close of business on the record date, are entitled to notice
of and to vote at the special meeting. On the record date, 14,190,581
shares of TNI common stock were issued and outstanding and held by approximately
115 holders of record.
A quorum is present at the special meeting if 50% of the shares of TNI
common stock issued and outstanding and entitled to vote on the record date are
represented in person or by proxy. In the event that a quorum is not present at
the special meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. Holders of record of TNI common stock
on the record date are entitled to one vote per share at the special meeting on
the proposal to adopt the merger agreement.
Votes Required
The adoption of the merger agreement requires the affirmative vote of a
majority of the shares of TNI common stock outstanding on the record date.
Voting by TNI Directors and Executive Officers
At the close of business on the record date, TNI directors and executive
officers and their affiliates owned and were entitled to vote 2,192,934 shares
of TNI common stock, which represented approximately 15.5% of the shares of TNI
common stock outstanding on that date. Each TNI director and executive officer
has indicated his present intention to vote, or cause to be voted, the TNI
common stock owned by him "for" adoption of the merger agreement. In addition,
Jurgen Manchot, William N. Melton, John J. McDonnell, Jr., McDonnell &
Associates, L.P. and The John J. McDonnell, Jr. and Marion J. McDonnell
Charitable Foundations have entered into a stockholders' voting and proxy
agreement with PSINet, PSINet Shelf I Inc. and certain officers of PSINet.
These TNI stockholders have agreed to vote their shares of TNI common stock in
favor of the merger and against alternate proposals and have granted PSINet and
the named officers
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a proxy to vote the TNI shares at the special stockholders meeting.
Approximately 14.1% of the outstanding TNI shares are covered by the voting
agreement.
Voting of Proxies
All TNI shares represented by properly executed proxies received in time
for the special meeting will be voted at the special meeting in the manner
specified by the proxies. Properly executed proxies that do not contain voting
instructions will be voted "for" adoption of the merger agreement. Shares of
TNI common stock represented at the special meeting but not voting, including
shares of TNI common stock for which proxies have been received but for which
holders of shares have abstained, will be treated as present at the special
meeting for purposes of determining the presence or absence of a quorum for the
transaction of all business.
Only shares affirmatively voted for adoption of the merger agreement,
including properly executed proxies that do not contain voting instructions,
will be counted as favorable votes for that proposal. Brokers who hold shares
of TNI common stock in street name for customers who are the beneficial owners
of such shares may not give a proxy to vote those customers' shares in the
absence of specific instructions from those customers. These unvoted shares are
referred to as broker non-votes and have the effect of votes against adoption of
the merger agreement. The persons named as proxies by a stockholder may propose
and vote for one or more adjournments of the special meeting, including
adjournments to permit further solicitations of proxies. No proxy voted against
the proposal to adopt the merger agreement will be voted in favor of any
adjournment or postponement.
TNI does not expect that any matter other than the proposal to adopt the
merger agreement will be brought before the special meeting. If, however, the
TNI board of directors properly presents other matters, the persons named as
proxies will vote in accordance with their judgment.
Revocability of Proxies
The grant of a proxy by telephone, over the Internet or on the enclosed
form of proxy does not preclude a stockholder from voting in person at the
special meeting. A stockholder may revoke a proxy at any time prior to its
exercise by filing with the Secretary of TNI a duly executed revocation of
proxy, by submitting in the same manner as the prior proxy a duly executed proxy
bearing a later date or by appearing at the special meeting and voting in
person. Attendance at the special meeting will not itself constitute revocation
of a proxy.
Solicitation of Proxies
TNI will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of TNI and its subsidiaries may solicit proxies from stockholders by
telephone or other electronic means or in person. TNI will cause brokerage
houses and other custodians, nominees and fiduciaries to forward solicitation
materials to the beneficial owners of stock held of record by such persons. TNI
will reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in doing so.
MacKenzie Partners, Inc. will assist in the solicitation of proxies by TNI.
TNI will pay MacKenzie Partners, Inc. a fee, not to exceed $5,000 plus
reimbursement of certain out-of-pocket expenses, and will indemnify them against
any losses arising out of their proxy solicitation services on behalf of
TNI.
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You should NOT send stock certificates with your proxy cards. A form of
election with instructions for the surrender of TNI common stock certificates
will be mailed to you as soon as practicable after completion of the merger.
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THE MERGER
The following discussion summarizes the material terms of the merger and
the merger agreement. Stockholders should read carefully the merger agreement,
which is attached as Annex 1 to this prospectus/proxy statement.
Background to the Merger
PSINet has actively pursued expanding its role as a leading global Internet
Service Provider (ISP) to businesses through acquisitions of internet capacity
as well as customers. In October, 1998, John Walpuck, PSINet's Vice President
of Corporate Development, initiated telephone calls to TNI's then Chief
Financial Officer, Thaddeus Weed, with a goal of meeting to discuss views on the
e-Commerce and internet industry and to explore joint business opportunities.
They generally discussed potential business relationships between the two
companies, including a possible business combination. No meeting was held
following those telephone calls, and PSINet focused on other opportunities. TNI
had been approached by another company and announced on October 20, 1998 that it
was in negotiations with a prospective acquiror.
On May 24, 1999, at a meeting initiated by PSINet, representatives of
PSINet, including Mr. Walpuck, William Opet, President, Corporate Network
Services, Kathleen Horne, Vice President and Deputy General Counsel, Lawrence
Winker, Vice President and Treasurer, and James Davin, Vice President and Chief
Technical Officer, met with representatives of TNI, including John McDonnell,
Jr., President and Chief Executive Officer, Henry Graham, Chief Financial
Officer, Mr. Weed, Brian Bates, Senior Vice President and General Manager, POS
Services Division, John Shanz, Senior Vice President and General Manager,
Financial Services Division, Peter Gorog, Vice President and John McDonnell,
III, Senior Vice President and General Counsel. The parties exchanged a mutual
nondisclosure agreement and discussed a variety of business opportunities
between the two companies. The four-hour meeting covered a number of topics
including possibilities for a commercial relationship, joint marketing
opportunities, and a business combination.
At a meeting of PSINet's board of directors held on the morning of May 27,
1999, PSINet's board was apprised of the status of discussions between PSINet
and TNI and the proposed timing of future meetings between the parties. At the
conclusion of this discussion, PSINet's board of directors authorized its
officers to continue discussions with TNI.
On May 27, 1999, Mr. Walpuck and Mr. Winkler met again with Mr. Graham, Mr.
Weed and Mr. McDonnell, III and expressed PSINet's desire to pursue a potential
business combination between the companies, subject to the satisfactory
completion of due diligence, negotiations between the companies, and other
matters. The representatives proposed a meeting between the chief executive
officers of the two companies which occurred on the next day. On May 28, 1999,
Mr Walpuck, Mr. Winkler and Harold Wills, President and Chief Operating Officer
of PSINet, met with Mr McDonnell, Jr., Mr. Graham, Mr. Weed and Mr. McDonnell
III. to discuss their views of the industry and possible business relationships
including possible business combinations. On the same day, William Schrader,
Chairman and Chief Executive Officer of PSINet, and John McDonnell, Jr. met and
agreed on an intensive review and analysis of TNI and its business, technology,
financial condition and prospects by PSINet and its representatives.
Commencing June 1, 1999, TNI provided PSINet and its representatives with
access to corporate records, documents and other information regarding TNI and
its subsidiaries for PSINet's legal, financial and business review. PSINet also
provided representatives of TNI with access to similar materials for their
diligence review.
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On June 4, 1999, the Board of Directors of PSINet held a telephonic
meeting to discuss the results of the diligence review and various structure and
pricing information. The Board unanimously approved management's proceeding
with an offer for the acquisition of TNI.
On June 6, 1999, Mr Wills, Mr. Walpuck, Mr. Schrader, Mr. Winkler and Alex
Diaz-Asper, Director of Mergers and Acquisitions of PSINet, met with Mr.
McDonnell, Jr., Mr. Graham, Mr. Weed and Mr. McDonnell, III. Later that day, Mr.
Wills met separately with Mr. McDonnell, Jr. Mr. Wills and Mr. McDonnell, Jr.
discussed price and valuations, and Mr. Wills extended an oral offer of $40 per
share for TNI common stock, with a fixed exchange ratio of PSINet common stock
for TNI common stock.
During the week of June 7, 1999, the parties engaged in negotiations
regarding price and structure of the proposed transaction and continued their
diligence review. PSINet proposed a merger agreement that contemplated a stock
for stock exchange with a fixed exchange ratio and a price of $40 to $41 per
share of TNI common stock, subject to completing due diligence. TNI management,
TNI's in-house and outside legal counsel and TNI's financial advisors, Morgan
Stanley & Co. Incorporated, reviewed and discussed the draft of the merger
agreement distributed by PSINet, including price and other terms of the proposed
merger.
On June 10, 1999, TNI held a special meeting of its board of directors. A
representative of Morgan Stanley discussed the major terms of PSINet's proposal.
The board discussed the PSINet proposal and synergies between the two companies.
A representative of Arent Fox Kintner Plotkin & Kahn, PLLC, TNI's outside legal
counsel, discussed the board's fiduciary duties and the significant terms of the
merger agreement proposed by PSINet. The board identified and discussed aspects
of the proposal that directors considered unacceptable. The board authorized
TNI's management to continue negotiations with PSINet consistent with the
board's guidelines. On June 11, TNI submitted to PSINet a revised draft of a
merger agreement.
On June 12, 1999, Mr. Walpuck, Mr. Winkler, Mr. Diaz-Asper, Ms. Horne and
representatives of PSINet's legal counsel, Nixon Peabody LLP, and its financial
advisors, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
Wasserstein Parella & Co., Inc., met with Mr. Graham, Mr. Weed, and TNI's legal
counsel, Arent Fox, and financial advisors, Morgan Stanley, to discuss the terms
of the merger agreement and the proposed structure and price. At the conclusion
of that meeting, the parties determined that they did not have an agreement on
price and structure and terminated discussions.
During the week of July 26, 1999, PSINet indicated a renewed interest in a
business combination and then directed DLJ to contact Morgan Stanley regarding a
transaction with TNI. On August 6, 1999, Morgan Stanley responded that they had
discussed the matter with members of TNI management and that TNI had indicated
interest in resuming discussions with respect to a transaction. Representatives
from DLJ then spoke with Mr. Schrader and Mr. Wills, conveying information from
the conversation with Morgan Stanley. On August 7, 1999, at the direction of
PSINet, DLJ spoke again with Morgan Stanley about various price alternatives,
and on August 15, PSINet's legal counsel delivered to TNI and TNI's legal
counsel draft copies of a merger agreement.
The parties, through their financial advisors, continued to discuss
possible purchase price alternatives throughout the week of August 16, 1999. On
Thursday, August 19, 1999, Mr. Schrader sent an offer letter to TNI's board of
directors outlining the terms of the proposed merger in which TNI stockholders
could elect to exchange each share of TNI common stock for $45 in cash or one
share of PSINet common stock, or a combination of both, subject to the
requirement that the total be one half cash and one half stock.
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On Friday, August 20, 1999, TNI held a special meeting of its board of
directors to consider the merger proposal. The board reviewed and discussed the
PSINet proposal of August 19th. The board discussed alternative approaches that
might be available to enhance TNI stockholder value and the inherent market
risks of remaining independent and the uncertainties of market valuations and
prices. The board also discussed the financial performance of PSINet, financial
projections for the combined entity and the differences in the relative
valuations of the two companies. After further discussion, the board authorized
management to proceed with negotiations on the terms outlined in the August 19th
proposal.
Throughout the weekend of August 21 and 22, 1999, various working groups of
TNI and PSINet and their respective legal counsel, financial advisors and
accountants continued a review of the business and financial aspects of the
merger and negotiated the terms of the merger agreement, including pricing
terms.
At 5:15 p.m. on Sunday, August 22, 1999, TNI convened a special meeting of
its board of directors. A representative of Morgan Stanley described the
proposed consideration and reviewed the valuation analysis prepared by Morgan
Stanley and distributed to the board. The board discussed price and other terms
of the proposed merger and Morgan Stanley's valuation analysis. After answering
questions from various directors, the representative of Morgan Stanley presented
Morgan Stanley's opinion that the consideration offered by PSINet in the
proposed merger was fair from a financial point of view to TNI's shareholders.
A representative of Arent Fox, TNI's legal counsel, reviewed the terms of the
merger agreement and the fiduciary duties of the board of directors in
determining whether to approve the merger consideration and the other terms of
the merger agreement. The TNI board of directors determined that the terms of
the merger agreement were fair and in the best interests of TNI stockholders and
voted unanimously to approve the merger agreement and to recommend to TNI
stockholders that they vote to approve the merger agreement. On the evening of
August 22, 1999, PSINet's board of directors convened and approved the merger
agreement and the transactions contemplated by the agreement and authorized the
execution, delivery and performance of the merger agreement and related
documents on behalf of PSINet.
The chief executive officers of the two companies executed and delivered
the merger agreement on the evening of August 22, 1999. On August 23, 1999,
PSINet and TNI issued a joint press release announcing the transaction.
On October 14, 1999, the two companies amended the merger agreement to
provide for an additional 16,646 shares of outstanding TNI common stock that had
not been reported as outstanding as of the date of execution of the merger
agreement.
TNI's Reasons for the Merger and Board of Directors Recommendation
Reasons for the Merger. In reaching its decision to approve the merger
agreement and the merger and to recommend adoption of the merger agreement by
TNI stockholders, the TNI board of directors consulted with its management team
and advisors and independently considered the proposed merger agreement and the
transactions contemplated by the merger agreement. The following discussion of
the factors considered by the TNI board of directors in making its decision is
not intended to be exhaustive, but TNI believes that it includes all material
factors considered by the TNI board of directors.
The TNI board of directors considered the following factors as reasons that
the merger will be beneficial to TNI and its stockholders:
. Stockholder value. The TNI board believes that the consideration to be
received in the merger by the TNI stockholders is fair to the TNI
stockholders and that the PSINet common stock has prospects for positive
long-term performance.
. Strategic combination. TNI believes that the combination of TNI's e-
commerce business and technology with PSINet's Internet connectivity,
Web hosting and suite of value-added products and services will provide
a significant opportunity for the combined company to be a leader in
providing global e-commerce and Internet solutions to businesses. TNI
believes that TNI's
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relationship with leading transaction processing companies and TNI's
proprietary e-commerce software will enable PSINet to utilize its
telecommunications network assets to position the combined company as a
leader in enabling e-commerce solutions to businesses. TNI has
relationships with transaction processing companies that have an
aggregate customer base of approximately two million merchants. TNI
believes that these relationships will offer the combined company an
opportunity to market bundled data and Internet service offerings,
including turnkey e-commerce solutions. The TNI board also considered
the possible revenue enhancements and cost savings that could be
associated with an acquisition of TNI by PSINet and the impact of the
business combination on PSINet's financial condition, results of
operations and cashflow.
. International opportunities. TNI believes that PSINet's presence in 16
of the 20 largest global communications markets will provide a
significant opportunity to more quickly expand and develop TNI's
international operations. TNI also believes that the combination will
create additional opportunities to expand TNI's service offerings as
well as to further utilize PSINet's international backbone network.
The TNI board considered that the merger agreement provides that TNI may
not solicit any alternate transaction. The TNI board discussed other acquisition
alternatives and expressed the view that other acquisition proposals were
unlikely. The TNI board noted that the merger agreement provides that TNI may
furnish information to, and enter into discussions or negotiations with, any
party that makes an unsolicited bona fide written proposal to acquire TNI or
substantially all of its assets on terms which, in an exercise of the TNI
board's fiduciary duty after the consideration of advice from TNI's legal
counsel, a majority of TNI's directors determines is likely to be materially
more beneficial to TNI's stockholders than the Merger. The TNI board also noted
that the merger agreement provides for the payment of termination fees of $15
million if TNI enters into an alternate transaction with another party and was
aware that PSINet would not have agreed to enter into the merger agreement
without this provision. The TNI board concluded that, while the existence of the
termination fee provision might reduce the likelihood that a third party would
propose an alternate transaction, the increased cost to a third party would not
be material and the benefits of the merger to TNI outweighed the risks. The TNI
board also considered the prospects for TNI completing other strategic
transactions and determined that the completion of such transactions was
speculative.
As part of its review, the TNI board considered, among other things, the
following factors:
. the terms of the merger;
. information concerning PSINet's and TNI's respective businesses,
prospects, financial positions, results of operations, operations,
services, service development and technologies, based in the case of
PSINet on information provided by PSINet and on TNI's management's due
diligence investigation;
. information regarding comparable business-focused Internet service
providers, including market prices of the companies' stock, market
capitalizations, revenues, ratios of revenues to market price and other
results of operations, based on reported historical information and
analysts' reports;
. information regarding reported acquisitions of other companies in the e-
commerce industry and other comparable acquisitions;
. an analysis of the relative value that PSINet and TNI might contribute
to the future business and prospects of the combined company;
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. current financial market conditions, historical market prices,
volatility and trading information with respect to PSINet common stock
and historical market prices, volatility and trading information with
respect to TNI common stock;
. advice and detailed analysis of Morgan Stanley, including its written
opinion on August 22, 1999, that the merger consideration was fair from
a financial point of view to the TNI stockholders, as of the date of
that opinion;
. the compatibility of the businesses, services, technologies, management
and the administrative, sales and marketing and technical organizations
of PSINet and TNI;
. the expectation that the merger will be a reorganization for federal
income tax purposes; and
. reports from management and legal advisors on the results of TNI's due
diligence analysis of PSINet.
In considering the Morgan Stanley opinion, the TNI board took into account the
fees payable to Morgan Stanley. See "Opinion of Morgan Stanley & Co.
Incorporated."
In considering the merger, the TNI board acknowledged that there are
certain risks associated with the merger, including:
. the uncertainty of customer acceptance of the combined company's bundled
service offerings following the merger;
. the risk that integration of the technologies, services, organizations
or other operations of the two companies might not be accomplished
smoothly and might require more time, expense and management attention
than anticipated;
. the possibility that the benefits anticipated from the merger might not
be achieved or might not occur as rapidly or to the extent currently
anticipated;
. the risk that, despite the efforts of the combined company, key
technical, management and sales personnel of PSINet and TNI might not be
retained by the combined company;
. the risk that the merger would not be effected, and the disruption in
the business of TNI and the potential adverse effect on the market price
of the TNI common stock if the merger is abandoned; and
. the other risks described above in "Risk Factors."
The TNI board of directors believed that some of these risks were unlikely
to occur, that TNI could avoid or mitigate others, and that, overall, these
risks were outweighed by the potential benefits of the merger.
In view of the variety of factors considered in connection with its
evaluation of the merger agreement and the merger, the TNI board of directors
did not find it practicable to and did not quantify or otherwise assign relative
weight to the specific factors considered in reaching its determination. In
addition, individual members of the TNI board of directors may have given
different weight to different factors.
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Recommendation of the TNI Board of Directors. After careful consideration,
the TNI board of directors has unanimously determined that the terms of the
merger agreement and the merger are fair to, and in the best interests of, TNI
and its stockholders and has approved the merger agreement and the merger. The
TNI board of directors unanimously recommends that the stockholders of TNI vote
"for" the adoption of the merger agreement.
PSINet's Reasons for the Merger
In reaching its decision to approve the merger agreement and the merger,
the PSINet board of directors consulted with its management teams and advisors
and independently considered the proposed merger agreement and the transactions
contemplated thereby. Based upon, among other things, this review, the PSINet
board of directors approved the merger agreement and the transactions
contemplated by the agreement.
The strategic basis for the merger is PSINet's belief that the integration
of TNI's eCommerce business and technology with PSINet's Internet connectivity,
Web hosting and a suite of value-added products and services designed to
maximize utilization of the Internet will present a significant opportunity to
create a combined organization that will be a leader in providing global
eCommerce and Internet solutions to businesses. PSINet believes that TNI's
relationship with leading transaction processing companies and TNI's proprietary
eCommerce software will enable PSINet to utilize its telecommunications network
assets to position the combined company as a leader in enabling eCommerce
solutions to businesses. TNI has relationships with transaction processing
companies that have an aggregate customer base of approximately two million
merchants. PSINet believes these relationships will offer the combined company
an opportunity to market bundled data and Internet service offerings, including
turnkey eCommerce solutions. PSINet also believes that its global presence will
create additional opportunities to expand TNI's service offerings geographically
as well as to further utilize PSINet's international network backbone. The
PSINet board of directors also considered the revenue enhancements and cost
savings associated with an acquisition of TNI by PSINet and the impact of the
business combination on PSINet's financial condition, results of operations and
cashflows.
The foregoing assessment of the merger is based on PSINet's expectations
about future performance. Neither PSINet nor TNI can assure you that after the
merger any of the results, efficiencies or opportunities described in this
prospectus/proxy statement will be achieved. See "Risk Factors Risks Relating
to the Merger."
In reaching its decision to approve the merger agreement and the
transactions contemplated thereby, the PSINet board also considered, among other
things, the following factors:
. the effect on shareholder value of a combination with TNI in light of
the financial condition and prospects of PSINet and TNI and the current
economic and industry environment, including, but not limited to other
strategic alternatives for PSINet and the possibility of synergies from
combining PSINet's and TNI's product and service offerings and sales and
marketing organizations;
. results of due diligence investigations by PSINet's management and
legal, financial and accounting advisors concerning the business,
products and services, technology, operations, financial condition and
prospects of TNI;
. its knowledge of the business operations, properties, assets, financial
condition and operating results of TNI;
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. PSINet's future prospects and whether such prospects could be
significantly enhanced by the merger and the anticipated operating
results of TNI;
. the terms and conditions of the merger agreement, which were the product
of extensive arms' length negotiations (see "The Merger Agreement");
. the compatibility of the respective business philosophies and corporate
cultures of PSINet and TNI;
. the management resources available to address the management needs of
PSINet and management's experience in managing operations at different
locations in integrating acquisitions; and
. the impact of the merger on PSINet's and TNI's customers, suppliers and
employees.
The PSINet board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including, but not limited to:
. TNI's concentration of customers;
. the risk that the combined company's ability to achieve synergies would
be dependent upon customer acceptance of bundled service offerings and
the pricing of bundled services, including the maintenance of current
pricing levels and retention of key customers;
. the risk that despite the efforts of PSINet, management, marketing and
technical personnel of TNI might not choose to remain employed by
PSINet;
. the risk that the operations of the two companies would not be
successfully integrated; and
. the other risks associated with PSINet's and TNI's businesses and with
the merger described under "Risk Factors."
The PSINet board of directors believe that certain of these risks were
unlikely to occur while others could be avoided or mitigated by PSINet, and
that, overall, these risks were outweighed by the potential benefits of the
merger.
The foregoing discussion of the information and factors considered by the
PSINet board of directors is not intended to be exhaustive but is believed to
include all material factors considered by the PSINet board of directors. In
view of the variety of factors considered with its evaluation of the merger, the
PSINet board of directors did not find it practicable to and did not quantify or
otherwise assign relative weight to the specific factors considered in reaching
its determination. In addition, individual members of the PSINet board of
directors may have given different weight to different factors.
Opinion of Morgan Stanley & Co. Incorporated
TNI retained Morgan Stanley to act as its financial advisor in connection
with the merger and related matters based upon Morgan Stanley's qualifications,
expertise and reputation. On August 22, 1999, Morgan Stanley rendered an oral
opinion, which was confirmed in writing, to the TNI board of directors that,
based on and subject to the considerations set forth in the written opinion, the
consideration to be
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<PAGE>
received by the holders of shares of TNI common stock pursuant to the merger
agreement was fair from a financial point of view to those holders, as of the
date of the opinion.
We have attached as Annex 2 to this prospectus/proxy statement the full
text of the Morgan Stanley opinion, dated as of August 22, 1999, which sets
forth the assumptions made, procedures followed, matters considered and
limitations on the review undertaken. The Morgan Stanley opinion is directed to
the TNI board of directors and only addresses the fairness from a financial
point of view of the consideration to be received by the holders of shares of
TNI common stock pursuant to the merger agreement as of the date of the opinion.
It does not address any other aspect of the merger, nor is it a recommendation
to any TNI stockholder as to how they should vote at the TNI special meeting.
The summary of the Morgan Stanley opinion included below should not be viewed as
a substitute for the full text of the opinion. TNI stockholders should read the
Morgan Stanley opinion in its entirety.
In arriving at its opinion, Morgan Stanley:
. reviewed certain publicly available financial statements and other
information of TNI and PSINet;
. reviewed certain internal financial statements and other financial and
operating data concerning TNI and PSINet prepared by the managements of
TNI and PSINet;
. reviewed certain financial projections of TNI and PSINet prepared by the
managements of TNI and PSINet;
. discussed the past and current operations and financial conditions and
the prospects of TNI and PSINet with the managements of TNI and PSINet;
. analyzed the estimated pro forma impact of the merger on PSINet's
revenues and cash flow;
. reviewed the reported prices and trading activity for TNI common stock
and PSINet common stock;
. compared the financial performance of TNI and PSINet and the prices and
trading activity of TNI common stock and PSINet common stock with those
of certain other comparable publicly traded companies and their
securities;
. reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
. participated in discussions and negotiations among representatives of
TNI and PSINet and their financial and legal advisors;
. reviewed the merger agreement and certain related documents; and
. performed such other analyses and considered such other factors as it
deemed appropriate.
Morgan Stanley assumed and relied upon without independent verification,
the accuracy and completeness of the information reviewed by it for the purposes
of its opinion. Morgan Stanley assumed that the financial projections have been
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the future financial performance of TNI and PSINet.
Morgan Stanley
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did not make any independent valuation or appraisal of the assets or liabilities
of TNI, nor were they furnished with any appraisals.
The Morgan Stanley opinion was necessarily based on financial, economic,
market and other conditions as in effect on, and the information made available
to it as of, the date of the opinion.
Morgan Stanley further assumed, with TNI's consent, that the merger will be
consummated in accordance with the terms set forth in the merger agreement
without waiver of any condition specified in the agreement and will be treated
as a tax-free reorganization or exchange for purposes of the Internal Revenue
Code of 1986.
In arriving at its opinion, Morgan Stanley was not authorized to solicit,
and did not solicit, interest from any party with respect to the acquisition of
TNI or any of its assets.
Morgan Stanley acted as financial advisor to the TNI board of directors in
connection with the merger and will receive a fee for its services. In the
past, Morgan Stanley and its affiliates have provided financial advisory and
financing services for PSINet and have received fees for the rendering of these
services.
The following is a brief summary of the material financial analyses
performed by Morgan Stanley in preparing its opinion to the TNI board of
directors on August 22, 1999. Some of these summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses used by Morgan Stanley, the tables must be read together
with the text of each summary. The tables alone do not represent a complete
description of the financial analyses.
Historical Stock Price Performance. Morgan Stanley reviewed the recent
stock price performance of TNI based on an analysis of historical intra-day and
closing prices and trading volumes during the period from the TNI initial public
offering on April 22, 1994 through August 20, 1999. The following table
summarizes the price performance of TNI's common stock over that period:
Historical TNI
Common Stock Prices
August 20, 1999 $34.25
Previous All-Time High Price (September 24, 1998) $33.75
Last Twelve Months Low Price (December 23, 1998) $12.00
All-Time Low Price (June 8, 1994) $ 5.88
Morgan Stanley also reviewed the recent stock price performance of PSINet
based on an analysis of historical intra-day and closing prices and trading
volumes during the period from the PSINet initial public offering on May 2, 1995
through August 20, 1999. The following table summarizes the price performance
of PSINet's common stock over that period:
Historical PSINet
Common Stock Prices
August 20, 1999 $45.56
Last Twelve Months High Price (April 13, 1999) $73.75
Last Twelve Months Low Price (October 8, 1998) $ 8.38
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Comparative Stock Price Performance. Morgan Stanley reviewed the recent
stock price performance of TNI and compared this performance with that of the
S&P 500 Index and the following composite indices: Large IT Services (comprised
of Affiliated Computer Services, Automatic Data Processing, Computer Sciences,
Electronic Data Systems, First Data and Perot Systems) and Transaction
Processors (comprised of Ceridian, Concord EFS, DST Systems, Equifax, National
Data, NOVA, Paychex, Paymentech, ProBusiness Services, SunGard Data Systems and
The Sabre Group Holdings). Morgan Stanley observed that over the period from
September 19, 1997 to August 20, 1999, the closing market prices appreciated as
set forth below:
<TABLE>
<CAPTION>
Company % Appreciation
------- --------------
<S> <C>
TNI 68.3%
Large IT Services Index 45.8%
Transaction Processors Index 40.4%
S&P 500 Index 40.3%
</TABLE>
Morgan Stanley also reviewed the recent stock price performance of PSINet
and compared this performance with the S&P 500 Index and the following Internet
data services companies: Verio and Concentric Network. Morgan Stanley observed
that over the period from May 12, 1998 to August 20, 1999, the closing market
prices appreciated as set forth below:
<TABLE>
<CAPTION>
Company % Appreciation
------- --------------
<S> <C>
PSINet 253.9%
Concentric Network 89.6%
Verio 161.9%
S&P 500 Index 19.8%
</TABLE>
Historical Price-to-Earnings Multiple Analysis. Morgan Stanley reviewed
the historical share price of TNI expressed as a multiple of both historical and
forecast earnings per share ("P/E multiple") during the period from July 29,
1994 through July 30, 1999. The average P/E multiples over this period were as
set forth below:
<TABLE>
<CAPTION>
P/E Multiple Statistic Average P/E Multiple
---------------------- --------------------
<S> <C>
Last Twelve Months 34.5x
One-Year Forward 28.9x
Two-Year Forward 21.1x
</TABLE>
Morgan Stanley applied the one-year forward and two-year forward average
P/E multiples to both selected research analyst forecast earnings per share and
management forecast earnings per share. Based on research analyst forecast
earnings per share, the analysis implied a range of public market trading values
for TNI common stock of $34 to $35 per share. Based on management forecast
earnings per share, the analysis implied a range of public market trading values
for TNI common stock of $37 to $49 per share.
Comparable Company Trading Analysis. Morgan Stanley reviewed and analyzed
the financial information of nine publicly-traded transaction processing
companies and compared the results to financial information relating to TNI.
Morgan Stanley noted that none of these companies were, and that there was no
other publicly-traded company that was, directly comparable to TNI. However,
Morgan Stanley noted
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that both TNI and transaction processing companies were influenced by similar
industry dynamics and trends. Morgan Stanley analyzed, among other things,
current P/E multiples and current P/E multiples as a multiple of forecast
earnings growth rate ("P/E-to-growth multiple"). Based on forecasts of 1999 and
2000 earnings per share taken from I/B/E/S International, the statistics derived
from this analysis were as set forth below:
<TABLE>
<CAPTION>
1999E P/E 2000E P/E 1999E P/E-to-Growth 2000E P/E-to-Growth
Multiple Multiple Multiple Multiple
--------- --------- ------------------- -------------------
<S> <C> <C> <C> <C>
TNI 24.1x 16.8x 0.9x 0.6x
Ceridian 28.0x 22.9x 1.4x 1.1x
Concord EFS 38.9x 28.5x 1.2x 0.9x
DST Systems 33.5x 29.2x 1.7x 1.5x
Equifax 18.0x 15.2x 1.1x 0.9x
National Data 15.8x 13.3x 0.8x 0.7x
NOVA 24.6x 18.7x 0.9x 0.7x
Paychex 41.7x 35.1x 1.5x 1.3x
SunGard Data Systems 18.9x 15.9x 0.9x 0.8x
The Sabre Group Holdings 29.1x 25.7x 1.9x 1.7x
</TABLE>
Morgan Stanley also analyzed the current aggregate value of each company
expressed as a multiple of forecast earnings before interest, taxes,
depreciation and amortization ("EBITDA") and forecast earnings before interest
and taxes ("EBIT") for 1999. As of August 20, 1999 and based on forecasts of
EBITDA and EBIT taken from selected securities research analysts, the statistics
derived from this analysis were as set forth below:
<TABLE>
<CAPTION>
Aggregate Value as a Multiple of Aggregate Value as a Multiple of
1999E EBITDA 1999E EBIT
-------------------------------- --------------------------------
<S> <C> <C>
TNI 9.6x 16.0x
Ceridian 14.7x 18.7x
DST Systems 13.1x 19.7x
Equifax 9.0x 11.5x
National Data 8.5x 11.9x
NOVA 9.9x 13.9x
Paychex 18.0x 20.4x
SunGard Data Systems 7.5x 11.1x
The Sabre Group Holdings 10.7x 17.8x
</TABLE>
The comparable company analysis implied a range of public market trading
values for TNI common stock of $25 to $38 per share.
Morgan Stanley also reviewed and analyzed the financial information of six
Internet data services companies and compared the results to financial
information relating to PSINet. Morgan Stanley noted that Concentric Network
and Verio were more comparable to PSINet than the other four Internet data
services companies reviewed. Morgan Stanley analyzed, among other things, the
current aggregate value of each company expressed as a multiple of forecast
revenues in 1999 and 2000. As of August 25, 1999 and based on forecasts of
revenues taken from selected securities research analysts, the statistics
derived from this analysis were as set forth below:
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<TABLE>
<CAPTION>
Aggregate Value as of
Multiple of Revenues
-------------------------------
1999E 2000E
----- -----
<S> <C> <C>
PSINet 8.0x 5.2x
AboveNet Communications 30.5x 10.2x
Concentric Network 8.2x 4.7x
Equant 15.6x 11.2x
Exodus Communications 36.2x 17.1x
Globix 17.1x 10.4x
Verio 13.5x 8.8x
</TABLE>
No company used in the comparable company analysis is identical to TNI or
PSINet. In evaluating the comparable companies, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of TNI and PSINet, such as the impact of competition on TNI or PSINet
and the industry generally, industry growth and the absence of any material
adverse change in the financial condition and prospects of TNI or PSINet or the
industry or in the financial markets in general. Mathematical analysis, such as
determining the average or median, is not in itself a meaningful method of using
comparable company data.
Securities Research Analysts' Future Price Targets. Morgan Stanley
reviewed and analyzed future public market trading price targets for TNI common
stock prepared and published by particular securities research analysts in the
period from April 22, 1999 to August 20, 1999. These targets reflected each
analyst's estimate of the future public market trading price of TNI common stock
at the end of the particular time period considered for each time estimate
(typically 6 to 18 months). Morgan Stanley discounted, at a cost of equity rate
of 13%, each TNI research analyst's public market trading price target to August
20, 1999. Morgan Stanley also reviewed and analyzed future public market
trading price targets for PSINet common stock prepared and published by
particular securities research analysts in the period from April 28, 1999 to
August 20, 1999. These targets reflected each analyst's estimate of the future
public market trading price of PSINet common stock at the end of the particular
time period considered for each time estimate (typically 12 months).
<TABLE>
<CAPTION>
Value Per Share Range
---------------------
Low High
--- ----
<S> <C> <C>
TNI Public Market Trading Price Target $31 $ 42
Present Value of TNI Public Market Trading Price Target $28 $ 36
PSINet Public Market Trading Price Target $72 $100
</TABLE>
Morgan Stanley noted that the public market trading price targets published
by the securities research analysts do not reflect current market trading prices
for TNI or PSINet common stock and that these estimates are subject to
uncertainties, including the availability of information, the future financial
performance of TNI and PSINet and future financial market conditions.
Precedent Transaction Analysis. As part of its analysis, Morgan Stanley
reviewed the following nine transactions involving payment services providers
since September 1994 (listed as acquiror/acquiree):
. September 1994: FFMC Securities / Western Union Financial Services
. June 1995: First Data / First Financial Management Corporation
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. August 1995: Ceridian / Comdata Holdings
. April 1997: Hewlett-Packard / Verifone
. April 1998: Viad / MoneyGram Payment Systems
. June 1998: PMT Services / NOVA
. September 1998: DST Systems / USCS International
. December 1998: Bank of America / BA Merchant Services
. May 1999: Ceridian / ABR Information Services
For each of these transactions, Morgan Stanley reviewed the price paid and
calculated, and among other things, the following:
. the premium paid to the unaffected stock price;
. the one-year forward P/E-to-growth multiple; and
. the multiples of forecast EBITDA and EBIT.
This analysis implied a range of private market, or acquisition, values for TNI
common stock of $32 to $42 per share.
No transaction used in the precedent transaction analysis is identical to
the merger. In evaluating these transactions, Morgan Stanley made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of TNI and PSINet, such as the impact of competition on TNI or PSINet
and the industry generally, industry growth and the absence of any material
adverse change in the financial condition and prospects of TNI or PSINet or the
industry or in the financial markets in general. Mathematical analysis, such as
determining the average or median, is not in itself a meaningful method of using
precedent transaction data.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash
flow analysis, which is an analysis of the present value of projected cash flows
using discount rates and terminal year EBITDA multiples (as indicated below), of
TNI. Morgan Stanley analyzed TNI's business using a management forecast for the
period beginning June 30, 1999 and ending December 31, 2005. Morgan Stanley
estimated TNI's discounted cash flow value using discount rates ranging from 11%
to 12% and perpetual growth rates ranging from 3.5% to 4.5%. The discounted
cash flow analysis implied a range of values for TNI common stock of $43 to $56
per share. Morgan Stanley also performed a discounted cash flow sensitivity
analysis on the management forecast by adjusting forecast revenue growth to
reflect a 15% compound annual growth rate. This analysis implied a range of
values for TNI common stock of $39 to $50 per share.
Morgan Stanley also performed a discounted cash flow analysis of PSINet.
Morgan Stanley analyzed PSINet's business using a Morgan Stanley equity research
analyst forecast for the period beginning June 30, 1999 and ending December 31,
2009. Morgan Stanley estimated PSINet's discounted cash flow value using
discount rates ranging from 13% to 14% and terminal multiples of estimated 2008
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EBITDA ranging from 11x to 13x. The discounted cash flow analysis implied a
range of values for PSINet common stock of $46 to $60 per share.
Exchange Ratio Analysis. Morgan Stanley compared the "effective" exchange
ratio of 0.9938 PSINet shares to each TNI share (calculated based on the
consideration provided in the merger agreement of 0.5 PSINet shares, which
closed at a price of $45.56 per share on August 20, 1999, plus $22.50 in cash
per TNI share) to the ratio of the closing market prices of TNI and PSINet
common stock on August 20, 1999. Morgan Stanley also compared this ratio to
selected average historical ratios of the closing market price of TNI common
stock to PSINet common stock over various periods ending August 20, 1999. The
results of this analysis were as set forth below:
<TABLE>
<CAPTION>
Market Price Ratio
------------------
<S> <C>
August 20, 1999 0.75x
1-Month Average 0.60x
3-Month Average 0.58x
6-Month Average 0.51x
1-Year Average 0.90x
Since PSINet IPO (May 2, 1995) 1.39x
</TABLE>
Morgan Stanley performed a variety of financial and comparative analyses
solely for purposes of providing its opinion to the TNI Board as to the fairness
of the consideration to be received by the holders of shares of TNI common stock
pursuant to the Merger Agreement from a financial point of view to such holders.
The summary set forth above does not purport to be a complete description of the
analyses performed by Morgan Stanley in connection with the merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Morgan Stanley considered the results of all of its analyses as
a whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and factors and may
have considered various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of TNI or PSINet. In performing its analyses, Morgan Stanley made
a number of assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of TNI or PSINet. Any estimates used by Morgan Stanley in rendering its opinion
or reflected in this prospectus/proxy statement are not necessarily indicative
of future results or actual values, which may be significantly more or less
favorable than those suggested by the estimates. The analyses performed were
prepared solely as part of Morgan Stanley's analysis of the fairness of the
consideration to be received by the holders of shares of TNI common stock
pursuant to the merger agreement from a financial point of view to those holders
and were conducted in connection with the delivery of its opinion to the TNI
board of directors. The analyses are not intended to be appraisals or to
reflect the prices at which TNI or PSINet might actually be sold or the price at
which their securities may trade.
The merger consideration was determined through arm's-length negotiations
between TNI and PSINet and was approved by the TNI board of directors. Morgan
Stanley did not recommend any specific merger consideration to TNI or that any
specific merger consideration constituted the only appropriate merger
consideration for the merger. Morgan Stanley's opinion to the TNI board of
directors was one of many factors taken into consideration by the TNI board of
directors in making its determination to approve
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the merger. Consequently, you should not view the Morgan Stanley analyses
described above as the opinion of the TNI board of directors with respect to the
value of TNI or whether the TNI board of directors would have been willing to
agree to different merger consideration. Morgan Stanley was not authorized to
solicit, and did not solicit, interest from any party with respect to the
acquisition of TNI or any of its assets or any other strategic alternative,
other than the merger.
The TNI board of directors retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan
Stanley, as part of its investment banking business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of Morgan
Stanley's trading, brokerage and financing activities, Morgan Stanley or its
affiliates may at any time hold long or short positions, may trade, make a
market or otherwise effect transactions, for its own account or for the accounts
of customers, in the securities of TNI or PSINet. In the past, Morgan Stanley
and its affiliates have provided financial advisory and financing services for
PSINet and have received fees for rendering those services.
Under a letter agreement dated as of June 9, 1999, Morgan Stanley provided
advisory services and a fairness opinion in connection with the merger, and TNI
agreed to pay a customary fee to Morgan Stanley. TNI also agreed to reimburse
Morgan Stanley for its out-of-pocket expenses incurred in performing its
services. In addition, TNI agreed to indemnify Morgan Stanley and its
affiliates, their respective directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley or any of its affiliates against
specified liabilities, including liabilities under the federal securities laws,
and expenses, including the fees of its legal counsel, arising out of Morgan
Stanley's engagement and any related transactions in connection with its
engagement.
Interests of TNI Directors and Management in the Merger
In considering the recommendation of the TNI board of directors in favor of
the merger, stockholders of TNI should be aware that the directors and executive
officers of TNI have interests in the merger that are different from, or in
addition to, the interests of stockholders of TNI. Those interests relate to or
arise from, among other things, the terms of the merger agreement providing for
the continued indemnification of current directors and officers of TNI, the
accelerated vesting of TNI stock options and the continuation of TNI employee
benefits.
Indemnification and Insurance. The merger agreement provides that all
rights of indemnification and exculpation from liabilities existing in favor of
the current and former directors or officers of TNI and its subsidiaries as
provided in their respective certificates of incorporation and by-laws of TNI
will be assumed by the surviving corporation in the merger, and will continue in
full force and effect in accordance with their terms for at least six years
after the effective time of the merger. The merger agreement provides that for
three years after the effective time of the merger, PSINet will maintain
directors' and officers' liability insurance for acts or omissions occurring
prior to the effective time of the merger covering those persons who were, as of
the date of the merger agreement, covered by TNI's directors' and officers'
liability insurance policy, on terms no less favorable than those in effect on
the date of the merger agreement.
TNI Stock Options. Stock options issued by TNI became fully vested and
exercisable in connection with the signing of the merger agreement. Under the
merger agreement, PSINet will assume outstanding TNI options as of the effective
time of the merger and such options will be exercisable for shares of PSINet
common stock. The members of the TNI board hold options to purchase shares of
TNI common stock as follows: Mr. McDonnell, Jr. - 182,553 shares; Mr. Guidi - 0
shares; Mr. Manchot - 27,500 shares; Mr. Melton - 27,500 shares; Mr. Nichols -
27,500 shares; and Mr. Squarzini - 12,500 shares. In addition to
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Mr. McDonnell, Jr., TNI's other executive officers hold options to purchase
shares of TNI common stock as follows: Mr. Bates - 113,000 shares; Mr. Graham -
40,000 shares; Mr. Lyman - 17,500 shares; Mr. McDonnell III - 23,271 shares; Mr.
Mudd - 110,250 shares; Mr. Mullen - 40,000 shares; Mr. Peters - 25,000 shares;
Mr. Reingold -18,000 shares; Mr. Schanz - 59,764 shares; Mr. Scheibel - 30,000
shares; Mr. Stutzman - 55,001 shares and Mr. Ziegler- 25,568 shares.
Continuation of TNI Employee Benefits. PSINet has agreed that, from the
effective time of the merger until the second anniversary of the effective time
of the merger, it will provide benefit plans, programs and arrangements to
employees of TNI that are substantially equivalent to those provided to
employees of TNI immediately prior to the effective time of the merger. To the
extent that directors and management were covered under these plans as TNI
employees prior to the merger, they will continue to receive such benefits.
For a more detailed description of the continuation of employee benefits, see
page 75.
Employment Agreement. TNI has entered into an employment agreement with
Mr. McDonnell to serve as TNI's president and chief executive officer. The
agreement has a term of three years and six months expiring December 31, 2002,
and the term automatically extends for 18 months on January 1, 2003 and on the
expiration of each extension period, unless either TNI or Mr. McDonnell gives
six months notice that the agreement is not to be extended.
The agreement provides that Mr. McDonnell is entitled to:
. a base salary of $450,000 per year, subject to annual review and
increase by the TNI board;
. an annual bonus, with the target bonus ranging up to four times the base
salary, depending upon TNI's earnings per share achieved during the
year;
. stock options, with a target amount of 70,000 shares per year, but the
actual amount is subject to the discretion of the compensation committee
of the TNI board;
. reimbursement of reasonable and ordinary business expenses;
. all employee benefits made available to other TNI officers;
. payment of the annual premiums on (1) a $5 million term life insurance
policy belonging to Mr. McDonnell and (2) a disability policy providing
benefits up to 60 percent of base salary, plus an amount sufficient to
pay the taxes applicable to the payments;
. paid vacations consistent with TNI's vacation policy applicable to
executive officers; and
. indemnification in his capacity as a director and officer of TNI.
TNI may terminate Mr. McDonnell at any time for cause, as defined in the
agreement, and may terminate him for any other reason after 90 days notice. Mr.
McDonnell also may terminate the agreement after 90 days notice. The agreement
terminates if Mr. McDonnell becomes disabled or dies. The agreement defines
cause to include:
. continued failure to perform his material responsibilities;
. engaging in willful or reckless conduct that is demonstrably injurious
to the company;
. conviction of a felony;
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. material misrepresentation of his professional qualifications; or
. commission or omission of an act that is materially inimical to the best
interest of the company and constitutes fraud, malfeasance, misfeasance
or nonfeasance of duty.
To terminate Mr. McDonnell for cause, the company must give him reasonable
notice setting forth the company's reasons to terminate him for cause and a
reasonable opportunity to be heard, and a majority of the company's board must
find, in its good faith opinion, that he is guilty of conduct constituting cause
as defined in the agreement.
If the agreement is terminated by TNI for cause, by Mr. McDonnell, other
than in the circumstances described below, or upon his death, Mr. McDonnell, or
his estate, would be entitled to receive all of his accrued and unpaid base
salary, accrued vacation pay and earned incentive compensation for the period
prior to termination. If the agreement is terminated due to disability, Mr.
McDonnell would continue to receive his salary and benefits until he became
eligible for disability payments under TNI's disability income plan. He would
also be entitled to receive an amount equal to the difference between his base
salary and the disability payments until the expiration of the agreement.
If the agreement is terminated by TNI other than for cause or by Mr.
McDonnell for good reason, TNI is required to pay Mr. McDonnell:
. his base salary for the remainder of the then-current term of the
agreement or two years, whichever is greater;
. any deferred salary and bonus compensation, whether or not then
otherwise vested or payable; and
. an amount equal to two times the highest incentive bonus paid to him for
any of the three calendar years preceding the termination, prorated
through the month of departure.
In addition, all of his stock options would vest, and he would be entitled to
continue to participate in TNI's life, health, disability and other benefit
programs for the remainder of the then-current term of the agreement or two
years, whichever is greater, at no higher cost than the cost immediately before
the date of termination.
Mr. McDonnell may terminate the agreement for good reason upon 30 days
notice. The agreement defines good reason to include:
. the company relocates its general and administrative offices or Mr.
McDonnell's place of employment to an area other than the Washington,
D.C. metropolitan area;
. the company assigns him duties inconsistent with his responsibilities or
substantially adversely alters the nature or status of his
responsibilities;
. the company reduces his base salary, as it may be increased from time to
time;
. the company fails to pay him any portion of his compensation within
seven days after payment is due;
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. the company fails to continue any compensation plan in which Mr.
McDonnell participates which is material to his compensation, unless an
equitable substitute arrangement is made, or fails to continue his
participation in the plan on a basis not materially less favorable to
him;
. the company fails to continue to provide Mr. McDonnell with benefits
substantially similar to the benefits he receives under any pension,
life insurance, medical, health and accident or disability plan;
. the company materially reduces any of Mr. McDonnell's benefits, deprives
him of any material fringe benefit or fails to provide him with the
amount of paid vacation days to which he is entitled; or
. the company purports to terminate Mr. McDonnell for cause not in
compliance with the terms of the agreement.
If the agreement is terminated for any reason, other than a termination for
cause, within two years following a change in control of the company, TNI is
required to pay Mr. McDonnell:
. an amount equal to three times his base salary in effect as of the date
of termination;
. any deferred salary and bonus compensation, whether or not then
otherwise vested or payable; and
. an amount equal to three times the highest incentive bonus paid to him
for any of the three calendar years preceding the termination, prorated
through the month of departure.
In addition, all of his stock options would vest, and he would be entitled to
continue to participate in TNI's life, health, disability and other benefit
programs for three years at no higher cost than the cost immediately prior to
the date of termination.
If Mr. McDonnell would be subject to excise tax under the provisions of the
Internal Revenue Code relating to payments after a change of control, the
payments would be required to be grossed up so that TNI would make additional
payments to Mr. McDonnell equal to the amount of the excise tax plus the amount
of the tax on the additional payments. The merger will constitute a "change of
control" for the purposes of the agreement.
During the 24 months following termination of employment described above,
except (1) any termination by the company other than for cause, (2) any
termination by Mr. McDonnell for good reason or (3) any termination within two
years following a change in control, Mr. McDonnell would be subject to
specified non-competition covenants. Also, following termination of employment
Mr. McDonnell is required to keep secret all of the company's confidential
information that he obtained during his employment and that has not become
public knowledge. The company, however, may not defer or withhold any benefits
otherwise payable under the agreement based upon an asserted violation of this
provision.
Change in Control Agreements. TNI has entered into change in control
agreements with its executive officers, Messrs. Bates, Graham, Lyman, McDonnell
III, Mudd, Mullen, Peters, Reingold, Schanz, Scheibel, Stutzman and Ziegler, and
other officers as well. Before a change in control of TNI, the agreements may
be terminated on 24 months advance written notice and automatically terminate
upon termination of the officer's employment, unless the officer is terminated
within six months before a change in control at the request of the acquiring
person or otherwise in connection with the change in control. The merger will
constitute a "change in control" for the purposes of the agreements.
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If within 36 months after a change in control of TNI, (1) TNI or its
successor terminates the officer, other than for cause or the officer's death or
disability, or (2) the officer terminates his employment for good reason, TNI or
its successor is obligated to provide the officer the following benefits:
. a lump sum cash payment composed of (1) the officer's accrued and unpaid
salary and unused vacation pay and (2) a severance payment in an amount
equal to the product of a multiple times the officer's average annual
compensation from TNI for the five calendar years before the change in
control. The multiple is 2.99 for executive officers and 1.5 for other
officers;
. a lump sum cash payment for the officer's stock options equal to the
difference between the exercise price of the options and the higher of
(1) the fair market value of the shares on the date of termination or
(2) the highest price paid for the shares by the acquiring person;
. life insurance and health plan coverage substantially comparable to the
coverage the officer was receiving immediately before termination until
the earlier of (1) the date on which the officer becomes eligible for
comparable coverage in connection with subsequent employment or (2) 36
months, for an executive officer or 18 months for any other officer; and
. all of the officer's benefits accrued under any supplemental retirement
plans, excess retirement plans and deferred compensation plans shall
immediately become vested in full.
If the benefit under this agreement would not be deductible by the company
for federal income tax purposes under the provisions of the Internal Revenue
Code relating to payments after a change of control, the payments would be
reduced only to the extent required, in the opinion of the company's tax
counsel, to prevent the nondeductibility of any part of the benefits. The
officer is entitled to determine which elements of the benefits will be reduced
to conform to this provision.
The agreement defines cause to include:
. continued failure of the employee to perform his material
responsibilities;
. engaging in willful or reckless conduct that is demonstrably injurious
to the company;
. conviction of a felony;
. material misrepresentation by the employee of his professional
qualifications; or
. commission or omission of an act that is materially inimical to the best
interest of the company and constitutes fraud, malfeasance, misfeasance
or nonfeasance of duty.
To terminate an officer for cause, the company must give the officer reasonable
notice setting forth the company's reasons to terminate him for cause and a
reasonable opportunity to be heard, and a majority of the company's board must
find, in its good faith opinion, that the officer is guilty of conduct
constituting cause as defined in the agreement.
Under the agreement an officer may terminate his employment for good reason
if:
. the company assigns the officer any duties inconsistent with the
officer's position or takes any other action that results in a
diminution of the officer's position, authority, duties or
responsibilities;
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. the company reduces the officer's base salary in effect at the change in
control or as increased from time to time;
. the company fails to maintain plans providing benefits at least as
beneficial as those provided by any plan in which the officer
participated immediately before the change in control;
. the company takes any action to adversely affect the officer's
participation in or opportunity to benefit under any plan or to deprive
the officer of any material fringe benefit;
. the company requires the officer to be based at an office in excess of
50 miles from his office location immediately before the change in
control;
. the company purports to terminate the officer for cause not in
compliance with the terms of the agreement; or
. the company fails to cause its successor to assume the obligations under
this agreement.
Following termination of employment, the officer is required to keep secret
all of the company's confidential information that he obtained during his
employment and that has not become public knowledge. The company, however, may
not defer or withhold any benefits otherwise payable under the agreement based
upon an asserted violation of this provision.
Tax Treatment
Completion of the merger is conditioned upon its being accounted for as a
reorganization within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code and the receipt by PSINet and TNI of letters from Nixon Peabody LLP
and Arent Fox Kintner Plotkin & Kahn, PLLC, respectively, that the merger
qualifies as a reorganization under such section.
Form of the Merger
Subject to the terms and conditions of the merger agreement and in
accordance with Delaware law, at the effective time of the merger, TNSI shall be
merged with and into PSINet Shelf I Inc. The separate existence of TNI will
cease and PSINet Shelf I Inc. shall survive the merger as a wholly-owned
Delaware subsidiary of PSINet. PSINet Shelf I Inc. will continue under the name
"Transaction Network Services, Inc."
Merger Consideration
In the merger, each share of outstanding TNI stock (other than those that
are held by TNI stockholders who have not voted in favor of the merger and have
properly demanded dissenters' rights) will be converted into the right to
receive (i) $45.00 in cash, (ii) one share of PSINet common stock, or (iii) a
combination of cash and PSINet common stock totaling $45.00 in value, assuming
that one share of PSINet common stock is valued at $45.00.
Each stockholder can elect the form of consideration he or she would like
to receive, but this election is subject to proration. Under the merger
agreement, 50% of all issued and outstanding TNI shares must be exchanged for
cash, and 50% must be exchanged for PSINet shares. If TNI stockholders owning
more than 50% of TNI shares elect to receive cash, the number of TNI shares
converted into cash will be fewer than the number which elected cash
consideration. Similarly, if TNI stockholders owning more than
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50% of TNI shares elect to receive PSINet common stock, the number of TNI shares
converted into stock will be less than the number which elected to receive
PSINet common stock. Assuming the exercise of all outstanding options, no more
than 7,804,546 shares of PSINet common stock will be issued as stock
consideration and a maximum aggregate of $351,204,570 will be issued as cash
consideration in the merger. If the aggregate number of shares of TNI stock
covered by stock elections exceeds the number of shares of PSINet shares
available for stock consideration in the merger, each holder of TNI shares
making a stock election will receive PSINet common stock on a pro rata basis
with all other holders making stock elections and will receive cash
consideration for the balance. Similarly, if the aggregate number of shares of
TNI shares covered by cash elections exceeds the aggregate amount of cash
consideration available in the merger, each holder of TNI shares making a cash
election will receive cash on a pro rata basis with all other holders making
cash elections and will receive stock consideration for the balance. A holder of
TNI shares who fails to make an election prior to the deadline will be treated
as having made a mixed election and will receive consideration for 50 percent of
his or her shares in cash and 50 percent in PSINet common stock.
TNI stockholders will receive cash for any fractional shares of PSINet
common stock which they would otherwise receive in the merger. As of the
effective time of the merger, all shares of TNI common stock will automatically
be canceled and will cease to exist, and each holder of a certificate
representing any shares of TNI common stock will cease to have any rights as a
stockholder except the right to receive PSINet common stock or cash or a
combination of cash and stock in the merger.
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares
The conversion of TNI common stock into the right to receive merger
consideration will occur automatically at the effective time of the merger.
Within thirty days prior to, but no later than seven business days prior to the
effective time of the merger, the paying agent will send a Form of Election to
each former TNI stockholder. The Form of Election will contain instructions for
surrendering certificates representing TNI common stock in exchange for shares
of PSINet common stock and/or cash consideration. TNI stockholders should not
return stock certificates with the enclosed proxy.
Each holder of a certificate representing TNI common stock will be asked to
surrender and deliver the certificate to First Chicago Trust Company of New
York, as the paying agent, together with a properly completed and executed Form
of Election no later than 5:00 p.m., New York City time, the third business day
following the effective time of the merger. Promptly after surrender and
delivery, the holder will receive a certificate representing the number of whole
shares of PSINet common stock for which the holder's shares of TNI common stock
has been converted for stock elections, together with a check for any cash in
lieu of any fractional share of PSINet common stock, or a check for cash payable
with respect to cash elections, or both stock consideration and cash
consideration. TNI stockholders who do not submit a Form of Election prior to
the election deadline and TNI stockholders who (in the discretion of PSINet,
which discretion it may delegate to the paying agent) are deemed to have made an
improper election will be treated as having made a mixed election, of one-half
stock consideration and one-half cash consideration. Until so surrendered and
exchanged, each certificate formerly representing an outstanding share of TNI
common stock will be treated for all purposes to evidence only the right to
receive stock consideration, any cash payable in lieu of fractional shares, or
cash consideration or both based upon such holder's election, as adjusted.
At the effective time, the stock transfer books of TNI will be closed and
no transfer of shares of TNI common stock will be made after that, other than
registration of transfers of shares of TNI common stock that occurred prior to
the effective time. If certificates are presented for transfer to the transfer
agent for TNI, PSINet, or PSINet Shelf I Inc. after the effective time, they
will be delivered to the paying agent and exchanged for stock consideration, any
cash payable in lieu of fractional shares, or cash consideration or both.
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Any shares of PSINet common stock or any cash that remains undistributed to
TNI stockholders as of the first anniversary of the effective time will be
delivered to PSINet by the paying agent, upon demand, and any former
stockholders of TNI who have not previously complied with these procedures for
exchange may look only to PSINet for payment of their claim for stock
consideration, any cash payable in lieu of fractional shares, or cash
consideration or both.
Neither the paying agent nor any of TNI, PSINet or PSINet Shelf I, Inc.
will be liable to any holder of shares of TNI common stock with respect to any
shares of PSINet common stock (or dividends or distributions with respect to
PSINet common stock) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law, rule, regulation, statute, order,
judgment or decree.
If any TNI certificates have been lost, stolen or destroyed, the paying
agent may require the claiming holder to make an affidavit of that fact and
deliver a bond as the paying agent may reasonably require, and the paying agent
may then issue stock consideration, any cash payable in lieu of fractional
shares, or cash consideration and any dividends or other distributions with
respect to PSINet common stock to which the holder is entitled in exchange for
the lost, stolen or destroyed certificates.
Stockholders of TNI will not be required to pay any transfer taxes with
respect to the issuance of the PSINet common stock, unless any PSINet common
stock is to be issued in a name other than that in which the certificate
surrendered has been registered. In such case, the person requesting the
issuance must pay to PSINet any transfer taxes payable by reason of the
transfer, or of any prior transfer of the surrendered certificate, or establish
to the satisfaction of PSINet that the taxes have been paid or are not payable.
Effective Time of the Merger
The merger will become effective once the certificate of merger has been
filed with the Secretary of State for the State of Delaware and has become
effective in accordance with Delaware law.
Listing of PSINet Common Stock on The Nasdaq Stock Market
It is a condition to the completion of the merger that PSINet common stock
issuable to TNI stockholders in the merger be approved for listing on The Nasdaq
Stock Market, subject to official notice of issuance.
Delisting and Deregistration of TNI Common Stock
If the merger is completed, TNI common stock will be delisted from the New
York Stock Exchange and will be deregistered under the Securities Exchange Act
of 1934.
Material United States Federal Income Tax Consequences of the Merger
The following discussion is a summary description of the material U.S.
federal income tax consequences of the merger applicable to TNI stockholders.
This discussion is for general information only and does not purport to consider
all aspects of U.S. federal income taxation that may be relevant to a TNI
stockholder. This discussion is based upon the provisions of the Internal
Revenue Code, existing regulations, and administrative and judicial
interpretations of the Internal Revenue Code, all as in effect as of the date
hereof and all of which are subject to change (possibly with retroactive
effect). This discussion applies only to TNI stockholders who hold their TNI
shares as capital assets within the meaning of Section 1221 of the Internal
Revenue Code and does not apply to the following:
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. stockholders who received their TNI shares pursuant to the exercise of
employee stock options or similar securities or otherwise as
compensation;
. stockholders who hold their TNI shares as part of a "straddle," "hedge,"
"conversion transaction," "synthetic security" or other integrated
investment;
. stockholders (including, without limitation, financial institutions,
insurance companies, tax-exempt organizations, dealers or traders in
securities, and stockholders subject to the alternative minimum tax) who
may be subject to special rules;
. stockholders whose functional currency is not the U.S. dollar; or
. stockholders who, for U.S. federal income tax purposes, are non-resident
alien individuals, foreign corporations, foreign partnerships, or
foreign estates or trusts.
This discussion also does not consider the effect of any foreign, state or
local laws or any U.S. federal laws other than those pertaining to the income
tax.
ACCORDINGLY, YOU SHOULD CONSULT YOUR TAX ADVISOR TO DETERMINE THE TAX
EFFECT TO YOU OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, OR
U.S. FEDERAL, STATE, LOCAL OR OTHER TAX LAWS.
Tax Opinion and Merger. The consummation of the merger is contingent upon
the receipt by:
. PSINet of an opinion from its attorneys to the effect that the merger
will be treated as a reorganization within the meaning of Section
368(a)(2)(D) of the Internal Revenue Code; and
. TNI of an opinion from its attorneys to the effect that the merger will
be treated as a reorganization within the meaning of Section
368(a)(2)(D) of the Internal Revenue Code.
The opinions will be based upon certain customary assumptions and
representations of fact, including representations of fact contained in
certificates of officers of PSINet, TNI and others. No ruling has been or will
be sought from the Internal Revenue Service as to the U.S. federal income tax
consequences of the merger, and the opinions of counsel are not binding upon the
Internal Revenue Service or any court. Accordingly, there can be no assurances
that the Internal Revenue Service will not contest the conclusions expressed in
the opinions or that a court will not sustain such contest.
To qualify as a reorganization, among other requirements, the merger must
satisfy a "continuity of interest" test, under which the TNI stockholders must
continue to retain a meaningful ownership interest in PSINet after the merger.
Generally, this test will be considered satisfied if TNI stockholders in the
aggregate exchange a substantial part of their TNI common stock for PSINet
common stock in the merger. The merger has been structured with the intent that
50% of the consideration provided in the merger will consist of PSINet common
stock. It is possible, however, that the value of the PSINet common stock
issued at the time of the merger could fall below this 50% threshold.
For advance ruling purposes, the Internal Revenue Service has provided a
safe harbor with respect to the minimum degree of continuity necessary to
satisfy the continuity of interest requirement. This safe harbor requires that
taxpayers requesting a private letter ruling from the Internal Revenue Service
demonstrate that the historic stockholders of the acquired entity will exchange
at least 50%, by value, of the total outstanding stock of the acquired entity
for stock of the acquiring entity. This safe harbor, however, merely indicates
the level of continuity required by the Internal Revenue Service for the
issuance of an
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advance ruling. It does not represent the degree of continuity that is required
to qualify as a reorganization. In fact, the Internal Revenue Service has
explicitly stated that the safe harbor is not intended to define the lower
limits of the continuity of interest requirement. The case law is less
restrictive than the Internal Revenue Service's ruling guidelines in this area
and, in one early case, the United States Supreme Court held that the continuity
of interest requirement was satisfied where the stockholders of the acquired
company received stock of the acquiring company having a value of less than 40%
of the value of the formerly outstanding stock of the acquired company.
Thus, although no assurance can be given that the Internal Revenue Service
or a court would ultimately determine that the continuity of interest
requirement has been met (and that the merger qualifies as a reorganization) if
the amount of stock consideration received by TNI stockholders is less than 50%
of the aggregate merger consideration (including payments to dissenters and
payments in lieu of fractional shares), it is the opinion of Arent Fox Kinter
Plotkin & Kahn, PLLC, attorneys for TNI, and Nixon Peabody LLP, attorneys for
PSINet, that the "continuity of interest" requirement as specified in Treas.
Reg. sec. 1.368-1(b) and as interpreted in certain Internal Revenue Service
rulings and federal judicial decisions will be satisfied if the amount of stock
received by TNI stockholders is at least 40% (and the amount of cash received is
no more than 60%) of the aggregate merger consideration (including payments to
dissenters and payments in lieu of fractional shares). Arent Fox Kinter Plotkin
& Kahn, PLLC and Nixon Peabody LLP have not and will not issue an opinion that
the continuity of interest requirement would be met if the amount of stock
received by TNI stockholders is less than 40% (and the amount of cash received
is more than 60%) of the aggregate merger consideration (including payments to
dissenters and payments in lieu of fractional shares).
The following discussion of U.S. federal income tax consequences of the
merger to TNI stockholders assumes that the merger will qualify as a
"reorganization" within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code. As discussed below, the U.S. federal income tax consequences of
the merger to a TNI stockholder depend on the form of consideration received by
the stockholder.
Stockholders Who Receive Solely PSINet Common Stock. A TNI stockholder who
exchanges TNI shares solely for PSINet shares will not recognize any gain or
loss on that exchange (except to the extent the stockholder receives cash in
lieu of fractional shares of PSINet, as discussed below). The aggregate
adjusted tax basis of PSINet shares received will equal the TNI stockholder's
aggregate adjusted tax basis in the TNI shares surrendered. The holding period
of the PSINet shares received pursuant to the merger will include the holding
period of the TNI shares surrendered.
Stockholders Who Receive Cash and PSINet Common Stock. If the
consideration received in the merger by a TNI stockholder consists of part cash
and part PSINet common stock, then any gain realized by the stockholder will be
recognized to the extent of the lesser of (1) the excess of the sum of the
amount of cash and the fair market value, as of the date of the merger, of the
shares of PSINet common stock received, over the adjusted basis of the TNI
shares surrendered in exchange therefor, and (2) the amount of cash received by
the stockholder in the exchange. However, if a TNI stockholder's adjusted basis
in the TNI shares surrendered in the transaction is greater than the sum of the
amount of cash and the fair market value of the PSINet shares received, the TNI
stockholder's loss will not be currently allowed or recognized for U.S. federal
income tax purposes.
In the case of a TNI stockholder who recognizes gain on the exchange, if
the exchange sufficiently reduces the stockholder's proportionate stock interest
(as discussed below), the gain will be characterized as a capital gain. If the
exchange does not sufficiently reduce the stockholder's proportionate stock
interest, such gain will be taxable as a dividend to the extent of the
stockholder's ratable share of accumulated earnings and profits (and the
remainder, if any, of such recognized gain will be capital gain).
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The determination of whether the exchange sufficiently reduces a TNI
stockholder's proportionate stock interest will be made in accordance with
Section 302 of the Internal Revenue Code, taking into account the stock
ownership attribution rules of Section 318 of the Internal Revenue Code. Under
Section 318, individuals are treated as constructively owning stock owned by
specified members of the individual's family or by certain entities in which the
individual or his family members have a beneficial interest and certain entities
are treated as constructively owning stock owned by persons having a beneficial
interest in the entity. For purposes of determining whether the exchange
sufficiently reduces a stockholder's proportionate stock interest, a TNI
stockholder is treated as if (1) all such stockholder's TNI shares were first
exchanged in the merger for PSINet shares, and (2) a portion of those PSINet
shares were then redeemed for the cash actually received in the merger. The TNI
stockholder's hypothetical stock interest in PSINet (both actual and
constructive) after hypothetical step (2) is compared to such TNI stockholder's
hypothetical stock interest in PSINet (both actual and constructive) after
hypothetical step (1). Dividend treatment will apply unless the stockholder's
stock interest in PSINet has been completely terminated, there has been a
"substantially disproportionate" reduction in the stockholder's stock interest
in PSINet (i.e., such interest after hypothetical step (2) is less than 80% of
the interest after hypothetical step (1)), or the exchange is not "essentially
equivalent to a dividend." While the determination is based on a TNI
stockholder's particular facts and circumstances, the Internal Revenue Service
has indicated in published rulings that a distribution is not "essentially
equivalent to a dividend" and will therefore result in capital gain treatment if
the distribution results in any actual reduction in the stock interest of an
extremely small minority stockholder in a publicly held corporation and the
stockholder exercises no control with respect to corporate affairs.
BECAUSE THE DETERMINATION OF WHETHER A PAYMENT WILL BE TREATED AS HAVING
THE EFFECT OF THE DISTRIBUTION OF A DIVIDEND GENERALLY WILL DEPEND UPON THE
FACTS AND CIRCUMSTANCES OF EACH TNI STOCKHOLDER, TNI STOCKHOLDERS ARE STRONGLY
ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF CASH
RECEIVED IN THE MERGER, INCLUDING THE APPLICATION OF THE CONSTRUCTIVE OWNERSHIP
RULES OF THE INTERNAL REVENUE CODE AND THE EFFECT OF ANY TRANSACTIONS IN PSINET
SHARES OR TNI SHARES BY THE TNI STOCKHOLDER.
The basis of a TNI stockholder who receives cash and PSINet shares in the
merger in the PSINet shares received will equal such stockholder's adjusted
basis in the stockholder's TNI shares increased by any gain recognized as a
result of the merger and reduced by the amount of cash received in the merger.
The holding period of the PSINet shares received will include the holding period
of the TNI shares surrendered.
Stockholders Who Receive Solely Cash. The exchange of TNI shares solely
for cash generally will result in recognition of gain or loss by the stockholder
in an amount equal to the difference between the amount of cash received and the
stockholder's adjusted tax basis in the TNI shares surrendered. The gain or loss
recognized will be long-term capital gain or loss if the stockholder's holding
period for the TNI shares surrendered exceeds one year. There are limitations on
the extent to which stockholders may deduct capital losses from ordinary income.
If a TNI stockholder who receives only cash in exchange for all such
stockholder's TNI shares actually or constructively owns PSINet shares after the
merger (as the result of constructive ownership of TNI shares that are exchanged
for PSINet shares in the merger, prior actual or constructive ownership of
PSINet shares or otherwise), all or a portion of the cash received by the
stockholder may, in certain circumstances, be taxed as a dividend, and such
stockholders should consult their tax advisors to determine the amount and
character of the income recognized in connection with the merger.
Cash Received in Lieu of Fractional Shares. A TNI stockholder who receives
cash in lieu of a fractional PSINet share will be treated as having first
received such fractional PSINet share in the merger
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and then as having received cash in exchange for the fractional share interest.
Thus, such a TNI stockholder generally will recognize gain or loss in an amount
equal to the difference between the amount of cash received in lieu of the
fractional PSINet share and the portion of the basis in the TNI shares allocable
to that fractional interest.
Special Rules for Stockholders that are Corporations. To the extent that
cash received in exchange for TNI shares is taxable as a dividend (as described
above) to a TNI stockholder that is a corporation, that stockholder will be (1)
eligible for a dividends received deduction (subject to applicable limitations),
and (2) subject to the "extraordinary dividend" provisions of the Internal
Revenue Code. Under recently enacted legislation, any such cash that is taxable
as a dividend to a corporate stockholder will constitute an extraordinary
dividend. Consequently, the nontaxed portion of any such dividend will reduce
the adjusted tax basis of a TNI stockholder that is a corporation in the PSINet
shares received in the merger, but not below zero, and will thereafter be
taxable as capital gain.
Income Tax Rates. Capital gain recognized in the merger by individuals and
certain other noncorporate TNI stockholders who have held their TNI shares for
more than one year generally will be subject to a U.S. federal income tax rate
of 20%. Gain or dividend income otherwise recognized by TNI stockholders
generally will be subject to a (1) maximum 39.6% U.S. federal income tax rate
for individuals and certain other noncorporate stockholders, or (2) maximum 35%
U.S. federal income tax rate for corporations.
Material Federal Income Tax Consequences to PSINet, TNI and PSINet Shelf I
Inc. Assuming that the merger is treated as a reorganization, none of PSINet,
TNI or PSINet Shelf I Inc. will recognize gain or loss as a result of the
merger.
PSINet had a federal consolidated net operating loss ("NOL") carryover of
approximately $216.7 million as of December 31, 1998, of which $77.6 million is
not subject to limitation under Section 382 of the Code and which is generally
expected to be available to offset future taxable income of PSINet's
consolidated post-merger group, subject to expiration at different intervals. In
addition, PSINet generated a net operating loss of approximately $88.1 million
from January 1, 1999 through June 30, 1999, and it expects to generate further
net operating losses up to the date of merger, which will increase PSINet's NOL
carryover. The use of this NOL carryover is subject to the rules of Section 382
of the Code, which generally restricts NOL utilization after an "ownership
change" (generally a more than 50% increase in stock ownership during a 3-year
"testing period" by "5% stockholders" of a "loss corporation" measured by
value). While the merger will result in a substantial increase in percentage
holdings by 5% stockholders, the merger (in conjunction with other relevant
increases by other 5% stockholders) will not result in an ownership change.
However, no assurance can be given that an ownership change may not occur in the
future. In the event of an ownership change, the amount of PSINet's NOL
carryover that could be utilized in any taxable year would be generally limited
to the value of PSINet's stock on the date of the ownership change multiplied by
a prescribed rate of return (5.26% in September 1999). As of September 28, 1999,
under this formula, PSINet would have been entitled to use approximately $156.5
million of its NOL carryover per taxable year as an offset to its future taxable
income. Any amount of the $156.5 million of NOL carryovers not utilized in a
taxable year would be permitted to be carried over to the next taxable year for
use in that year, subject to the expiration of the NOL carryovers. PSINet
presently does not expect that the Section 382 limitation will cause any part of
its NOL carryover to be unavailable for use prior to the expiration of any of
its NOL carryovers.
Backup Withholding. Payments in connection with the merger may be subject
"backup withholding" at a rate of 31%, unless a TNI stockholder, (1) provides a
correct taxpayer identification number (which, for an individual stockholder, is
the stockholder's social security number) and any required information to the
paying agent, or (2) is a corporation or comes within certain exempt categories
and, when required, demonstrates that fact and otherwise complies with
applicable requirements of the backup withholding rules. A TNI stockholder who
does not provide a correct taxpayer identification number may be subject to
penalties imposed by the Internal Revenue Service. Any amount paid as backup
withholding
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does not constitute an additional tax and will be creditable against the
stockholder's U.S. federal income tax liability. Each TNI stockholder should
consult with his own tax advisor as to his qualification for exemption from
backup withholding and the procedure for obtaining such exemption. TNI
STOCKHOLDERS MAY PREVENT BACKUP WITHHOLDING BY COMPLETING A SUBSTITUTE FORM W-9
(CONTAINED WITH THE TRANSMITTAL LETTER TO BE FORWARDED TO TNI STOCKHOLDERS) AND
SUBMITTING IT TO THE PAYING AGENT FOR THE MERGER WHEN THEY SUBMIT THEIR TNI
SHARE CERTIFICATES.
Accounting Treatment
The acquisition of TNI will be accounted for as a purchase business
combination and, accordingly, the purchase price of TNI will be
allocated to tangible and intangible assets acquired and liabilities assumed,
based upon their respective fair values, with the excess allocated to goodwill
to be amortized over the estimated economic life of the goodwill. PSINet has
undertaken a study by an independent third party to determine the allocation of
the total purchase price of the merger to the various assets acquired, including
in-process research and development, and the liabilities assumed. Any portion of
the purchase price allocated to in-process research and development will be
recognized as a charge against income in PSINet's financial statements for the
period in which the merger closes, which is expected to be the fourth quarter of
1999. The results of operations of TNI will be included in PSINet's consolidated
results of operations upon the consummation of the merger.
Regulatory Matters
United States Antitrust. Under the Hart-Scott-Rodino Act and related
rules, the merger may not be completed unless applicable waiting period
requirements have been satisfied. On August 30, 1999, PSINet and TNI each filed
a Notification and Report Form with the Antitrust Division of the Department of
Justice and the Federal Trade Commission, and the Federal Trade Commission has
granted early termination of the waiting period. At any time before or after
the effective time of the merger, the Antitrust Division, the Federal Trade
Commission or others could take action under the antitrust laws, including
seeking to prevent the merger, to rescind the merger or to conditionally approve
the merger upon the divestiture of substantial assets of PSINet or TNI. There
can be no assurance that a challenge to the merger on antitrust grounds will not
be made or, if such a challenge is made, that it would not be successful. Based
upon the advice of counsel, neither PSINet nor TNI expect any conditions to be
imposed by either the Antitrust Division or the Federal Trade Commission.
Other Regulatory Approvals. The merger also requires the approval of the
Irish Department of Enterprise, Trade and Employment. Application has been made
to obtain its approval of the merger.
General. It is possible that any of the governmental entities with which
filings are made may seek, as conditions for granting approval of the merger,
various regulatory concessions. There can be no assurance that:
. PSINet or TNI will be able to satisfy or comply with such conditions
. compliance or non-compliance will not have adverse consequences for
PSINet after completion of the merger
. the required regulatory approvals will be obtained within the time frame
contemplated by PSINet and TNI and referred to in this prospectus/proxy
statement or on terms that will be satisfactory to PSINet and TNI.
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Appraisal Rights
Record holders of TNI common stock that follow the appropriate procedures
are entitled to dissenters rights under Section 262 of the Delaware General
Corporation Law (the "DGCL") in connection with the merger.
The following discussion of the applicable provisions of the DGCL is not
intended to be a complete statement of those provisions you should refer to the
full text of Section 262 of the DGCL, which is reprinted in its entirety and
attached as Annex 3 to this prospectus/proxy statement. This discussion and
Annex 3 should be reviewed carefully by any stockholder of TNI who wishes to
exercise statutory dissenters' rights or who wishes to preserve the right to do
so. Failure to strictly comply with any of the procedural requirements of the
DGCL may result in a termination or waiver of dissenters' rights under the DGCL.
Under the DGCL, each TNI stockholder has the right to dissent from the
merger and demand payment of the fair value of his or her shares of TNI common
stock. If a stockholder elects to dissent, the stockholder must file with TNI a
written notice of dissent stating that the stockholder intends to demand payment
for his or her shares if the merger is consummated. The written notice of
dissent must be filed with TNI before the vote of TNI stockholders on the
merger. Upon making the demand, the dissenting stockholder will cease to have
any of the rights of a stockholder except the right to be paid the fair value of
his or her shares and other rights of a dissenting stockholder under DGCL.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger any dissenting stockholder will have the right to withdraw
his or her demand for appraisal and to accept the terms offered upon the merger.
Within 120 days after the effective date of the merger, the surviving or
resulting corporation or any stockholder who is entitled to appraisal rights may
file a petition in the Court of Chancery demanding a determination of the value
of the stock of all dissenting stockholders. Upon the filing of any such
petition by a stockholder, service of a copy will be made upon the surviving or
resulting corporation, which will within 20 days after receipt of service file
in the Office of the Register in Chancery a list containing the names and
addresses of all dissenting stockholders. The Register will give notice of the
time and place fixed for the hearing to the stockholders shown on the list. At
the hearing, the Court will determine the stockholders who are entitled to
appraisal rights. The Court will then appraise the shares, determining their
fair value together with a fair rate of interest, if any, and will direct the
payment of the fair value of the shares by the surviving or resulting
corporation to the stockholders entitled to the payment.
The Court may also determine the costs of the proceeding and may impose
such costs upon the parties as it deems equitable. The Court may order all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding to be charged pro rata against the value of the shares
entitled to an appraisal.
Continuation of TNI Employee Benefits
PSINet has agreed that, from the effective time of the merger until the
second anniversary of the effective time of the merger, it will provide, or
cause to be provided, benefit plans, programs and arrangements to employees of
TNI that are no less favorable in the aggregate to those provided to employees
of TNI immediately before the effective time of the merger.
PSINet has agreed that, to the extent permitted under applicable benefit
plans or insurance policies:
. it will credit continuing employees of TNI with their service with TNI
and its affiliates for purposes of participation, vesting and
entitlement to benefits in any employee benefits plans,
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programs or arrangements in which they subsequently participate after
the effective time of the merger
. it will provide each TNI employee with credit for any co-payments and
deductibles paid before the effective time of the merger in satisfying
any applicable deductible or out-of-pocket requirements
. it will not impose any limitations more onerous than those currently in
effect as to pre-existing conditions, exclusions and waiting periods
with respect to participation and coverage requirements applicable to
TNI employees.
Effect on Options Awards Outstanding under TNI Stock Plans
The outstanding and unexercised employee stock options to acquire an
aggregate of 2,400,886 shares of TNI common stock became vested and immediately
exercisable in accordance with their terms upon the signing of the merger
agreement. Under the merger agreement, at the effective time of the merger, the
options not previously exercised will become exercisable for shares of PSINet
common stock. Each option to acquire shares of TNI common stock will be
converted into an option to acquire PSINet common stock on the same terms and
conditions, based upon the 1:1 exchange ratio provided by the merger agreement.
TNI agreed not to issue any additional stock options prior to the effective time
of the merger other than up to 12,000 options offered under an offer letter
outstanding at the time the merger agreement was signed.
Resale of PSINet Common Stock
PSINet common stock issued in the merger will not be subject to any
restrictions on transfer arising under the Securities Act of 1933, except for
shares issued to any TNI stockholder who may be deemed to be an "affiliate" of
TNI or PSINet for purposes of Rule 145 under the Securities Act. It is expected
that each such affiliate will agree not to transfer any PSINet common stock
received in the merger except in compliance with the resale provisions of Rule
144 or 145 under the Securities Act or as otherwise permitted under the
Securities Act.
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THE MERGER AGREEMENT
The following description summarizes the material provisions of the merger
agreement. You should read carefully the merger agreement, which is attached as
Annex 1 to this prospectus/proxy statement.
Conditions to the Completion of the Merger. Each party's obligation to
effect the merger is subject to the satisfaction or waiver of various conditions
which include, in addition to other customary closing conditions, the following:
. holders of a majority of the outstanding shares of TNI common stock must
adopt the merger agreement;
. the waiting period required under the Hart-Scott-Rodino Act must expire
or be terminated (the waiting period was terminated on September 9,
1999) and any other required consents from governmental entities and
other third parties must be received;
. TNI's $75 million revolving credit facility ($62.0 million of which was
outstanding at June 30, 1999) must be paid prior to the effectiveness of
the merger;
. PSINet common stock issuable to TNI stockholders in the merger must have
been approved for listing on the Nasdaq National Market;
. no court with appropriate jurisdiction has issued an order, judgment,
decree, injunction or ruling which restrains, enjoins, prohibits or
prevents, after the best efforts of the parties to cause such action to
be vacated or lifted, the completion of the merger; and
. the registration statement of which this prospectus/proxy statement
forms a part must have been declared effective by the SEC and must
remain effective.
In addition, each of PSINet's and TNI's obligation to effect the merger is
also subject to the satisfaction or waiver of the following additional
conditions:
. the representations and warranties of the other party set forth in the
merger agreement that are modified by materiality or material adverse
effect shall be true and correct in all respects, and those that are not
so modified shall be true and correct in all material respects as of the
date of the merger agreement and as of the date on which the merger is
to be effective as though made on and as of the date on which the merger
is to be completed, or, if such representations and warranties expressly
relate to an earlier date, then as of such date, except that
representations set forth by TNI with respect to capitalization of TNI
shall be true and correct in all respects;
. the other party to the merger agreement having performed or complied
with all agreements and covenants required to be performed by it under
the merger agreement on or prior to the date on which the merger is to
be completed, in all material respects (other than certain covenants
made by TNI with respect to issuance of shares of TNI capital stock or
options) and TNI having issued the additional common stock or options to
acquire common stock except as provided in the merger agreement; and
. TNI having received from Arent Fox Kintner Plotkin & Kahn, PLLC, counsel
to TNI, and PSINet having received from Nixon Peabody LLP, counsel to
PSINet, on the date on which the
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merger is to be completed, an opinion in each case dated as of such
respective date and stating that the merger will qualify for United
States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. The issuance of
such opinions will be conditioned upon the receipt by such tax counsel
of customary representation letters from each of TNI, PSINet and PSINet
Shelf, Inc., in each case, in form and substance reasonably satisfactory
to such tax counsel.
TNI can provide no assurance that all of the conditions precedent to the
merger will be satisfied or waived by the party permitted to do so. TNI cannot
at this point determine whether it would resolicit proxies in the event that it
decides to waive any of the items listed above. This decision would depend upon
the facts and circumstances leading to TNI's decision to complete the merger and
whether TNI believes there has been a material change in the terms of the merger
and its effect on TNI stockholders. In making its determination, TNI would
consider, among other factors, the reasons for the waiver, the effect of the
waiver on the terms of the merger, whether the requirement being waived was
necessary in order to make the deal fair to the stockholders from a financial
point of view, the availability of alternative transactions and the prospects of
TNI as an independent entity. If TNI determines that a waiver of a condition
would materially change the terms of the merger, including the expected
qualification of the merger as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code, it would resolicit proxies.
No Solicitation of Alternate Transactions. The merger agreement provides
that TNI will not, nor will its subsidiaries, nor any of their directors,
officers or employees, or any investment banker, attorney, accountant or other
representative retained by it or any of its subsidiaries, directly or indirectly
through another person:
. initiate, solicit, encourage or knowingly facilitate, including by way
of furnishing information, any inquiries or the making of any
acquisition proposal, as described below;
. participate in any discussions, provide any confidential information or
data relating to, or engage in any negotiations regarding, any
acquisition proposal or knowingly facilitate any effort or attempt to
implement an acquisition proposal or accept an acquisition proposal;
provided, however, that if, at any time prior to the date of the special
meeting, the TNI board of directors determines in good faith, that an
unsolicited bona fide written acquisition proposal could reasonably be expected
to be a superior proposal, as defined below, TNI may, in response to a superior
proposal which was subject to providing prior notice of its decision to do so to
PSINet:
. furnish under a customary confidentiality agreement information about
TNI and its subsidiaries to any person making a superior proposal
. participate in discussions or negotiations regarding the superior
proposal.
The merger agreement provides that:
. the term "acquisition proposal" means any inquiry, proposal or offer
from any person relating to a merger, reorganization, share exchange,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving TNI, or any purchase or
sale of all or any significant portion of the assets of TNI or more than
10% of the TNI common stock or the assets or capital sock of any of its
subsidiaries;
. the term "superior proposal" means any bona fide unsolicited written
acquisition proposal made by a third party to acquire more than 50% of
the voting power of the shares of TNI common
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stock then outstanding or all or substantially all the assets of TNI,
for consideration consisting of cash and/or securities, that the TNI
board of directors concludes in good faith, after consultation with its
financial advisors and legal counsel, taking into account legal,
financial, regulatory and other aspects of the proposal and the
proposer, would, if consummated, result in a transaction materially more
favorable from a financial point of view to TNI's stockholders than the
merger and which is reasonably capable of being completed, including its
financing, to the extent required, is then committed or is, in the good
faith judgment of the TNI board of directors, reasonably capable of
being financed.
Except as expressly permitted by the merger agreement, neither the TNI
board of directors nor any committee of the board will:
. withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to PSINet, or take any other action not explicitly
permitted by the merger agreement that would be inconsistent with, the
approval or recommendation by the TNI board of directors or that
committee of the merger;
. approve or recommend, or propose publicly to approve or recommend, any
acquisition proposal; or
. cause TNI to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any
acquisition proposal, other than any agreement entered into concurrently
with a termination as described in the next sentence in order to
facilitate such action.
Notwithstanding the foregoing, if prior to the special meeting, TNI's board
of directors determines in good faith, after giving effect to all concessions
which may be offered by PSINet, that an acquisition proposal constitutes a
superior proposal which was not solicited by TNI and which did not otherwise
result from a breach of the provisions of the merger agreement described above,
the TNI board of directors may terminate the merger agreement, but only at a
time that is after the fifth day following PSINet's receipt of written notice
advising PSINet that the TNI board of directors is prepared to accept a superior
proposal. TNI must pay a fee in the amount of $15 million to PSINet as a
condition to the termination. See "-- Termination" and "--Termination Fees."
Termination. The merger agreement may be terminated at any time before the
effective time of the merger, whether before or after adoption of the merger
agreement by the stockholders of TNI:
1. by mutual written consent of PSINet and TNI;
2. by PSINet or TNI, if the other party has materially breached the merger
agreement, which breach has not been cured and which would cause a
closing condition to be incapable of being satisfied by February 29,
2000;
3. by PSINet or TNI if any court of competent jurisdiction has issued,
enacted, entered, promulgated or enforced any order, judgment, decree,
injunction or ruling, after reasonable efforts on the part of PSINet
and TNI to resist, resolve or lift, which permanently restrains,
enjoins or otherwise prohibits the merger and the order, judgment,
decree, injunction or ruling has become final and nonappealable;
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4. by PSINet or TNI, if the merger has not been completed by February 29,
2000 provided that the terminating party is not otherwise in material
breach of its representations, warranties or obligations under the
merger agreement;
5. by PSINet or TNI, if the TNI special meeting (including as it may be
adjourned from time to time) concluded without TNI having obtained the
required stockholder approval of the merger;
6. by PSINet if, before the TNI special meeting, the TNI board of
directors: (a) withdraws or modifies in any adverse manner its approval
of the merger agreement, (b) approves or recommends a superior
proposal, or (c) resolves to take either of the foregoing actions; or
7. by TNI at any time before the TNI special meeting, upon five business
days' prior notice to PSINet, if TNI's board of directors approves a
superior proposal provided that (a) TNI has not violated its agreement
not to solicit acquisition proposals, (b) the TNI board of directors
has concluded in good faith, after giving effect to all concessions
which may be offered by PSINet described in (c) below, on the basis of
the advice of its financial advisors and outside counsel, that the
proposal is a superior proposal and (c) before any termination, TNI has
negotiated, and caused its financial and legal advisors to negotiate,
with PSINet to make adjustments in the terms and conditions of the
merger agreement as would enable PSINet to proceed with the merger, and
(d) TNI has paid the termination fee.
Termination Fees. If the merger agreement is terminated under specified
circumstances, TNI must pay PSINet a $15 million termination fee. The
termination fee is due before, and as a pre-condition to the effectiveness of, a
termination by TNI relating to TNI's board of directors approval of a superior
proposal as described in paragraph 7 above. TNI will be required to pay the
termination fee if PSINet terminates the merger agreement as a result of TNI's
board of directors having approved or recommended, before the TNI special
meeting, a superior proposal or if TNI or PSINet terminates the merger agreement
as described in paragraph 5 above due to the failure to the TNI stockholders to
approve and adopt the merger agreement and, in each case, before the
termination, there existed an acquisition proposal and within 12 months after
the termination TNI enters into a definitive agreement with respect to, or
consummates, an acquisition proposal. TNI will also be required to pay the
termination fee if PSINet terminates the merger agreement based on TNI's
material breach of the merger agreement as described in paragraph 2 above, the
failure to consummate the merger by February 29, 2000 as described in paragraph
4 above, or a withdrawal or modification in the recommendation of TNI's board of
directors to its stockholders or resolution of TNI's board of directors to do so
or to approve or recommend a superior proposal as described in paragraph 6 above
or if PSINet or TNI terminates the merger agreement based on a court's
prohibition of the transaction as described in paragraph 3 above, and, in each
case, if before the date giving rise to the right of termination, there existed
an acquisition proposal and TNI intentionally breaches the merger agreement and,
within 12 months after the termination, TNI enters into a definitive agreement
with respect to, or consummates, an acquisition proposal.
Conduct of Business Pending the Merger. Before the effective time, except
as contemplated by the merger agreement or unless PSINet otherwise agrees in
writing, TNI has agreed that it will, and will cause its subsidiaries to, carry
on their respective businesses in the usual, regular and ordinary course in
substantially the same manner as conducted immediately before the signing of the
merger agreement and to use reasonable efforts to conduct their business in a
manner consistent with the budgets and plans made available to PSINet. TNI has
agreed to cause its subsidiaries to use reasonable efforts to preserve intact
their business organizations, keep available the services of their employees and
preserve their relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with them to the end that their
goodwill and on-going businesses will not be impaired in any material respect at
the effective
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time of the merger. TNI has also agreed that, unless PSINet otherwise agrees in
writing, before the effective time of the merger, it will not and will not
permit its subsidiaries to:
. declare, set aside, or pay any dividends on, or make any other
distributions with respect to, any of its capital stock, other than
dividends and distributions by any direct or indirect subsidiary of TNI
to its parent(s);
. split, combine or reclassify any of its capital stock or, other than
pursuant to the exercise of TNI stock options or options under its
employee stock purchase plan (ESPP) outstanding on the date of the
merger agreement, issue or authorize the issuance of any other
securities with respect to, instead of or in substitution for shares of
its capital stock;
. purchase, redeem or otherwise acquire, other than pursuant to the
exercise of TNI stock options or ESPP options outstanding on the date of
the merger agreement, any shares of TNI capital stock or any of its
subsidiaries or any other equity securities of TNI or its subsidiaries
or any rights, warrants, or options to acquire any of those shares or
other securities other than purchases, redemptions or acquisitions of
equity securities of wholly-owned subsidiaries of TNI or rights,
warrants or options to acquire those securities;
. issue, deliver, sell, pledge or otherwise encumber any shares of its
capital stock including any TNI employee stock options (other than those
agreed to previously by PSINet) or any ESPP options, any other voting
securities of TNI or any securities convertible into, or any rights,
warrants or options to acquire, any of those shares or voting securities
(other than the issuance of TNI common stock upon the exercise of stock
options or ESPP options outstanding on the date of the merger agreement)
or amend the terms of any of those securities, rights, warrants or
options;
. amend its certificate of incorporation or by-laws or comparable
organizational documents of any of its subsidiaries or ventures;
. acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, any business or any
corporation, partnership, joint venture, association or other business
organization or division, or any assets that are material to TNI and its
subsidiaries taken as a whole, except, in the ordinary course of
business;
. subject to a lien or sell, lease or otherwise dispose of any of its
material properties or assets, including the ventures and other
investments referred to in the merger agreement, except in the ordinary
course of business;
. incur any indebtedness for borrowed money or guarantee any indebtedness
of another person, issue or sell any debt securities of TNI or any of
its subsidiaries, guarantee any debt securities of another person (other
than indebtedness to, guarantees of, or issuances or sales to TNI or a
wholly-owned subsidiary of TNI), or enter into any "keep well" or other
agreement to maintain any financial condition of another person, except,
in any case, for borrowings or other transactions incurred in the
ordinary course of business including to repay existing indebtedness
pursuant to the terms of the indebtedness;
. except in the ordinary course of business, make any loans, advances or
capital contributions to, or investments in, any other person, other
than to TNI or any direct or indirect subsidiary of TNI or settle or
compromise any material claims or litigation;
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. authorize any of, or commit or agree to take any of, the foregoing
actions.
These limitations upon TNI's conduct do not generally apply to these
transactions or actions if they are between TNI and a wholly-owned subsidiary of
TNI or if they are between two wholly-owned subsidiaries of TNI.
TNI has agreed to promptly provide PSINet copies of all filings made by TNI
with any governmental entity in connection with the merger agreement and the
transactions contemplated by the agreement. Before settling or compromising any
material income tax liability of TNI or any of its subsidiaries, TNI has agreed
to consult with PSINet and its advisors as to the positions and elections that
will be taken or made with respect to the matter.
Amendment and Waiver. Subject to applicable law:
. the merger agreement provides that it may be amended by the parties in
writing at any time, except that after the merger agreement has been
adopted by the stockholders of TNI, no amendment may be entered into
which changes the form or decreases the amount of merger consideration,
materially affects the rights of TNI stockholders or requires further
approval by TNI stockholders, unless further approval is obtained; and
. at any time before the effective time of the merger, any party may by
written instrument extend the time for performance of the obligations of
any other party to the merger agreement, waive inaccuracies in
representations and warranties of any other party contained in the
merger agreement or in any related document and, except as provided in
the merger agreement, waive compliance by any other party with any
agreements or conditions in the merger agreement.
Under Section 251(d) of the Delaware General Corporation Law, no amendment
to the merger agreement made after the adoption of the merger agreement by the
stockholders of TNI may, without further stockholder approval, alter or change
the amount or kind of shares, securities, cash, property or rights to be
received by TNI stockholders in the merger, or alter or change any terms and
conditions of the merger agreement if the alteration or change would adversely
affect the holders of any class or series of stock of TNI.
Expenses. Whether or not the merger is consummated, all costs and expenses
incurred in connection with the merger agreement and the transactions
contemplated by the agreement will be paid by the party incurring the fees or
expenses, except as otherwise provided in the merger agreement. Notwithstanding
the above, PSINet Shelf I Inc. will pay all real property transfer, gains and
other similar taxes and all documentary stamps, filing fees, recording fees and
sales and use taxes, if any, and any related penalties or interest, payable in
connection with the consummation of the merger without any offset, deduction,
counterclaim or deferment of the payment of the merger consideration. If the
merger agreement is terminated, PSINet and TNI will share equally the expenses
incurred in connection with filing and printing of this prospectus/proxy
statement and the filing fees for the premerger notification and report forms
under the Hart-Scott-Rodino Act.
Representations and Warranties. The merger agreement contains customary
representations and warranties relating to, among other things:
. corporate organization and similar corporate matters of PSINet and TNI
and their respective subsidiaries;
. the capital structure of each of PSINet and TNI;
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. authorization, execution, delivery, performance and enforceability of,
and required consents, approvals, orders and authorizations of
governmental authorities relating to, the merger agreement and related
matters of PSINet and TNI;
. documents filed by each of PSINet and TNI with the Securities and
Exchange Commission, the accuracy of information contained in those
documents and the absence of undisclosed liabilities of each of PSINet
and TNI;
. the accuracy of information supplied by each of PSINet and TNI in
connection with this prospectus/proxy statement and the registration
statement of which it is a part;
. absence of certain material changes or events concerning PSINet and TNI;
. compliance with applicable laws by TNI;
. absence of changes in benefit plans of TNI;
. matters relating to the Employee Retirement Income Security Act for TNI;
. filing of tax returns and payment of taxes by TNI and its subsidiaries;
. required stockholder vote of TNI to approve the merger;
. engagement and payment of fees of brokers, investment bankers, finders
and financial advisors by each of PSINet and TNI;
. receipt of fairness opinion by TNI from its financial advisor;
. intellectual property and year 2000 matters of TNI;
. outstanding and pending material litigation of each of PSINet and TNI;
. specified material contracts of TNI; and
. environmental matters of TNI.
Amendments to the PSINet Shelf I, Inc. Certificate of Incorporation. As of
the effective time of the merger, the PSINet Shelf I, Inc. certificate of
incorporation will be substantially identical to its certificate of
incorporation immediately prior to the merger except that its name will change
to "Transaction Network Services, Inc." For a summary of some provisions of the
TNI certificate of incorporation and the associated rights of TNI stockholders,
see "Comparison of Rights of Holders of Common Stock of PSINet and TNI."
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet as of June 30,
1999 and the unaudited pro forma consolidated statements of operations for the
year ended December 31, 1998 and for the six months ended June 30, 1999 (``Pro
Forma Financial Information'') present the pro forma effect of the merger,
particular acquisitions and capital raising activity of PSINet Inc. since
January 1, 1998.
The objective of Pro Forma Financial Information is to provide investors
with information about the continuing impact of particular completed or probable
transactions by indicating how the transactions might have affected historical
financial statements had they occurred at an earlier date.
Under the terms of the merger agreement, the aggregate consideration to be
paid to TNI stockholders consists of up to approximately $351.0 million in cash
and up to approximately 7.8 million shares (assuming the exercise of
approximately 2.4 million currently exercisable TNI stock options as of June 30,
1999) of PSINet common stock (which represents an aggregate value of up to
approximately $707.3 million, assuming a price per share of PSINet common stock
of $45.719); additionally, PSINet will repay the $62.0 million of obligations
outstanding under TNI's revolving credit facility (such transactions are
collectively referred to as the ``merger''). The source of the cash
consideration for the merger and the cash for the repayment of the TNI revolving
credit facility obligation will be from cash on hand. TNI stockholders may elect
to receive cash, PSINet stock, or both cash and shares, subject to particular
adjustments. The amount of cash paid and shares of PSINet stock issued in the
merger are contingent upon the ultimate number of outstanding TNI stock options
exercised prior to closing. PSINet does not believe that any change in the
consideration paid would materially impact the pro forma financial information
presented herein, and accordingly, alternative presentations have not been
included.
During July 1999, PSINet issued $1.05 billion and euro 150.0 million
($157.6 million, using an exchange rate of $1.00: euro .9520) aggregate
principal amount of 11% senior notes due 2009 (the "11% Senior Notes").
On September 10, 1998, TNI acquired form AT&T Corp. ("AT&T") the right to
provide services under particular customer service contracts and particular
related equipment related to AT&T's Transaction Access Services ("TAS
Acquisition") for approximately $64.3 million in cash, which materially changed
TNI's business. For accounting and reporting purposes, the TAS Acquisition was
considered to be an acquisition of a business.
The following Unaudited Pro Forma Consolidated Balance Sheet at June 30,
1999 presents, on a pro forma basis, PSINet's consolidated financial position
assuming each of the following had occurred on June 30, 1999: (i) the merger,
(ii) PSINet's acquisition of Intercomputer, S.A and Intercomputer Soft, S.A.
("Intercomputer"), and (iii) the issuance by PSINet of the 11% Senior Notes and
the application of the net proceeds from that issuance.
The following Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1998 presents, on a pro forma basis, PSINet's
consolidated results of operations assuming each of the following had occurred
on January 1, 1998:
(1) the merger;
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(2) the TAS Acquisition, assuming that the TAS operations were conducted
under TNI's Communications Services Agreement with AT&T and assuming the
elimination of certain AT&T costs allocated to TAS;
(3) PSINet's acquisitions of iSTAR internet inc., Interactive Networx GmbH,
ioNET Internetworking Services, LinkAge Online Limited, INTERLOG Internet
Services, Inc., Rimnet Corporation, iNet, Inc. and Tokyo Internet
Corporation (the "Other 1998 Acquisitions") and of Planete.net S.A.R.L.,
Satelnet S.A., TeleLinx Ltd., Horizontes Internet Ltda, Wavis Equipamentos
de Informatica Ltda, Sao Paulo On-Line Ltda, Internet de Mexico S.A. de
C.V., Datanet S.A. de C.V., The Internet Company, Caribbean Internet
Service Corp., The Internet Access Company and Intercomputer (the "Other
1999 Acquisitions" and, collectively with the Other 1998 Acquisitions, the
"Other Acquisitions"); and
(4) the issuance by PSINet of the 11% Senior Notes.
The following Unaudited Pro Forma Consolidated Statement of Operations for
the six months ended June 30, 1999 presents, on a pro forma basis, PSINet's
consolidated results of operations assuming each of the following had occurred
on January 1, 1998:
(1) the merger;
(2) the Other 1999 Acquisitions; and
(3) the issuance by PSINet of the 11% Senior Notes.
The financial information in this section should be read along with
PSINet's and TNI's historical consolidated financial statements and accompanying
notes incorporated by reference in this prospectus/proxy statement. See "Where
You Can Find More Information" on page 108.
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PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
for
Transaction Transaction Transaction Transaction
Network Access Network Network
PSINet Inc. Services Inc. Services, Inc. Services Inc. Services Inc.
Consolidated Consolidated Acquisition Adjustments Acquisition
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue......................................... $ 259,636 $101,906 $40,259 $ -- $ 401,801
Operating costs and expenses:
Data communications and operations............. 199,372 68,361 24,749 -- 292,482
Sales and marketing............................ 57,026 3,895 -- -- 60,921
General and administrative..................... 45,288 8,579 -- -- 53,867
Depreciation and amortization.................. 63,424 10,783 3,402 44,737(a) 122,346
Charge for acquired in-process R&D............. 70,800 -- -- -- 70,800
--------- -------- ------- -------- ---------
Total operating costs and expenses............ 435,910 91,618 28,151 44,737 600,416
--------- -------- ------- -------- ---------
Income (loss) from operations................... (176,274) 10,288 12,108 (44,737) (198,615)
Interest expense................................ (63,914) (1,205) (2,566) 2,534(b) (65,151)
Interest income................................. 19,638 1,532 -- -- 21,170
Other income (expense), net..................... 6,833 -- -- -- 6,833
Non-recurring arbitration charge................ (49,000) -- -- -- (49,000)
--------- -------- ------- -------- ---------
Income (loss) before income taxes, equity in
earnings of affiliate and minority interest.... (262,717) 10,615 9,542 (42,203) (284,763)
Income tax benefit (expense).................... 848 (4,425) (3,698) 8,123(f) 848
Equity in earnings of unconsolidated
affiliate...................................... -- 356 -- -- 356
Minority interest in net loss of consolidated
subsidiary..................................... -- 319 -- -- 319
--------- -------- ------- -------- ---------
Net income (loss)............................... (261,869) 6,865 5,844 (34,080) (283,240)
Return to preferred shareholders................ (3,079) -- -- -- (3,079)
--------- -------- ------- -------- ---------
Net income (loss) available to common $(264,948) $ 6,865 $ 5,844 $(34,080) $(286,319)
shareholders................................... ========= ======== ======= ======== =========
Basic and diluted loss per share................ $ (5.32)
=========
Shares used in computing basic and diluted loss
per share...................................... 49,806 7,800(c)
========= ========
<CAPTION>
Other Other
Acquisitions Adjustments Pro Forma
------------ ----------- ---------
<S> <C> <C> <C>
Revenue......................................... $111,276 $ -- $ 513,077
Operating costs and expenses:
Data communications and operations............. 67,162 -- 359,644
Sales and marketing............................ 11,760 -- 72,681
General and administrative..................... 28,876 -- 82,743
Depreciation and amortization.................. 8,973 28,117(a) 159,436
Charge for acquired in-process R&D............. -- -- 70,800
-------- --------- ---------
Total operating costs and expenses............ 116,771 28,117 745,304
-------- --------- ---------
Income (loss) from operations.................. (5,495) (28,117) (232,227)
Interest expense............................... (3,147) (139,073)(b) (207,371)
Interest income................................ 272 -- 21,442
Other income (expense), net.................... (500) -- 6,333
Non-recurring arbitration charge............... -- -- (49,000)
-------- --------- ---------
Income (loss) before income taxes, equity in
earnings of affiliate and minority interest... (8,870) (167,190) (460,823)
Income tax benefit (expense)................... (1,680) -- (832)
Equity in earnings of unconsolidated
affiliate..................................... -- -- 356
Minority interest in net loss of consolidated
subsidiary.................................... -- -- 319
-------- --------- ---------
Net income (loss).............................. (10,550) (167,190) (460,980)
Return to preferred shareholders............... -- -- (3,079)
-------- --------- ---------
Net income (loss) available to common $(10,550) $(167,190) $(464,059)
shareholders................................... ======== ========= =========
Basic and diluted loss per share................ $ (8.06)
=========
Shares used in computing basic and diluted loss
per share...................................... 57,606
=========
</TABLE>
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PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
(In thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
for
Transaction Transaction Transaction
Network Network Network
PSINet Inc. Services Inc. Services Inc. Services Inc.
Consolidated Consolidated Adjustments Acquisition
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenue........................................... $ 228,668 $80,827 $ -- $ 309,495
Operating costs and expenses:
Data communications and operations............... 162,341 53,827 -- 216,168
Sales and marketing.............................. 40,505 3,497 -- 44,002
General and administrative....................... 32,469 6,442 -- 38,911
Depreciation and amortization.................... 61,210 9,266 22,369(d) 92,845
--------- ------- -------- ---------
Total operating costs and expenses.............. 296,525 73,032 22,369 391,926
--------- ------- -------- ---------
Income (loss) from operations..................... (67,857) 7,795 (22,369) (82,431)
Interest expense.................................. (61,486) (1,925) 1,783(e) (61,628)
Interest income................................... 12,798 874 -- 13,672
Other income (expense), net....................... (358) -- -- (358)
--------- ------- -------- ---------
Income (loss) before income taxes, equity in
earnings of affiliate and minority interest...... (116,903) 6,744 (20,586) (130,745)
Income tax benefit (expense)...................... 450 (2,552) 2,552 (f) 450
Equity in earnings of unconsolidated affiliate.... -- 93 -- 93
Minority interest in net loss (income) of
consolidated subsidiary.......................... -- (128) -- (128)
--------- ------- -------- ---------
Net income (loss)................................. (116,453) 4,157 (18,034) (130,330)
Return to preferred shareholders.................. (4,797) -- -- (4,797)
--------- ------- -------- ---------
Net income (loss) available to common $(121,250) $ 4,157 $(18,034) $(135,127)
shareholders..................................... ========= ======= ======== =========
Basic and diluted loss per share.................. $ (2.10)
=========
Shares used in computing basic and diluted loss
per share........................................ 57,657 7,800(c)
========= ========
<CAPTION>
Other
1999 Other
Acquisitions Adjustments Pro Forma
------------ ----------- ---------
<S> <C> <C> <C>
Revenue........................................... $19,691 $ -- $ 329,186
Operating costs and expenses:
Data communications and operations............... 8,844 -- 225,012
Sales and marketing.............................. 1,906 -- 45,908
General and administrative....................... 5,812 -- 44,723
Depreciation and amortization.................... 1,534 4,590(d) 98,969
------- -------- ---------
Total operating costs and expenses.............. 18,096 4,590 414,612
------- -------- ---------
Income (loss) from operations.................... 1,595 (4,590) (85,426)
Interest expense................................. (410) (68,545)(e) (130,583)
Interest income.................................. 110 -- 13,782
Other income (expense), net...................... (110) -- (468)
------- -------- ---------
Income (loss) before income taxes, equity in
earnings of affiliate and minority interest..... 1,185 (73,135) (202,695)
Income tax benefit (expense)..................... (803) -- (353)
Equity in earnings of unconsolidated affiliate... -- -- 93
Minority interest in net loss (income) of
consolidated subsidiary......................... -- -- (128)
------- -------- ---------
Net income (loss)................................ 382 (73,135) (203,083)
Return to preferred shareholders................. -- -- (4,797)
------- -------- ---------
Net income (loss) available to common $ 382 $(73,135) $(207,880)
shareholders..................................... ======= ======== =========
Basic and diluted loss per share.................. $ (3.18)
=========
Shares used in computing basic and diluted loss
per share........................................ 65,457
=========
</TABLE>
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PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS
The pro forma adjustments outlined below present separate adjustments
related to the acquisition of TNI and the adjustments related to the other
transactions reflected in the Unaudited Pro Forma Consolidated Statements of
Operations.
The purchase price of each acquisition has been allocated to tangible
assets acquired and liabilities assumed, based upon their respective fair
values, with the excess allocated to intangible assets to be amortized over the
estimated economic lives of the intangible assets of up to 20 years from the
respective dates of acquisition. In conjunction with the acquisition of TNI,
PSINet has recorded $72.8 million of net deferred tax liabilities.
PSINet has recently engaged an independent third party to determine the
allocation of the total purchase price of TNI. Until the study is complete,
preliminary estimates have been used in the development of the Pro Forma
Financial Information, including an estimate of the amount of acquired in-
process research and development that will result from this acquisition. As of
the acquisition announcement date, TNI was in the process of working on five key
projects which had not yet been determined to be technologically feasible and
which have no alternative future use, which would give rise to such a charge.
The five key research and development projects include:
. Next Generation Excel C2 Switch. This is a project to develop a major
software enhancement for controlling an Excel switch. Although TNI
purchases the Excel switch, TNI is responsible for writing the software
that controls it. This project is expected to allow TNI to enter new
markets because the software under development may allow the same piece
of hardware to process both outbound and inbound calls. The material
technology risk associated with this project is that the product may not
be capable of supporting the large volume of business that it must be
equipped to handle. This project, under current plans, is expected to be
completed in the first quarter of 2000.
. Outdial. This is a project under development in Ireland for application
in the United Kingdom. This product is designed to give TNI's network
access controllers the ability to originate calls. This technology is
designed to allow TNI to force the host (credit card processor) to call
a merchant's terminal for batch verification rather than the merchant
remembering to dial. This project is expected to allow TNI to enter new
markets because the software allows the same piece of hardware to
receive both outbound and inbound calls. The material technology risk
associated with this project is that the product may not be capable of
supporting the large volume of business that it must be equipped to
handle. This project, under current plans, is expected to be completed
in the first quarter of 2000.
. Next Generation Terminal Adaptor. This is a project under development
designed to increase the speed and connectivity of an ATM terminal. This
project is expected to allow TNI to strengthen its market share by
offering customers more features from the same piece of equipment. The
material technology risk associated with the project is that the product
may not be capable of supporting the large volume of business that it
must be equipped to handle. This project, under current plans, is
expected to be completed in the fourth quarter of 1999.
-88-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS - (Continued)
. Fraud Engine Update. This is a project under development designed to
update the system by which a telephone company verifies the billability
of a long distance call originating from a pay phone. This project is
expected to allow TNI to gain more market share through the introduction
of a more reliable product to market. The material technology risk
associated with this project is that this product is based on an
entirely new design and is currently unproven. This project, under
current plans, is expected to be completed in the first quarter of 2000.
. Local Number Portability. This is a project that is designed to allow
TNI to house the database against which a telephone company verifies the
billability of a long distance call originating from a pay phone in
Australia. This project is expected to open a new market for TNI. The
material technology risk associated with this project is that the
product may not be capable of supporting the large volume of business
that it must be equipped to handle. This project, under current plans,
is expected to be completed in the first quarter of 2000.
If none of these projects is successfully developed, TNI's and, after
completing the acquisition of TNI, PSINet's sales and profitability may be
adversely affected in future periods. However, the failure of any particular
individual project in-process would not have a material impact on PSINet's
financial condition or results of operations. Additionally, the failure of any
particular individual project in-process could impair the value of other
intangible assets acquired.
For purposes of this Pro Forma Financial Information, PSINet has attributed
the excess of the purchase price over the acquired net tangible assets for TNI
of approximately $760.7 million to other intangible assets in accordance with
the preliminary valuation; these include: existing technology including
software, patents, unpatented technology and know-how, tradenames, customer
contracts and relationships, existing workforce and goodwill, with useful lives
from five to 20 years, and $35.0 million to purchased in-process research and
development. To the extent that a portion of the purchase price of TNI is
allocated among the other intangible assets in different proportions, the
adjustment for amortization expense for the twelve months ended December 31,
1998 and for the six months ended June 30, 1999 would be different. For every
$1.0 million change in the amount allocated to purchased in-process research and
development, annual amortization expense reflected in the pro forma consolidated
statement of operations would change by $50,000.
-89-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS - (Continued)
For the Year Ended December 31, 1998
(a) Reflects the increase in amortization resulting from the allocation of
the purchase price to the acquired net tangible and intangible assets
(principally tradename, customer relationships, goodwill, assembled workforce
and existing technology, including software, patents, unpatented technology and
know-how) relating to the acquisitions included herein. The assigned lives of
the acquired intangible assets range from three to 20 years.
<TABLE>
<CAPTION>
(thousands of U.S. dollars)
TNI Other
--- -----
<S> <C> <C>
Amortization....................................................... $44,737 $28,117
======= =======
</TABLE>
(b) Reflects the following:
<TABLE>
<CAPTION>
(thousands of U.S. dollars)
TNI Other
--- -----
<S> <C> <C>
Interest expense on the 11% Senior Notes from January 1,
1998 December 31, 1998 (assuming an average
exchange rate of $1.00: Euro .8539)............................... $ -- $134,824
Amortization of deferred financing costs associated
with the 11% Senior Notes from January 1, 1998 -
December 31, 1998................................................. -- 3,421
Interest expense avoided through assumed repayment of
the TNI revolving credit facility as of January 1, 1998........... (2,534) --
Other.............................................................. -- 828
------- --------
$(2,534) $139,073
======= ========
</TABLE>
(c) Basic and diluted loss per share are computed using net loss available
to common shareholders divided by the weighted average number of shares of
PSINet common stock that were outstanding during the periods presented and
assumes that the issuance of approximately 7,800,000 shares of PSINet common
stock in connection with the acquisition of TNI had occurred on January 1, 1998.
Because all common stock equivalents are antidilutive, basic and diluted loss
per share are the same for all periods presented.
-90-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999
NOTE 1 PRO FORMA ADJUSTMENTS - (Continued)
For the Six Months Ended June 30, 1999
(d) Reflects the increase in amortization resulting from the allocation of
the purchase price to the acquired net tangible and intangible assets
(principally tradename, customer relationships, goodwill, assembled workforce
and existing technology, including software, patents, unpatented technology and
know-how) relating to the acquisitions included herein. The assigned lives of
the acquired intangible assets range from three to 20 years.
<TABLE>
<CAPTION>
(thousands of U.S. dollars)
TNI Other
--- -----
<S> <C> <C>
Amortization.................................................... $22,369 $4,590
======= ======
</TABLE>
(e) Reflects the following:
<TABLE>
<CAPTION>
(thousands of U.S. dollars)
TNI Other
--- -----
<S> <C> <C>
Interest expense on the 11% Senior Notes from January 1,
1999 June 30, 1999 (assuming an average exchange
rate of $1.00: Euro .9178)........................................ $ -- $66,740
Amortization of deferred financing costs associated
with the 11% Senior Notes from January 1, 1999 -
June 30, 1999..................................................... -- 1,710
Interest expense avoided through assumed repayment of
the TNI revolving credit facility as of January 1, 1998........... (1,783) --
Other.............................................................. -- 95
------- -------
$(1,783) $68,545
======= =======
</TABLE>
For the Year Ended December 31, 1998 and the Six Months Ended June 30, 1999
(f) Reversal of tax expense recorded by TNI and TAS as a result of
availability to offset TNI and TAS taxable income with PSINet taxable losses for
the periods presented.
-91-
<PAGE>
PSINET INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1999
(In thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Pro Forma
for
Transaction Transaction Transaction
Network Network Network
PSINet Inc. Services Inc. Services Inc. Services Inc. Intercomputer
Consolidated Consolidated Adjustments Acquisition Acquisition
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 609,987 $ 13,940 $ (350,830)(a)
(62,000)(f) $ 211,097 $ 124
Restricted cash and short-term
investments............................. 144,504 -- -- 144,504 --
Short-term investments and marketable
securities.............................. 106,369 1,216 -- 107,585 --
Accounts receivable, net.................. 58,596 30,049 -- 88,645 2,545
Prepaid expenses.......................... 12,361 -- -- 12,361 2
Other current assets...................... 20,513 6,390 -- 26,903 94
---------- -------- ---------- ---------- ------
Total current assets.................... 952,330 51,595 (412,830) 591,095 2,765
Property, plant and equipment, net........ 620,687 41,568 -- 662,255 677
Goodwill and other intangibles, net....... 373,583 84,788 (84,788)(b)
760,742 (b) 1,134,325 67
Other assets and deferred charges......... 66,859 5,184 -- 72,043 85
---------- -------- ---------- ---------- ------
Total assets............................ $2,013,459 $183,135 $ 263,124 $2,459,718 $3,594
========== ======== ========== ========== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 78,455 $ 90 $ -- $ 78,545 $ 14
Trade accounts payable.................... 82,504 5,375 -- 87,879 621
Accrued payroll and related expenses...... 18,057 1,431 -- 19,488 225
Other accounts payable and accrued
liabilities.............................. 54,110 16,067 17,000(c) 87,177 923
Accrued interest payable.................. 29,397 180 -- 29,577 --
Deferred revenue.......................... 21,306 1,243 -- 22,549 --
---------- -------- ---------- ---------- ------
Total current liabilities................ 283,829 24,386 17,000 325,215 1,783
Long-term debt............................ 1,141,730 62,946 (62,000)(f) 1,142,676 39
Deferred income taxes..................... 4,721 -- 72,793 (g) 77,514 --
Other liabilities......................... 53,252 402 -- 53,654 109
Minority interest........................ -- 2,596 -- 2,596 --
---------- -------- ---------- ---------- ------
Total liabilities....................... 1,483,532 90,330 27,793 1,601,655 1,931
---------- -------- ---------- ---------- ------
Shareholders' equity:
Convertible preferred stock, Series C.... 362,434 -- -- 362,434 --
Common stock............................. 648 131 (131)(d)
78 (a) 726 112
Capital in excess of par value........... 823,636 62,866 (62,866)(d)
363,058 (a)(g) 1,186,694 --
Accumulated earnings (deficit)........... (548,847) 30,680 (30,680)(d)
(35,000)(e) (583,847) 1,551
Treasury stock........................... (2,005) -- -- (2,005) --
Accumulated other comprehensive income... 17,672 (872) 872 (d) 17,672 --
Bandwidth Asset/IRU Agreement............ (123,611) -- -- (123,611) --
---------- -------- ---------- ---------- ------
Total shareholders' equity............... 529,927 92,805 235,331 858,063 1,663
---------- -------- ---------- ---------- ------
Total liabilities and shareholders'
equity.................................. $2,013,459 $183,135 $ 263,124 $2,459,718 $3,594
========== ======== ========== ========== ======
<CAPTION>
Other
Adjustments Pro Forma
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................
$1,173,352(h)
(25,199)(i) $1,359,374
Restricted cash and short-term
investments............................. -- 144,504
Short-term investments and marketable
securities.............................. -- 107,585
Accounts receivable, net................. -- 91,190
Prepaid expenses......................... -- 12,363
Other current assets..................... -- 26,997
----------- ----------
Total current assets.................... 1,148,153 1,742,013
Property, plant and equipment, net........ -- 662,932
Goodwill and other intangibles, net.......
27,982 (i) 1,162,374
Other assets and deferred charges......... 34,209 (h) 106,337
----------- ----------
Total assets............................ $1,210,344 $3,673,656
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........ $ -- $ 78,559
Trade accounts payable................... -- 88,500
Accrued payroll and related expenses..... -- 19,713
Other accounts payable and accrued
liabilities............................. -- 88,100
Accrued interest payable................. -- 29,577
Deferred revenue......................... -- 22,549
----------- ----------
Total current liabilities............... -- 326,998
Long-term debt............................ 1,207,560(h) 2,350,275
Deferred income taxes..................... -- 77,514
Other liabilities......................... 4,447(i) 58,210
Minority interest......................... -- 2,596
----------- ----------
Total liabilities...................... 1,212,007 2,815,593
----------- ----------
Shareholders' equity:
Convertible preferred stock, Series C... -- 362,434
Common stock............................
(112)(j) 726
Capital in excess of par value..........
-- 1,186,694
Accumulated earnings (deficit)..........
(1,551)(j) (583,847)
Treasury stock.......................... -- (2,005)
Accumulated other comprehensive income.. -- 17,672
Bandwidth Asset/IRU Agreement........... -- (123,611)
----------- ----------
Total shareholders' equity.............. (1,663) 858,063
----------- ----------
Total liabilities and shareholders'
equity................................. $1,210,344 $3,673,656
=========== ==========
</TABLE>
-92-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1999
NOTE 1--PRO FORMA ADJUSTMENTS
Reflects the acquisition of TNI, including:
(a) the assumed cash paid and the issuance of approximately 7.8 million
shares of PSINet common stock in connection with the merger assuming
the acquisition had been consummated on June 30,1999 (the shares of
PSINet common stock assume a value of $45.719 per share, based on the
average of the closing price of PSINet common stock on the Nasdaq
Stock Market's National Market on August 20, 1999 and August 23, 1999,
and also assume the exercise in full of approximately 2.4 million
currently exercisable TNI stock options).
(b) the preliminary allocation of the purchase price of TNI which has been
allocated to tangible assets acquired and liabilities assumed, based
upon their respective fair values, with the excess allocated to
intangible assets to be amortized over the estimated economic lives of
the intangible assets, and the elimination of existing intangible
assets of TNI.
(c) the estimated closing costs and estimated purchase liabilities
associated with the merger.
(d) the elimination of the TNI common stock, capital in excess of par
value, retained earnings and accumulated other comprehensive income.
(e) the write-off from the preliminary allocation of a portion of the
purchase price of TNI to purchased in-process research and
development.
(f) the repayment of the TNI Revolving Credit Facility in accordance with
the Merger Agreement.
(g) the net deferred tax liabilities recorded in conjunction with the TNI
merger, consisting of $206.0 million of gross deferred tax liabilities
and the reversal of $126.5 million of valuation allowance previously
recorded on PSINet's deferred tax assets. Approximately $6.7 million
of PSINet's valuation allowance has been reversed to capital in excess
of par value arising from the deferred tax asset related to non
qualified stock options.
Reflects other adjustments including:
(h) the issuance by PSINet of the 11% Senior Notes, after giving effect to
underwriter's discounts, commissions and other offering expenses of
$34.2 million.
(i) the cash paid by PSINet for the acquisition of Intercomputer and the
increase in goodwill and other intangible assets and acquisition
liabilities, based on a preliminary allocation.
(j) the elimination of the Intercomputer equity accounts.
-93-
<PAGE>
PSINET INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 1999
NOTE 1--PRO FORMA ADJUSTMENTS - (Continued)
PSINet has recently engaged an independent third party to determine the
allocation of the total purchase price of TNI. Until the study is complete,
preliminary estimates have been used in the development of the Pro Forma
Financial Information, including an estimate of the amount of purchased in-
process research and development that will result from this acquisition. For
purposes of this Pro Forma Financial Information, PSINet has attributed the
excess of the purchase price over the acquired net tangible assets for TNI of
$760.7 million to other intangible assets in accordance with the preliminary
valuation; these include: existing technology including software, patents,
unpatented technology and know-how, tradenames, customer contracts and
relationships, existing workforce and goodwill, with useful lives from five to
20 years, and $35.0 million to purchased in-process research and development.
To the extent that a different portion of the purchase price is allocated
to in-process research and development, a different charge against operating
results, which may be material, would be recognized in the fourth quarter of
1999, the period in which the merger is expected to be completed, with a
corresponding change in the recorded amount of goodwill.
-94-
<PAGE>
PRO FORMA CAPITALIZATION OF PSINET
The following table presents the pro forma cash, cash equivalents, short-
term investments and marketable securities, restricted cash and short-term
investments and capitalization of PSINet as of June 30, 1999 after giving pro
forma effect to (i) the merger, (ii) the July 1999 issuance by PSINet of $1.05
billion and euro 150 million of 11% senior notes and (iii) the July 1999
acquisition by PSINet of Intercomputer.
This table should be read in conjunction with PSINet's and TNI's
consolidated financial statements incorporated by reference in this
prospectus/proxy statement and the "Unaudited Pro Forma Consolidated Financial
Information" included in this prospectus/proxy statement on page 84. See also
"Where You Can Find More Information" included in this prospectus/proxy
statement on page 109.
<TABLE>
<CAPTION>
Pro Forma
June 30, 1999
-----------------------------
(in thousands of U.S. dollars)
<S> <C>
Cash, cash equivalents, short-term investments and marketable securities........ $1,466,959
==========
Restricted cash and short-term investments...................................... $ 144,504
==========
Current portion of long-term debt............................................... $ 78,559
----------
Long-term debt:
10% senior notes............................................................... 600,000
11% senior notes............................................................... 1,207,560
11 1/2% senior notes (plus unamortized premium of $2,800)...................... 352,800
Notes payable.................................................................. 31,559
Capital lease obligations...................................................... 158,356
----------
Total long-term debt.......................................................... 2,350,275
----------
Shareholders' equity:
Preferred stock, $.01 par value; 30,000,000 shares authorized
Preferred stock, Series A, 1,000,000 shares designated; no shares
issued or outstanding...................................................... --
Convertible preferred stock, Series C, 9,200,000 shares designated,
issued and outstanding..................................................... 362,434
Common stock, $.01 par value; 250,000,000 shares authorized (500,000,000
shares authorized as of October 8, 1999);
72,477,497 shares issued................................................. 726
Capital in excess of par value................................................. 1,186,694
Accumulated deficit............................................................ (583,847)
Treasury stock, 99,556 shares, at cost......................................... (2,005)
Accumulated other comprehensive income......................................... 17,672
Bandwidth asset to be delivered under IXC agreement............................ (123,611)
----------
Total shareholders' equity.................................................... 858,063
----------
Total capitalization.......................................................... $3,286,897
==========
</TABLE>
-95-
<PAGE>
DESCRIPTION OF PSINET CAPITAL STOCK
The following summary of the capital stock of PSINet is subject in all
respects to applicable New York law, PSINet's certificate of incorporation and
by-laws and PSINet's rights agreement. See "Comparison of Rights of Holders of
Common Stock of PSINet and TNI" and "Where You Can Find More Information."
PSINet authorized capital stock consists of 500,000,000 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 PSINet's capital stock and provisions of its
certificate of incorporation, by-laws, and shareholders rights plan does not
purport to be complete and is qualified in its entirety by reference to the
provisions of its certificate of incorporation, by-laws, and shareholders rights
plan. Copies of PSINet's certificate of incorporation, by-laws, and
shareholders rights plan have been filed with the Securities and Exchange
Commission. See "Where You Can Find More Information."
Common Stock
As of October 1, 1999, approximately 64,967,306 shares of PSINet common
stock were outstanding. In addition, a total of approximately 14,256,102 shares
of PSINet 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 9,153,788
additional shares were reserved for issuance under PSINet's Executive Stock
Option Plan, Executive Stock Incentive Plan, Director's Stock Incentive Plan,
Strategic Stock Incentive Plan, Employee Stock Purchase Plan and International
Employee Stock Purchase Plan.
Holders of PSINet's 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 PSINet's 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 PSINet's Board of
Directors out of funds legally available for payment. In the event of a
liquidation, dissolution or winding up of PSINet, holders of PSINet's common
stock are entitled to share ratably in all 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 PSINet's common stock. All shares of
PSINet's common stock to be outstanding upon completion of this offering will be
fully paid and non-assessable, subject to Section 630 of the New York Business
Corporation Law.
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 PSINet's employees if the Company's capital stock ceases to be listed on a
national or an affiliated securities association.
Preferred Stock
PSINet's board of directors has the authority to issue up to 30,000,000
shares of PSINet's 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/proxy
statement, 1,000,000 shares of PSINet's preferred stock were designated as
Series A Junior Participating
-96-
<PAGE>
Preferred Stock, $.01 per value per share, in connection with PSINet's
Shareholder Rights Plan, no shares of which have been issued and 9,200,000
shares of PSINet's preferred stock were designated as 6 3/4% Series C cumulative
convertible preferred stock, all of which are issued and outstanding. PSINet's
board of directors may designate and authorize the issuance of new series of
PSINet's preferred stock with voting and other rights that could adversely
affect the voting power of holders of PSINet's common stock and the likelihood
that such holders will receive dividend payments and payments upon PSINet's
liquidation and could have the effect of delaying, deferring or preventing a
change in control of PSINet.
In November 1997, PSINet issued 600,000 shares of its 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 PSINet common stock. As a
result of this conversion, PSINet is 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 PSINet preferred stock
undesignated as to series, and are available for future issuance as described in
the immediately preceding paragraph.
PSINet's 6 3/4% Series C cumulative convertible preferred stock was issued
in May 1999. Simultaneously with the issuance of the Series C preferred stock,
the purchasers of the convertible preferred stock deposited funds into an
account called the Deposit Account, from which quarterly cash payments of
$0.84375 per share will be made or which may be used at PSINet's option to
purchase shares of common stock from PSINet at 95% of the then current market
price of PSINet's common stock for delivery to holders of the Series C preferred
stock in lieu of cash payments. The funds placed in the Deposit Account by the
purchasers of the Series C preferred stock will, together with the earnings on
those funds, be sufficient to make payments, in cash or stock, through May 15,
2002. Until the expiration of the Deposit Account, PSINet will accrete a
return to preferred shareholders each quarter from the date of issuance at an
annual rate of approximately 6 3/4% of the liquidation preference per share.
Such amount will be recorded as a deduction from net income to determine net
income available to common shareholders. Upon the expiration of the Deposit
Account, which is expected to occur on May 15, 2002 unless earlier terminated,
the Series C Preferred Stock will begin to accrue dividends at an annual rate of
6 3/4% of the liquidation preference payable, at PSINet's option, in cash
or in shares of its common stock at 95% of the market price of the common stock
on that date. Under specified circumstances, PSINet can elect to terminate
the Deposit Account prior to May 15, 2002, at which time the remaining funds in
the Deposit Account would be distributed to PSINet and the Series C
Preferred Stock would begin to accrue dividends.
Each share of the Series C preferred stock will be convertible at any time
at the option of the holders into 0.8017 shares of PSINet common stock, equal to
an initial conversion price of $62.3675 per share, subject to adjustment. The
shares of Series C preferred stock will be entitled to a liquidation preference
equal to $50 per share.
PSINet may redeem the Series C preferred stock at a redemption premium of
101.929% of the liquidation preference (plus accumulated and unpaid dividends,
if any) on or after November 15, 2000 and prior to May 15, 2002, if the trading
price for the Series C preferred stock equals or exceeds $124.74 per share for a
specified trading period. Additional payments will also be made from the
Deposit Account or by PSINet to the holders of the Series C preferred stock if
PSINet redeems Series C preferred stock under the foregoing circumstances.
Except in the foregoing circumstances, PSINet may not redeem the Series C
preferred stock prior to May 15, 2002. Beginning on May 15, 2002, PSINet may
redeem shares of convertible preferred stock at an initial redemption premium of
103.857% of the liquidation preference, declining to 100.00% on May 15, 2006 and
thereafter, plus in each case all accumulated and unpaid dividends to the
redemption date. PSINet may effect any redemption, in whole or in part, at its
option, in cash by delivery of fully paid and nonassessable shares of its common
stock or a combination thereof (subject to applicable law), by delivering notice
to the holders of the Series C preferred stock.
-97-
<PAGE>
Holders of Series C preferred stock will have no voting rights except (1)
as required by law, (2) if dividends payable on the Series C preferred stock are
in arrears for six quarterly periods, the holders of Series C preferred stock
voting separately as a class with shares of any other preferred stock or
preference securities having similar voting rights will be entitled to elect two
directors to PSINet's board of directors, and (3) the affirmative vote or
consent of the holders of at least 66 2/3% of the outstanding Series C preferred
stock will be required to permit PSINet to issue any class or series of stock,
or security convertible into stock or evidencing a right to purchase any shares
of any class or series of stock ranking senior to the Series C preferred stock
as to dividends, liquidation rights or voting rights, and for amendments to
PSINet's charter that would adversely affect the rights of holders of Series C
preferred stock.
In the event of a change of control of PSINet (as defined in the charter
amendment designating the convertible preferred stock), holders of Series C
preferred stock will, if the market value of PSINet common stock at such time is
less than the conversion price for the Series C preferred stock, have a one time
option to convert all of their outstanding shares of Series C preferred stock
into shares of PSINet common stock at an adjusted conversion price equal to the
greater of (1) the market value of PSINet common stock as of the date of the
change in control and (2) $38.73. In lieu of issuing shares of common stock
issuable upon conversion in the event of a change of control, PSINet may, at its
option, make a cash payment equal to the market value of the common stock
otherwise issuable.
Registration Rights
In connection with PSINet's acquisitions of InterCon Systems Corporation in
June 1995 and Software Ventures Corporation in July 1995, PSINet granted
registration rights with respect to an aggregate of approximately 1,683,819
shares of its common stock and options to purchase 543,347 shares of its 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 PSINet 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, PSINet proposes to register any of its 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, PSINet is 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.
In connection with the private placement of PSINet's Series B preferred
stock, PSINet granted registration rights to the holders of its Series B
preferred stock with respect to 600,000 shares of Series B preferred stock,
which were converted into an aggregate of 3,000,000 shares of PSINet common
stock. These registration rights rank ratably with and are substantially
similar to those described in the immediately preceding paragraph, except that
PSINet was required to file a registration statement on
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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 PSINet and IXC, PSINet granted registration rights to IXC with
respect to the shares. 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 PSINet
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.
New York Anti-Takeover Law, Particular Charter and By-law Provisions and Other
Anti-takeover Considerations
As a New York corporation, PSINet is 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 it has a class of securities registered under Section 12
of the Securities Exchange Act of 1934, at least 25% of its total employees are
employed primarily within New York or at least 250 employees are so employed and
at least 10% of its voting stock is owned beneficially by residents of the State
of New York. Section 912 provides, with specified 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 specified 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
of 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.
PSINet's certificate of incorporation and by-laws contain provisions
intended to enhance the likelihood of continuity and stability in the
composition of its 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 of PSINet's board of
directors, even if some or a majority of PSINet's shareholders deemed such an
attempt to be in their best interests.
PSINet's certificate of incorporation or 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 PSINet's 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 PSINet preferred stock which
may be granted by PSINet's 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 PSINet preferred stock which
may be granted by PSINet's 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 PSINet's
certificate of incorporation;
7. require any shareholder who wished to bring any proposal before a
meeting of PSINet shareholders or to nominate a person to serve as a
director to give written notice thereof and particular 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 PSINet
capital stock entitled to vote to amend particular provisions of its
certificate of incorporation and to amend its by-laws; and
9. provide that PSINet's board of directors, without action by its
shareholders, may issue and fix the rights and preferences of shares of its
preferred stock.
These provisions may have the effect of delaying, deferring or preventing a
change of control of PSINet without further action by PSINet's shareholders, may
discourage bids for its common stock at a premium
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over the market price of its 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 PSINet 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 registered holder to buy one one-thousandth of a share of PSINet
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 PSINet outstanding common stock (other than persons
who acquire ownership pursuant to a tender offer or exchange offer which
is for all outstanding shares of PSINet common stock, or persons who
acquire ownership directly from PSINet, William L. Schrader, the
Chairman and Chief Executive Officer, or his or PSINet's affiliates so
long as such persons beneficially own less than 50% of PSINet
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 PSINet 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 PSINet's board of directors, a
number of additional shares of common stock as set forth in the rights plan.
The acquisition of shares of PSINet's common stock by IXC or its controlled
affiliates pursuant to the IRU purchase agreement between IXC and PSINet,
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 PSINet or expire earlier upon the consummation of certain
transactions. Shares of PSINet 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 PSINet's 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 PSINet's remaining assets. Each share of PSINet's Series A preferred
stock will have 1,000 votes, voting together with PSINet's 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
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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 PSINet's board of directors, that number of shares of
common stock or, in certain circumstances, other of PSINet's 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 PSINet's common stock pursuant to certain
transactions approved by its board of directors (each, a "permitted offer").
In the event that, after a person or group has become an acquiring person,
PSINet is acquired in a merger or other business combination transaction or 50%
or more of its 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
PSINet has 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 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. PSINet's may,
at its option, pay the redemption price in shares of its common stock. After
the date that a person becomes an acquiring person, PSINet 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 PSINet 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 PSINet 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
PSINet's board of directors because the rights are redeemable under specified
circumstances.
1999 Employee Stock Purchase Plan and the 1999 International Employee Stock
Purchase Plan.
On September 28, 1999, our stockholders approved the adoption of our 1999
Employee Stock Purchase Plan and our 1999 International Employee Stock Purchase
Plan, which we refer to as the purchase plans, to encourage our employees and
employees of our subsidiaries to acquire a proprietary interest in PSINet by
purchasing shares of our common stock through voluntary payroll deductions. The
1999 Employee Stock Purchase Plan is designed as an "employee stock purchase
plan" within the meaning of Section 423(b) of the Internal Revenue Code. The
1999 International Employee Stock Purchase Plan for non-U.S. employees does not
provide the same tax incentives due to differences in applicable law. An
aggregate of 1,057,500 shares of our common stock has been reserved for issuance
under the purchase plans. Any person regularly employed by us or by one of our
subsidiaries for at least 20 hours per week is eligible to participate in the
applicable purchase plan. No person who owns or holds options or rights to
acquire, or as a result of participation in the 1999 Employee Stock Purchase
Plan would own or hold options or rights to acquire, 5% or more of our common
stock may participate in the purchase plans. As of July 31, 1999, approximately
1,015 U.S. employees were eligible to participate in the 1999 Employee Stock
Purchase Plan. In addition, if the merger is consummated, we will have
approximately 200 additional U.S. employees. The international purchase plan
covers certain of our non-U.S. employees as determined from time to time by the
committee depending on the number of employees in a particular jurisdiction and
the requirements of applicable local law. The purchase price per share at which
shares of common stock are sold to participating employees under each of the
purchase plans will be 85% of the lower of the fair market value per share of
common stock on (1) trading day immediately preceding the first business day of
the calendar quarter or (2) the trading day immediately preceding the last
business day of the calendar quarter. The fair market value of the common stock
on a given date is determined by reference to the closing price of the common
stock on the Nasdaq National Stock Market.
Transfer Agent and Registrar
First Chicago Trust Company of New York is the transfer agent and registrar
for PSINet's common stock and PSINet's Series C preferred stock. Its telephone
number for such purposes is (201) 222-4099.
COMPARISON OF RIGHTS OF HOLDERS OF COMMON STOCK OF PSINET AND TNI
PSINet is a business corporation incorporated in New York and the rights of
PSINet shareholders are currently governed by the New York Business Corporation
Law, PSINet's certificate of incorporation and PSINet's by-laws. TNI is a
business corporation incorporated in Delaware and the rights of TNI stockholders
are currently governed by the Delaware General Corporation Law, TNI's
certificate of incorporation and TNI's by-laws. Upon completion of the merger,
the rights of TNI stockholders who become shareholders of PSINet in the merger
will be governed by the New York Business Corporation Law, PSINet's certificate
of incorporation and PSINet's by-laws.
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The following description summarizes the material differences which may
affect the rights of stockholders of PSINet and TNI but is not a complete
statement of all the differences, or a complete description of the specific
provisions referred to in this summary. The identification of specific
differences is not intended to indicate that other equally or more significant
differences do not exist. You should read carefully the relevant provisions of
the New York Business Corporation Law, the Delaware General Corporation Law,
PSINet's certificate of incorporation, PSINet's by-laws, TNI's certificate of
incorporation and TNI's by-laws.
<TABLE>
<CAPTION>
PSINet TNI
Authorized Capital Stock
<S> <C>
PSINet's authorized capital stock consists of TNI's authorized capital stock consists of 20,000,000
500,000,000 shares of common stock, par value $.01 shares of common stock, par value $.01 per share, of
per share, of which approximately 64,967,306 were which 14,175,764 were outstanding at the close of
outstanding at the close of business on October 1, business on October 1, 1999, and 38,681 shares of
1999, and 30,000,000 shares of preferred stock, preferred stock, par value $.01 per share, none of
par value $.01 per share, of which 10,200,000 which was outstanding at the close of business on
shares have been designated and 9,200,000 were October 1, 1999.
outstanding at the close of business on October 1,
1999.
Under the New York General Corporation Law, the ten
largest stockholders (as determined by the fair
value of their beneficial holdings) of a
corporation which does not have a class of stock
which is listed on a national stock exchange are
jointly and severally liable for any unpaid wages
and salaries owed to the corporation's employees.
<CAPTION>
Dividends
<S> <C>
Under the New York Business Corporation Law, PSINet Under the Delaware General Corporation Law, TNI may
may declare and pay dividends or make other make distributions to its stockholders (subject to
distributions to its stockholders (subject to the the rights of preferred stockholders) out of its
rights of preferred stockholders) out of its surplus, or in the event there is no surplus, out of
surplus, unless PSINet is insolvent at the time, if its net profits for the fiscal year in which the
PSINet would become insolvent by doing so, or when dividend is declared or the preceding fiscal
doing so would be contrary to any restrictions year. If TNI's capital is diminished to an amount
contained in its certificate of incorporation. The less than the aggregate amount of the capital
net assets of PSINet remaining after a declaration represented by the issued and outstanding stock of
or payment of dividends must be at least as much as all classes having a preference upon the distribution
its stated capital. of assets, however, no dividends may be paid until
the deficiency in the amount of the capital
represented by such stock is repaired.
<CAPTION>
Classification of the Board of Directors
<S> <C>
Under the New York Business Corporation Law, a Under the Delaware General Corporation Law, a
corporation's certificate of incorporation or a corporation's certificate of incorporation or a bylaw
by-law adopted by its stockholders may provide that adopted by its stockholders may provide that the
the directors be divided into two, three or four directors be divided into two or three classes. The
classes. The PSINet certificate of incorporation TNI certificate of incorporation provides that the
and by-laws provide that the board of directors board of directors shall be comprised of three
shall be of comprised of two classes of at least classes as nearly equal in number as possible. One
three directors each. One class is elected each class is elected each year for a three-year term.
year for a two-year term.
</TABLE>
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<TABLE>
<CAPTION>
Size of the Board of Directors
<S> <C>
Under the New York Business Corporation Law, the Under the Delaware General Corporation Law, the
number of directors constituting a corporation's number of directors constituting a corporation's
board may be fixed by its by-laws, by action of its board may be fixed by, or in the manner provided in,
stockholders or by action of its board pursuant to its by-laws unless its certificate of incorporation
a by-law adopted by the stockholders. Under the fixes the number of directors. Under the TNI
PSINet certificate of incorporation and by-laws, certificate of incorporation and by-laws, the board
the board may fix the number of directors, provided may fix the number of directors, provided that such
that such number must be between three and nine. number must be between three and seven. The TNI
The PSINet board of directors currently consists of board of directors currently consists of six
six directors. directors.
<CAPTION>
Removal of Directors; Filling of Vacancies
<S> <C>
Under the PSINet certificate of incorporation and Under the Delaware General Corporation Law, a
by-laws, except as otherwise provided by the New director of a corporation having a classified board
York Business Corporation Law, a director may be may only be removed for cause. Any vacancies on the
removed only for cause and only at an annual or TNI board of directors may be filled solely by the
special meeting of stockholders. Any vacancies on affirmative vote of a majority of the remaining
the PSINet board of directors may be filled solely directors.
by the affirmative vote of a majority of the
remaining directors.
<CAPTION>
Special Meetings of the Stockholders
<S> <C>
Under the New York Business Corporation Law, special Under the Delaware General Corporation Law, special
meetings of stockholders may be called by the board meetings of stockholders may be called by the board
or by such person or persons as are authorized by or by such person or persons as are authorized by the
the certificate of incorporation or by-laws. The certificate of incorporation or by-laws. Under the
only business that may be conducted at a special TNI by-laws, special meetings of stockholders may be
meeting of stockholders is that which is related to called by the Chairman, the President or at the
the purposes set forth in the notice of the written request of a majority of the board of
meeting. Under the PSINet by-laws, special directors or of holders owning more than one-third of
meetings of stockholders may be called by the the shares of capital stock issued and outstanding
Chairman, the President or at the written request and entitled to vote at any such meeting. TNI
of a majority of the board of directors. PSINet stockholders may act without a meeting, without prior
shareholders may act without a meeting but only by notice and without a vote, upon the written consent
unanimous written consent. of the number of stockholders having not less than
the minimum number of votes necessary to authorize
such action at a meeting at which all stockholders
entitled to vote were present and voted.
<CAPTION>
Stockholder Proposals
<S> <C>
Under the PSINet certificate of incorporation and TNI's by-laws do not include a requirement for
by-laws, for a stockholder to bring a matter before advance notice of stockholder proposals.
a meeting of stockholders, the Secretary of PSINet
must receive advance written notice of the
stockholder's intent, containing certain required
information. With respect to a stockholder
proposal to be submitted at an annual meeting, the
</TABLE>
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<TABLE>
<CAPTION>
PSINet TNI
<S> <C>
Secretary must receive the notice no later than
sixty days before the anniversary of the preceding
annual meeting. With respect to a stockholder
proposal to be submitted at a special meeting, the
Secretary must receive the notice no later than the
tenth day following the date on which notice of
such meeting is first given to stockholders.
<CAPTION>
Indemnification of Officers and Directors
<S> <C>
The New York Business Corporation Law generally The Delaware General Corporation Law generally
provides that a corporation may indemnify an provides that a corporation may indemnify any person
officer or director made a party or threatened to made a party or threatened to be made a party to a
be made a party to a legal proceeding against legal proceeding by reason of the fact that such
judgments, fines, amounts paid in settlement and person is or was an officer, director, employee or
reasonable expenses (including attorneys' fees) agent of the corporation against expenses (including
actually and necessarily incurred in connection attorney's fees), judgments, fines and amounts paid
with the proceeding if: in settlement if:
. he acted in good faith for a purpose he . he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the reasonably believed to be in or not opposed to the
best interests of the corporation; best interests of the corporation;
. in the case of a criminal proceeding, he had no . in the case of a criminal proceeding, he had no
reasonable cause to believe that his conduct was reasonable cause to believe that his conduct was
unlawful; and unlawful; and
. in the case of a suit by or in the right of the . in the case of a suit by or in the name of the
corporation, the suit is not settled and he is not corporation, he is not adjudged to be liable to the
adjudged to be liable to the corporation, unless a corporation, unless the Court of Chancery determines
proper court determines that he is nonetheless that he is nonetheless entitled to indemnification.
entitled to indemnification.
The New York Business Corporation Law also permits TNI's certificate of incorporation and by-laws
corporations to indemnify corporate personnel other provide for indemnification to the fullest extent
than officers and directors but provides no permitted by law for all persons it is permitted to
specific criteria for such indemnification. indemnify. Furthermore, to the extent not prohibited
by law, such persons would not be liable to TNI
PSINet's certificate of incorporation and by-laws except for their own willful misconduct or actions
generally provide for indemnification, as described taken in bad faith. Under the Delaware General
above, of directors and officers, as well as others Corporation Law, such person may also be entitled to
serving at the request of PSINet, to the extent not other indemnification rights arising under any
prohibited by law. Furthermore, to the extent not by-law, agreement or stockholder vote.
prohibited by law, such persons will not be liable
to PSINet except in the event of bad faith,
intentional misconduct, a knowing violation or law
or a violation of certain statutory provisions
relating to the payment of dividends and the
distribution of the assets of the corporation.
Under PSINet's by-laws, a director, officer or
employee may also be entitled to other
indemnification rights, including any arising under
any agreement with the corporation.
</TABLE>
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<TABLE>
<CAPTION>
PSINet TNI
Amendment of Certificate of Incorporation
<S> <C>
The PSINet certificate of incorporation generally Under the Delaware General Corporation Law, unless
may be amended by a majority of the outstanding otherwise specified in the certificate of
PSINet shares entitled to vote thereon, but the incorporation, an amendment to the certificate of
provision relating to amendments to specified incorporation requires the affirmative vote of a
by-laws may be amended only by two-thirds of the majority of the outstanding shares entitled to vote
votes of the outstanding PSINet shares. thereon. Under TNI's certificate of incorporation,
Furthermore, under the New York Business amendments which would change the relative rights of
Corporation Law, any amendment to the PSINet any series of preferred stock to its disadvantage
certificate of incorporation must be authorized by must be approved by a majority of the outstanding
its board of directors. shares of such series. Furthermore, under the
Delaware General Corporation Law, any amendment to
the TNI certificate of incorporation must also be
authorized by its board of directors.
<CAPTION>
Amendment of By-Laws
<S> <C>
The PSINet by-laws may be amended by two-thirds of Under the Delaware General Corporation Law, a
the outstanding PSINet shares entitled to vote in majority of the stockholders may adopt, amend or
the election of directors or by a majority of the repeal TNI's by-laws. Under TNI's certificate of
PSINet directors present at a meeting of the board incorporation and by-laws, a majority of the board of
of directors. However, any by-law adopted by the directors can also adopt, amend or repeal its by-laws.
board may be amended or repealed by two-thirds of
the outstanding shares at an annual or special
meeting.
<CAPTION>
Business Combinations
<S> <C>
Under the PSINet certificate of incorporation, a Under the Delaware General Corporation Law, a
majority of the outstanding PSINet shares is needed majority of the outstanding shares is needed to adopt
to adopt a plan of merger or consolidation. a plan of merger or consolidation.
The New York Business Corporation Law prohibits a The Delaware General Corporation Law prohibits a
New York corporation which has a class of voting Delaware corporation which has a class of stock which
stock which is registered with the SEC from is listed on a national stock exchange or which has
engaging in business combinations with an 2,000 or more stockholders of record from engaging in
interested stockholder (generally, the beneficial business combinations with an interested stockholder
owner of 20% or more of the corporation's voting (generally, the beneficial owner of 15% or more of
stock) for five years following the time the the corporation's outstanding voting stock) for three
stockholder became an interested stockholder, years following the time the stockholder became an
unless, prior to that time, the corporation's board interested stockholder, unless, prior to that time,
of directors approved either the business the corporation's board of directors approved either
combination or the transaction that resulted in the the business combination or the transaction that
stockholder becoming an interested stockholder. resulted in the stockholder becoming an interested
After five years, these business combinations may stockholder, or if two-thirds of the outstanding
occur if approved by a majority vote of shares not shares not owned by such interested stockholder
owned by the interested stockholder, or if certain approve the business combination, or if, upon
fair price requirements are met. becoming an interested stockholder, such stockholder
owned 85% of the outstanding shares (excluding those
held by officers, directors and certain employee
stock plans).
</TABLE>
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<TABLE>
PSINet TNI
Stockholder Rights Plan
<S> <C>
PSINet's stockholder rights plan is described in the TNI does not have a stockholder rights plan.
preceding section.
</TABLE>
LEGAL MATTERS
The legality of PSINet common stock offered by this prospectus/proxy
statement will be passed upon for PSINet by Nixon Peabody LLP, New York, New
York, counsel for PSINet. Certain attorneys with Nixon Peabody LLP currently
own in the aggregate less than one percent of PSINet's common stock.
Certain United States federal income tax consequences of the merger will be
passed upon for TNI by its counsel, Arent Fox Kintner Plotkin & Kahn, PLLC,
Washington, D.C. Certain attorneys with Arent Fox Kintner Plotkin & Kahn, PLLC
currently own in the aggregate less than one percent of TNI's common stock.
EXPERTS
The consolidated financial statements of PSINet Inc. incorporated in this
prospectus/proxy statement by reference to PSINet Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998, 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.
The financial statements of Transaction Network Services, Inc. ("TNI") as
of December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998 are incorporated by reference in this prospectus/proxy
statement from TNI's Annual Report on Form 10-K for the year ended December 31,
1998. Such financial statements have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report incorporated by
reference herein in reliance upon the authority of such firm as experts in
giving said reports.
The financial statements of Transaction Access Service (a fully integrated
business of AT&T Corp.) as of August 31, 1998 and November 30, 1997 and for the
nine month period ended August 31, 1998 and the twelve month period ended
November 30, 1997 incorporated in this prospectus/proxy statement by reference
to TNI's Current Report on Form 8-K Amendment No. 1 filed with the Securities
and Exchange Commission on November 24, 1998, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
give on the authority of said firm as experts in auditing and accounting.
The financial statements of OmniLink Communications Corporation for the
fiscal year ended December 31, 1997 are incorporated by reference in this
prospectus/proxy statement from TNI's Current Report on Form 8-K Amendment No.1
filed with the Securities and Exchange Commission on September 14, 1998. Such
financial statements have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report incorporated by reference herein
in reliance upon the authority of such firm as experts in giving said reports.
Representatives of Arthur Andersen, LLP are not expected to be present at
the TNI special meeting.
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<PAGE>
STOCKHOLDER PROPOSALS
TNI will hold an annual meeting of TNI stockholders in the year 2000 only
if the merger is not completed before the time of the annual meeting. The
deadline for submission of stockholder proposals for inclusion in TNI's proxy
materials for the TNI annual meeting to be held in the year 2000 is November 15,
1999.
If the merger is not completed, TNI stockholders may present proper
proposals for consideration at the next annual meeting of TNI stockholders by
submitting their proposal in writing to the Secretary of TNI in a timely manner.
OTHER MATTERS
As of the date of this prospectus/proxy statement, the TNI board of
directors knows of no matters that will be presented for consideration at the
special meeting other than as described in this prospectus/proxy statement.
WHERE YOU CAN FIND MORE INFORMATION
PSINet and TNI file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information that PSINet and TNI file
with the Securities and Exchange Commission at the Securities and Exchange
Commission's public reference rooms at the following locations:
Public Reference Room New York Regional Office
450 Fifth Street, N.W 7 World Trade Center
Room 1024 Suite 1300
Washington, D.C. 20549 New York, NY 10048
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. These Securities and
Exchange Commission filings are also available to the public from commercial
document retrieval services and at the Internet world wide web site maintained
by the Securities and Exchange Commission at "http://www.sec.gov." Reports,
proxy statements and other information concerning TNI may also be inspected at
the offices of the New York Stock Exchange at 20 Broad Street, New York, New
York 10005. Reports, proxy statements and other information pertaining to
PSINet are also available for inspection at the offices of The Nasdaq Stock
Market, which is located at 1735 K Street, N.W., Washington, D.C. 20006.
PSINet filed a registration statement on Form S-4 on October 1, 1999 to
register with the Securities and Exchange Commission the PSINet common stock to
be issued to TNI stockholders in the merger and filed Amendment No. 1 to such
registration statement on Form S-4 on October 19, 1999. This prospectus/proxy
statement is a part of that registration statement, as amended, and constitutes
a prospectus of PSINet in addition to being a proxy statement of TNI. As allowed
by Securities and Exchange Commission rules, this prospectus/proxy statement
does not contain all the information you can find in PSINet's registration
statement or the exhibits to the registration statement.
The Securities and Exchange Commission allows PSINet and TNI to
"incorporate by reference" information into this prospectus/proxy statement,
which means that the companies can disclose important information to you by
referring you to other documents filed separately with the Securities and
Exchange Commission. The information incorporated by reference is considered
part of this prospectus/proxy statement, except for any information superseded
by information contained directly in this
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<PAGE>
prospectus/proxy statement or in later filed documents incorporated by reference
in this prospectus/proxy statement.
This prospectus/proxy statement incorporates by reference the documents set
forth below that PSINet and TNI have previously filed with the Securities and
Exchange Commission. These documents contain important business and financial
information about PSINet and TNI that is not included in or delivered with this
prospectus/proxy statement.
PSINet and TNI also incorporate by reference additional documents that may
be filed with the Securities and Exchange Commission under Section 13(a),13(c),
14 or 15(d) of the Exchange Act between the date of this prospectus/proxy
statement and the date of the special meeting. These include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
PSINet has supplied all of the information contained or incorporated by
reference in this prospectus/proxy statement relating to PSINet and TNI has
supplied all of the information relating to TNI.
TNI stockholders should not send in their TNI certificates until they
receive the transmittal materials from the paying agent. TNI stockholders of
record who have further questions about their share certificates or the exchange
of their TNI common stock for PSINet common stock or cash consideration in the
merger should call the paying agent.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through the companies,
the Securities and Exchange Commission or the Securities and Exchange
Commission's Internet web site as described above. Documents incorporated by
reference are available from the companies without charge, excluding all
exhibits, except that if the companies have specifically incorporated by
reference an exhibit in this prospectus/proxy statement, the exhibit will also
be provided without charge. Stockholders may obtain documents incorporated by
reference in this prospectus/proxy statement by requesting them in writing or by
telephone from the appropriate company at the following addresses:
PSINet Inc. Transaction Network Services, Inc.
510 Huntmar Park Drive 1939 Roland Clarke Place
Herndon, Virginia 20170 Reston, Virginia 20191
Attention: Corporate Secretary Attention: Karen Kazmark
Telephone: (703) 904-4100 Telephone: 703-453-8406
You should rely only on the information contained or incorporated by
reference in this prospectus/proxy statement. We have not authorized anyone to
provide you with information that is different from what is contained in this
prospectus/proxy statement. This prospectus/proxy statement is dated October
22, 1999. You should not assume that the information contained in this
prospectus/proxy statement is accurate as of any date other than that date.
Neither the mailing of this prospectus/proxy statement stockholders nor the
issuance of PSINet common stock in the merger creates any implication to the
contrary.
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PSINet
PSINet is incorporating by reference in this prospectus the following
documents which have been filed with the Securities and Exchange Commission:
1. Annual report on Form 10-K for the fiscal year ended December 31,
1998. This report contains:
. audited consolidated balance sheets for PSINet and its 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, 1996, 1997 and 1998
2. Quarterly reports on Form 10-Q for the quarters ended:
. March 31, 1999
. June 30, 1999
3. Current reports on Form 8-K dated:
. April 27, 1999
. May 7, 1999
. July 6, 1999
. July 16, 1999
. August 22, 1999
. August 22,1999
. July 31, 1997 (solely insofar as it relates to our Shareholder Rights
Agreement dated May 8, 1996, as amended)
. August 20, 1997
4. Registration statement on Form 8-A dated April 7, 1995, as amended
(registration no. 0-25812).
5. Registration statement on Form 8-A dated June 4, 1996, as amended
(registration no. 0-25812).
TNI
TNI is incorporating by reference in this prospectus the following
documents which have been filed with the Securities and Exchange Commission:
1. Annual report on Form 10-K for the fiscal year ended December 31,
1998. This report contains:
. audited consolidated balance sheets for TNI and its 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, 1996, 1997 and 1998
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<PAGE>
2. Quarterly reports on Form 10-Q for the quarters ended:
. March 31, 1999
. June 30, 1999
3. Current reports on Form 8-K dated:
. July 15, 1998, as amended
. September 23, 1998, as amended
. July 29, 1999
. August 23, 1999
4. Registration statement on Form 8-A dated May 25, 1999 (registration
no. 00115033).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus/proxy statement contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations, business strategies,
operating efficiencies or synergies, competitive positions, growth opportunities
for existing products, plans and objectives of management, markets for stock of
PSINet and TNI and other matters. Statements in this prospectus/proxy statement
that are not historical facts are hereby identified as "forward-looking
statements" for the purpose of the safe harbor provided by Section 21E of the
Exchange Act and Section 27A of the Securities Act. Such forward-looking
statements, including, without limitation, those relating to the future business
prospects, revenues and income, in each case relating to PSINet and TNI,
wherever they occur in this prospectus/proxy statement, are necessarily
estimates reflecting the best judgment of the senior management of PSINet and
TNI and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. Such forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth in this
prospectus/proxy statement. Important factors that could cause actual results
to differ materially from estimates or projections contained in the forward-
looking statements include without limitation:
. the ability to integrate the operations of PSINet and TNI, including
their respective product lines; and
. the effects of vigorous competition in the markets in which PSINet and
TNI operate.
Words such as "estimate," "project," "plan," "intend," "expect," "believe,"
"anticipate" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are found at various places
throughout this prospectus/proxy statement and the other documents incorporated
by reference, including, but not limited to, the Annual Report on Form 10-K for
the year ended December 31, 1998 of PSINet, including any amendments, and the
Annual Report on Form 10-K for the year ended December 31, 1998 of TNI,
including any amendments. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
prospectus/proxy statement. Neither PSINet nor TNI undertakes any obligation to
publicly update or release any revisions to these forward-looking statements to
reflect events or circumstances after the date of this prospectus/proxy
statement or to reflect the occurrence of unanticipated events.
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<PAGE>
Annex 1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of August 22,
1999, by and among PSINET INC. ("Parent"), a New York corporation, PSINET SHELF
------
I INC. ("Merger Subsidiary"), a Delaware corporation and a wholly-owned
-----------------
subsidiary of Parent, and TRANSACTION NETWORK SERVICES, INC. (the "Company"), a
-------
Delaware corporation.
WHEREAS, the respective Boards of Directors of Parent, Merger Subsidiary
and the Company have approved the merger of the Company with and into the Merger
Subsidiary (the "Merger"), upon the terms and subject to the conditions set
------
forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE I
The Merger
Section 1.1 The Merger. Upon the terms and subject to the conditions of
----------
this Agreement, at the Effective Time (as defined in Section 1.3), the Company
shall be merged with and into Merger Subsidiary and the separate existence of
the Company shall thereupon cease, and the Merger Subsidiary shall continue as
the surviving corporation in the Merger (the "Surviving Corporation") under the
---------------------
laws of the State of Delaware under the name "Transaction Network Services,
Inc." as a wholly-owned subsidiary of Parent. Throughout this Agreement, the
term "Merger Subsidiary" shall refer to the Merger Subsidiary prior to the
Merger and the term "Surviving Corporation" shall refer to the Merger Subsidiary
in its status as the surviving corporation in the Merger.
Section 1.2 Closing. The closing of the Merger will take place as
-------
promptly as practicable (and in any event within two business days) after
satisfaction or waiver in writing of the conditions set forth in Article VIII
(the "Closing Date"). The Closing shall be held at the offices of Nixon Peabody
------------
LLP, One Thomas Circle, Washington, D.C., unless another date, time or place is
agreed to in writing by the parties hereto.
Section 1.3 Effective Time of the Merger. The Merger shall become
----------------------------
effective upon the filing of a certificate of merger ("Certificate of Merger")
---------------------
pursuant to and in compliance with this Agreement and Section 251 of the General
Corporation Law of the State of Delaware (the "Delaware Law") with the Secretary
------------
of State of the State of Delaware. When used in this Agreement, the term
"Effective Time" shall mean the time at which the Certificate of Merger has been
filed and become effective in accordance with Delaware Law.
Section 1.4 Effect of the Merger. The Merger shall, from and after the
--------------------
Effective Time, have all the effects provided by Delaware Law. If at any time
after the Effective Time the Surviving Corporation shall consider or be advised
that any further deeds, conveyances, assignments or assurances in law or any
other acts are necessary, desirable or proper to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, the title to any property or
rights of the Company to be vested in the Surviving Corporation, by reason of,
or as a result of, the Merger, or otherwise to carry out the purposes of this
Agreement, the Company agrees that the Surviving Corporation and its proper
officers and directors shall execute and deliver all such deeds, conveyances,
assignments and assurances in law and do all things necessary, desirable or
proper to vest, perfect or confirm title to such property or rights in the
Surviving
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<PAGE>
Corporation and otherwise to carry out the purposes of this Agreement, and that
the proper officers and directors of the Surviving Corporation are fully
authorized in the name of each of the Company and the Merger Subsidiary or
otherwise to take any and all such actions.
ARTICLE II
The Surviving Corporation
Section 2.1 Certificate of Incorporation. The certificate of incorporation
----------------------------
of the Merger Subsidiary as in effect immediately prior to the Effective Time
shall be the certificate of incorporation of the Surviving Corporation until
thereafter duly amended, except that the name of the Surviving Corporation shall
be "Transaction Network Services, Inc."
Section 2.2 By-laws. The By-laws of the Merger Subsidiary as in effect
-------
immediately prior to the Effective Time shall be the By-laws of the Surviving
Corporation until thereafter duly amended.
Section 2.3 Board of Directors; Officers. The directors of the Merger
----------------------------
Subsidiary in office immediately prior to the Effective Date shall be the
directors of the Surviving Corporation immediately after the Effective Time and
the officers of the Merger Subsidiary in office immediately prior to the
Effective Date shall be the officers of the Surviving Corporation immediately
after the Effective Time in each case, until the earlier of their respective
deaths, resignations, or removals, and the time that their respective
successors have been duly elected or appointed and shall have qualified.
ARTICLE III
Conversion of Shares
Section 3.1 Merger Consideration. As of the Effective Time, by virtue of
------ -------------
the Merger and without any action on the part of any stockholder of the Company
or Merger Subsidiary:
(a) Shares Of Merger Subsidiary Stock. Each share of common stock, par
---------------------------------
value $.01 per share, of Merger Subsidiary (the "Merger Subsidiary Common
------------------------
Stock") that is issued and outstanding immediately prior to the Effective Time
shall remain issued and outstanding unchanged by reason of the Merger as one
fully paid and nonassessable share of common stock, par value $.01 per share, of
the Surviving Corporation.
(b) Cancellation Of Certain Company Common Stock. Each share of the
--------------------------------------------
Company's common stock, par value $.01 per share ("Company Common Stock") that
--------------------
is owned by the Company as treasury stock and any shares of Company Common Stock
that are owned by Parent shall be canceled and shall cease to exist, and no
stock of Parent or other consideration shall be delivered in exchange therefor.
(c) Conversion Of Company Common Stock. Subject to the provisions of this
----------------------------------
Section 3.1, each share of Company Common Stock, other than Dissenting Shares
(as defined in Section 3.1(n)) and shares canceled pursuant to Section 3.1(b),
issued and outstanding immediately prior to the Effective Time shall by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into the right to receive the merger consideration as follows (the
"Merger Consideration") (i) $45.00 in cash (the "Cash Consideration"), or (ii) a
- --------------------- ------------------
number of validly issued, fully paid and nonassessable (subject to Section 630
of the New York Business Corporation Law ("NYBCL") shares of Common Stock, par
-----
value $.01 per share, of Parent ("Parent Common Stock") equal to the Exchange
-------------------
Ratio (as defined below) (the "Stock Consideration"), or (iii) the right to
-------------------
receive a combination of cash and shares of Parent Common Stock determined in
accordance with this Section 3.1 (the "Mixed Consideration"). Notwithstanding
-------------------
any
1-2
<PAGE>
provision of this Agreement to the contrary (other than Section 3.1(l)) and
assuming all outstanding Company Stock Options, ESPP Options and any options
issued pursuant to Section 6.1(a)(ii) are exercised prior to the Effective Time,
no more than 7,796,223 shares of Parent Common Stock shall be issued as Stock
Consideration and a maximum aggregate of $350,830,015 shall be issued as Cash
Consideration in the Merger. The "Exchange Ratio" shall be equal to 1:1. No
fractional shares of Parent Common Stock shall be issued in connection with the
Merger and in lieu thereof the holder of shares of Company Common Stock shall
have the right to receive cash in an amount equal to the closing price of the
Parent Common Stock on the third trading day prior to the Effective Time
multiplied by the fractional share amount.
(d) Cash Election. Subject to the limitations of the Cash Election Number
-------------
(defined below), each record holder of shares of Company Common Stock
immediately prior to the Effective Time shall be entitled to elect to receive
cash for all or any part of such holder's shares of Company Common Stock (a
"Cash Election"). Notwithstanding the foregoing, the maximum aggregate number of
- --------------
shares of Company Common Stock that may be converted into the right to receive
cash in the Merger plus any Dissenting Shares shall be 50% of the total number
of shares of Company Common Stock issued and outstanding as of the Effective
Time (the "Cash Election Number"). Cash Elections shall be made on a form
--------------------
designed for that purpose (a "Form of Election"). A holder of record of shares
----------------
of Company Common Stock who holds such shares as nominee, trustee or in another
representative capacity (a "Representative") may submit multiple Forms of
--------------
Election, provided that such Representative certifies that each such Form of
Election covers all the shares of Company Common Stock held by such
Representative for a particular beneficial owner.
(e) Cash Election Shares. If the aggregate number of shares of Company
--------------------
Common Stock covered by Cash Elections (the "Cash Election Shares") exceeds the
--------------------
Cash Election Number, each Cash Election Share shall be converted into (i) the
right to receive an amount in cash, without interest, equal to the product of
(A) the Cash Consideration and (B) a fraction (the "Cash Fraction"), the
-------------
numerator of which shall be the Cash Election Number and the denominator of
which shall be the total number of Cash Election Shares, and (ii) a number of
shares of Parent Common Stock equal to the product of (A) the Exchange Ratio and
(B) a fraction equal to one minus the Cash Fraction. The adjustments provided in
this Section 3.1(e), if applicable, will result in each holder of Company Common
Stock making a Cash Election receiving Cash Consideration for such holder's Cash
Election Shares on a pro rata basis with all other holders of Cash Election
Shares and Stock Consideration for the balance of such holder's shares of
Company Common Stock so that the maximum aggregate Cash Election Number is not
exceeded.
(f) Stock Election. Subject to the limitations of the Stock Election
--------------
Number (as defined below), each record holder of shares of Company Common Stock
immediately prior to the Effective Time shall be entitled to elect to receive
shares of Parent Common Stock for all or any part of such holder's shares of
Company Common Stock (a "Stock Election"). Notwithstanding the foregoing, the
--------------
maximum aggregate number of shares of Company Common Stock that may be converted
into the right to receive shares of Parent Common Stock in the Merger shall be
50% of the total number of shares of Company Common Stock issued and outstanding
as of the Effective Time (the "Stock Election Number"). Stock Elections shall be
---------------------
made on a Form of Election. A Representative may submit multiple Forms of
Election, provided that such Representative certifies that each such Form of
Election covers all the shares of Company Common Stock held by such
Representative for a particular beneficial owner.
(g) Stock Election Shares. If the aggregate number of shares of Company
---------------------
Common Stock covered by Stock Elections (the "Stock Election Shares") exceeds
---------------------
the Stock Election Number, each Stock Election Share shall be converted into (i)
the right to receive a number of shares of Parent Common Stock, equal to the
product of (A) the Exchange Ratio and (B) a fraction (the "Stock Fraction"), the
--------------
numerator of which shall be the Stock Election Number and the denominator of
which shall be the total
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<PAGE>
number of Stock Election Shares, and (ii) an amount in cash, without interest,
equal to the product of (A) the Cash Consideration and (B) a fraction equal to
one minus the Stock Fraction. The adjustments provided in this Section 3.1(g),
if applicable, will result in each holder of Company Common Stock making a Stock
Election receiving Stock Consideration for such holder's Stock Election Shares
on a pro rata basis with all other holders of Stock Election Shares and Cash
Consideration for the balance of such holder's shares of Company Common Stock so
that the maximum aggregate Stock Election Number is not exceeded.
(h) Mixed Election. Subject to the limitations of the Cash Election Number
--------------
and the Stock Election Number, each record holder of shares of Company Common
Stock immediately prior to the Effective Time shall be entitled to elect to
receive shares of Parent Common Stock for part of such holder's shares of
Company Common Stock and cash for the remaining part of such holder's shares of
Company Common Stock (the "Mixed Election" and, collectively with Stock Election
--------------
and Cash Election, the "Election"). Mixed Elections shall be made on a Form of
--------
Election. A Representative may submit multiple Forms of Election, provided that
such Representative certifies that each such Form of Election covers all the
shares of Company Common Stock held by such Representative for a particular
beneficial owner. With respect to each holder of Company Common Stock who makes
a Mixed Election, the shares of Company Common Stock such holder elects to be
converted into the right to receive Cash Consideration shall be treated as Cash
Election Shares for purposes of the provisions contained in Sections 3.1(d) and
(e), and the shares such holder elects to be converted into the right to receive
shares of Parent Common Stock shall be treated as Stock Election Shares for
purposes of the provisions contained in Sections 3.1(f) and (g).
(i) Form Of Election. To be effective, a Form of Election must be properly
----------------
completed, signed and submitted to Parent's transfer agent and registrar, as
paying agent or such other entity as may be designated by Parent (the "Paying
------
Agent"). Parent shall have the discretion, which it may delegate in whole or in
- -----
part to the Paying Agent, to determine whether Forms of Election have been
properly completed, signed and submitted or revoked and to disregard immaterial
defects in Forms of Election. The decision of Parent (or the Paying Agent) in
such matters shall be conclusive and binding. Neither Parent nor the Paying
Agent shall be under any obligation to notify any person of any defect in a Form
of Election submitted to the Paying Agent. The Paying Agent shall also make all
computations contemplated by this Section 3.1, and all such computations shall
be conclusive and binding on the holders of shares of Company Common Stock.
(j) Failure to Make an Election. For the purposes hereof, a holder of
---------------------------
shares of Company Common Stock who does not submit a Form of Election that is
received by the Paying Agent prior to the Election Deadline (as defined in
Section 3.1(k)) (the "No Election Shares") shall be deemed not to have made a
------------------
Cash Election, Stock Election or Mixed Election. If Parent or the Paying Agent
shall determine that any purported Election was not properly made, the shares
subject to such improperly made Election shall be treated as No Election Shares.
No Election Shares shall be treated by the Parent as a Mixed Election
designating one-half as Cash Election Shares and one-half as Stock Election
Shares.
(k) Election Deadline. Parent and the Company shall each use its
-----------------
reasonable commercial efforts to cause copies of the Form of Election to be
mailed to the record holders of the Company Shares not fewer than thirty days
prior to the Effective Time and to make the Form of Election available to all
persons who become record holders of Company Shares subsequent to the date of
such mailing and no later than the close of business on the seventh business day
prior to the Effective Time. A Form of Election must be received by the Paying
Agent by 5:00 p.m., New York City time, on third Business Day following the
Effective Date (the "Election Deadline") in order to be effective. All elections
-----------------
may be revoked until the Election Deadline in writing by the record holders
submitting Forms of Election.
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<PAGE>
(l) Anti-Dilution Provisions. In the event Parent (i) changes (or
------------------------
establishes a record date for changing) the number of shares of Parent Common
Stock issued and outstanding prior to the Effective Time as a result of a stock
split, stock dividend, stock combination, recapitalization, reclassification,
reorganization or similar transaction with respect to the outstanding Parent
Common Stock or (ii) pays or makes an extraordinary dividend or distribution in
respect of Parent Common Stock (other than a distribution referred to in clause
(i) of this sentence) and, in either case, the record date therefor shall be
prior to the Effective Time, the Merger Consideration shall be proportionately
adjusted. If, between the date hereof and the Effective Time, Parent shall merge
or consolidate with or into any other corporation (a "Business Combination") and
--------------------
the terms thereof shall provide that Parent Common Stock shall be converted into
or exchanged for the shares of any other corporation or entity, then provision
shall be made so that shareholders of the Company who would be entitled to
receive shares of Parent Common Stock pursuant to this Agreement shall be
entitled to receive, in lieu of each share of Parent Common Stock issuable to
such shareholders as provided herein, the same kind and amount of securities or
assets as shall be distributable upon such Business Combination with respect to
one share of Parent Common Stock and the parties hereto shall agree on an
appropriate restructuring of the transactions contemplated herein.
(m) Company Stock Options. Pursuant to the terms of the plans pursuant to
---------------------
which the Company Stock Options (as defined in Section 4.2(a)) were issued and
this Agreement, which are expressly assumed by the Parent as of the Effective
Time, the outstanding and unexercised Company Stock Options shall, at the
Effective Time, become exercisable for shares of Parent Common Stock in
accordance with their terms except that the number of shares of Parent Common
Stock subject to such Options shall be equal to the product of the (i) number of
shares of Company Common Stock subject to the original Option, and (ii) the
Exchange Ratio, and the exercise price per share of Parent Common Stock under
such Option shall be equal to (iii) the exercise price under the Option as
written divided by (iv) the Exchange Ratio. The adjustments provided herein
with respect to any Options which are "incentive stock options" (as defined in
Section 422 of the Code) shall be effected in a manner consistent with Section
424(a) of the Code.
(n) Dissenting Shares. Each outstanding share of Company Common Stock the
-----------------
holder of which has perfected his right to dissent under applicable law and has
not effectively withdrawn or lost such right as of the Effective Time (the
"Dissenting Shares") shall not be converted into or represent a right to receive
- ------------------
the Merger Consideration, and the holder thereof shall be entitled only to such
rights as are granted by applicable law; provided, however, that any Dissenting
Share held by a person at the Effective Time who shall, after the Effective
Time, withdraw the demand for payment for shares or lose the right to payment
for shares, in either case pursuant to the Delaware Law, shall be deemed to be
converted into, as of the Effective Time, into the right to receive Stock
Consideration, any cash in lieu of fractional shares, and/or Cash Consideration
pursuant to Section 3.1(c) in the same manner as if such shares were No Election
Shares. The Company shall give Parent prompt notice upon receipt by the Company
of any such written demands for payment of the fair value of such shares of
Company Common Stock and of withdrawals of such notice and any other instruments
provided pursuant to applicable law. Any payments of Cash Consideration made in
respect of Dissenting Shares shall be made by the Surviving Corporation.
3.2 Stockholders' Rights at the Effective Time. On and after the
------------------------------------------
Effective Time, the certificates that immediately prior to the Effective Time
represented shares of the Company Common Stock (the "Certificates") shall cease
------------
to represent any rights with respect to the Company and shall only represent the
right to receive the Cash Consideration and/or the Stock Consideration, together
with the amount of cash, if any, payable in lieu of fractional shares of Parent
Common Stock into which any shares of Company Common Stock have been converted,
provided, however, that no dividends or other distributions, if any, in respect
of the shares of Parent Common Stock, declared after the Effective Time and
payable to holders of record after the Effective Time, and no interest with
respect to any Cash Consideration, shall be paid to the holders of any
unsurrendered Certificates until such Certificates and
1-5
<PAGE>
transmittal letters are surrendered and delivered as provided in Section 3.3 of
this Agreement. Subject to applicable Delaware Law, after the surrender and
exchange of Certificates, the record holders thereof will be entitled to receive
any such dividends or other distributions declared after the Effective Time
without interest thereon, which theretofore have become payable with respect to
the number of shares of Parent Common Stock for which such Certificates were
exchangeable. Notwithstanding anything herein to the contrary, holders of any
unsurrendered Certificates shall not be entitled to exercise any rights as a
holder of Parent Common Stock, including, without limitation, the right to vote
the Parent Common Stock, until such Certificates are surrendered and exchanged
pursuant to this Agreement.
3.3 Surrender and Exchange of Share Certificates.
--------------------------------------------
(a) Promptly after the Effective Time, the Parent shall make available to
the Paying Agent such certificates evidencing such number of shares of Parent
Common Stock and such amount of cash in order to enable the Paying Agent to
effect the conversion of Company Common Stock into Stock Consideration, any cash
in lieu of fractional shares, and/or Cash Consideration.
(b) On the Closing Date, Parent shall instruct the Paying Agent to mail to
each person who was a holder of record of shares of the Company Common Stock
immediately prior to the Effective Time: (i) a letter of transmittal; and (ii)
instructions for use in effecting the surrender of the Certificates nominally
representing the Company Common Stock in exchange for Stock Consideration, and
any cash payable in lieu of fractional shares, and/or Cash Consideration based
upon such holder's Election, as adjusted, or otherwise as provided in Section
3.1.
(c) After the Effective Time, each holder of a Certificate shall surrender
and deliver such Certificate to the Paying Agent together with a duly completed
and executed transmittal letter. and accompanied by the Certificate (or by an
appropriate guarantee of delivery of such Certificate signed by a firm that is a
member of any registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or a bank, broker, dealer,
credit union, savings association or other entity that is a member in good
standing of an acceptable signature guarantee program of transfer agents or
securities exchanges)Promptly after such surrender and delivery, the holder
shall receive a certificate representing the number of whole shares of Parent
Common Stock for which such holder's shares of the Company Common Stock have
been converted for Stock Elections, together with a check for any cash in lieu
of any fractional share of Parent Common Stock, or a check for the cash payable
in respect of such shares for Cash Elections or both. Until so surrendered and
exchanged, each Certificate formerly representing an outstanding share of
Company Common Stock shall after the Effective Time be deemed for all purposes
to evidence only the right to receive Stock Consideration, and any cash payable
in lieu of fractional shares, and/or Cash Consideration elected based upon such
holder's Election, as adjusted, or otherwise, as provided in Section 3.1.
(d) At the Effective Time, the stock transfer books of the Company shall
be closed and no transfer of shares of Company Common Stock shall be made
thereafter, other than transfers of shares of Company Common Stock that have
occurred prior to the Effective Time. In the event that, after the Effective
Time, certificates are presented for transfer to the transfer agent for the
Company, the Merger Subsidiary or Parent, they shall be delivered to the Paying
Agent and exchanged for Stock Consideration, and any cash payable in lieu of
fractional shares, and/or Cash Consideration, all as provided for in this
Section 3.3.
(e) Any shares of Parent Common Stock or cash that remains undistributed
to the stockholders of the Company as of the Effective Time for one year after
the Effective Time shall be delivered to the Company by the Paying Agent, upon
demand, and any former stockholders of the Company who have not
1-6
<PAGE>
previously complied with this Section 3.3 shall thereafter look only to Parent
for payment of their claim for Stock Consideration, any cash payable in lieu of
fractional shares, and/or Cash Consideration.
(f) Neither the Paying Agent, nor any of the Company, Merger Subsidiary or
Parent shall be liable to any holder of shares of Company Common Stock with
respect to any shares of Parent Common Stock (or dividends or distributions with
respect to Parent Common Stock) delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law, rule, regulation,
statute, order, judgment or decree.
(g) In the event any Certificates shall have been lost, stolen or
destroyed, the Paying Agent shall issue such Stock Consideration, and any cash
payable in lieu of fractional shares, and/or Cash Consideration and any
dividends or other distributions with respect to Parent Common Stock to which
such holder is entitled in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder thereof
and the delivery of such bond as the Paying Agent may reasonably require.
(h) No transfer taxes shall be payable by any stockholder of the Company
in respect of the issuance of the Parent Common Stock under this Section 3.3,
except that if any Parent Common Stock is to be issued in a name other than that
in which the Certificate surrendered has been registered, it shall be a
condition of such issuance that the person requesting such issuance shall pay to
Parent any transfer taxes payable by reason thereof, or of any prior transfer of
such surrendered certificate, or establish to the satisfaction of Parent that
such taxes have been paid or are not payable.
Section 3.4 No Further Rights. From and after the Effective Time, holders
-----------------
of certificates theretofore evidencing shares of Company Common Stock shall
cease to have any rights as stockholders of the Company, except as provided
herein or by law.
Section 3.5 Registration Statement; Prospectus/Proxy Statement.
--------------------------------------------------
(a) For the purposes of (i) registering the issuance of Parent Common
Stock to holders of the shares of Company Common Stock in connection with the
Merger with the Securities and Exchange Commission ("SEC") under the Securities
---
Act of 1933, as amended, and the rules and regulations promulgated thereunder
(the "Securities Act"), and complying with applicable state securities laws and
--------------
(ii) holding the meeting of the Company stockholders ("Company Special Meeting")
-----------------------
to approve the Merger (the "Company Proposal"), Parent and the Company will
----------------
cooperate in the preparation of a registration statement on Form S-4 (such
registration statement, together with any and all amendments and supplements
thereto, being herein referred to as the "Registration Statement"), including a
----------------------
prospectus/proxy statement satisfying all requirements of applicable state
securities laws, the Securities Act and the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder (the "Exchange
--------
Act"). Such prospectus/proxy statement in the form mailed by the Company and, if
required, Parent to their respective stockholders, together with any and all
amendments or supplements thereto, is herein referred to as the
"Prospectus/Proxy Statement."
- ---------------------------
(b) The Company will furnish Parent with such information concerning the
Company and its subsidiaries as is necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to the Company and its
subsidiaries, to comply with applicable law. None of the information relating to
the Company and its subsidiaries supplied by the Company for inclusion in, or
incorporated by reference in, the Prospectus/Proxy Statement will be false or
misleading with respect to any material fact or will omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company agrees promptly to advise Parent if, at any time prior
to the Company Special Meeting, any information provided
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<PAGE>
by it for inclusion in, or incorporated by reference in, the Prospectus/Proxy
Statement is or becomes incorrect or incomplete in any material respect and to
provide Parent with the information needed to correct such inaccuracy or
omission. The Company will furnish Parent with such supplemental information as
may be necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to the Company and its subsidiaries, to comply with applicable law after
the mailing thereof to the stockholders of the Company.
(c) Parent will include in the Prospectus/Proxy Statement such information
concerning Parent and its subsidiaries as is necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to Parent and its
subsidiaries, to comply with applicable law. None of the information relating to
Parent and its subsidiaries included in, or incorporated by reference in, the
Prospectus/Proxy Statement will be false or misleading with respect to any
material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If, at any time
prior to the Company Special Meeting, any information included in or
incorporated by reference by Parent in the Prospectus/Proxy Statement is or
becomes incorrect or incomplete in any material respect, Parent shall correct
such inaccuracy or omission. Parent will furnish such supplemental information
as may be necessary in order to cause the Prospectus/Proxy Statement, insofar as
it relates to Parent and its subsidiaries, to comply with applicable law after
the mailing thereof to the stockholders of the Company.
(d) The Company and Parent agree to cooperate in making any preliminary
filings of the Prospectus/Proxy Statement with the SEC, as promptly as
practicable, pursuant to Rule 14a-6 under the Securities Exchange Act, and shall
cooperate in responding to any comments with respect thereto received from the
SEC.
(e) Parent will file the Registration Statement with the SEC and
appropriate materials with applicable state securities agencies as promptly as
practicable and will use all reasonable efforts to cause the Registration
Statement to become effective under the Securities Act and all such state filed
materials to comply with applicable state securities laws. The Company
authorizes Parent to utilize in the Registration Statement and in all such state
filed materials, the information concerning the Company and its subsidiaries
provided to Parent for inclusion in, or incorporated by reference in, the
Prospectus/Proxy Statement. Parent promptly will advise the Company when the
Registration Statement has become effective and of any supplements or amendments
thereto, and Parent will furnish the Company with copies of all such documents.
Except for the Prospectus/ Proxy Statement or the preliminary prospectus/proxy
statement, neither Parent nor the Company shall distribute any written material
that might constitute a "prospectus" relating to the Merger or the Company
Proposal within the meaning of the Securities Act or any applicable state
securities law without the prior written consent of the other party.
(f) The Company shall mail the Prospectus/Proxy Statement to its
stockholders as promptly as practicable after the date the Registration
Statement is declared effective under the Securities Act.
Section 3.6 Tax-Free Reorganization. The parties intend that the Merger
-----------------------
qualify as a reorganization within the meaning of Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Code"). None of the parties will knowingly take any action that would cause
- -----
the Merger to fail to qualify as a reorganization within the meaning of Section
368(a) of the Code or applicable SEC rules. Each of the parties shall report
the Merger for income tax purposes as a reorganization within the meaning of
Section 368(a)(2)(D) of the Code (and any comparable state or local tax
statute), subject to the receipt of the opinions described in Sections 8.2(c)
and 8.3(c).
1-8
<PAGE>
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to Parent and Merger Subsidiary that,
except as disclosed in the Company Disclosure Schedule which has been delivered
to Parent prior to the execution of this Agreement (the "Company Disclosure
------------------
Schedule"):
- --------
Section 4.1 Organization and Qualification. The Company is a corporation
------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Each of the Company and its Significant Subsidiaries (as
defined in Section 10.8(a)) has the requisite corporate power and authority to
carry on its business as it is now being conducted and is duly qualified or
licensed to do business, and is in good standing, in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified will not have a Company Material Adverse Effect (as defined in Section
10.8(a)). The Company has heretofore made available to Parent and Merger
Subsidiary a complete and correct copy of the Certificate of Incorporation and
By-laws or comparable organizational documents, each as amended to the date
hereof, of the Company and each of its Significant Subsidiaries.
Section 4.2 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of 20,000,000
shares of Company Common Stock and 38,681 shares of Company preferred stock. As
of the date of this Agreement, 13,172,942 shares of Company Common Stock were
validly issued and outstanding, fully paid and nonassessable and no shares of
Company preferred stock were outstanding. There are no bonds, debentures, notes
or other indebtedness or other securities issued or outstanding having general
voting rights with respect to the Company or directly or indirectly convertible
in to securities having general voting rights. The Company holds no shares of
capital stock as treasury shares. As of the date hereof, except for stock
options to acquire an aggregate of 2,400,886 shares of Company Common Stock (the
"Company Stock Options"), options to acquire approximately 6,617 shares of the
---------------------
Company Common Stock issued pursuant to the Company's employee stock purchase
plan ("ESPP Options"), there are no options, warrants, calls or other rights,
------------
agreements or commitments presently outstanding obligating the Company to issue,
deliver or sell shares of its capital stock, or obligating the Company to grant,
extend or enter into any such option, warrant, call or other such right,
agreement or commitment.
(b) All the outstanding shares of capital stock of each Significant
Subsidiary of the Company are validly issued, fully paid and nonassessable and,
except as disclosed in the Company SEC Reports (as defined in Section 4.5(a)),
are owned by the Company or by a wholly-owned subsidiary of the Company, free
and clear of any Liens. There are no existing options, warrants, calls or other
rights, agreements or commitments of any character relating to the sale,
issuance or voting of any shares of the issued or unissued capital stock of any
of the Significant Subsidiaries of the Company which have been issued, granted
or entered into by the Company or any of its Significant Subsidiaries. The
Significant Subsidiaries of the Company are listed in Section 4.2(b) of the
Company Disclosure Schedule.
(c) The Company SEC Reports set forth all entities in which the Company or
any subsidiary holds less than all of the outstanding equity interests (the
"Ventures") and each entity in which the Company or any subsidiary holds the
- ---------
right or obligation to acquire any equity interests ("Other Investments").
-----------------
Except as set forth in the Company SEC Reports, the Company has not exercised
any call with respect to any interest in the Ventures nor has the holder of any
interest in the Ventures exercised any put with respect to any such interest to
the Company. The Company has no obligation to acquire any
1-9
<PAGE>
additional interests in the Other Investments and neither the Company nor any
other Person has taken any action to acquire additional interests in, or to
dispose of any equity in, such Other Investments.
Section 4.3 Authority Relative to this Agreement. The Company has the
------------------------------------
necessary corporate power and authority to execute and deliver this Agreement
and, subject to approval of this Agreement and the transactions contemplated
hereby by the holders of the Company Common Stock, to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby by the Company have
been duly and validly authorized and approved by the Company's Board of
Directors and no other corporate proceedings on the part of the Company are
necessary to authorize or approve this Agreement or to consummate the
transactions contemplated hereby (other than, with respect to the Merger, the
approval of this Agreement by the necessary vote of the stockholders of the
Company). This Agreement has been duly executed and delivered by the Company,
and assuming the due authorization, execution and delivery by Parent and Merger
Subsidiary, and subject to the stockholder approval referred to in the preceding
sentence, constitutes the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
Section 4.4 No Conflicts, Required Filings and Consents.
-------------------------------------------
(a) None of the execution and delivery of this Agreement by the Company,
the consummation by the Company of the transactions contemplated hereby or
compliance by the Company with any of the provisions hereof will (i) subject to
approval by the Company's stockholders referred to in Section 4.3, conflict with
or violate the Certificate of Incorporation or By-laws of the Company or the
comparable organizational documents of any of the Company's Significant
Subsidiaries or Ventures, (ii) subject to receipt or filing of the required
Consents (as defined in Section 4.4(b)), conflict with or violate any statute,
ordinance, rule, regulation, order, judgment or decree applicable to the Company
or any of its Significant Subsidiaries or by which any of them or any of their
respective properties or assets may be bound or affected, or (iii) result in a
violation or breach of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result in
the creation of any lien, charge, security interest, pledge, or encumbrance of
any kind or nature (any of the foregoing being a "Lien") on any of the property
----
or assets of the Company or any of the Company's Significant Subsidiaries (any
of the foregoing referred to in clause (ii) or this clause (iii) being a
"Violation") pursuant to, any note, bond, mortgage, indenture, contract,
- ----------
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any of the Company's Significant Subsidiaries is a party
or by which the Company or any of the Company's Significant Subsidiaries or any
of their respective properties may be bound or affected except in the case of
the foregoing clause (ii) or (iii) for any such Violations which would not have
a Company Material Adverse Effect.
(b) None of the execution and delivery of this Agreement by the Company,
the consummation by the Company of the transactions contemplated hereby or
compliance by the Company with any of the provisions hereof will require any
consent, waiver, license, approval, authorization, order or permit of, or
registration or filing with or notification to (any of the foregoing being a
"Consent"), any government or subdivision thereof, domestic, foreign,
- --------
multinational or supranational or any administrative, governmental or regulatory
authority, agency, commission, court, tribunal or body, domestic, foreign,
multinational or supranational (a "Governmental Entity"), except for (i)
-------------------
compliance with any applicable requirements of the Securities Act and the
Exchange Act, (ii) the filing of the Certificate of Merger pursuant to Delaware
Law, (iii) certain state takeover, securities, "blue sky" and environmental
statutes, (iv) compliance with the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), (v) such filings as may be required in
-------
connection with the taxes described in Section 7.8, and (vi) Consents the
failure of which to obtain or make would not have a Company Material Adverse
Effect.
1-10
<PAGE>
Section 4.5 Reports and Financial Statements.
--------------------------------
(a) The Company has filed with the SEC all forms, reports, schedules,
registration statements and definitive proxy statements (the "Company SEC
-----------
Reports") required to be filed by it with the SEC since January 1, 1996. As of
- -------
their respective dates, the Company SEC Reports complied as to form in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Company SEC Reports. As of their respective dates and as of
the date any information from such Company SEC Reports has been incorporated by
reference, the Company SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company has filed all material
contracts and agreements and other documents or instruments required to be filed
as exhibits to the Company SEC Reports.
(b) The consolidated balance sheets of the Company as of December 31, 1998
and 1997 and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998 (including the related notes and schedules thereto) contained in the
Company's Form 10-K for the year ended December 31, 1998 (the "Company Financial
-----------------
Statements") present fairly, in all material respects, the consolidated
- ----------
financial position and the consolidated results of operations and cash flows of
the Company and its consolidated subsidiaries as of the dates or for the periods
presented therein in conformity with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods involved
----
except as otherwise noted therein, including in the related notes.
(c) The consolidated balance sheets and the related statements of earnings
and cash flows (including, in each case, the related notes thereto) of the
Company contained in the Form 10-Q for the quarterly period ended June 30, 1999
(the "Company Quarterly Financial Statements") have been prepared in accordance
--------------------------------------
with the requirements for interim financial statements contained in Regulation
S-X, which do not require all the information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with GAAP. The Company Quarterly Financial Statements reflect all
adjustments necessary to present fairly in accordance with GAAP (except as
indicated), in all material respects, the consolidated financial position,
results of operations and cash flows of the Company for all periods presented
therein.
Section 4.6 Information. None of the information supplied or to be
-----------
supplied by the Company for inclusion or incorporation by reference in the
definitive Prospectus/Proxy Statement will, at the time of filing with the SEC,
at the time of the mailing of the Prospectus/Proxy Statement or any amendments
or supplements thereto to the Company's stockholders or at the time of the
Company Special Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. The portion of the Prospectus/Proxy Statement based
on information supplied by the Company for inclusion or incorporation by
reference therein will comply as to form in all material respects with the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder.
Section 4.7 Litigation. Except as disclosed in the Company SEC Reports,
----------
as of the date hereof, there is no suit, action or proceeding pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its subsidiaries that is reasonably expected to have a Company Material Adverse
Effect, nor is there any judgment, decree, injunction or order of any
Governmental Entity or arbitrator outstanding against the Company or any of its
subsidiaries having, or which is reasonably expected to have, individually or in
the aggregate, a Company Material Adverse Effect.
1-11
<PAGE>
Section 4.8 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the Company SEC Reports or as contemplated by this Agreement, since June 30,
1999, the Company has conducted its business only in the ordinary course, and
there has not been (i) any change that would have a Company Material Adverse
Effect; (ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Company's capital stock, or any redemption, purchase or other acquisition of any
of its capital stock, (iii) any split, combination or reclassification of any of
the Company's capital stock or, except with respect to the Company Stock Options
and ESPP Options described in Section 4.2 or after the date hereof, as expressly
permitted by Section 6.1(a)(ii) hereof, any issuance or the authorization of any
issuance of any other securities in respect of, in lieu of or in substitution
for shares of the Company's capital stock, (iv) any granting by the Company or
any of its subsidiaries to any officer of the Company of any increase in
compensation, except in the ordinary course of business consistent with prior
practice or as required under employment agreements in effect as of December 31,
1998, (v) any granting by the Company or any of its subsidiaries to any officer
of the Company of any increase in severance or termination pay, except as
required under employment, severance or termination agreements or plans in
effect as of December 31, 1998, (vi) any entry by the Company or any of its
subsidiaries into any employment, severance or termination agreement with any
officer of the Company, or any increase in benefits available under or
establishment of any Company Benefit Plan (as defined in Section 4.9(a) below)
except in the ordinary course of business consistent with past practice, or
(vii) any material change in accounting methods, principles or practices by the
Company, except insofar as may have been required by a change in GAAP.
Section 4.9 Employee Benefit Plans. (a) Schedule 4.9 of the Company
----------------------
Disclosure Schedule sets forth a complete and correct list of all "employee
benefit plans", as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and any other pension plans or
-----
employee benefit arrangements or payroll practices (including, without
limitation, severance pay, vacation pay, company awards, salary continuation for
disability, sick leave, deferred compensation, bonus or other incentive
compensation, stock option or stock purchase arrangements or policies)
maintained, or contributed to, by the Company, its subsidiaries or any trade or
business (whether or not incorporated) which is treated with the Company or its
subsidiaries as a single employer under Section 414(b), (c), (m) or (o) of the
Code ("ERISA Affiliate") with respect to employees of the Company, its
---------------
subsidiaries or their ERISA Affiliates ("Company Benefit Plans"). Each Plan is
---------------------
in writing and the Company has previously furnished Parent with a true and
complete copy of each Plan document, including all amendments thereto, and a
true and complete copy of each material document prepared in connection with
each such Plan, including, without limitation, (i) a copy of each trust or other
funding arrangement, (ii) each summary plan description and summary of material
modifications, (iii) the three most recently filed Form 5500's, including all
attachments thereto, (iv) the most recently received Internal Revenue Service
("IRS") determination letter for each such Plan, and (v) the most recently
- -----
prepared actuarial report and financial statement in connection with each such
Plan. Neither the Company nor its subsidiaries have any express or implied
commitment (x) to create or incur liability with respect to or cause to exist
any other employee benefit plan, program or arrangement, (y) to enter into any
contract or agreement to provide compensation or benefits to any individual, or
(z) to modify, change or terminate any Plan, other than with respect to a
modification, change or termination required by ERISA or the Code.
(b) The Company, its subsidiaries and their ERISA Affiliates have never
sponsored, contributed to, or incurred any liability with respect to an employee
benefit plan that is subject to Title IV of ERISA or Section 412 of the Code and
no fact or event exists which could give rise to any liability under Title IV of
ERISA or Section 412 of the Code.
(c) Each of the Company Benefit Plans intended to qualify under Section
401(a) of the Code ("Qualified Plans") has received a favorable determination
---------------
letter from the Internal Revenue Service that
1-12
<PAGE>
such Plan is so qualified, and, except as disclosed on Schedule 4.9(c), nothing
has occurred with respect to the operation of any such Plan which, either
individually or in the aggregate, would cause the loss of such qualification or
the imposition of any material liability, penalty or tax under ERISA or the
Code.
(d) There has been no prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) with respect to any Company
Benefit Plan. Neither the Company nor any Subsidiary is currently liable or has
previously incurred any liability for any tax or penalty arising under Section
4971, 4972, 4975, 4979, 4980 or 4980B of the Code or Section 502 of ERISA, and
no fact or event exists which could give rise to any such liability.
(e) All contributions and premiums required by law or by the terms of any
Company Benefit Plan or any agreement relating thereto have been timely made
(without regard to any waivers granted with respect thereto) in all material
respects.
(f) The liabilities of each Company Benefit Plan that has been terminated
or otherwise wound up, have been fully discharged in material compliance with
applicable law.
(g) There has been no violation of ERISA with respect to the filing of
applicable returns, reports, documents and notices regarding any of the Company
Benefit Plans with the Secretary of Labor or the Secretary of the Treasury or
the furnishing of such notices or documents to the participants or beneficiaries
of the Company Benefit Plans which, either individually or in the aggregate,
could result in a material liability to the Company.
(h) There are no pending legal proceedings which have been asserted or
instituted against any of the Company Benefit Plans, the assets of any such
Plans or the Company or any ERISA Affiliate or the plan administrator or any
fiduciary of the Company Benefit Plans with respect to the operation of such
plans (other than routine, uncontested benefits claims).
(i) Each of the Company Benefit Plans has been maintained, in all material
respects, in accordance with its terms and all provisions of applicable laws and
regulations. All amendments and actions required to bring each of the Company
Benefit Plans into conformity in all material respects with all of the
applicable provisions of ERISA and other applicable laws and regulations have
been made or taken except to the extent that such amendments or actions are not
required by law to be made or taken until a date after the Closing Date.
(j) The Company and its subsidiaries have never maintained a welfare
benefit plan providing continuing benefits after the termination of employment
(other than as required by Section 4980B of the Code and at the former
employee's own expense), and the Company, its subsidiaries and each of their
ERISA Affiliates have complied in all material respects with the notice and
continuation requirements of Section 4980B of the Code and the regulations
thereunder.
(k) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
material payment (including, without limitation, severance, unemployment
compensation or golden parachute) becoming due to any director or employee of
the Company or it subsidiaries, (ii) materially increase any benefits otherwise
payable under any Company Benefit Plan, or (iii) result in the acceleration of
the time of payment or vesting of any such benefits to any material extent other
than vesting of the Company Stock Options in accordance with their terms.
(l) The Company and its subsidiaries are in compliance in all material
respects with applicable laws and collective bargaining agreements with respect
to all benefit plans, contracts and arrangements
1-13
<PAGE>
covering non-U.S. Business Employees ("Non-U.S. Benefit Plans"). The Company and
----------------------
its subsidiaries have no unfunded liabilities in violation of local law or that
would, if the plan were covered by ERISA, violate the funding obligations
prescribed by ERISA, which, either individually or in the aggregate, in any
material respect. All benefits payable under each of the Non-U.S. Benefit Plans
are provided in accordance with the terms of the governing provisions of the
relevant Non-U.S. Benefit Plan. The Company and the Subsidiaries are not aware
of any failure to comply with any applicable law which would or might result in
the loss of tax approval or qualification of any Non-U.S. Benefit Plans.
Section 4.10 Labor Relations. There are no labor controversies pending or
---------------
threatened with respect to the Company and neither the Company nor any U.S.
subsidiary is a party to any collective bargaining agreements with any labor
union or other representative of employees. No non-U.S. subsidiary is a party
to any collective bargaining agreement with any labor union or other
representative of employees or any works' council or similar entity under
applicable laws. To the knowledge of the Company, there no any pending or
threatened union organization activity by or among any of its or its
subsidiaries' employees.
Section 4.11 Taxes. The Company and its subsidiaries have duly filed all
-----
material foreign, federal, state and local income, franchise, excise, real and
personal property and other Tax (as defined in Section 10.8(a)) returns and
reports (including, but not limited to, those filed on a consolidated, combined
or unitary basis) required to have been filed by the Company and its
subsidiaries prior to the date hereof. All of the foregoing returns and reports
are true and correct in all material respects, and the Company and its
subsidiaries have paid or, prior to the Effective Time will pay, all Taxes,
interest and penalties shown on such returns or reports as being due or (except
to the extent the same are contested in good faith) claimed to be due to any
federal, state, local or other taxing authority. The Company has paid and will
pay all installments of estimated taxes due on or before the Effective Time. The
Company and its subsidiaries have paid or made adequate provision in accordance
with GAAP in the financial statements of the Company for all Tax payable in
respect of all periods ending on or prior to the date of this Agreement and will
have made or provided for all taxes payable in respect of all periods entering
in or prior to the Closing Date. As of the date hereof, all deficiencies
proposed as a result of any audits have been paid or settled. The Company and
each subsidiary has paid, collected or withheld, or caused to be paid, collected
or withheld, all amounts of Tax required to be paid, collected or withheld,
other than such Taxes for which adequate reserves in the Company Financial
Statements have been established or which are being contested in good faith.
There are no claims or assessments pending against the Company or any
Significant Subsidiary for any alleged deficiency in any Tax, and the Company
has not been notified in writing of any proposed Tax claims or assessments
against the Company or any Significant Subsidiary. There is no contract,
agreement, plan or arrangement covering any Person that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible by the Parent, the Company, or any of the subsidiaries of the Company
by reason of Section 280G of the Code.
Section 4.12 Compliance with Applicable Laws. The Company and its
-------------------------------
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for them to own, lease or
operate their properties and assets and to carry on their businesses
substantially as now conducted (the "Company Permits"), except for such permits,
---------------
licenses, variances, exemptions, orders and approvals the failure of which to
hold would not have a Company Material Adverse Effect. The Company and its
subsidiaries are in material compliance with applicable laws and the terms of
the Company Permits. Except as disclosed in the Company SEC Reports filed prior
to the date of this Agreement, the Company has not received any notice that the
business operations of the Company and its subsidiaries are being conducted in
violation of any law, ordinance or regulation of any Governmental Entity.
1-14
<PAGE>
Section 4.13 Voting Requirements. The affirmative vote of the holders of
-------------------
a majority of the total number of votes entitled to be cast by the holders of
the Company Common Stock outstanding as of the record date for the Company
Special Meeting is the only vote of the holders of any class or series of the
Company's capital stock or other securities necessary to approve this Agreement
and the transactions contemplated by this Agreement.
Section 4.14 Material Contracts. Neither the Company nor any subsidiary
------------------
is a party or is subject to any material note, bond, mortgage, indenture,
contract, lease, license, agreement, understanding, instrument, bid or proposal
that is required to be described in or filed as an exhibit to any Company SEC
Report ("Company Material Contract") that is not so described in or filed as
-------------------------
required by the Securities Act or the Exchange Act, as the case may be. The
Company has made available to Parent true and accurate copies of the Company
Material Contracts. All such Company Material Contracts are valid and binding
and are in full force and effect and enforceable against the Company or its
subsidiaries in accordance with their respective terms. Other than contracts
included in the Company Material Contracts, none of the Company's contracts
which are material individually or in the aggregate provide for consideration to
be paid or received other than cash on the one hand and goods and services
customarily provided by the Company or used by the Company in its business in
the ordinary course on the other hand. No Consent of any person is needed in
order that each such Company Material Contract shall continue in full force and
effect in accordance with its terms without penalty, acceleration or rights of
early termination by reason of the consummation of the transactions contemplated
by this Agreement, except for Consents the absence of which would not, in the
aggregate, have a Company Material Adverse Effect, and neither the Company nor
any of its subsidiaries is in violation or breach of or default under any such
Company Material Contract; nor to the Company's knowledge is any other party to
any such Company Material Contract in violation or breach of or default under
any such Company Material Contract.
Section 4.15 Title to Property. The Company and each of its subsidiaries
-----------------
has good and defensible title to all of its material properties and assets, free
and clear of all Liens, except Liens for taxes not yet due and payable and such
Liens or other imperfections of title, that do not constitute a Company Material
Adverse Effect, and all leases, easements, licenses, rights of way, and other
rights pursuant to which the Company or any of its subsidiaries lease from
others or otherwise have the right to use material real or personal property,
individually or in the aggregate material to the business of Company (all of the
foregoing, collectively, the "Company Real Property Rights"), are valid and
----------------------------
effective in accordance with their respective terms, and there is not, under any
of such leases, easements, licenses, and other rights, any existing material
default or event of default (or event which with notice or lapse of time, or
both, would constitute a material default), except where the lack of such
validity and effectiveness or the existence of such default or event of default
does not constitute a Company Material Adverse Effect. Neither the Company nor
any subsidiary is a party or is subject to any Company Real Property Rights that
is required to be described in or filed as an exhibit to any Company SEC Report
that is not so described in or filed as required by the Securities Act or the
Exchange Act, as the case may be. The Company has made available to Parent true
and accurate copies of the Company Real Property Rights. All such Company Real
Property Rights are valid and binding and are in full force and effect and
enforceable against the Company or its subsidiaries in accordance with their
respective terms. No Consent of any person is needed in order that each such
Company Real Property Rights shall continue in full force and effect in
accordance with its terms without penalty, acceleration or rights of early
termination by reason of the consummation of the transactions contemplated by
this Agreement, except for Consents the absence of which would not have a
Company Material Adverse Effect, and neither the Company nor any of its
subsidiaries is in violation or breach of or default under any such Company Real
Property Rights; nor to the Company's knowledge is any other party to any such
Company Real Property Rights in violation or breach of or default under any such
Company Real Property Rights.
1-15
<PAGE>
Section 4.16 Intellectual Property.
---------------------
(a) The Company and its subsidiaries, directly or indirectly, own, or are
licensed or otherwise possess legally enforceable rights to use, all patents,
trademarks, trade names, service marks, copyrights and any applications
therefor, technology, know-how and tangible or intangible proprietary
information or materials that are material to the business of the Company and
its subsidiaries (the "Company Intellectual Property Rights").
------------------------------------
(b) Either the Company or one of its subsidiaries is the sole and
exclusive owner of, or the exclusive or non-exclusive licensee of, with all
right, title and interest in and to (free and clear of any Liens), the Company
Intellectual Property Rights, and, in the case of the Company Intellectual
Property Rights owned by the Company or one of its subsidiaries, has sole and
exclusive rights (and is not contractually obligated to pay any compensation to
any third party in respect thereof) to the use thereof or the material covered
thereby in connection with the services or products in respect of which the
Company Intellectual Property Rights are being used. Except as described in the
Company SEC Reports, no claims with respect to the Company Intellectual Property
Rights have been asserted or, to the knowledge of the Company, are threatened by
any person that are reasonably likely to constitute a Company Material Adverse
Effect: (i) to the effect that the manufacture, sale, licensing, or use of any
of the services or products of the Company or any of its subsidiaries as now
manufactured, sold or licensed or used or proposed for manufacture, use, sale or
licensing by the Company or any of its subsidiaries infringes on any copyright,
patent, trade mark, service mark or trade secret of a third party; (ii) against
the use by the Company or any of its subsidiaries of any trademarks, service
marks, trade names, trade secrets, copyrights, patents, technology or know-how
and applications used in the business of the Company and any of its subsidiaries
as currently conducted or as proposed to be conducted; or (iii) challenging the
ownership by the Company or any of its subsidiaries or the validity of any of
the Company Intellectual Property Rights. All registered trademarks, service
marks and copyrights held by the Company and the Significant Subsidiaries are
valid and subsisting, except to the extent any failure does not constitute a
Company Material Adverse Effect. To the knowledge of the Company, there is no
unauthorized use, infringement or misappropriation of any of the Company
Intellectual Property Rights by any third party, including any employee or
former employee of the Company or any of its subsidiaries that would have a
Company Material Adverse Effect. No Intellectual Property Right is subject to
any outstanding decree, order, judgment, or stipulation restricting in any
manner the licensing thereof by the Company or any subsidiary, except to the
extent any such restriction does not constitute a Company Material Adverse
Effect. Neither the Company nor any of the subsidiaries has entered into any
agreement (other than exclusive distribution agreements) under which the Company
or any of the subsidiaries is restricted from selling, licensing or otherwise
distributing any of its products to any class of customers, in any geographic
area, during any period of time or in any segment of the market, except to the
extent any such restriction does not constitute a Company Material Adverse
Effect.
(c) The Company and its subsidiaries have a compliance program in place to
evaluate and address issues regarding whether their computer systems, software,
hardware, firmware, middleware and other information technology (collectively,
"Information Technology") are Year 2000 Ready (as defined below); the Company
- -----------------------
and its subsidiaries have taken, are taking, and will take all measures the
Company reasonably believes are necessary to make their Information Technology,
particularly the Information Technology upon which the Company or the
subsidiaries will rely to provide services to customers, Year 2000 Ready,
including remediation and the use of contingency plans, if necessary, should a
year 2000 problem arise from any cause within the control of the Company or any
of the subsidiaries that may affect those services; and the Company and the
subsidiaries have requested or are in the process of requesting from those
third-party vendors and suppliers of the Company or of the subsidiaries that
directly support the services that the Company or any of the subsidiaries
provides to customers reasonable assurances that their Information Technology
are Year 2000 Ready, and that they are taking or have taken adequate
1-16
<PAGE>
measures to prevent problems caused by the year 2000 that may impact the
services and products they provide to the Company or any of the subsidiaries.
The Company and the subsidiaries have previously made available to Parent copies
of all year 2000 warranties that the Company or any of the subsidiaries has
provided, and currently provides, to customers. As used in this Agreement, "Year
2000 Ready" shall mean that Information Technology is designed to be used prior
to, during and after the calendar year 2000 A.D. and such Information Technology
will accurately receive, provide and process date/time data (including, without
limitation, calculating, comparing and sequencing) from, into and between the
twentieth and twenty-first centuries A.D., and leap year calculations and will
not malfunction, cease to function or provide invalid or incorrect results as a
result of date/time data (including, without limitation, to the extent that
other Information Technology used in combination with such Information
Technology properly exchanges date/time data with it).
Section 4.17 Interested Party Transactions. Since December 31, 1998, or
-----------------------------
as described in the Company SEC Reports, no event has occurred that would be
required to be reported by the Company pursuant to Item 404 of Regulation S-K
promulgated by the SEC.
Section 4.18 Undisclosed Liabilities. Except as disclosed in the
-----------------------
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998
(or in any subsequently filed Company SEC Reports), as of the date hereof,
neither the Company nor any of its subsidiaries has any liabilities or any
obligations of any nature whether or not accrued, contingent or otherwise,
except for liabilities or obligations incurred in the ordinary course of
business since December 31, 1998 or which individually or in the aggregate are
not material in nature or amount. As of the date of this Agreement, no
investigation or review by any Governmental Entity with respect to the Company
or any of its subsidiaries is pending or threatened, nor has any such
Governmental Entity indicated an intention to conduct any such investigation or
review.
Section 4.19 Environmental Matters. Except as would not reasonably be
---------------------
expected to have a Company Material Adverse Effect: (i) to the knowledge of the
Company, no real property currently or formerly owned or operated by the Company
or any current subsidiary is contaminated with any Hazardous Substances to an
extent or in a manner or condition now requiring remediation under any
Environmental Law; (ii) no judicial or administrative proceeding is pending or
to the best knowledge of the Company threatened relating to liability for any
off-site disposal or contamination; and (iii) the Company and its subsidiaries
have not received any claims or notices alleging liability under any
Environmental Law, and the Company has no knowledge of any circumstances that
could result in such claims. "Environmental Law" means any applicable federal,
-----------------
state or local law, regulation, order, decree, or judicial opinion or other
agency requirement having the force and effect of law and relating to noise,
odor, Hazardous Substance or the protection of the environment. "Hazardous
---------
Substance" means any toxic or hazardous substance that is regulated by or under
- ---------
authority of any Environmental Law, including any petroleum products, asbestos
or polychlorinated biphenyls.
Section 4.20 Restrictions on Business Activities. There is no Material
-----------------------------------
Agreement, judgment, injunction, order or decree binding upon the Company or any
of its subsidiaries or any of their properties which has had or could reasonably
be expected to have the effect of prohibiting or materially impairing any
business practice of the Company or any of its subsidiaries or the conduct of
business by the Company or any of its Subsidiaries as currently conducted or as
proposed to be conducted by the Company.
Section 4.21 Certain Business Practices. Neither the Company nor any of
--------------------------
its subsidiaries nor any director, officer, employee or agent of the Company or
any of its subsidiaries has in any material respect (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful payments relating
to political activity, (ii) made any unlawful payment to any foreign or domestic
government official or
1-17
<PAGE>
employee or to any foreign or domestic political party or campaign or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, (iii)
consummated any transaction, made any payment, entered into any agreement or
arrangement or taken any other action in violation of Section 1128B(b) of the
Social Security Act, as amended, or (iv) made any other unlawful payment.
Section 4.22 Brokers; Expenses. Except for Morgan Stanley & Co.
-----------------
Incorporated (the "Company's Financial Advisor") whose fees shall be paid by the
---------------------------
Company, no agent, broker, finder, investment banker or other firm or Person is
or will be entitled to any broker's or finder's fee or other similar commission
or fee in connection with the transactions contemplated by this Agreement based
upon arrangements made by or on behalf of the Company. The Company has provided
to Parent a good faith estimate and description of the expenses of the Company
and its subsidiaries that the Company expects to incur or has incurred in
connection with the transactions contemplated by the Agreement.
Section 4.23 Board Approval. The Board of Directors of the Company by
--------------
resolutions duly adopted by unanimous vote of those voting at a meeting duly
called and held and not subsequently rescinded or modified in any way (the
"Company Board Approval"), has duly (i) determined that this Agreement and the
- -----------------------
Merger are fair to and in the best interests of the Company and its
stockholders, (ii) approved this Agreement and the Merger and (iii) recommended
that the stockholders of the Company adopt this Agreement and approve the Merger
and directed that this Agreement and the transactions contemplated hereby be
submitted for consideration by the Company's stockholders at the Company Special
Meeting. The Company Board Approval constitutes approval of this Agreement and
the Merger for purposes of Section 203 of the Delaware Law. To the knowledge of
the Company, except for Section 203 of the Delaware Law (which has been rendered
inapplicable), no state takeover statute is applicable to the Merger or the
other transactions contemplated hereby. The Company's Board of Directors or an
appropriate committee thereof has determined (y) to accelerate the "Option
Termination Date" of the offering under the Company's 1994 Employee Stock
Purchase Plan so that all outstanding ESPP Options shall be exercisable as of
August 23, 1999, and (z) to suspend any further offerings under such plan prior
to the consummation of the Merger or termination of this Agreement in accordance
with its terms.
Section 4.24 Opinion of the Company's Financial Advisor. The Company has
------------------------------------------
received the opinion of the Company's Financial Advisor, dated the date of this
Agreement, to the effect that, as of such date, the Merger Consideration is
fair, from a financial point of view, to the Company's stockholders, a copy of
which opinion has been made available to Parent.
ARTICLE V
Representations and Warranties of Parent and Merger Subsidiary
Parent and Merger Subsidiary jointly and severally represent and warrant to
the Company that, except as disclosed in the Parent Disclosure Schedule which
has been delivered to the Company prior to the execution of this Agreement (the
"Parent Disclosure Schedule"):
--------------------------
Section 5.1 Organization and Qualification. Parent is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
New York. Merger Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Each of Parent
and each of its Significant Subsidiaries has the requisite corporate power and
authority to carry on its business as it is now being conducted and is duly
qualified or licensed to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified will not, individually or in the aggregate, have
a Parent Material Adverse Effect.
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<PAGE>
Section 5.2 Ownership of Merger Subsidiary. Merger Subsidiary is a direct
-----------------------------
wholly-owned subsidiary of Parent.
Section 5.3 Authority Relative to Agreement. Each of Parent and Merger
-------------------------------
Subsidiary has the necessary corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Parent and Merger Subsidiary have been duly
and validly authorized and approved by the respective Boards of Directors of
Parent and Merger Subsidiary and by Parent as the sole stockholder of Merger
Subsidiary and no other corporate proceedings on the part of Parent or Merger
Subsidiary are necessary to authorize and approve this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of Parent and Merger Subsidiary, and assuming the
due authorization, execution and delivery by the Company, constitutes the valid
and binding obligation of Parent and Merger Subsidiary enforceable against each
of them in accordance with its terms.
Section 5.4 No Conflicts; Required Filings and Consents.
-------------------------------------------
(a) None of the execution and delivery of this Agreement by Parent or
Merger Subsidiary, the consummation by Parent or Merger Subsidiary of the
transactions contemplated hereby or compliance by Parent or Merger Subsidiary
with any of the provisions hereof will (i) conflict with or violate the charter
or By-laws of Parent or Merger Subsidiary or the comparable organizational
documents of any of Parent's Significant Subsidiaries, (ii) subject to receipt
or filing of the required Consents, conflict with or Violate any statute,
ordinance, rule, regulation, order, judgment or decree applicable to Parent or
Merger Subsidiary or any of Parent's Significant Subsidiaries, or by which any
of them or any of their respective properties or assets may be bound or
affected, or (iii) result in a Violation of, or result in the creation of any
Lien on any of the property or assets of Parent or Merger Subsidiary or any of
Parent's Significant Subsidiaries pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Parent or Merger Subsidiary or any of Parent's
Significant Subsidiaries is a party or by which Parent or Merger Subsidiary or
any of Parent's Significant Subsidiaries or any of their respective properties
may be bound or affected except in the case of the foregoing clause (ii) or
(iii) for any such Violations which would not have a Parent Material Adverse
Effect.
(b) None of the execution and delivery of this Agreement by Parent or
Merger Subsidiary, the consummation by Parent or Merger Subsidiary of the
transactions contemplated hereby or compliance by Parent or Merger Subsidiary
with any of the provisions hereof will require any Consent of any Governmental
Entity, except for (i) compliance with any applicable requirements of the
Securities Act and the Exchange Act, (ii) the filing of the Certificate of
Merger under Delaware Law, (iii) certain state takeover, securities, "blue sky"
and environmental statutes, (iv) compliance with the HSR Act, (v) such filings
as may be required in connection with the taxes described in Section 7.8, and
(vi) Consents the failure of which to obtain or make would not have a Parent
Material Adverse Effect.
Section 5.5 Information. None of the information supplied or to be
-----------
supplied by Parent or Merger Subsidiary for inclusion in, or incorporation by
reference in, the definitive Prospectus/Proxy Statement required to be mailed to
the stockholders of the Company in connection with the Merger will, at the time
of filing with the SEC, at the time of the mailing of the Prospectus/Proxy
Statement' or any amendments or supplements thereto to the Company's
stockholders and at the time of the Company Special Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The portion of the
Prospectus/Proxy Statement based on information supplied by Parent for inclusion
or incorporation by reference therein will comply as to form in all
1-19
<PAGE>
material respects with the applicable provisions of the Securities Act and the
Exchange Act and the rules and regulations thereunder.
Section 5.6 Litigation. As of the date hereof, there is no suit, action
----------
or proceeding pending or, to the knowledge of Parent or Merger Subsidiary,
threatened against or affecting Parent, Merger Subsidiary or any of Parent's
Significant Subsidiaries that, individually or in the aggregate, is reasonably
expected to have a Parent Material Adverse Effect, nor is there any judgment,
decree, injunction or order of any Governmental Entity or arbitrator outstanding
against Parent, Merger Subsidiary or any of Parent's Significant Subsidiaries
having, or which is reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect which has not been disclosed in
Parent's SEC Reports.
Section 5.7 Voting Requirements. No vote of the holders of any class or
-------------------
series of the capital stock of Parent is necessary to approve this Agreement or
the transactions contemplated hereby.
Section 5.8 Brokers. Except for Donaldson Lufkin & Jenrette Securities
-------
Corporation and Wasserstein Perella & Co., Inc. whose fees shall be paid by
Parent, no agent, broker, finder, investment banker or other firm or Person is
or will be entitled to any broker's or finder's fee or other similar commission
or fee in connection with the transactions contemplated by this Agreement based
upon arrangements made by or on behalf of Parent or the Merger Subsidiary.
Section 5.9 Capitalization. The authorized capital stock of Parent as of
--------------
the date of this Agreement consists of 250 million shares of Parent Common Stock
and 30 million shares of Parent preferred stock, of which 1,000,000 shares are
designated as Series A Junior Participating Preferred Stock and 9,200,000 shares
are designated as 6 3/4% Series C Cumulative Convertible Preferred Stock
("Series C Stock"). Parent has scheduled a special meeting of its shareholders
- ----------------
at which it is seeking authorization to, among other things, increase the number
of authorized shares of Parent Common Stock to 500 million. As of August 18,
1999, 64,864,145 shares of Parent Common Stock were validly issued and
outstanding, fully paid and nonassessable, subject to Section 630 of the NYBCL;
-----
99,556 shares of Parent Common Stock in its treasury; and 9,200,000 shares of
the Series C Stock were validly issued and outstanding, fully paid and
nonassessable subject to Section 630 of the NYBCL. There are no bonds,
debentures, notes or other indebtedness issued or outstanding having general
voting rights with respect to Parent. As of the date hereof, except for the
Series C Stock, Parent's Rights Agreement, dated as of May 8, 1996, as amended,
and securities issued or issuable thereunder, stock options to acquire an
aggregate of 13,737,764 shares of Parent Common Stock ("Parent Stock Options")
--------------------
and options issued or to be issued pursuant to Parent's employee stock purchase
plan from time to time and other rights and commitments described in the
Parent's SEC Reports (as defined in Section 5.10 below), there are no options,
warrants, calls or other rights, agreements or commitments presently outstanding
obligating Parent to issue, deliver or sell shares of its capital stock, or
obligating Parent to grant, extend or enter into any such option, warrant, call
or other such right, agreement or commitment.
Section 5.10 Reports and Financial Statements.
--------------------------------
(a) Parent has filed with the SEC all forms, reports, schedules,
registration statements and definitive proxy statements (the "Parent SEC
----------
Reports") required to be filed by it with the SEC since January 1, 1996. As of
their respective dates, the Parent SEC Reports complied as to form in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Parent SEC Reports. As of their respective dates and as of
the date any information from such Parent SEC Reports has been incorporated by
reference, the Parent SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
1-20
<PAGE>
circumstances under which they were made, not misleading. Parent has filed all
material contracts, agreements and other documents or instruments required to be
filed as exhibits to the Parent SEC Reports.
(b) The consolidated balance sheets of Parent as of December 31, 1998 and
1997 and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the three years in the period ended December 31, 1998
(including the related notes and schedules thereto) contained in Parent's Form
10-K for the year ended December 31, 1998 present fairly, in all material
respects, the consolidated financial position and the consolidated results of
operations and cash flows of Parent and its consolidated subsidiaries as of the
dates or for the periods presented therein in conformity with GAAP applied on a
consistent basis during the periods involved except as otherwise noted therein,
including in the related notes.
(c) The consolidated balance sheets and the related statements of earnings
and cash flows (including, in each case, the related notes thereto) of Parent
contained in the Form 10-Q for the quarterly period ended June 30, 1999 (the
"Parent Quarterly Financial Statements") have been prepared in accordance with
- --------------------------------------
the requirements for interim financial statements contained in Regulation S-X,
which do not require all the information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with GAAP. The Parent Quarterly Financial Statements reflect all
adjustments necessary to present fairly in accordance with GAAP (except as
indicated), in all material respects, the consolidated financial position,
results of operations and cash flows of Parent for all periods presented
therein.
Section 5.11 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the Parent SEC Reports, since June 30, 1999, there has not been (i) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Parent's capital
stock, or, any redemption, purchase or other acquisition of any of its capital
stock, (ii) any split, combination or reclassification of any of the Parent's
capital stock or, except with respect to Parent Stock Options, any issuance or
the authorization of any issuance of any other securities in respect of, in lieu
of or in substitution for shares of the Parent's capital stock, or (iii) any
material change in accounting methods, principles or practices by Parent, except
insofar as may have been concurred in by the Parent's independent public
accountants or required by a change in GAAP.
ARTICLE VI
Conduct of Business Pending the Merger
Section 6.1 Conduct of the Business Pending the Merger
(a) From and after the date hereof, prior to the Effective Time, except as
contemplated by this Agreement or unless Parent shall otherwise agree in
writing, the Company shall, and shall cause its subsidiaries to, carry on their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and to use reasonable efforts to conduct
their business in a manner consistent with the budgets and plans heretofore made
available to Parent, and shall cause its subsidiaries to, use reasonable efforts
to preserve intact their present business organizations, keep available the
services of their employees and preserve their relationships with customers,
suppliers, licensors, licensees, distributors and others having business
dealings with them to the end that their goodwill and on-going businesses shall
not be impaired in any material respect at the Effective Time. Unless Parent
shall otherwise agree in writing, prior to the Effective Time, the Company shall
not and shall not permit its subsidiaries to:
1-21
<PAGE>
(i) declare, set aside, or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than
dividends and distributions by any direct or indirect subsidiary of
the Company to its parent(s), split, combine or reclassify any of its
capital stock or, other than pursuant to the exercise of Company Stock
Options or ESPP Options outstanding on the date of this Agreement,
issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock, or
except as permitted by clause (ii) below, purchase, redeem or
otherwise acquire, other than pursuant to the exercise of Company
Stock Options or ESPP Options outstanding on the date of this
Agreement, any shares of capital stock of the Company or any of its
subsidiaries or any other equity securities thereof or any rights,
warrants, or options to acquire any such shares or other securities
other than purchases, redemptions or acquisitions of equity securities
of wholly-owned subsidiaries of the Company or rights, warrants or
options to acquire such securities;
(ii) except for issuances of capital stock of the Company's
subsidiaries to the Company or a wholly-owned subsidiary of the
Company, issue, deliver, sell, pledge or otherwise encumber any shares
of its capital stock including any Company Options other than 12,000
options at fair market value on the date of issuance to the
prospective employee listed on Schedule 6.1(a) or any ESPP Options,
any other voting securities of the Company or any securities
convertible into, or any rights, warrants or options to acquire, any
such shares or voting securities (other than the issuance of Company
Common Stock upon the exercise of Company Stock Options or ESPP
Options outstanding on the date of this Agreement) or amend the terms
of any such securities, rights, warrants or options;
(iii) amend its Certificate of Incorporation or By-Laws or comparable
organizational documents of any of its subsidiaries or Ventures;
(iv) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof, or any
assets that are material, individually or in the aggregate, to the
Company and its subsidiaries taken as a whole, except, in any such
case, in the ordinary course of business, and except transactions
between a wholly-owned subsidiary of the Company and the Company or
another wholly-owned subsidiary of the Company;
(v) subject to a Lien or sell, lease or otherwise dispose of any of
its material properties or assets, including the Ventures and Other
Investments, except in the ordinary course of business and except
transactions between a wholly-owned subsidiary of the Company and the
Company or another wholly-owned subsidiary of the Company;
(vi) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities of
the Company or any of its subsidiaries, guarantee any debt securities
of another person (other than indebtedness to, guarantees of, or
issuances or sales to the Company or a wholly-owned subsidiary of the
Company), or enter into any "keep well" or other agreement to maintain
any financial condition of another person, except, in any such case,
for borrowings or other transactions incurred in the ordinary course
of business including to repay existing indebtedness pursuant to the
terms thereof, or except in the ordinary course of business, make any
loans, advances or capital contributions to, or investments in, any
other person, other than to the Company or any direct or indirect
subsidiary of the Company or settle or compromise any material claims
or litigation;
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(vii) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) The Company shall promptly provide the Parent copies of all filings
made by the Company with any Governmental Entity in connection with this
Agreement and the transactions contemplated hereby. The Company shall, before
settling or compromising any material income tax liability of the Company or any
of its subsidiaries, consult with Parent and its advisors as to the positions
and elections that will be taken or made with respect to such matter.
ARTICLE VII
Additional Agreements
Section 7.1 Access to Information.
---------------------
(a) From the date hereof through the Effective Time or earlier termination
of this Agreement in accordance with its terms, the Company and its subsidiaries
shall afford to Parent and Parent's accountants, counsel and other
representatives full and reasonable access during normal business hours (and at
such other times as the parties may mutually agree) to its properties, books,
contracts, commitments, records and personnel and, during such period, shall
furnish promptly to Parent (i) a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws, and (ii) all other information concerning its business,
properties and personnel as Parent may reasonably request. Parent shall hold,
and shall cause its employees, agents and representatives to hold, in confidence
all "Confidential Information" in accordance with the terms of the Mutual
Nondisclosure Agreement, dated May 24, 1999 between Parent and the Company
("Confidentiality Agreement"), which shall remain in full force and effect in
- ---------------------------
accordance with the terms thereof, including, without limitation, in the event
of termination of this Agreement. No investigation pursuant to this Section
7.1(a) shall limit any representation or warranty of the Company.
(b) From the date hereof through the Effective Time or earlier termination
of this Agreement in accordance with its terms, Parent shall afford to the
Company and the Company's accountants, counsel and other representatives full
and reasonable access during normal business hours (and at such other times as
the parties may mutually agree) to its properties, books, contracts,
commitments, records and personnel and, during such period, shall furnish
promptly to the Company (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal securities laws,
and (ii) all other information concerning its business, properties and personnel
as the Company may reasonably request. The Company shall hold, and shall cause
its employees, agents and representatives to hold, in confidence all
"Confidential Information" in accordance with the terms of the Confidentiality
Agreement, which shall remain in full force and effect in accordance with the
terms thereof, including, without limitation, in the event of termination of
this Agreement. No investigation pursuant to this Section 7.1(b) shall limit
any representation or warranty of Parent.
(c) As soon as practicable after the date hereof, the Company shall use
its best efforts to cooperate and assist Parent and Parent's independent public
accountants in the compilation and preparation of all financial statements and
financial statement schedules of the Company prepared in accordance with GAAP
and reports and consents of the Company's independent public accountants as may
be necessary or deemed advisable by Parent to comply with SEC reporting and
disclosure requirements. The Company shall deliver to Parent's independent
public accountants and/or the Company's independent public accountants all
engagement letters and management representation letters as may be reasonably
requested by Parent or such accountants. The Company shall use its best efforts
to cause its independent public accountants to cooperate with and assist Parent
and its independent public accountants in the preparation of the financial
statements contemplated by this Section 7.1(c).
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<PAGE>
Section 7.2 Company Special Meeting. The Company shall take all action
-----------------------
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-laws, to convene the Company Special Meeting as promptly as
reasonably practicable after the date on which the definitive Prospectus/Proxy
Statement' has been mailed to the Company's stockholders for the purpose of
considering and taking action upon the Merger and this Agreement.
Section 7.3 Revolving Credit Facility. Parent and Merger Subsidiary will
-------------------------
cooperate with the Company to provide for the payment of the Company's $75
million revolving credit facility (the "Credit Facility") at or prior to
---------------
Closing.
Section 7.4 Public Announcements. On or before the Closing Date, Parent
--------------------
and the Company shall not (nor shall they permit any of their respective
Affiliates to), without prior consultation with the other party and such other
party's review of and consent to any public announcement concerning the
transactions contemplated by this Agreement, issue any press release or make any
public announcement with respect to such transactions during such period, and
Parent and the Company shall, to the extent practicable, allow the other party
reasonable time to review and comment on such release or announcement in advance
of its issuance and use reasonable efforts in good faith to reflect the
reasonable and good faith comments of such other party, provided, however, no
party shall be prevented from making any disclosure required by law at the time
so required because of any delay on the part of the other party. The parties
intend that the initial announcement of the terms of the transactions
contemplated by this Agreement shall be made by joint press release of Parent
and the Company.
Section 7.5 Indemnification of the Company's Directors and Officers and
-----------------------------------------------------------
Insurance. Parent agrees that all rights to indemnification existing as of the
- ---------
date of this Agreement in favor of any director, officer, employee or agent of
the Company and its subsidiaries (the "Indemnified Parties") as provided in
-------------------
their respective Certificate of Incorporation, By-laws or comparable
organizational documents or in indemnification agreements with the Company or
any of its subsidiaries, or otherwise in effect as of the date hereof, shall
survive the Merger and shall continue in full force and effect for a period of
not less than six years from the Effective Time, provided that, in the event any
claim or claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims, shall continue until
final disposition of any and all such claims. Without limiting the generality of
the foregoing, in the event any such Indemnified Party is or becomes involved in
any capacity in any action, proceeding or investigation in connection with any
matter, including, without limitation, the transactions contemplated by this
Agreement, occurring prior to or at the Effective Time, Parent shall cause the
Surviving Corporation to pay as incurred such Indemnified Party's legal and
other expenses (including the cost of any investigation and preparation)
incurred in connection therewith. The Surviving Corporation shall cause to be
maintained in effect for a period of three years, the current policies of
directors' and officers' liability insurance and fiduciary liability insurance
maintained by the Company (provided that the Surviving Corporation may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are, in the aggregate, no less
advantageous to the insured) with respect to claims arising from facts or events
that occurred on or before the Effective Time; provided, however, that in no
event shall the Surviving Corporation be required to expend in any one year an
amount in excess of 200% of the annual premiums currently paid by the Company
for such insurance; and, provided, further, that if the annual premiums of such
insurance coverage exceed such amount, the Surviving Corporation shall be
obligated to obtain a policy with the greatest coverage available for a cost not
exceeding such amount.
Section 7.6 Efforts; Consents.
-----------------
(a) Subject to the terms and conditions of this Agreement, each of the
parties hereto agrees to use its reasonable commercial efforts to take, or cause
to be taken, all actions and to do, or cause to be done,
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<PAGE>
all things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and the
Merger and to cooperate with each other in connection with the foregoing.
Without limiting the generality of the foregoing, each of the Company, Merger
Subsidiary and Parent shall make or cause to be made all required filings with
or applications to Governmental Entities (including under the Securities Act,
the Exchange Act and the HSR Act and to state and local Governmental Entities
with respect to any transfers of Company Permits), and use its best efforts to
(i) obtain all necessary consents of all Governmental Entities and other third
parties, necessary for the parties to consummate the transactions contemplated
hereby, (ii) oppose, lift or rescind any injunction or restraining order or
other order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and (iii) fulfill all conditions to this
Agreement.
(b) Without limiting the foregoing, the Company and Parent shall use their
best efforts and cooperate in promptly preparing and filing as soon as
practicable, and in any event within five business days of executing this
Agreement, (i) notifications under the HSR Act, (ii) notifications or other
filings under the merger control statutes of any other applicable jurisdictions
in connection with the Merger and the other transactions contemplated hereby,
and to respond as promptly as practicable to any inquiries or requests received
from the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, the other Governmental Entities for additional
information or documentation and to respond as promptly as practicable to all
inquiries and requests received from any Governmental Entity in connection with
antitrust matters or matters relating to the Company Permits. Each of Parent,
Merger Subsidiary and the Company, to the extent applicable, further agrees to
file contemporaneously with the filing of the applications any requests for
waivers of applicable FCC rules or rules or regulations of other Governmental
Entities as may be required to expeditiously prosecute such waiver requests and
to diligently submit any additional information or amendments for which the FCC
or any other relevant Governmental Entity may ask with respect to such waiver
requests.
Section 7.7 Notice of Breaches. The Company shall give prompt notice to
------------------
Parent, and Parent or Merger Subsidiary shall give prompt notice to the Company,
of (i) any representation or warranty made by it contained in this Agreement
which has become untrue or inaccurate in any material respect, or (ii) the
failure by it to comply with or satisfy in any material respect any covenant,
condition, or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that such notification shall not excuse or
otherwise affect the representations, warranties, covenants or agreements of the
parties or the conditions to the obligations of the parties under this
Agreement.
Section 7.8 Transfer and Gains Taxes and Certain Other Taxes and Expenses.
-------------------------------------------------------------
Parent and Merger Subsidiary agree that the Surviving Corporation will pay all
real property transfer, gains and other similar taxes and all documentary
stamps, filing fees, recording fees and sales and use taxes, if any, and any
penalties or interest with respect thereto, payable in connection with
consummation of the Merger without any offset, deduction, counterclaim or
deferment of the payment of the Merger Consideration.
Section 7.9 Acquisition Proposals.
---------------------
(a) The Company agrees that it shall not nor shall any of its subsidiaries
or any of the officers and directors of the Company or its subsidiaries nor any
of its or its subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
subsidiaries), directly or indirectly, initiate, solicit, encourage or knowingly
facilitate (including by way of furnishing information) any inquiries or the
making of any proposal or offer with respect to a merger, reorganization, share
exchange, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving, or any purchase or sale of all or
any significant portion of the assets or more than 10% of the Company Common
Stock or the assets or capital stock of any of its subsidiaries (any such
proposal or offer (other than a proposal or offer made by Parent or an affiliate
1-25
<PAGE>
thereof) being hereinafter referred to as an "Acquisition Proposal"). The
--------------------
Company further agrees that neither it nor any of its subsidiaries nor any of
the officers and directors of it or its subsidiaries shall, and that it shall
direct and use its best efforts to cause its and its subsidiaries' employees,
agents and representatives (including any investment banker, attorney or
accountant retained by it or any of its subsidiaries) not to, directly or
indirectly, have any discussion with or provide any confidential information or
data to any Person relating to an Acquisition Proposal, or engage in any
negotiations concerning an Acquisition Proposal, or knowingly facilitate any
effort or attempt to make or implement an Acquisition Proposal or accept an
Acquisition Proposal. Notwithstanding the foregoing, the Company or its Board of
Directors shall be permitted, in response to an unsolicited bona fide written
Acquisition Proposal by any Person, to engage in any discussions or negotiations
with, or provide any information to, any Person in response to an unsolicited
bona fide written Acquisition Proposal by any such Person, if and only to the
extent that: (i) the Company Special Meeting shall not have occurred; (ii) the
Board of Directors of the Company concludes in good faith that such Acquisition
Proposal could reasonably be expected to constitute a Superior Proposal (as
defined in Section 10.8(a) below); (iii) prior to providing any information or
data to any Person in connection with an Acquisition Proposal by any such
Person, the Company Board of Directors receives from such Person an executed
confidentiality agreement on terms substantially similar to those contained in
the Confidentiality Agreement; and (iv) at least two days prior to providing
any information or data to any Person or entering into discussions or
negotiations with any Person, the Board of Directors of the Company notifies
Parent promptly of such inquiries, proposals or offers received by, any such
information requested from, or any such discussions or negotiations sought to be
initiated or continued with, any of its representatives indicating, in
connection with such notice, the name of such Person and the material terms and
conditions of any proposals or offers. The Company agrees that it will keep
Parent informed, on a current basis, of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations. The
Company agrees that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any Acquisition Proposal. The Company agrees that it
will take the necessary steps to promptly inform the individuals or entities
referred to in the first sentence of this Section 7.9 of the obligations
undertaken in this Section 7.9 and that any breach of the provisions of this
Section 7.9 by any officer or director of the Company or its subsidiaries or any
investment banker, financial advisor, attorney, accountant or other
representative of the Company or its subsidiaries will be deemed a breach by the
Company.
(b) Except as permitted in this Section 7.9, neither the Board of
Directors of the Company nor any committee thereof shall (i) withdraw or modify,
or propose publicly to withdraw or modify, in a manner adverse to Parent, or
take any action not explicitly permitted by this Agreement that would be
inconsistent with, the approval or recommendation by such Board of Directors or
such committee of the transactions contemplated by this Agreement, (ii) approve
or recommend, or propose publicly to approve or recommend, any Acquisition
Proposal, or (iii) cause the Company to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement (each,
an "Acquisition Agreement") related to any Acquisition Proposal. Notwithstanding
---------------------
the foregoing, in the event that prior to the vote on the transactions at the
Company Special Meeting, the Board of Directors of the Company determines in
good faith, that an Acquisition Proposal constitutes a Superior Proposal, the
Board of Directors of the Company may (x) withdraw or modify its approval or
recommendation of the Transactions in connection with the Company Special
Meeting, (y) approve or recommend a Superior Proposal and (z) if it so chooses,
cause the Company to enter into an Acquisition Agreement with respect to such
Superior Proposal but, in each of the case, only at a time that is after: (A)
the fifth (5th) day following Parent's receipt of written notice from the
Company advising Parent that the Board of Directors of the Company has received
a Superior Proposal, specifying the material terms and conditions of such
Superior Proposal, identifying the person making such Superior Proposal, and
advising Parent that the Board of Directors, of the Company has determined that
it will no longer recommend approval of the
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<PAGE>
Transactions; (B) the Company has paid the Termination Fee (as defined in
Section 9.3(b)) to Parent; and (C) the Company has terminated this Agreement in
accordance with its terms.
Section 7.10 Related Agreements. Simultaneously with the execution and
------------------
delivery of this Agreement, or as otherwise provided in this Section 7.10, and
as material consideration for the execution and delivery of this Agreement by
Parent and Merger Subsidiary, each of the executive officers and the other
Persons listed on Schedule 7.10(a) to this Agreement is entering into a
stockholders' voting and proxy agreement pursuant to which such Persons agree to
vote the shares of the Company Common Stock owned by them in favor of the
Company Proposal at the Company Special Meeting and provide the proxies named
therein with such Person's irrevocable proxy with respect to such vote
(collectively, the "Related Agreements").
------------------
Section 7.11 Employee Benefits.
-----------------
(a) Parent shall cause the employees of the Company and its subsidiaries
(collectively, the "Company Employees") to be covered under the Parent's
-----------------
"employee benefit plans" as defined in ERISA ("Parent Benefit Plans") and for at
--------------------
least two years after the Effective Time, Parent shall, or shall cause the
Surviving Corporation to, provide benefits, in the aggregate, that are no less
favorable than the benefits provided, in the aggregate, under such Parent
Benefit Plans immediately prior to the Effective Time to the Company Employees.
Notwithstanding the foregoing, nothing herein shall require: (A) the
continuation of any Company Benefit Plan or prevent the amendment or termination
thereof (subject to the maintenance, in the aggregate, of the benefits as
provided in the preceding sentence); or (B) require Parent or the Surviving
Corporation to continue or maintain any stock purchase or other equity plan
related to the equity of the Company or the Surviving Corporation or to change
the eligibility requirements of any stock or other equity plan of Parent; or (C)
constitute any obligation on the part of Parent, the Surviving Corporation or
any of their Affiliates to change the employment status of any of the Company
Employees to other than "at will."
(b) With respect to any Parent Benefit Plans in which the Company
Employees participate effective as of the Closing Date, Parent shall, or shall
cause the Surviving Corporation to, to the extent permitted under the Parent
Benefits Plans: (A) not impose any limitations more onerous than those
currently in effect as to pre-existing conditions, exclusions and waiting
periods with respect to participation and coverage requirements applicable to
the Company Employees under which any welfare benefit plan in which such
employees may be eligible to participate after the Effective Time, (B) provide
each Company Employee with credit for any co-payments and deductibles paid prior
to the Effective Time in satisfying any applicable deductible or out-of-pocket
requirements under any welfare benefit plan in which such employees may be
eligible to participate after the Effective Time, and (C) recognize all service
of the Company Employees with the Company for all purposes (including, without
limitation, purposes of eligibility to participate, vesting credit, entitlement
for benefits, and benefit accrual) in any benefit plan in which such employees
may be eligible to participate after the Effective Time, to the same extent
taken into account under a comparable Company Benefit Plan immediately prior to
the Closing Date.
Section 7.12 Nasdaq Listing. Parent shall use its best efforts to cause
--------------
the shares of Parent Common Stock to be issued in the Merger and the shares of
Parent Common Stock to be reserved for issuance upon exercise of the Company
Stock Options to be approved for quotation, upon official notice of issuance on
the Nasdaq National Market.
ARTICLE VIII
Conditions Precedent
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<PAGE>
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger.
----------------------------------------------------------
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) This Agreement and the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of the holders of
the Company Common Stock at the Company Special Meeting;
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and any other
material Consents from Governmental Entities and other third parties
which in any case are required to be received prior to the Effective
Time with respect to the transactions contemplated hereby shall have
been received;
(c) The shares of Parent Common Stock to be issued in the Merger and
such other shares to be reserved for issuance in connection with the
Merger shall have been approved for listing on the Nasdaq National
Market upon official notice of issuance;
(d) The Registration Statement shall have been declared effective by
the SEC under the Securities Act, no stop order suspending the
effectiveness of the Registration Statement shall have been issued by
the SEC, and no proceedings for that purpose shall have been initiated
or threatened by the SEC; and
(e) The consummation of the Merger shall not be restrained, enjoined
or prohibited by any order, judgment, decree, injunction or ruling of
a court of competent jurisdiction; provided, however, that the parties
shall comply with the provisions of Section 7.6 and shall further use
their best efforts to cause any such order, judgment, decree,
injunction or ruling to be vacated or lifted.
Section 8.2 Conditions to Obligation of the Company to Effect the Merger.
------------------------------------------------------------
The obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions, unless waived by the Company, that:
(a) The representations and warranties of Parent and Merger Subsidiary
contained in this Agreement that are modified by materiality or Parent Material
Adverse Effect shall be true and correct in all respects, and those that are not
so modified shall be true and correct in all material respects, on the date
hereof and as of the Effective Time as if made at the Effective Time (except
such representations and warranties made as of a specific date which need only
be true as written as of such date). The Company shall have received a
certificate of an authorized officer of Parent and Merger Subsidiary, on behalf
of Parent and Merger Subsidiary, to such effect.
(b) Parent and Merger Subsidiary shall have performed or complied with all
agreements and covenants required to be performed by each of them under this
Agreement at or prior to the Effective Time in all material respects, and the
Company shall have received a certificate of an authorized officer of Parent and
Merger Subsidiary, on behalf of Parent and Merger Subsidiary, to such effect.
(c) The Company shall have received from Arent Fox Kintner Plotkin & Kahn,
PLLC, or other counsel reasonably acceptable to the Company, on the Closing
Date, a written opinion dated as of such date that the Merger qualifies as a
reorganization within the meaning of Section 368(a)(2)(D) of the Code.
(d) The Credit Facility shall have been paid.
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<PAGE>
Section 8.3 Conditions to Obligations of Parent and Merger Subsidiary to
------------------------------------------------------------
Effect the Merger. The obligations of Parent and Merger Subsidiary to effect
- -----------------
the Merger shall be subject to the fulfillment at or prior to the Effective Time
of the following additional conditions, unless waived by Parent:
(a) The representations and warranties of the Company contained in this
Agreement that are modified by materiality or Company Material Adverse Effect
shall be true and correct in all respects, and those that are not so modified
shall be true and correct in all material respects, on the date hereof and as of
the Effective Time as if made at the Effective Time (except such representations
and warranties made as of a specific date which need only be true as written as
of such date and except that the representations set forth in Section 4.2 shall
be true and correct in all respects). Parent shall have received a certificate
of an authorized officer of the Company, on behalf of the Company, to such
effect.
(b) The Company shall have performed or complied with all agreements and
covenants required to be performed by it under this Agreement at or prior to the
Effective Time in all material respects, other than the covenants with respect
to issuance of shares of Company capital stock, Company Options and ESPP Options
which shall be complied with as set forth in Section 6.1(a)(i) and (ii), and
Parent shall have received a certificate of an authorized officer of the
Company, on behalf of the Company, to such effect.
(c) Parent shall have received from Nixon Peabody LLP, on the Closing
Date, a written opinion dated as of such date that the Merger qualifies as a
reorganization within the meaning of Section 368(a)(2)(D) of the Code.
(d) The Related Agreements have been executed and delivered by the
respective parties thereto and continue in full force and effect.
ARTICLE IX
Termination, Amendment and Waiver
Section 9.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Effective Time, whether before or after approval by the
stockholders of the Company:
(a) by mutual written consent of Parent and the Company;
(b) by the Company, upon a material breach of this Agreement on the
part of Parent or Merger Subsidiary which has not been cured and which
would cause the condition set forth in Section 8.2 to be incapable of
being satisfied by February 29, 2000;
(c) by Parent, upon a material breach of this Agreement on the part
of the Company set forth in this Agreement which has not been cured
and which would cause the conditions set forth in Section 8.3 to be
incapable of being satisfied by February 29, 2000;
(d) by Parent or the Company if any court of competent jurisdiction
shall have issued, enacted, entered, promulgated or enforced any
order, judgment, decree, injunction or ruling, after reasonable
efforts on the part of Parent and the Company to resist, resolve or
lift, which permanently restrains, enjoins or otherwise prohibits the
Merger and such order, judgment, decree, injunction or ruling shall
have become final and nonappealable;
(e) by either Parent or the Company if the Merger shall not have been
consummated on or before February 29, 2000 (the "Upset Date") provided
----------
the terminating party is not otherwise in material breach of its
representations, warranties or obligations under this Agreement;
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<PAGE>
(f) by either Parent or the Company if the Company Special Meeting
(including as it may be adjourned from time to time) shall have
concluded without the Company having obtained the required stockholder
approval of this Agreement and the transactions contemplated hereby;
(g) by Parent if the Board of Directors of the Company, prior to the
Company Special Meeting (i) shall withdraw or modify in any adverse
manner the Company Board Approval, (ii) shall approve or recommend a
Superior Proposal pursuant to Section 7.9 or (iii) shall resolve to
take any of the actions specified in clauses (i) or (ii) above; or
(h) by the Company at any time prior to the Company Special Meeting,
upon five business days' prior notice to Parent, if the Board of
Directors of the Company shall approve a Superior Proposal; provided,
however, that (i) the Company shall have complied with Section 7.9,
(ii) the Board of Directors of the Company shall have concluded in
good faith, after giving effect to all concessions which may be
offered by Parent pursuant to clause (iii) below, on the basis of the
advice of its financial advisors and outside counsel, that such
proposal is a Superior Proposal and (iii) prior to any such
termination, the Company shall, and shall cause its financial and
legal advisors to, negotiate with Parent to make such adjustments in
the terms and conditions of this Agreement as would enable Parent to
proceed with the transactions contemplated hereby; provided, however,
that it shall be a condition to termination by the Company pursuant to
this Section 9.l(h) that the Company shall have made the payment of
the Termination Fee to Parent required by Section 9.3(b).
Section 9.2 Effect of Termination. In the event of termination of this
---------------------
Agreement by either Parent or the Company, as provided in Section 9.1, this
Agreement shall forthwith terminate and there shall be no liability hereunder on
the part of any of the Company, Parent or Merger Subsidiary or their respective
officers or directors; provided that Sections 4.22 (Brokers); 5.8 (Brokers); the
second sentence of 7.1(a) (Confidentiality), the second sentence of 7.1(b)
(Confidentiality); Section 7.9 to the extent the Company is required to pay the
Termination Fee until such Fee is paid; this Section 9.2, 9.3 (Fees and
Expenses); and 10.6 (Governing Law) shall survive the termination and remain in
full force and effect and; provided, further, that (i) each party shall remain
--------
liable for any willful breaches of such party's covenants hereunder or
intentional or willful breaches of such party's representations and warranties
hereunder prior to its termination, and (ii) Parent and the Company shall share
equally the fees and expenses incurred in connection with the filing and
printing of the Proxy Statement/Prospectus (including any preliminary proxy
statement/ prospectus) and the filing fees under the HSR Act.
Section 9.3 Fees and Expenses.
-----------------
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses, except as
otherwise provided in Section 7.8 and Section 9.2.
(b) Parent and the Company agree that the Company shall pay to Parent the
sum of $15,000,000 (the "Termination Fee") solely as follows: (i) if Parent
---------------
shall terminate this Agreement pursuant to Section 9.1(g)(ii) or if the Company
shall terminate this Agreement pursuant to Section 9.1(h), (ii) if (A) the
Company or Parent shall terminate this Agreement pursuant to Section 9.1(f) due
to the failure of the Company's stockholders to approve and adopt this
Agreement, (B) at any time after the date of this Agreement and at or before the
time of the event giving rise to such termination there shall exist an
Acquisition Proposal with respect to the Company and (C) within 12 months of the
termination of this Agreement, the Company enters into a definitive agreement
with any third party with respect to an
1-30
<PAGE>
Acquisition Proposal or an Acquisition Proposal is consummated, or (iii) if (A)
Parent shall terminate this Agreement pursuant to Section 9.1(c) or 9.1(e) or
Section 9.1(g)(i) or 9.1(g)(iii) or the Company or Parent shall terminate this
Agreement pursuant to Section 9.1(d), (B) at any time after the date of this
Agreement and at or before the time of the event giving rise to such termination
there shall exist an Acquisition Proposal, (C) following the existence of such
Acquisition Proposal and prior to any such termination, the Company shall have
intentionally breached (and not cured after notice thereof) any of its material
covenants or agreements set forth in this Agreement in any material respect, and
(D) within 12 months of any such termination of this Agreement, the Company
shall enter into a definitive agreement with any third party with respect to an
Acquisition Proposal or an Acquisition Proposal is consummated.
(c) The Termination Fee required to be paid pursuant to Section 9.3(b)
shall be made prior to, and shall be a pre-condition to the effectiveness of
termination of this Agreement by the Company pursuant to Section 9.1(h). Any
other payment required to be made shall be made to Parent not later than two
business days after the entering into of a definitive agreement with respect to,
or the consummation of, an Acquisition Proposal, as applicable. All payments
under this Section 9.3 shall be made by wire transfer of immediately available
funds to an account designated by Parent.
Section 9.4 Amendment. This Agreement may be amended by the parties
---------
hereto at any time before or after approval hereof by the stockholders of the
Company, but, after such approval, no amendment shall be made which (i) changes
the form or decreases the amount of the Merger Consideration, (ii) in any way
materially adversely affects the rights of the Company's stockholders or (iii)
under applicable law would require approval of the Company's stockholders, in
any such case referred to in clauses (i), (ii) and (iii), without the further
approval of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 9.5 Waiver. At any time prior to the Effective Time, the parties
------
hereto may, to the extent permitted by applicable law, (i) extend the time for
the performance of any of the obligations or other acts of any other party
hereto, (ii) waive any inaccuracies in the representations and warranties by any
other party contained herein or in any documents delivered by any other party
pursuant hereto and (iii) waive compliance with any of the agreements of any
other party or with any conditions to its own obligations contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE X
General Provisions
Section 10.1 Non-Survival of Representations, Warranties and Agreements.
----------------------------------------------------------
The representations and warranties in this Agreement shall not survive the
Merger.
Section 10.2 Notices. All notices or other communications under this
-------
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by telecopy (with
confirmation of receipt), or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows:
1-31
<PAGE>
If to the Company:
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, VA 20191
Attention: John J. McDonnell, III,
General Counsel and Secretary
Telecopy No.: (703) 453-8397
With copies to:
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, N.W.
Washington, DC 20036-5339
Attention: Jeffrey E. Jordan, Esq.
Telecopy: (202) 8576395
If to Parent or Merger Subsidiary:
PSINet Inc. Courier:
510 Huntmar Park Drive 11180 Sunrise Valley Drive
Herdon, VA 22070 Reston, VA 20191
Attention: David N. Kunkel
Executive Vice President, General Counsel
Telecopy: (703) 904-9527
With a copy to:
Nixon Peabody LLC
437 Madison Avenue
New York, NY 10022
Attention: Richard F. Langan, Jr., Esq.
Telecopy: (212) 940-3111
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
Section 10.3 Specific Performance. The parties hereto agree that
--------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. Accordingly, the parties further agree that each party shall
be entitled to an injunction or restraining order to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other right or remedy to which such party may be entitled under
this Agreement, at law or in equity.
Section 10.4 Entire Agreement. This Agreement (including the documents
----------------
and instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof.
Section 10.5 Assignments; Parties in Interest. Neither this Agreement nor
--------------------------------
any of the rights, interests or obligations hereunder may be assigned by any of
the parties hereto (whether by operation of
1-32
<PAGE>
law or otherwise) without the prior written consent of the other parties. This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any person not a party hereto any right, benefit or remedy of
any nature whatsoever under or by reason of this Agreement, including to confer
third party beneficiary rights, except for the provisions of Article III and
Section 7.5.
Section 10.6 Governing Law. This Agreement, except to the extent that
-------------
provisions of Delaware Law (with respect to the Merger only) are mandatorily
applicable to the Merger and the rights of the stockholders of the Company,
shall be governed in all respects by the laws of the State of New York (without
giving effect to the provisions thereof relating to conflicts of law). The
exclusive venue for the adjudication of any dispute or proceeding arising out of
this Agreement or the performance thereof shall be the courts located in the
County of New York, State of New York and the parties hereto and their
affiliates each consents to and hereby submits to the jurisdiction of any court
located in the County of New York, State of New York or Federal courts in the
Southern District of New York.
Section 10.7 Headings; Disclosure. The descriptive headings herein are
--------------------
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement. Any disclosure by
the Company or Parent in any portion of its respective Disclosure Schedule
shall be deemed disclosure in each other portion of such Disclosure Schedule.
Section 10.8 Certain Definitions and Rules of Construction.
---------------------------------------------
(a) As used in this Agreement:
"Affiliate," as applied to any person, shall mean any other person directly
or indirectly controlling, controlled by, or under common control with, that
person; for purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common control
with"), as applied to any person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
that person, whether through the ownership of voting securities, by contract or
otherwise.
"Acquisition Agreement" has the meaning set forth in Section 7.9(b).
---------------------
"Acquisition Proposal" has the meaning set forth in Section 7.9(a).
--------------------
"Agreement" has the meaning set forth in the preamble to this Agreement.
---------
"Business Combination" has the meaning set forth in Section 3.1(m).
--------------------
"Cash Consideration" has the meaning set forth in Section 3.1(c).
------------------
"Cash Election" has the meaning set forth in Section 3.1(d).
-------------
"Cash Election Number" has the meaning set forth in Section 3.1(d).
--------------------
"Cash Election Shares" has the meaning set forth in Section 3.1(e).
--------------------
"Cash Fraction" has the meaning set forth in Section 3.1(e).
-------------
"Certificate of Merger" has the meaning set forth in Section 1.3.
---------------------
"Certificates" has the meaning set forth in Section 3.2.
------------
1-33
<PAGE>
"Closing Date" has the meaning set forth in Section 1.2.
------------
"Code" has the meaning set forth in Section 3.6.
----
"Company" has the meaning set forth in the preamble to this Agreement.
-------
"Company Benefit Plans" has the meaning set forth in Section 4.9.
---------------------
"Company Board Approval" has the meaning set forth in Section 4.23.
----------------------
"Company Common Stock" has the meaning set forth in Section 3.1(b).
--------------------
"Company Disclosure Schedule" has the meaning set forth in Article IV,
---------------------------
Introduction.
"Company Employees" has the meaning set forth in Section 7.11.
-----------------
"Company Intellectual Property Rights" has the meaning set forth in Section
------------------------------------
4.16(a).
"Company Financial Statements" has the meaning set forth in Section 4.5(b).
----------------------------
"Company Material Adverse Effect" shall be an event or occurrence or series
-------------------------------
of events or occurrences which individually or in the aggregate with all other
events or occurrences would be reasonably likely to have a material adverse
effect on the business, operations, financial condition or results of operations
of the Company and its subsidiaries taken as a whole, other than any change,
circumstances or effect relating to (i) the economy or securities markets in
general or (ii) the industries in which the Company operates in general and not
specifically relating to the Company.
"Company Material Contract" has the meaning set forth in Section 4.14.
-------------------------
"Company Permits" has the meaning set forth in Section 4.12.
---------------
"Company Proposal" has the meaning set forth in Section 3.5(a).
----------------
"Company Real Property Rights" has the meaning set forth in Section 4.15.
----------------------------
"Company Quarterly Financial Statements" has the meaning set forth in
--------------------------------------
Section 4.5(c).
"Company SEC Reports" has the meaning set forth in Section 4.5(a).
-------------------
"Company Special Meeting" has the meaning set forth in Section 3.5(a).
-----------------------
"Company Stock Options" has the meaning set forth in Section 4.2(a).
---------------------
"Company's Financial Advisor" has the meaning set forth in Section 4.2.3.
---------------------------
"Confidentiality Agreement" has the meaning set forth in Section 7.1(a).
-------------------------
"Consent" has the meaning set forth in Section 4.4(b).
-------
"Credit Facility" has the meaning set forth in Section 7.3.
---------------
"Delaware Law" has the meaning set forth in Section 1.3.
------------
1-34
<PAGE>
"Dissenting Shares" has the meaning set forth in Section 3.1(n).
-----------------
"Effective Time" has the meaning set forth in Section 1.3.
--------------
"Election" has the meaning set forth in Section 3.1(h).
--------
"Election Deadline" has the meaning set forth in Section 3.1(k).
-----------------
"Environmental Law" has the meaning set forth in Section 4.19.
-----------------
"ERISA" shall have the meaning set forth in Section 4.9(a).
-----
"ERISA Affiliate" has the meaning set forth in Section 4.9(a).
---------------
"ESPP Options" has the meaning set forth in Section 4.2(a).
------------
"Exchange Act" has the meaning set forth in Section 3.5(c).
------------
"Exchange Ratio" has the meaning set forth in Section 3.1(a).
--------------
"Form of Election" has the meaning set forth in Section 3.1(d).
----------------
"GAAP" has the meaning set forth in Section 4.5(b).
----
"Governmental Entity" has the meaning set forth in Section 5.4(b)
-------------------
"HSR Act" has the meaning set forth in Section 4.4(b).
-------
"Hazardous Substance" has the meaning set forth in Section 4.19.
-------------------
"Indemnified Parties" has the meaning set forth in Section 7.5.
-------------------
"Information Technology" has the meaning set forth in Section 4.16(c).
----------------------
"IRS" has the meaning set forth in Section 4.9.
---
"Knowledge" or any other formulation of "knowledge" shall mean, the
---------
knowledge of the Company's senior executive officers with respect to the
Company, and with respect to Parent and Merger Subsidiary, the knowledge of
Parent's senior executive officers.
"Lien" has the meaning set forth in Section 4.4(a).
----
"Merger" has the meaning set forth in the preamble to this Agreement.
------
"Merger Consideration" has the meaning set forth in Section 3.1(a).
--------------------
"Merger Subsidiary" has the meaning set forth in the preamble to this
-----------------
Agreement.
"Merger Subsidiary Common Stock" has the meaning set forth in Section
------------------------------
3.1(a).
"Mixed Consideration" has the meaning set forth in Section 3.1(c).
-------------------
1-35
<PAGE>
"Mixed Election" has the meaning set forth in Section 3.1(h).
--------------
"NYBCL" has the meaning set forth in Section 3.1(c).
-----
"No Election Shares" has the meaning set forth in Section 3.1(j).
------------------
"Non-U.S. Benefit Plans" has the meaning set forth in Section 4.9(l).
----------------------
"Other Investments" has the meaning set forth in Section 4.2(c).
-----------------
"Parent" has the meaning set forth in the preamble to this Agreement.
------
"Parent Benefit Plans" has the meaning set forth in Section 7.11.
--------------------
"Parent Common Stock" has the meaning set forth in Section 3.1(c).
-------------------
"Parent Disclosure Schedule" has the meaning set forth in Article V,
--------------------------
Introduction.
"Parent Material Adverse Effect" shall be an event or occurrence or series
------------------------------
of events or occurrences which individually or in the aggregate with all other
events or occurrences would be reasonably likely to have a material adverse
effect on the business, operations, financial condition or results of operations
of Parent and its subsidiaries taken as a whole, other than any change,
circumstances or effect relating to (i) the economy or securities markets in
general or (ii) the industries in which Parent operates in general and not
specifically relating to Parent.
"Parent Quarterly Financial Statements" has the meaning set forth in
-------------------------------------
Section 5.10(c).
"Parent SEC Reports" has the meaning set forth in Section 5.10(a).
------------------
"Paying Agent" has the meaning set forth in Section 3.1(i).
------------
"Person" shall include individuals, corporations, partnerships, limited
------
liability companies, trusts, other entities and groups (which term shall include
a "group" as such term is defined in Section 13(d)(3) of the Exchange Act).
"Prospectus/Proxy Statement" has the meaning set forth in Section 3.5(a).
--------------------------
"Qualified Plans" has the meaning set forth in Section 4.9.
---------------
"Registration Statement" has the meaning set forth in Section 3.5(a).
----------------------
"Related Agreements" has the meaning set forth in Section 7.10.
------------------
"Representative" has the meaning set forth in Section 3.1(d).
--------------
"SEC" has meaning set forth in Section 3.5(a).
---
"Securities Act" has the meaning set forth in Section 3.5(a).
--------------
"Series C Stock" has the meaning set forth in Section 5.9.
--------------
1-36
<PAGE>
"Significant Subsidiaries" means subsidiaries within the meaning of
------------------------
Regulation S-X under the Exchange Act, which in the case of references to the
Significant Subsidiaries of Parent, shall include Merger Subsidiary.
"Stock Consideration" has the meaning set forth in Section 3.1(c).
-------------------
"Stock Election" has the meaning set forth in Section 3.1(f).
--------------
"Stock Election Number" has the meaning set forth in Section 3.1(f).
---------------------
"Stock Election Shares" has the meaning set forth in Section 3.1(g).
---------------------
"Stock Fraction" has the meaning set forth in Section 3.1(g).
--------------
"Subsidiary" or "Subsidiaries" means, with respect to Parent, the Company
----------- ------------
or any other person, any corporation, partnership, joint venture or other legal
entity of which Parent, the Company or such other person, as the case may be
(either alone or through or together with any other subsidiary), owns, directly
or indirectly, stock or other equity interests the holders of which are
generally entitled to more than 50% of the vote for the election of the board of
directors or other governing body of such corporation or other legal entity.
"Superior Proposal" means a bona fide unsolicited written Acquisition
-----------------
Proposal to acquire more than 50% of the voting power of the shares of the
Company Common Stock then outstanding or all or substantially all the assets of
the Company for consideration consisting of cash and/or securities which the
Board of Directors of the Company concludes in good faith (after consultation
with its financial advisors and legal counsel), taking into account all legal,
financial, regulatory and other aspects of the proposal and the Person making
the proposal, (i) would, if consummated, result in a transaction that is
materially more favorable to the Company's stockholders (in their capacities as
stockholders), from a financial point of view, than the transactions
contemplated by this Agreement and (ii) is reasonably capable of being
completed, including, without limitation, a conclusion that its financing, to
the extent required, is then committed or is in the good faith judgment of the
Board of Directors of the Company, reasonably capable of being financed by such
third party.
"Surviving Corporation" has the meaning set forth in Section 1.1.
---------------------
"Tax" shall mean any federal, state, local, foreign or provincial income,
---
gross receipts, property, sales, service, use, license, lease, excise,
franchise, employment, payroll, withholding, employment, unemployment insurance,
workers' compensation, social security, alternative or added minimum, ad
valorem, value added, stamp, business license, occupation, premium,
environmental, windfall profit, customs, duties, estimated, transfer or excise
tax, or any other tax, custom, duty, premium, governmental fee or other
assessment or charge of any kind whatsoever, together with any interest or
penalty imposed by any Governmental Entity.
"Termination Fee" has the meaning set forth in Section 9.3(b).
---------------
"Upset Date" has the meaning set forth in Section 9.1(e).
----------
"Ventures" has the meaning set forth in Section 4.2(c).
--------
"Violation" has the meaning set forth in Section 4.4(a) and "Violate" shall
--------- -------
have a correlative meaning.
1-37
<PAGE>
"Year 2000 Ready" has the meaning set forth in Section 4.16(c).
---------------
(b) Other Rules of Construction.
(i) References in this Agreement to any gender shall include references
to all genders. Unless the context otherwise requires, references in the
singular include references in the plural and vice versa. References to a party
to this Agreement or to other agreements described herein means those Persons
executing such agreements.
(ii) The words "include", "including" or "includes" shall be deemed to be
followed by the phrase "without limitation" or the phrase "but not limited to"
in all places where such words appear in this Agreement.
(iii) This Agreement is the joint drafting product of Parent and the
Company and each provision has been subject to negotiation and agreement and
shall not be construed for or against either party as drafter thereof.
(iv) Each case in this Agreement where a contract or agreement is
represented or warranted to be enforceable will be deemed to include as a
limitation to the extent that enforceability may be subject to applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
similar Laws affecting the enforcement of creditors' rights generally and to
general equitable principles, whether applied in equity or at law.
(v) All references in the Agreement to financial terms shall be deemed to
refer to such terms as they are defined under GAAP, consistently applied.
Section 10.9 Counterparts. This Agreement may be executed in two or more
------------
counterparts which together shall constitute a single agreement.
Section 10.10 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economics or legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon determination that any term or other
provision hereof is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
1-38
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Subsidiary and the Company have caused
this Agreement to be signed by their respective officers thereunder duly
authorized all as of the date first written above.
PARENT
PSINET INC.
By /s/ William L . Schrader
------------------------
William L. Schrader
Chairman and Chief Executive Officer
MERGER SUBSIDIARY
PSINET SHELF I, INC.
By /s/ William L . Schrader
------------------------
William L. Schrader
Chairman
COMPANY
TRANSACTION NETWORK SERVICES, INC.
By /s/ John J .McDonnell, Jr.
--------------------------
Title: John J. McDonnell, Jr.
1-39
<PAGE>
Amendment No. 1 to Agreement and Plan of Merger
-----------------------------------------------
This Amendment No.1 to Agreement and Plan of Merger ("Amendment
---------
Agreement"), is made this 14th day of October, 1999 by and among PSINET INC.
- ---------
("Parent"), a New York corporation, PSINET SHELF I INC. ("Merger Subsidiary"), a
------ -----------------
Delaware corporation and a wholly-owned subsidiary of Parent, and TRANSACTION
NETWORK SERVICES, INC. ("Company"), a Delaware corporation.
-------
WHEREAS, Parent, Merger Subsidiary and Company entered into an
Agreement and Plan of Merger ("Merger Agreement") dated as of August 22, 1999
----------------
pursuant to which, among other things, the Company shall be merged with and into
the Merger Subsidiary and all outstanding shares of Company Common Stock shall
automatically be converted into the right to receive Merger Consideration;
WHEREAS, Section 4.2(a) of the Merger Agreement states that, as of the
date thereof, 13,172,942 shares of Company Common Stock were validly issued and
outstanding;
WHEREAS, subsequent to the date of execution of the Merger Agreement,
the Company has informed Parent that the number of shares of Company Common
Stock outstanding set forth in Section 4.2(a) of the Merger Agreement was
understated by 16,646 shares;
WHEREAS, the calculation of the aggregate amount of Merger
Consideration to be paid to stockholders of the Company in respect of the
outstanding shares of Company Common Stock to be converted into the right to
receive Cash Consideration and/or Stock Consideration was based upon 13,172,942
shares of Company Common Stock outstanding, as reported; and
WHEREAS, the parties desire to amend the Merger Agreement, including
the Stock Consideration and Cash Consideration portions of the Merger
Consideration, to reflect the additional 16,646 outstanding shares of Company
Common Stock.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
1. Amendment of Section 3. Section 3.1(c) of the Merger Agreement
----------------------
is hereby amended by (i) deleting therefrom the Stock Consideration number
"7,796,223" and substituting therefor the number "7,804,546" and (ii) deleting
therefrom the Cash Consideration amount of "$350,830,015" and substituting
therefor the amount "$351,204,570."
2. Amendment of Section 4. Section 4.2(a) of the Merger Agreement
----------------------
is hereby amended by deleting therefrom the number "13,172,942" and substituting
therefor the number "13,189,588."
3. No Other Amendments. Except as expressly set forth herein, all
-------------------
terms and provisions of the Merger Agreement shall remain unchanged and in full
force and effect.
4. Defined Terms. Capitalized terms used in this Amendment
-------------
Agreement but not otherwise defined herein shall have the respective meanings
ascribed to them in the Merger Agreement.
I-40
<PAGE>
5. Governing Law. This Amendment Agreement, except to the extent
-------------
that provisions of Delaware Law (with respect to the Merger only) are
mandatorily applicable to the Merger and the rights of the stockholders of the
Company, shall be governed in all respects by the laws of the State of New York
(without giving effect to the provisions thereof relating to conflicts of law).
The exclusive venue for the adjudication of any dispute or proceeding arising
out of this Amendment Agreement or the performance thereof shall be the courts
located in the County of New York, State of New York and the parties hereto and
their affiliates each consents to and hereby submits to the jurisdiction of any
court located in the County of New York, State of New York or Federal courts in
the Southern District of New York.
I-41
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Subsidiary and the Company have
caused this Amendment Agreement to be signed by their respective officers
thereunder duly authorized all as of the date first written above.
PARENT
PSINET INC.
By: /s/ William L. Schrader
----------------------------
Name: William L. Schrader
Title: Chairman and Chief Executive Officer
MERGER SUBSIDIARY
PSINET SHELF I INC.
By: /s/ William L. Schrader
----------------------------
Name: William L. Schrader
Title: Chairman and Chief Executive Officer
COMPANY
TRANSACTION NETWORK SERVICES, INC.
By: /s/ John J. McDonnell, Jr.
----------------------------
Name: John J. McDonnell, Jr.
Title: President and Chief Executive Officer
I-42
<PAGE>
Annex 2
Morgan Stanley Dean Witter
1585 Broadway
New York, New York 10036
(212)761-4000
August 22, 1999
Board of Directors
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, VA 20191
Members of the Board:
We understand that Transaction Network Services, Inc. (the "Company"),
PSINet Inc. (the "Acquiror") and Patriots Subsidiary, Inc., a wholly owned
subsidiary of the Acquiror ("Merger Subsidiary"), have entered into an Agreement
and Plan of Merger dated August 22, 1999 (the "Merger Agreement"), which
provides, among other things, for the merger (the "Merger") of the Company with
and into Merger Subsidiary. Pursuant to the Merger, the Company will become a
wholly-owned subsidiary of the Acquiror, and each outstanding share of Company
common stock, par value $0.01 per share ("Company Common Stock"), of the
Company, other than shares held in treasury or held by the Acquiror or any
affiliate of the Acquiror or as to which dissenters' rights have been perfected,
will be converted into the right to receive (i) $45.00 in cash; (ii) one share
of Acquiror common stock, par value $0.01 per share ("Acquiror Common Stock");
or (iii) a combination of cash and Acquiror Common Stock, all as determined
pursuant to the terms of the Merger Agreement (collectively, the
"Consideration"). The terms and conditions the Merger are more fully set forth
in the Merger Agreement.
You have asked for our opinion as to whether the Consideration to be
received by the holders of shares of Company Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and the Acquiror;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company and the Acquiror prepared
by the respective managements of such companies;
(iii) reviewed certain financial projections of the Company and the
Acquiror prepared by the respective managements of such companies;
(iv) discussed the past and current operations and financial conditions
and the prospects of the Company and the Acquiror with the respective
managements of such companies;
2-1
<PAGE>
Transaction Network Services, Inc.
August 22, 1999
(v) analyzed the estimated pro forma impact of the Merger on the
Acquiror's revenues and cash flow;
(vi) reviewed the reported prices and trading activity for the Company
Common Stock and the Acquiror Common Stock;
(vii) compared the financial performance of the Company and the Acquiror
and the prices and trading activity of the Company Common Stock and
the Acquiror Common Stock with those of certain other comparable
publicly traded companies and their securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(ix) participated in discussions and negotiations among representatives
of the Company and the Acquiror and their financial and legal
advisors;
(x) reviewed the Merger Agreement and certain related documents;
(xi) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. We have not made any independent valuation or appraisal of the assets
or liabilities of the Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement
without waiver of any condition contained therein and will be treated as a tax-
free reorganization and/or exchange, for purposes of the Internal Revenue Code
of 1986.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and/or financing services for the Acquiror and have received
fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the Merger with the Securities
and Exchange Commission. In addition, this opinion does not in any manner
address the prices at which the Acquiror Common Stock will trade following
announcement or consummation of the Merger, and we
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express no opinion or recommendation as to how the holders of Company Common
Stock should vote at the stockholders' meeting held in connection with the
Merger.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the Consideration to be received by the holders of shares of Company
Common Stock pursuant to the Merger Agreement is fair from a financial point of
view to such holders.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Jeffrey N. Hogan
------------------------------------
Jeffrey N. Hogan
Principal
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Annex 3
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S)228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to (S)251(g)
of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock , which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to (S)(S)251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy
or vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders or
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders or the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be
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sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall not be more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
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(g) At the hearing on such petition, the court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted such stockholder's certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings until
it is finally determined that such stockholder is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, the be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
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(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Sections 721 through 725 of the Business Corporation Law of the State
of New York (the "BCL"), the Registrant has broad powers to indemnify its
directors, officers and other employees. These sections (i) provide that the
statutory indemnification and advancement of expenses provision of the BCL are
not exclusive, provided that no indemnification may be made to or on behalf of
any director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action as adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled, (ii) establish
procedures for indemnification and advancement of expenses that may be contained
in the certificate of incorporation or by-laws, or, when authorized by either of
the foregoing, set forth in a resolution of the shareholders or directors of an
agreement providing for indemnification and advancement of expenses, (iii) apply
a single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful and (iv) permit the advancement
of litigation expenses upon receipt of an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification or to the extent the expenses advanced exceed the
indemnification to which the director or officer is entitled. Section 726 of
the BCL permits the purchase of insurance to indemnify a corporation or its
officers and directors to the extent permitted.
As permitted by Section 721 of the BCL, the Registrant's By-laws provide
that the Registrant shall indemnify its officers and directors, as such, to the
fullest extent permitted by applicable law, and that expenses reasonably
incurred by any such officer or director in connection with a threatened or
actual action or proceeding shall be advanced or promptly reimbursed by the
Registrant in advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if and to the extent that it is ultimately determined that such
officer or director is not entitled to indemnification.
Article EIGHTH of the Registrant's Certificate of Incorporation provides
that no director of the Registrant shall be held personally liable to the
Registrant or its shareholders for damages for any breach of duty in his
capacity as a director occurring after authorization of such Article EIGHTH by
the shareholders unless a judgment or other final adjudication adverse to him
establishes that (1) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, or (2) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled, or (3) his acts violated section 719 of the BCL. The Registrant has
entered into Indemnity Agreements with its directors and certain key officers
pursuant to which the Registrant generally is obligated to indemnify its
directors and such officers to the full extent permitted by the BCL as described
above. PSINet also has purchased directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all exhibits filed as part of this Registration
Statement.
2.1 Agreement and Plan of Merger, dated August 22, 1999, among PSINet,
PSINet Shelf I Inc. and Transaction Network Services, Inc.
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated October 14,
1999, among PSINet, PSINet Shelf Inc. and Transaction Network
Services, Inc. **
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3.1 Certificate of Incorporation, as amended.
3.2 Certificate of Amendment of Certificate of Incorporation, dated
April
25, 1995.
3.3 Certificate of Amendment of Certificate of Incorporation, dated
May 5, 1995.
3.4 Certificate of Amendment of Certificate of Incorporation, dated
November 11, 1995.
3.5 Certificate of Amendment of Certificate of Incorporation dated
May 18, 1996.
3.6 Certificate of Amendment of Certificate of Incorporation dated as of
November 6, 1997.
3.7 Certificate of Amendment of Certificate of Incorporation dated
February 5, 1998.
3.8 Certificate of Amendment of Certificate of Incorporation dated April
30, 1999.
3.9 Certificate of Amendment of Certificate of Incorporation dated as of
October 8, 1999.**
3.10 Amended and Restated By-laws of PSINet.
4.1 Form of 10% Senior Notes due 2005.
4.2 Indenture dated as of April 13, 1998 between PSINet and Wilmington
Trust Company, as trustee.
4.3 Form of 11 1/2% Senior Notes due 2008.
4.4 Indenture dated as of November 3, 1998 between PSINet and Wilmington
Trust Company, as trustee.
4.5 First Supplemental Indenture dated as of November 12, 1998 between
PSINet and Wilmington Trust Company, as trustee.
4.6 Form of unregistered Dollar-denominated 11% Senior Notes due 2009.
4.7 Form of unregistered Euro-denominated 11% Senior Notes due 2009.
4.8 Form of registered 11% Senior Notes due 2009.
4.9 Indenture dated as of July 23, 1999 between PSINet and Wilmington
Trust Company, as trustee.
4.10 Form of Common Stock Certificate.
4.11 Form of Common Stock Certificate (name change).
4.12 Form of 6 3/4% Series C Cumulative Convertible Preferred Stock
Certificate.
4.13 Articles Fourth, Fifth, Sixth, Ninth and Tenth of the Certificate of
Incorporation of PSINet, as amended.
4.14 Article I of the Amended and Restated By-laws of PSINet, as amended.
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4.15 Form 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.
4.16 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.
4.17 Amendment No. 2, dated as of July 31, 1997, to Rights Agreement,
dated as of May 8, 1996, between PSINet and First Chicago Trust
Company of New York, as Rights Agent.
4.18 Deposit Agreement dated as of May 4, 1999 between PSINet and
Wilmington Trust Company, as deposit agent.
5 Opinion of Nixon Peabody LLP.**
8.1 Opinion of Nixon Peabody LLP regarding tax matters (contained in
Exhibit 5).**
8.2 Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC regarding tax
matters.**
10.1 Lease Agreement dated July 1, 1990 between PSINet and Rensselaer
Polytechnic Institute, amended by Lease, Renewal Agreement dated as
of July 1, 1993, Letter Agreement, dated November 14, 1994 and
Letter Agreement dated February 1, 1995.
10.2 Lease Agreement dated February 8, 1995 between PSINet and Rensselaer
Polytechnic Institute.
10.3 Amendment to Lease Agreement dated July 1, 1995 between PSINet and
Rensselaer Polytechnic Institute.
10.4 Lease Agreement dated as of April 30, 1993 by and between Vingarden
Limited Partnership and PSINet.
10.5 Lease Agreement dated April 1995 by and between Brit Limited
Partnership.
10.6 Sublease dated September 20, 1995 by and between The Medical
Sciences Research Institute and PSINet and Lease Agreement dated
October 6, 1993 by and between Vingarden Associates Limited
Partnership and The Medical Sciences Research Institute.
10.7 Lease Agreement dated October 31, 1995 between Oakfern Properties
Limited and PSINet.
10.8 Amendment to Deed of 460 Spring Park Technology Center dated as of
June 12, 1997 between JBG/Spring Park Limited Partnership and
PSINet.
10.9 Sublease Agreement dated as of June 2, 1997 between Lucas
Industries, Inc. and PSINet and Office Lease Agreement between 3B
Limited Partnership and Lucas Industries Inc. dated as of September
12, 1989.
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10.10 Sublease Agreement dated January 22, 1998 between PSINet and Unisys
Corporation, as amended.
10.11 Lease Agreement dated February 20, 1998 between PSINet and
CarrAmerica Realty Corporation.
10.12 Lease Agreement dated October 1994 between PSINet and Cascade
Communications, Inc.
10.13 Master Lease Agreement dated July 19, 1994 between PSINet and
Technology Credit Corporation.
10.14 Lease Agreement dated as of July 9, 1993 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.15 Lease Agreement dated as of February 10, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.16 Lease Agreement dated as of March 14, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.17 Lease Agreement dated as of June 9, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.18 Lease Agreement dated as of September 21, 1994 between Applied
Telecommunications Technologies, Inc. and PSINet.
10.19 Master Equipment Lease Agreement dated as of June 23, 1995 between
PSINet and Forsythe/McArthur Associates, Inc. ("FMA").
10.20 Master Lease Line Commitment Agreement dated as of June 23, 1995
between PSINet and FMA.
10.21 Amendment Agreement dated as of August 1, 1995 between PSINet and
Technology Credit Corporation.
10.22 Master Equipment Lease Agreement No. 620-0004602-000 dated November
1995 between PSINet and Siemens Credit Corporation.
10.23 Amendment to Master Lease Agreement No. 1753 dated January 26, 1996
between PSINet and Technology Credit Corporation.
10.24 Master Equipment Lease Agreement dated December 15, 1995 between
PSINet and Financing for Science International, Inc.
10.25 Security Agreement dated as of March 20, 1996 between PSINet and
USL Capital Corporation.
10.26 Master Software/Equipment Lease Agreement dated as of September 20,
1996 between PSINet and LPI Software Funding Group, Inc.
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10.27 Master Lease Agreement dated as of January 27, 1997 between Cascade
Communications Corp. and PSINet.
10.28 Master Equipment/Software Rental Agreement dated as of September 11,
1997 between PSINet and Earthlink Network, Inc. and Change Order
Amendment Master Equipment dated as of September 22, 1997.
10.29 Equipment lease dated as of June 30, 1997 between Royal Bank of
Canada and PSINet Limited.
10.30 Master Lease Agreement dated as of October 10, 1997 between Cisco
Systems Capital Corporation and PSINet.
10.31 Master Lease Agreement No. A212 dated as of October 30, 1997
between 3Com Credit Corporation and PSINet, as amended.
10.32 Master Lease of Personal Property No. 3402, dated December 12, 1997
between PSINet and Charter Financial, Inc., as amended.
*10.33 Executive Stock Option Plan of PSINet.
*10.34 Executive Stock Incentive Plan of PSINet, as amended.
*10.35 Directors Stock Incentive Plan of PSINet, as amended.
*10.36 Strategic Stock Incentive Plan of PSINet, as amended.
*10.37 1996 Performance Bonus Plan of PSINet.
*10.38 InterCon Systems Corporation 1992 Incentive Stock Plan.
*10.39 InterCon Systems Corporation 1994 Stock Option Plan.
*10.40 Software Ventures Corporation 1994 Stock Option Plan.
*10.41 Employment Agreement dated February 9, 1996 between PSINet and
Mary-Ann Carolan.
*10.42 Employment Agreement dated February 13, 1996 between PSINet and
Mitchell Levinn.
*10.43 Employment Agreement dated October 9, 1996 between PSINet and
Richard R. Frizalone.
*10.44 Employment Agreement dated February 12, 1997 between PSINet and
David L. Hudson.
*10.45 Employment Agreement dated July 1, 1997 between PSINet and Michael
Malesardi.
*10.46 Employment Agreement dated August 2, 1997 between PSINet and
Anthony Aveta.
*10.47 Employment Agreement dated August 4, 1997 between PSINet and Harry
Hobbs.
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*10.48 Employment Agreement dated January 8, 1998 between PSINet and
William Cripe.
*10.49 Employment Agreement dated January 18, 1998 between PSINet and
Kathleen B. Horne.
*10.50 Employment Agreement dated February 16, 1998 between PSINet and
John Muleta.
*10.51 Employment Agreement dated October 16, 1998 between PSINet and
Harold S. Wills.
*10.52 Employment Agreement dated October 16, 1998 between PSINet and
Edward D. Postal.
*10.53 Employment Agreement dated October 16, 1998 between PSINet and
David N. Kunkel.
10.54 Form of Indemnification Agreement.
10.55 Registration Rights Agreement dated as of June 16, 1995 among PSINet
and Stockholders of InterCon Systems Corporation.
10.56 Registration Rights Agreement dated as of July 11, 1995 among PSINet
and Stockholders of Software Ventures Corporation.
10.57 Registration Rights Agreement dated as of November 11, 1997 between
PSINet and the purchasers of Series B 8% Convertible Preferred
Stock.
10.58 Registration Rights Agreement dated as of February 25, 1998 between
PSINet and IXC Internet Services, Inc.
10.59 Credit Agreement dated September 29, 1998 among PSINet, the Lenders
party thereto, The Chase Manhattan Bank, as Administrative Agent,
Fleet National Bank, as Syndication Agent, and The Bank of New York,
as Documentation Agent.
10.60 Guarantee Agreement dated September 29, 1998 among each of the
subsidiaries of PSINet party thereto and The Chase Manhattan Bank.
10.61 Pledge Agreement dated September 29, 1998 among PSINet, each
subsidiary of PSINet party thereto and The Chase Manhattan Bank.
10.62 Security Agreement dated September 29, 1998 among PSINet, each
subsidiary of PSINet party thereto and The Chase Manhattan Bank.
10.63 First Amendment dated as of October 27, 1998 to the Credit
Agreement, dated as of September 29, 1998, among PSINet, the Lenders
party thereto, The Chase Manhattan Bank, as Administrative Agent,
Fleet National Bank, as Syndication Agent, and The Bank of New York,
as Documentation Agent.
10.64 Warrant to purchase up to 25,000 shares of the Series B Preferred of
PSINet, at an exercise price of $1.60 per share, registered in the
name of William H. Baumer.
10.65 Warrant to purchase up to 25,000 shares of the Series B Preferred of
PSINet, at an exercise price of $1.60 per share, registered in the
name of William H. Baumer.
II-6
<PAGE>
10.66 Stock Acquisition Agreement, dated as of February 1, 1997, between
Ascend Communications, Inc., a Delaware corporation, and PSINet, a
New York corporation, with respect to all outstanding capital stock
of InterCon Systems Corporation, a Delaware corporation and a
wholly-owned subsidiary of PSINet.
10.67 Asset Purchase Agreement dated as of June 28, 1996 between PSINet
and MindSpring Enterprises, Inc.
10.68 Amendment No. 1 to Asset Purchase Agreement and Network Services
Agreement entered into as of June 28, 1996 by and between PSINet and
MindSpring Enterprises, Inc.
10.69 Amendment No. 2 to Asset Purchase Agreement entered into as of
September 1, 1996 by and between PSINet and MindSpring Enterprises,
Inc.
10.70 Amendment No. 3 to Asset Purchase Agreement and Amendment No. 1 to
Convertible Note entered into as of January 24, 1997 by and between
PSINet and MindSpring Enterprises, Inc.
10.71 Amendment No. 2 to Network Services Agreement entered into as of
January 1, 1997 by and between PSINet and MindSpring Enterprises,
Inc.
10.72 IRU and Stock Purchase Agreement dated as of July 22, 1997 between
IXC Internet Services, Inc. and PSINet.
10.73 First Amendment to IRU and Stock Purchase Agreement dated as of July
22, 1997 between IXC Internet Services, Inc. and PSINet.
10.74 Second Amendment to IRU and Stock Purchase Agreement dated as of
July 22, 1997 between IXC Internet Services, Inc. and PSINet.
10.75 Joint Marketing and Services Agreement dated as of July 22, 1997
between IXC Internet Services Inc. and PSINet.
10.76 Stock Purchase Agreement dated as of November 11, 1997 between
PSINet and the Purchasers of Series B 8% Convertible Preferred
Stock.
10.77 Agreement dated as of November 10, 1997 between iSTAR internet inc.
and PSINet.
10.78 Pre-Acquisition Agreement between PSINet and iSTAR internet inc.,
dated December 23, 1997.
10.79 Security Agreement and Assignment dated as of February 25, 1998
between PSINet and IXC Internet Services, Inc.
10.80 Collocation and Interconnection Agreement between PSINet and IXC
Internet Services, Inc.
10.81 Escrow Agreement, dated as of April 13, 1998, among Wilmington Trust
Company (as escrow agent and trustee) and PSINet.
II-7
<PAGE>
10.82 Registration Rights Agreement dated as of April 13, 1998 among
PSINet and Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Chase
Securities Inc.
10.83 First Amendment to Sublease dated as of March 23, 1998 between
Unisys Corporation and PSINet.
10.84 Share Purchase Agreement dated as of October 1, 1998 among PSINet
Japan Inc., a subsidiary of PSINet, Tokyo Internet Corporation and
Secom Co., Ltd.
10.85 Registration Rights Agreement dated as of November 3, 1998 among
PSINet and Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities, Inc. and Morgan Stanley & Co. Incorporated.
*10.86 Employment Agreement dated June 17, 1998 between PSINet and William
A. Opet.
*10.87 Employment Agreement dated July 2, 1998 between PSINet and Robert
D. Leahy.
*10.88 Employment Agreement dated September 1, 1998 between PSINet and Chi
H. Kwan.
*10.89 Employment Agreement dated September 8, 1998 between PSINet and
James A. Haid.
*10.90 Employment Agreement dated September 30, 1998 between PSINet and
Sandy L. Blaisdell.
*10.91 Employment Agreement dated October 12, 1998 between PSINet and
Geoffrey E. Axton.
*10.92 Employment Agreement dated October 14, 1998 between PSINet and
Edward Arnold Davis.
10.93 Registration Rights Agreement, dated as of November 13, 1998, among
PSINet and Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities Inc. and Morgan Stanley & Co. Incorporated.
10.94 Second Amendment dated as of November 9, 1998, to the Credit
Agreement, dated as of September 29, 1998, among PSINet, the Lenders
party thereto, the Chase Manhattan Bank, as Administrative Agent,
Fleet National Bank, as Syndication Agent, and The Bank of New York,
as Documentation Agent.
*10.95 Amendment to Employment Agreement dated October 1, 1998 between
PSINet and Harry Hobbs.
*10.96 Employment Agreement dated November 2, 1998 between PSINet and
David J. Kramer.
*10.97 Employment Agreement dated November 6, 1998 between PSINet and John
Walpuck.
*10.98 Employment Agreement dated November 12, 1998 between PSINet and
Lawrence Winkler.
*10.99 Employment Agreement dated May 24, 1999 between PSINet and Thomas
A. Leach.
II-8
<PAGE>
*10.100 Employment Agreement dated May 24, 1999 between PSINet and James
F. Cragg.
*10.101 Employment Agreement dated May 27, 1999 between PSINet and
Philippe J. Kuperman.
10.102 Master Lease Agreement between PSINet and Technology Credit
Corporation No. 1788 dated June 20, 1998.
10.103 Master Lease Agreement between PSINet and Technology Credit
Corporation No. 1789 dated June 20, 1998.
10.104 Master Loan and Security Agreement No. 3963 between PSINet and
Charter Financial Inc. dated September 28, 1998.
10.105 Lease Agreement dated July 8, 1998 between Ballymore Properties
Limited and Cordoba Holdings Limited and Thomas Charles Cembrinck.
10.106 Third Amendment dated as of June 30, 1999 to the Credit Agreement,
dated as of September 29, 1998, among PSINet, the Lenders party
thereto, The Chase Manhattan Bank, as Administrative Agent, Fleet
National Bank, as Syndication Agent, and The Bank of New York, as
Documentation Agent.
10.107 Fourth Amendment dated as of July 15, 1999 to the Credit Agreement,
dated as of September 29, 1998, among PSINet, the Lenders party
thereto, The Chase Manhattan Bank, as Administrative Agent, Fleet
National Bank, as Syndication Agent, and The Bank of New York, as
Documentation Agent.
10.108 Registration Rights Agreement, dated as of July 23, 1999, among
PSINet and Donaldson Lufkin & Jenrette International, Bear Stearns
International Limited and Chase Manhattan International Limited.
11.1 Calculation of PSINet's Basic and Diluted Loss Per Share and
Weighted Average Shares for the Year Ended December 31, 1998.
11.2 Calculation of PSINet's Basic and Diluted Loss Per Share and
Weighted Average Shares for the Year Ended December 31, 1997.
11.3 Calculation of PSINet's Basic and Diluted Loss Per Share and
Weighted Average Shares for the Year Ended December 31, 1996.
11.4 Calculation of PSINet's Basic and Diluted Loss Per Share and
Weighted Average Shares for the Six Months Ended June 30, 1999.
21 Significant subsidiaries of PSINet.
23.1 Consent of Nixon Peabody LLP.**
II-9
<PAGE>
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Arthur Andersen LLP.
24 Power of Attorney (set forth on the signature page to this
registration statement).
99.1 Form of Proxy for holders of TNI common stock.**
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an Exhibit pursuant to Item 14(a)(3).
** Filed with this Amendment No. 1.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES:
Financial Statements and Financial Statements Schedules:
Incorporated by reference in this registration statement from PSINet's
Annual Report on Form 10-K for the year ended December 31, 1998 and from
its Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing,
II-10
<PAGE>
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the SEC pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this
-------- -------
section do not apply if the registration statement is on Form S-3,
Form S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the SEC by the registrant pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4) If the registrant is a foreign private issuer, to file a post-
effective amendment to the registration statement to include any
financial statements required by (S) 210.3-19 of this chapter at the
start of any delayed offering or throughout a continuous offering.
Financial statements and information otherwise required by Section
10(a)(3) of the Act need not be furnished, provided that the
--------
registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph
(a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the foregoing, with
respect to registration statements on Form F-3, a post-effective
amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or (S)210.3-19 of
this chapter if such financial statements and information are
contained in periodic reports filed with or furnished to the SEC by
the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference on
the Form F-3.
(c) The undersigned Registrant hereby undertakes:
(1) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities and Exchange Act of
1934; and, where interim financial information required to be
presented by Article 3 of regulation S-X are not set forth in the
prospectus, to deliver, or cause to be delivered to each person to
whom
II-11
<PAGE>
the prospectus is sent or given, the latest quarterly report that
is specifically incorporated by reference in the prospectus to provide
such interim information.
(2) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of
this form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(d) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (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) that is incorporated by reference in the registration statement 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.
(e) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Amendment No
1 to registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Herndon, Commonwealth of Virginia on
October 18, 1999.
PSINet Inc.
By: /s/ Edward D. Postal
--------------------------
Edward D. Postal
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to registration statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William L. Schrader* Chairman, Chief Executive Officer and October 18, 1999
- ----------------------------------- Director (Principal Executive Officer)
William L. Schrader
/s/ Harold S. Wills* President, Chief Operating Officer October 18, 1999
- ----------------------------------- and Director
Harold S. Wills
/s/ David H. Kunkel* Vice Chairman, Executive Vice October 18, 1999
- ----------------------------------- President and Director
David H. Kunkel
/s/ Edward D. Postal Executive Vice President and Chief October 18, 1999
- ----------------------------------- Financial Officer (Principal
Edward D. Postal Financial Officer)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Michael J. Malesardi Vice President and Controller October 18, 1999
- ----------------------------------- (Principal Accounting Officer)
Michael J. Malesardi
/s/ William H. Baumer* Director October 18, 1999
- -----------------------------------
William H. Baumer
/s/ Ralph J. Swett* Director October 18, 1999
- -----------------------------------
Ralph J. Swett
/s/ Ian P. Sharp* Director October 18, 1999
- -----------------------------------
Ian P. Sharp
</TABLE>
*By: /s/ Edward D. Postal
------------------------------
Edward D. Postal
Attorney-in-fact
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated August 22, Incorporated by reference from Exhibit 2.1 to
1999, among PSINet, PSINet Shelf I Inc. and PSINet's Current Report on Form 8-K dated
Transaction Network Services, Inc. August 24, 1999 located under Securities and
Exchange Commission File No. 0-25812
2.2 Amendment No. 1 to Agreement and Plan of Incorporated by reference to Annex 1 hereto.
Merger, dated October 14, 1999, among PSINet,
PSINet Shelf I Inc. and Transaction Network
Services, Inc.
3.1 Certificate of Incorporation, as amended Incorporated by reference from Exhibit 3.1 to
PSINet's Registration Statement on Form S-1
declared effective on May 1, 1995 located under
Securities and Exchange Commission File No.
33-90154 ("May 1995 Registration Statement")
3.2 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation dated April 25, 1995 PSINet's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 located under
Securities and Exchange Commission File No.
0-25812 ("June 1995 10-Q")
3.3 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.2 to
Incorporation Dated May 5, 1995 the June 1995 10-Q
3.4 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation Dated November 11, 1995 PSINet's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 located under
Securities and Exchange Commission File No.
0-25812 ("September 1995 10-Q")
3.5 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3 to
Incorporation, dated May 18, 1996 PSINet's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 located under
Securities and Exchange Commission File No.
0-25812 ("June 1996 10-Q")
3.6 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation dated as of November 6, 1997 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 ("September 1997 10-Q")
3.7 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.7 to
Incorporation dated February 5, 1998 PSINet's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 located
under Securities and Exchange Commission File
No. 0-25812 ("1997 Form 10-K")
3.8 Certificate of Amendment of Certificate of Incorporated by reference from Exhibit 3.1 to
Incorporation dated April 30, 1999 PSINet's Current Report on Form 8-K dated May
7, 1999 located under Securities Exchange
Commission File No. 0-25812 ("May 7, 1999 8-K")
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
3.9 Certificate of Amendment of Certificate of Filed herewith
Incorporation dated as of October 8, 1999
3.10 Amended and Restated By-laws of PSINet Incorporated by reference from Exhibit 3.8 to
PSINet's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 located
under the Securities and Exchange Commission
File No. 0-25812 ("1998 Form 10-K")
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 Form of 11 1/2% Senior Notes due 2008 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
4.4 Indenture dated as of November 3, 1998 between Incorporated by reference from Exhibit 4.1 to
PSINet and Wilmington Trust Company, as trustee the November 10, 1998 8-K
4.5 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")
4.6 Form of unregistered Dollar-denominated Incorporated by reference from Exhibit 4.6 to
11% Senior Notes due 2009 PSINet's Registration Statement on Form S-4
filed on August 6, 1999 located under
Securities and Exchange Commission File No.
333-84721 ("August 1999 Registration Statement")
4.7 Form of unregistered Euro-denominated Incorporated by reference from Exhibit 4.7 to
11% Senior Notes due 2009 the August 1999 Registration Statement
4.8 Form of registered 11% Senior Notes due 2009 Incorporated by reference from Exhibit 4.8 to
the August 1999 Registration Statement
4.9 Indenture dated as of July 23, 1999 between PSINet Incorporated by reference from Exhibit 4.9 to
and Wilmington Trust Company, as trustee the August 1999 Registration Statement
4.10 Form of Common Stock Certificate Incorporated by reference from Exhibit 4.1 to
the May 1995 Registration Statement
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
4.11 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 ("December 1995 Registration
Statement")
4.12 Form of 6 3/4% Series C Cumulative Convertible Incorporated by reference from Exhibit 4.1 to
Preferred Stock Certificate the May 7, 1999 8-K
4.13 Articles Fourth, Fifth, Sixth, Ninth and Tenth of See Exhibits 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8
the Certificate of Incorporation of PSINet, as and 3.9
amended
4.14 Article I of the Amended and Restated By-laws of See Exhibit 3.10
PSINet, as amended
4.15 Form 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
4.16 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
4.17 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
4.18 Deposit Agreement dated as of May 4, 1999 between Incorporated by reference from Exhibit 4.2 to
PSINet and Wilmington Trust Company, as deposit the May 7, 1999 8-K
agent
5 Opinion of Nixon Peabody LLP Filed herewith
8.1 Opinion of Nixon Peabody LLP regarding tax matters Filed herewith
(contained in Exhibit 5)
8.2 Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC Filed herewith
regarding tax matters
10.1 Lease Agreement dated July 1, 1990 between PSINet Incorporated by reference from Exhibit 10.1 to
and Rensselaer Polytechnic Institute, amended by the May 1995 Registration Statement
Lease Renewal Agreement dated as of July 1, 1993,
Letter Agreement dated November 14, 1994 and Letter
Agreement dated February 1, 1995
10.2 Lease Agreement dated February 8, 1995 between Incorporated by reference from Exhibit 10.2 to
PSINet and Rensselaer Polytechnic Institute the May 1995 Registration Statement
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.3 Amendment to Lease Agreement dated July 1, 1995 Incorporated by reference from Exhibit 10.2A to
between PSINet and Rensselaer Polytechnic Institute the December 1995 Registration Statement
10.4 Lease Agreement dated as of April 30, 1993 by and Incorporated by reference from Exhibit 10.3 to
between Vingarden Limited Partnership and PSINet the May 1995 Registration Statement
10.5 Lease Agreement dated April 1995 by and between Incorporated by reference from by Exhibit 10.3A
Brit Limited Partnership and PSINet to the December 1995 Registration Statement
10.6 Sublease dated September 20, 1995 by and between Incorporated by reference from Exhibit 10.3B to
The Medical Sciences Research Institute and PSINet the December 1995 Registration Statement
and Lease Agreement dated October 6, 1993 by and
between Vingarden Associates Limited Partnership
and The Medical Sciences Research Institute
10.7 Lease Agreement dated October 31, 1995 between Incorporated by reference from Exhibit 10.4A to
Oakfern Properties Limited and PSINet the December 1995 Registration Statement
10.8 Amendment to Deed of 460 Spring Park Technology Incorporated by reference from Exhibit 10.1 to
Center dated as of June 12, 1997 between JBG/ the September 1997 Form 10-Q
Spring Park Limited Partnership and PSINet
10.9 Sublease Agreement dated as of June 2, 1997 between Incorporated by reference from Exhibit 10.2 to
Lucas Industries, Inc. and PSINet and Office Lease the September 1997 10-Q
Agreement between 3B Limited Partnership and Lucas
Industries Inc. dated as of September 12, 1989
10.10 Sublease Agreement dated January 22, 1998 between Incorporated by reference from Exhibit 10.9 to
PSINet and Unisys Corporation, as amended the 1997 Form 10-K
10.11 Lease Agreement dated February 20, 1998 between Incorporated by reference from Exhibit 10.11 to
PSINet and CarrAmerica Realty Corporation the 1997 Form 10-K
10.12 Lease Agreement dated October 1994 between PSINet Incorporated by reference from Exhibit 10.4 to
and Cascade Communications, Inc. the May 1995 Registration Statement
10.13 Master Lease Agreement dated July 19, 1994 between Incorporated by reference from Exhibit 10.5 to
PSINet and Technology Credit Corporation the May 1995 Registration Statement
10.14 Lease Agreement dated as of July 9, 1993 between Incorporated by reference from Exhibit 10.6 to
Applied Telecommunications Technologies, Inc. and the May 1995 Registration Statement
PSINet
10.15 Lease Agreement dated as of February 10, 1994 Incorporated by reference from Exhibit 10.7F to
between Applied Telecommunications Technologies, the December 1995 Registration Statement
Inc. and PSINet
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.16 Lease Agreement dated as of March 14, 1994 between Incorporated by reference from Exhibit 10.7G to
Applied Telecommunications Technologies, Inc. and the December 1995 Registration Statement
PSINet
10.17 Lease Agreement dated as of June 9, 1994 between Incorporated by reference from Exhibit 10.7H to
Applied Telecommunications Technologies, Inc. and the December 1995 Registration Statement
PSINet
10.18 Lease Agreement dated as of September 21, 1994 Incorporated by reference from Exhibit 10.7 to
between Applied Telecommunications Technologies, the May 1995 Registration Statement
Inc. and PSINet
10.19 Master Equipment Lease Agreement dated as of June Incorporated by reference from Exhibit 10.1 to
23, 1995 between PSINet and Forsythe/McArthur the September 1995 10-Q
Associates, Inc. ("FMA")
10.20 Master Lease Line Commitment Agreement dated as of Incorporated by reference from Exhibit 10.2 to
June 23, 1995 between PSINet and FMA the September 1995 10-Q
10.21 Amendment Agreement dated as of August 1, 1995 Incorporated by reference from Exhibit 10.8 to
between PSINet and Technology Credit Corporation the September 1995 10-Q
10.22 Master Equipment Lease Agreement No. Incorporated by reference from Exhibit 10.44A
620-0004602-000 dated November 1995 between PSINet to the December 1995 Registration Statement
and Siemens Credit Corporation
10.23 Amendment to Master Lease Agreement No. 1753 dated Incorporated by reference from Exhibit 10.77 to
January 26, 1996 between PSINet and Technology PSINet's Annual Report on Form 10-K for the
Credit Corporation fiscal year ended December 31, 1995 located
under the Securities and Exchange Commission
File No. 0-25812 ("1995 Form 10-K")
10.24 Master Equipment Lease Agreement dated December 15, Incorporated by reference from Exhibit 10.78 to
1995 between PSINet and Financing for Science the 1995 Form 10-K
International, Inc.
10.25 Security Agreement dated as of March 20, 1996 Incorporated by reference from Exhibit 10.79 to
between PSINet and USL Capital Corporation the 1995 Form 10-K
10.26 Master Software/Equipment Lease Agreement dated as Incorporated by reference from Exhibit 10.4 to
of September 20, 1996 between PSINet and LPI PSINet's Quarterly Report on Form 10-Q for the
Software Funding Group, Inc. quarter ended September 30, 1996 located under
Securities and Exchange Commission File No.
0-25812 ("September 1996 10-Q")
10.27 Master Lease Agreement dated as of January 27, 1997 Incorporated by reference from Exhibit 10.77 to
between Cascade Communications Corp. PSINet's Annual Report on Form 10-K for the
and PSINet fiscal year ended December 31, 1996 located
under Securities and Exchange Commission File
No. O-25812 ("1996 Form 10-K")
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.28 Master Equipment/Software Rental Agreement dated as Incorporated by reference from Exhibit 10.3 to
of September 11, 1997 between PSINet and Earthlink the September 1997 10-Q
Network, Inc. and Change Order Amendment Master
Equipment dated as of September 22, 1997
10.29 Equipment lease dated as of June 30, 1997 between Incorporated by reference from Exhibit 10.4 to
Royal Bank of Canada and PSINet Limited the September 1997 10-Q
10.30 Master Lease Agreement dated as Incorporated by reference from Exhibit 10.4 to
Of October 10, 1997 between Cisco Systems Capital the September 1997 Form 10-Q
Corporation and PSINet
10.31 Master Lease Agreement No. A212 between 3Com Credit Incorporated by reference from dated as of
Corporation and PSINet, as amended October 30, 1997 Exhibit 10.31 to the 1997 Form
10-K
10.32 Master Lease of Personal Property No. 3402, dated Incorporated by reference from Exhibit 10.32 to
December 12, 1997 between PSINet and Charter the 1997 Form 10-K
Financial, Inc., as amended
10.33* Executive Stock Option Plan of Incorporated by reference from Exhibit 10.10 to
PSINet the May 1995 Registration Statement
10.34* Executive Stock Incentive Plan of PSINet, as amended Incorporated by reference from Exhibit 10.12 to
the December 1995 Registration Statement
10.35* Directors Stock Incentive Plan of PSINet, as amended Incorporated by reference from Exhibit 10.13 to
the December 1995 Registration Statement
10.36* Strategic Stock Incentive Plan of PSINet Incorporated by reference from Exhibit 10 to
the June 1995 10-Q
10.37* 1996 Performance Bonus Plan of PSINet Incorporated by reference from Exhibit 10.25 to
the 1996 Form 10- K
10.38* InterCon Systems Corporation 1992 Incentive Stock Incorporated by reference from Exhibit 99.1 to
Plan PSINet's Registration Statement on Form S-8
which became effective on October 18, 1995
located under Securities Exchange Commission
File No. 33-98316 ("S-8 No. 16")
10.39* InterCon Systems Corporation 1994 Stock Option Plan Incorporated by reference from Exhibit 99.2 to
the S-8 No. 16
10.40* Software Ventures Corporation 1994 Stock Option Plan Incorporated by reference from Exhibit 99 to
PSINet's Registration Statement on Form S-8
which became effective on October 18, 1995
located under Securities and Exchange
Commission File No. 33-98314
10.41* Employment Agreement dated February 9, 1996 between Incorporated by reference from Exhibit 10.42 to
PSINet and Mary-Ann Carolan the 1995 Form 10-K
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.42* Employment Agreement dated February 13, 1996 Incorporated by reference from Exhibit 10.19 to
between PSINet and Mitchell Levinn the 1995 10-K
10.43* Employment Agreement dated October 9, 1996 between Incorporated by reference from Exhibit 10.3 to
PSINet and Richard R. the September 1996 10-Q
Frizalone
10.44* Employment Agreement dated February 12, 1997 Incorporated by reference from Exhibit 10.78 to
between PSINet and David L. Hudson the 1996 Form 10-K
10.45* Employment Agreement dated July 1, 1997 between Incorporated by reference from Exhibit 10.5 to
PSINet and Michael Malesardi the September 1997 10-Q
10.46* Employment Agreement dated August 2, 1997 between Incorporated by reference from Exhibit 10.6 to
PSINet and Anthony Aveta the September 1997 10-Q
10.47* Employment Agreement dated August 4, 1997 between Incorporated by reference from Exhibit 10.7 to
PSINet and Harry Hobbs the September 1997 10-Q
10.48* Employment Agreement dated January 8, 1998 between Incorporated by reference from Exhibit 10.52 to
PSINet and William Cripe the 1997 Form 10-K
10.49* Employment Agreement dated January 18, 1998 between Incorporated by reference from Exhibit 10.53 to
PSINet and Kathleen B. Horne the 1997 Form 10-K
10.50* Employment Agreement dated February 16, 1998 Incorporated by reference from Exhibit 10.54 to
between PSINet and John Muleta the 1997 Form 10-K
10.51* Employment Agreement dated October 16, 1998, 1996 Incorporated by reference from Exhibit 10.57 to
between PSINet and Harold S. Wills the 1998 Form 10-K
10.52* Employment Agreement dated October 16, 1998 between Incorporated by reference from Exhibit 10.58 to
PSINet and Edward D. Postal the 1998 Form 10-K
10.53 Employment Agreement dated October 16, 1998 between Incorporated by reference from Exhibit 10.59 to
PSINet and David N. Kunkel the 1998 Form 10-K
10.54 Form of Indemnification Agreement Incorporated by reference from Exhibit 10.21 to
the May 1995 Registration Statement
10.55 Registration Rights Agreement dated as of June 16, Incorporated by reference from Exhibit 10.39 to
1995 among PSINet and Stockholders of InterCon the December 1995 Registration Statement
Systems Corporation
10.56 Registration Rights Agreement dated as of July 11, Incorporated by reference from Exhibit 10.40
1995 among PSINet and Stockholders of Software to the December 1995 Registration Statement
Ventures Corporation
10.57 Registration Rights Agreement dated as of November Incorporated by reference from Exhibit 10.10 to
11, 1997 between PSINet and the purchasers of the September 1997 10-Q
Series B 8% Convertible Preferred Stock
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.58 Registration Rights Agreement dated as of February Incorporated by reference from Exhibit 10.62 to
25, 1998 between PSINet and IXC Internet Services, the 1997 Form 10-K
Inc.
10.59 Credit Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.2 to
PSINet, the Lenders party thereto, The Chase PSINet's Current Report on Form 8-K dated
Manhattan Bank, as Administrative Agent, Fleet October 16, 1998 located under Securities and
National Bank, as Syndication Agent, and The Bank Exchange Commission File No. 0-25812 ("October
of New York as Documentation Agent 16, 1998 8-K")
10.60 Guarantee Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.3 to
each of the subsidiaries of PSINet party thereto the October 16, 1998 8-K
and The Chase Manhattan Bank
10.61 Pledge Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.4 to
PSINet, each subsidiary of PSINet party thereto and the October 16, 1998 8-K
The Chase Manhattan Bank
10.62 Security Agreement dated September 29, 1998 among Incorporated by reference from Exhibit 2.5 to
PSINet, each subsidiary of PSINet party thereto and the October 16, 1998 8-K
The Chase Manhattan Bank
10.63 First Amendment dated as of October 27, 1998 to the Incorporated by reference from Exhibit 10.2 to
Credit Agreement dated as of September 29, 1998, the November 10, 1998 8-K
among PSINet, the Lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent, Fleet
National Bank, as Syndication Agent, and the Bank
of New York, as Documentation Agent
10.64 Warrant to purchase up to 25,000 shares of the Incorporated by reference from Exhibit 10.39 to
Series B Preferred of PSINet, at an exercise price the May 1995 Registration Statement
of $1.60 per share, registered in the name of
William H. Baumer
10.65 Warrant to purchase up to 25,000 shares of the Incorporated by reference from Exhibit 10.40 to
Series B Preferred of PSINet, at an exercise price the May 1995 Registration Statement
of $1.60 per share, registered in the name of
William H. Baumer
10.66 Stock Acquisition Agreement, dated as of February Incorporated by reference from Exhibit 2 to
1, 1997, between Ascend Communications, Inc. and PSINet's Current Report on Form 8-K dated
PSINet with respect to all outstanding capital February 14, 1997 located under Securities and
stock of InterCon Systems Corporation, a Delaware Exchange Commission File No. 0-25812
corporation and a wholly-owned subsidiary of PSINet
10.67 Asset Purchase Agreement dated as of June 28, 1996 Incorporated by reference from Exhibit 2 to the
between PSINet and MindSpring Enterprises, Inc. June 1996 10-Q
10.68 Amendment No. 1 to Asset Purchase Agreement and Incorporated by reference from Exhibit 2 to the
Network Services Agreement entered into as of June September 1996 10-Q
28, 1996 by and between PSINet and MindSpring
Enterprises, Inc.
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.69 Amendment No. 2 to Asset Purchase Agreement entered Incorporated by reference from Exhibit 10.8 to
into as of September 1, 1996 by and between PSINet the September 1996 10-Q
and MindSpring Enterprises, Inc.
10.70 Amendment No. 3 to Asset Purchase Agreement and Incorporated by reference from Exhibit 10.74 to
Amendment No. 1 to Convertible Note entered into the 1996 Form 10-K
as of January 24, 1997 by and between PSINet and
MindSpring Enterprises, Inc.
10.71 Amendment No. 2 to Network Services Agreement Incorporated by reference from Exhibit 10.75 to
entered in as of January 1, 1997 by and between the 1996 Form 10-K
PSINet and MindSpring Enterprises, Inc.
10.72 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 the June 1997 10-Q
PSINet
10.73 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 December 1997 Proxy Statement
Services, Inc. and PSINet
10.74 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
10.75 Joint Marketing and Services Agreement dated as of Incorporated by reference from Exhibit 10.1 to
July 22, 1997 between IXC Internet Services, Inc. PSINet's Quarterly Report on Form 10-Q for the
and PSINet quarter ended June 30, 1997 located under
Securities and Exchange Commission File no.
0-25812
10.76 Stock Purchase Agreement dated as of November 11, Incorporated by reference from Exhibit 10.9 to
1997 between PSINet and the Purchasers of its the September 1997 10-Q
Series B 8% Convertible Preferred Stock
10.77 Agreement dated as of November 10, 1997 between Incorporated by reference from Exhibit 2 to the
iSTAR internet inc. and PSINet September 1997 10-Q
10.78 Pre-Acquisition Agreement between PSINet and iSTAR Incorporated by reference from Exhibit 10.1 to
internet inc., dated December 23, 1997 the January 7, 1998 8-K
10.79 Security Agreement and Assignment dated as of Incorporated by reference from Exhibit 10.95 to
February 25, 1998 between PSINet and IXC Internet the 1997 Form 10-K
Services, Inc.
10.80 Collocation and Interconnection Agreement between Incorporated by reference from Exhibit 10.96 to
PSINet and IXC Internet Services, Inc. the 1997 Form 10-K
10.81 Escrow Agreement, dated as of April 13, 1998, Incorporated by reference from Exhibit 10.2 to
among Wilmington Trust Company (as escrow agent and the April 22, 1998 8-K
trustee) and PSINet.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.82 Registration Rights Agreement dated as of April 13, Incorporated by reference from Exhibit 10.1 to
1998 among PSINet and Donaldson, Lufkin & Jenrette the April 22, 1998 8-K
Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, and Chase Securities,
Inc.
10.83 First Amendment to Sublease dated as of March 23, Incorporated by reference from Exhibit 10.99 to
1998 between Unisys Corporation and PSINet PSINet's Registration Statement on Form S-4
declared effective on May 7, 1998 located under
the Securities and Exchange Commission File No.
333-51491 ("May 1998
Registration Statement")
10.84 Share Purchase Agreement dated as of October 1, Incorporated by reference from Exhibit 2.1 to
1998 among PSINet Japan Inc., a subsidiary of the October 16, 1998 8-K
PSINet, Tokyo Internet Corporation and Secom Co.,
Ltd.
10.85 Registration Rights Agreement dated as of November Incorporated by reference from Exhibit 10.1 to
3, 1998 among PSINet and Donaldson, Lufkin and the November 10, 1998 8-K
Jenrette Securities Corporation, Chase Securities,
Inc. and Morgan Stanley & Co. Incorporated
10.86* Employment Agreement dated June 17, 1998 between Incorporated by reference from Exhibit 10.1 to
PSINet and William A. Opet PSINet's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 located under
Securities and Exchange Commission File No.
0-25812 ("June 1998 10-Q")
10.87* Employment Agreement dated July 2, 1998 between Incorporated by reference from Exhibit 10.2 to
PSINet and Robert D. Leahy the June 1998 10-Q
10.88* Employment Agreement dated September 1, 1998 Incorporated by reference from Exhibit 10.8 to
between PSINet and Chi H. Kwan the September 1998 10-Q
10.89* Employment Agreement dated September 8, 1998 Incorporated by reference from Exhibit 10.5 to
between PSINet and James A. Haid the September 1998 10-Q
10.90* Employment Agreement dated September 30, 1998 Incorporated by reference from Exhibit 10.3 to
between PSINet and Sandy L. Blaisdell the September 1998 10-Q
10.91* Employment Agreement dated October 12, 1998 between Incorporated by reference from Exhibit 10.2 to
PSINet and Geoffrey E. Axton the September 1998 10-Q
10.92* Employment Agreement dated October 14, 1998 between Incorporated by reference from Exhibit 10.4 to
PSINet and Edward Arnold Davis the September 1998 10-Q
10.93 Registration Rights Agreement, dated as of November Incorporated by reference from Exhibit 4.3 to
13, 1998, among PSINet and Donaldson Lufkin & the September 1998 10-Q
Jenrette Securities Corporation, Chase Securities
Inc. and Morgan Stanley & Co. Incorporated
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.94 Second Amendment dated as of November 9, 1998, to Incorporated by reference from Exhibit 10.1 to
the Credit Agreement, dated as of September 29, the September 1998 10-Q
1998, among PSINet, the Lenders party thereto, the
Chase Manhattan Bank, as Administrative Agent,
Fleet National Bank, as Syndication Agent, and The
Bank of New York, as Documentation Agent
10.95* Amendment to Employment Agreement dated October 1, Incorporated by reference from Exhibit 10.6 to
1998 between PSINet and Harry Hobbs the September 1998 10-Q
10.96* Employment Agreement dated November 2, 1998 between Incorporated by reference from Exhibit 10.7 to
PSINet and David J. Kramer the September 1998 10-Q
10.97* Employment Agreement dated November 6, 1998 between Incorporated by reference from Exhibit 10.9 to
PSINet and John Walpuck the September 1998 10-Q
10.98* Employment Agreement dated November 12, 1998 Incorporated by reference from Exhibit 10.10 to
between PSINet and Lawrence Winkler the September 1998 10-Q
10.99* Employment Agreement dated May 24, 1999 between Incorporated by reference from Exhibit 10.99 to
PSINet and Thomas A. Leach the August 1999 Registration Statement
10.100* Employment Agreement dated May 24, 1999 between Incorporated by reference from Exhibit 10.100
PSINet and James F. Cragg to the August 1999 Registration Statement
10.101* Employment Agreement dated May 24, 1999 between Incorporated by reference from Exhibit 10.101
PSINet and Philippe J. Kuperman to the August 1999 Registration Statement
10.102 Master Lease Agreement between PSINet and Incorporated by reference from Exhibit 10.11 to
Technology Credit Corporation No. 1788 dated June the September 1998 10-Q
20, 1998
10.103 Master Lease Agreement between PSINet and Incorporated by reference from Exhibit 10.12 to
Technology Credit Corporation No. 1789 dated June the September 1998 10-Q
20, 1998
10.104 Master Loan and Security Agreement No. 3963 between Incorporated by reference from Exhibit 10.13 to
PSINet and Charter Financial Inc. dated September the September 1998 10-Q
28, 1998
10.105 Lease Agreement dated July 8, 1998 between Incorporated by reference from Exhibit 10.2 to
Ballymore Properties Limited and Cordoba Holdings the April 27, 1999 8-K
Limited and Thomas Charles Cembrinck
10.106 Third Amendment dated as of June 30, 1999 to the Incorporated by reference from Exhibit 10.1 to
Credit Agreement, dated as of September 29, 1998, PSINet's Current Report on Form 8-K dated July
among PSINet, the Lenders party thereto, The Chase 6, 1999 located under Securities and Exchange
Manhattan Bank, as Administrative Agent, Fleet Commission File No. 0-25812
National Bank, as Syndication Agent, and The Bank
of New York, as Documentation Agent
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------------ ---------------------------------------------------- ------------------------------------------------
<S> <C> <C>
10.107 Fourth Amendment dated as of July 15, 1999 to the Incorporated by reference from Exhibit 10.1 to
Credit Agreement, dated as of September 29, 1998, PSINet's Quarterly Report on Form 10-Q for the
among PSINet, the Lenders party thereto, The Chase quarter ended June 30, 1999 located under
Manhattan Bank, as Administrative Agent, Fleet Securities and Exchange Commission File No.
National Bank, as Syndication Agent, and The Bank 0-25812
of New York, as Documentation Agent.
10.108 Registration Rights Agreement, dated as of July 23, Incorporated by reference from Exhibit 10.108
1999, among PSINet and Donaldson Lufkin & Jenrette to the August 1999 Registration Statement
International, Bear Stearns International Limited
and Chase Manhattan International Limited
11.1 Calculation of Basic and Diluted Loss Per Share and Incorporated by reference from Exhibit 11.1 to
Weighted Average Shares for the Year Ended December the 1998 Form 10-K
31, 1998
11.2 Calculation of Basic and Diluted Loss Per Share and Incorporated by reference from Exhibit 11.2 to
Weighted Average Shares for the Year Ended December the 1998 Form 10-K
31, 1997
11.3 Calculation of Basic and Diluted Loss Per Share and Incorporated by reference from Exhibit 11.3 to
Weighted Average Shares for the Year Ended December the 1998 Form 10-K
31, 1996
11.4 Calculation of Basic and Diluted Loss Per Share and Incorporated by reference from Exhibit 11.1 to
Weighted Average Shares Used in Calculation for the PSINet's Quarterly Report on Form 10-Q for the
Six Months Ended June 30, 1999 quarter ended June 30, 1999 located under
Securities and Exchange Commission File No.
0-25812
21 Significant subsidiaries of PSINet Incorporated by reference from Exhibit 21 to
the 1998 Form 10-K
23.1 Consent of Nixon Peabody LLP Contained in Exhibit 5
23.2 Consent of PricewaterhouseCoopers LLP Filed herewith
23.3 Consent of Arthur Andersen LLP Filed herewith
23.4 Consent of PricewaterhouseCoopers LLP Filed herewith
23.5 Consent of Arthur Andersen LLP Filed herewith
24 Power of Attorney Set forth in the signature page to this
registration statement
99.1 Form of Proxy for holders of TNI common stock Filed herewith
</TABLE>
- -----------------------------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(a)(3).
-12-
<PAGE>
Exhibit 3.9
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PSINET INC.
Under Section 805 of the Business Corporation Law
The undersigned, being the Executive Vice President and Chief Financial
Officer of PSINet Inc. (the "Corporation"), in order to amend the Certificate of
Incorporation, does hereby certify that:
FIRST: The name of the corporation is PSINet INC.
-----
SECOND: The Certificate of Incorporation of the Corporation was filed with
------
the Department of State of the State of New York on October 21, 1988 under the
name Graphics Specialty Finishers, Inc.
THIRD: The Certificate of Incorporation is hereby amended to effect the
-----
following amendment authorized by the Business Corporation Law to amend
Paragraph FOURTH to increase the aggregate number of authorized shares of
capital stock of the Corporation from 280,000,000 to 530,000,000 shares, whereby
the number of authorized shares of the Corporation's common stock, par value
$.01 per share, will increase from 250,000,000 to 500,000,000 and the number of
authorized shares of the Corporation's preferred stock, par value $.01 per
share, will remain unchanged, and to add a sentence permitting the Corporation
to issue shares of one class or series of its capital stock as a distribution to
holders of any other class of its capital stock and to set forth in full the
text of the first paragraph of such amended Paragraph FOURTH.
FOURTH: The first paragraph of Paragraph FOURTH of the Certificate of
------
Incorporation is hereby amended to read in its entirety as follows:
The Corporation is authorized to issue two classes of shares to be
designated, respectively, Common Stock ("Common Stock") and Preferred
Stock ("Preferred Stock"). The total number of shares of capital
stock that the Corporation is authorized to issue is Five Hundred
Thirty Million (530,000,000). The total number of shares of Common
Stock the Corporation shall have authority to issue is Five Hundred
Million (500,000,000). The total number of shares of Preferred Stock
the Corporation shall have authority to issue is Thirty Million
(30,000,000). The Common Stock and Preferred Stock shall have a par
value of $.01 per share. Except as otherwise provided elsewhere in
this Certificate of Incorporation, the Corporation is authorized to
make a distribution of shares of any class or series to
<PAGE>
the holders of the same or any other class or series of shares. The
Preferred Stock may be issued from time to time in one or more series,
each of such series, to the extent not inconsistent with the
provisions of this Certificate of Incorporation pertaining to capital
stock, to have such designations, relative rights, preferences and
limitations as are stated and expressed in this Paragraph FOURTH and
in the resolution or resolutions providing for the issue of such
series adopted by the Board of Directors of the Corporation as
hereinafter provided. Except as otherwise provided in this Certificate
of Incorporation, authority is hereby expressly granted to the Board
of Directors, to the extent not inconsistent with the provisions of
this Certificate of Incorporation pertaining to capital stock, and
subject to the limitations set forth in Section 502(b) of the Business
Corporation Law, to establish and designate one or more series of
Preferred Stock and to fix the variations in the relative rights,
preferences and limitation of each such series, including without
limitation:
1. The number of shares to constitute such series and the
distinctive designation thereof;
2. The dividend rate, if any, to which such shares shall be entitled
and the restrictions, limitations and conditions upon the payment of
such dividends, whether dividends shall be cumulative, the date or
dates from which dividends (if cumulative) shall accumulate and the
dates on which dividends (if declared) shall be payable;
3. Whether or not the shares of such series shall be redeemable and,
if so, the terms, limitations and restrictions with respect to such
redemption, including without limitation the manner of selecting
shares for redemption if less than all shares are to be redeemed, and
the amount, if any, in addition to any accrued dividends thereon,
which the holders of shares of such series shall be entitled to
receive upon the redemption thereof, which amount may vary at
different redemption dates and may be different with respect to shares
redeemed through the operation of any purchase, retirement or sinking
fund and with respect to shares otherwise redeemed;
4. The amount in addition to any accrued dividends thereon which the
holders of shares of such series shall be entitled to receive upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, which amount may vary at different dates and may vary
depending on whether such liquidation, dissolution or winding up is
voluntary or involuntary;
5. Whether or not the shares of such series shall be subject to the
operation of a purchase, retirement or sinking fund and, if so, the
terms, limitations and restrictions with respect thereto, including,
without limitation, whether such purchase, retirement or sinking fund
shall be cumulative or non-cumulative, the extent to and the manner in
which such fund shall be applied to the purchase, retirement or
redemption of the shares of such series or to other corporate purposes
and the terms and provisions relative to the operation thereof;
<PAGE>
6. Whether or not the shares of such series shall have conversion
privileges and, if so, prices or rates of conversion and the method,
if any, of adjusting the same;
7. Whether or not the shares of such series shall have voting
powers, whether full or limited, or be without voting powers; and
8. Any other relative rights, preferences and limitations thereof as
shall not be inconsistent with this Paragraph FOURTH.
FIFTH: The foregoing amendment and changes to the Certificate of
-----
Incorporation were authorized by the affirmative vote of the members of the
Board of Directors of the Corporation at a meeting duly called and held on July
22, 1999 followed by the affirmative vote of the holders of a majority of all
outstanding shares of the Corporation entitled to vote thereon at a special
meeting of the Corporation's shareholders duly called and held on September 28,
1999, at which a quorum was at all times present and acting.
<PAGE>
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Amendment on this 8th day of October, 1999.
/s/ Edward D. Postal
-------------------------------------
Edward D. Postal
Executive Vice President and
Chief Financial Officer
<PAGE>
Exhibit 5.1
Nixon Peabody LLP
437 Madison Avenue
New York, New York 10022
October 18, 1999
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Ladies and Gentlemen:
We have acted as counsel to PSINet Inc., a New York corporation (the
"Company"), in connection with the Registration Statement on Form S-4, File No.
333-88325, as amended by Amendment No. 1 (the "Registration Statement") filed by
the Company with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), relating to the offering of
7,804,546 shares of common stock of the Company, par value $.01 per share (the
"Securities") to be issued in connection with the merger of Transaction Network
Services, Inc., a Delaware corporation, into the Company's wholly-owned
subsidiary, PSINet Shelf I Inc., a Delaware corporation (the "Merger") pursuant
to the Agreement and Plan of Merger (the "Merger Agreement") by and among the
Company, Transaction Network Services, Inc. and PSINet Shelf I Inc., dated as of
August 22, 1999, as amended, filed as Appendix 1 to the Prospectus/Proxy
Statement which forms a part of the Registration Statement.
This opinion is being delivered to you in connection with the Registration
Statement.
In connection with the foregoing, we have examined the Registration
Statement, the Prospectus/Proxy Statement and the Merger Agreement. We also
have examined originals or copies, certified or otherwise identified to our
satisfaction, of such corporate records, certificates and other documents and
have made such investigations of law as we have deemed necessary or appropriate
as a basis for the opinions expressed below.
As to questions of fact material to our opinions expressed herein, we have,
when relevant facts were not independently established, relied upon certificates
of, and information received from, the Company and/or representatives of the
Company. We have made no independent investigation of the facts stated in such
certificates or as to any information received from the Company and/or
representatives of the Company and do not opine as to the accuracy of such
factual matters. We also have relied, without investigation, upon certificates
and other documents from, and conversations with, public officials.
In rendering the following opinions, we have assumed, without
investigation, the authenticity of any document or other instrument submitted to
us as an original, the conformity
<PAGE>
to the originals of any document or other instrument submitted to us as a copy,
the genuineness of all signatures on such originals or copies, and the legal
capacity of natural persons who executed any such document or instrument at the
time of execution thereof.
Members of our firm involved in the preparation of this opinion are
licensed to practice law in the State of New York and we do not purport to be
experts on, or to express any opinion herein concerning, the laws of any other
jurisdiction other than the laws of the State of New York.
Based upon and subject to the foregoing, and the other qualifications and
limitations contained herein, and after (a) the Commission shall have entered an
appropriate order declaring effective the above-referenced Registration
Statement, as amended, and (b) the shares of Common Stock have, if required,
been duly qualified or registered, as the case may be, for sale under applicable
state securities laws, we are of the opinion that:
1. The Securities, when issued in accordance with the Merger Agreement,
will be duly authorized and validly issued and will be fully paid and non-
assessable, subject to Section 630 of the Business Corporation Law of the State
of New York.
2. The discussion in the Prospectus/Proxy Statement included in the
Registration Statement under the caption "Material United States Federal Income
Tax Consequences of the Merger" fairly summarizes the federal income tax
consequences that are likely to be material to the shareholders of Transaction
Network Services, Inc. who are United States citizens or residents or domestic
corporations who hold their shares as capital assets within the meaning of
Section 1221 of the Internal Revenue Code (the "Code") and who are not subject
to special treatment under the tax laws.
Our opinions expressed herein in paragraph number 2 are based upon our
interpretation of the current provisions of the Code and existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinions are not binding upon the Internal Revenue Service or courts and there
is no assurance that the Internal Revenue Service will not successfully
challenge the conclusions set forth herein. No assurance can be given that
future legislative, judicial or administrative changes, on either a prospective
or retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. We undertake no obligation to advise you of changes in law which
may occur after the date hereof.
Our opinions in paragraph number 2 are limited to the federal income tax
matters and the federal law of the United States of America addressed herein,
and no other opinions are rendered with respect to any other matter not
specifically set forth in the foregoing opinion and we assume no responsibility
as to the applicability thereto, or the effect thereon, of the laws of any other
jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
caption "Legal Matters" in the Registration Statement. In giving such consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Act or the rules and regulations of
the Commission thereunder.
<PAGE>
We further consent to the filing of this opinion as an exhibit to
applications to the securities commissioners of the various states of the United
States, to the extent so required, in connection with the registration of the
Securities.
This opinion is intended solely for your benefit in connection with the
transactions described above and, except as provided in the two immediately
preceding paragraphs, may not be otherwise communicated to, reproduced, filed
publicly or relied upon by, any other person or entity for any other purpose
without our express prior written consent. This opinion is limited to the
matters stated herein, and no opinion or belief is implied or may be inferred
beyond the matters expressly stated herein.
We wish to advise you that certain attorneys who are partners or employees
of Nixon Peabody LLP own certain shares of the Company's common stock.
Very truly yours,
/s/ Nixon Peabody LLP
<PAGE>
Exhibit 8.2
[Letterhead of Arent Fox Kintner Plotkin & Kahn PLLC]
October 18, 1999
Transaction Network Services, Inc.
1939 Roland Clarke Place
Reston, Virginia 20191
Gentlemen:
We have acted as counsel for Transaction Network Services, Inc., a Delaware
corporation ("TNI"), in connection with the proposed merger of TNI into PSINet
Shelf I Inc., a wholly-owned subsidiary of PSINet Inc. pursuant to the Agreement
and Plan of Merger dated as of August 22, 1999, as amended, among TNI, PSINet
Inc. and PSINet Shelf I Inc. (the "Merger Agreement"). The proposed merger
pursuant to the Merger Agreement is hereinafter referred to as the "Merger". You
have requested our opinion as to certain federal income tax consequences of the
Merger to the holders of shares of TNI's common stock.
In this connection we have reviewed the documents governing and describing
the proposed transactions, including the Merger Agreement and the
Prospectus/Proxy Statement included in Registration Statement on Form S-4, File
No. 333-88325, as amended by Amendment No. 1 filed by PSINet Inc. with the
Securities and Exchange Commission (the "Registration Statement") and have
received and relied on certain information and representations from the
managements of TNI and PSINet Inc. We have made no independent investigation of
the information and representations received from the managements of TNI and
PSINet Inc.
In rendering the following opinions, we have assumed, without
investigation, the authenticity of any document or other instrument submitted to
us as an original, the conformity to the originals of any document or other
instrument submitted to us as a copy, the genuineness of all signatures on such
originals or copies, and the legal capacity of natural persons who executed any
such document or instrument at the time of execution thereof.
<PAGE>
-2-
Based upon and subject to the foregoing, and the other qualifications and
limitations contained herein, we are of the opinion that the discussion in the
Prospectus included in the Registration Statement under the caption "Material
United States Federal Income Tax Consequences of the Merger" fairly summarizes
the federal income tax consequences that are likely to be material to the
shareholders of Transaction Network Services, Inc. who are United States
citizens or residents or domestic corporations who hold their shares as capital
assets within the meaning of Section 1221 of the Internal Revenue Code and who
are not subject to special treatment under the tax laws.
Our opinions expressed herein are based upon our interpretation of the
current provisions of the Code and existing judicial decisions, administrative
regulations and published rulings and procedures. Our opinions are not binding
upon the Internal Revenue Service or courts and we cannot give you assurance
that the Internal Revenue Service will not successfully challenge the
conclusions set forth herein. We cannot give you assurance that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. We undertake no obligation to advise you of changes in law which
may occur after the date hereof.
Our opinions are limited to the federal income tax matters and federal law
of the United States of America addressed herein, and no other opinions are
rendered with respect to any other matter not specifically set forth in the
foregoing opinion and we assume no responsibility as to the applicability
thereto, or the effect thereon, of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
caption "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
This opinion is intended solely for your benefit in connection with the
transactions described above and, except as provided in the immediately
preceding paragraph, may not be otherwise communicated to, reproduced, filed
publicly or relied upon by, any other person or entity for any other purpose
without our express prior written consent. This opinion is limited to the
matters stated herein, and no opinion or belief is implied or may be inferred
beyond the matters expressly stated herein.
We wish to advise you that certain attorneys with Arent Fox own certain
shares of TNI common stock.
Very truly yours,
/s/ Arent Fox Kintner Plotkin & Kahn PLLC
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-4 of our report dated March 9, 1999, except
as to Note 11, which is as of March 25, 1999 relating to the consolidated
financial statements and financial statement schedule of PSINet Inc. appearing
in 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, DC
October 18, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Amendment No. 1 to Registration Statement on Form S-4 (File No
333-88325)of our reports dated February 10, 1999, included in Transaction
Network Services, Inc.'s Form 10-K for the fiscal year ended December 31, 1998,
and to all references to our firm included in this Registration Statement.
/s/ Arthur Andersen LLP
Vienna, Virginia
October 15, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-4 of PSINet Inc. of our report dated
November 23, 1998, which appears in Transaction Network Services, Inc.'s Current
Report on Form 8-K/A, relating to the financial statements and financial
statement schedule of Transaction Access Service (a fully integrated business
unit of AT&T Corp.) as of August 31, 1998 and November 30, 1997 and for the nine
month period ended August 31, 1998 and the twelve month period ended November
30, 1997 and on the schedule of revenue for the twelve month period ended
November 30, 1996. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, NY
October 18, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Amendment No. 1 to Registration Statement on Form S-4 (File No
333-88325) of our report dated August 4, 1998, on the financial statements of
OmniLink Communications Corporation for the fiscal year ended December 31, 1997,
included in Transaction Network Services, Inc.'s Amendment No. 1 to Form 8-K
filed with the Securities and Exchange Commission on September 14, 1998, and to
all references to our firm included in this Registration Statement.
/s/ Arthur Andersen LLP
Detroit, Michigan
October 15, 1999
<PAGE>
Exhibit 99.1
[LOGO]
[1299 - TRANSACTION NETWORK SERVICES, INC.] [FILE NAME: TNS14B.ELX] [VERSION -
2] [10/18/99] [orig. 10/18/99]
TNS14B DETACH HERE
- --------------------------------------------------------------------------------
PROXY
TRANSACTION NETWORK SERVICES, INC.
Proxy for Special Meeting of Stockholders to be held November 23, 1999
This Proxy is Solicited on Behalf of the Board of Directors
The stockholder and recipient of the enclosed Proxy Voting Card (the "Card
Recipient"), having received the Notice of Special Meeting and the Board of
Directors' Proxy Statement, hereby appoint(s) John J. McDonnell, Jr. and John J.
McDonnell III, and each of them, proxies (the "Proxies") of the Card Recipient
(with full power of substitution) to attend the above Special Meeting and all
adjournments thereof (the "Meeting") and there to vote all shares of Common
Stock of Transaction Network Services, Inc. that the Card Recipient would be
entitled to vote, if personally present, in regard to all matters which may come
before the Meeting, and especially to consider and vote upon a proposal to adopt
the agreement and plan of merger among PSINet Inc., PSINet Shelf I Inc.
(a wholly-owned subsidiary of PSINet Inc.) and Transaction Network Services,
Inc., and to approve the transactions contemplated in that agreement.
In their discretion the Proxies are authorized to vote upon such other business
as may properly come before the meeting.
[SEE REVERSE] [SEE REVERSE]
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
<PAGE>
-2-
- -----------------
Vote by Telephone
- -----------------
It's fast, convenient, and immediate!
Call Toll-Free on a Touch-Tone Phone
1-800-867-9084.
- --------------------------------------------------------------------------------
Follow these four easy steps:
1. Read the accompanying Proxy Statement/Prospectus and Proxy Card.
2. Call the toll-free number 1-800-867-9084.
3. Enter your social security or tax I.D. number, followed by the four
highlighted digits of the account number located just below the
perforation below.
4. Follow the recorded instructions.
If you make a mistake or wish to change your vote, just press the star
key (*) at any time. You'll be returned to the beginning of the prompt
and you may start over again.
If you need further instructions or have any questions, please
contact Karen Kazmark, Director of Investor Relations, by calling (703)
453-8406 from 9 a.m. to 6 p.m. EST, Monday through Friday.
Your Vote is important!
Call 1-800-867-9084 anytime!
- --------------------------------------------------------------------------------
- ----------------
Vote by Internet
- ----------------
It's fast, convenient, and your vote is immediately confirmed and posted.
- --------------------------------------------------------------------------------
Follow these four easy steps:
1. Read the accompanying Proxy Statement/Prospectus and Proxy Card.
2. Go to the Website
http://www.eproxyvote.com/tni
3. Enter your 14-digit Voter Control Number located on your Proxy Card
above your name.
4. Follow the instructions provided.
- --------------------------------------------------------------------------------
Your vote is important!
Go to http://www.eproxyvote.com/tni anytime!
Do not return your Proxy Card if you are voting by Telephone or Internet
[1299- TRANSACTION NETWORK SERVES, INC.] [FILE NAME: TNS14A.ELX] [VERSION - 3]
[10/18/99] [orig. 10/18/88]
TNS 14A DETACH HERE
- -------------------------------------------------------------------------------
Please mark
[X] votes as in
this example.
This Proxy when properly executed will be voted in the same manner specified
herein. If no direction is made, the Proxies intend to and are authorized to
vote for the proposal.
FOR AGAINST ABSTAIN
1. To adopt the agreement and plan of merger among [ ] [ ] [ ]
PSINet Inc., PSINet Shelf I Inc. (a wholly-owned
subsidiary of PSINet Inc.) and Transaction
Network Services, Inc. and to approve the
transactions contemplated in that agreement.
2. In their discretion the Proxies are authorized to vote upon other business as
may properly come before the meeting.
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [ ]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign exactly as your name(s) appear(s) hereon.
All holders must sign. When signing in a fiduciary
capacity, please indicate full title as such. If a
corporation or partnership, please sign in full
corporate or partnership name by authorized person.
Signature: Date: Signature: Date:
---------------- ------ ----------------- ------
