SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(E)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional MaterialsATERIALS
/ / Soliciting Material Pursuant to Rule 14a-11(c) OR Rule 14a-12
PSINET INC.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14A-6(i)(1) AND 0-11.
(1) Title of each class of securities to which transaction applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid: N/A
/ / Fee paid previously with preliminary materials: N/A
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
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number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
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PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 28, 1999
The Special Meeting of Shareholders of PSINet Inc., a New York
corporation (the "Company"), will be held at[______________], ______, Virginia
on September 28, 1999, at __:00 a.m. for the purpose of considering and acting
upon the following matters:
1. The approval of the 1999 Employee Stock Purchase Plan and related
1999 International Employee Stock Purchase Plan.
2. The approval of a resolution allowing shares of the Company's
Common Stock to be issued as a dividend on the Company's 6 3/4%
Series C Cumulative Convertible Preferred Stock.
3. The approval of an amendment to the Company's Certificate of
Incorporation allowing the Company to issue shares of one class or
series of its stock as a distribution to holders of another class
or series of its stock.
4. The approval of an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
capital stock from 280 million shares to 530 million shares, of
which 500 million will be shares of Common Stock and 30 million
will be shares of Preferred Stock.
5. The approval of amendments to the Company's Executive Stock
Incentive Plan to increase the number of shares of Common Stock
available for awards under the Executive Stock Incentive Plan from
11,800,000 shares to 15,800,000 shares.
6. The approval of amendments to the Company's Strategic Stock
Incentive Plan to increase the number of shares of Common Stock
available for awards under the Strategic Stock Incentive Plan from
4,500,000 shares to 8,000,000 shares.
7. The conduct of such other business as shall properly come before
the meeting and any adjournments thereof.
Pursuant to the By-laws of the Company, the Board of Directors has
fixed the close of business on August 18, 1999 as the record date for
determining the Shareholders of the Company entitled to notice of and to vote at
the meeting and any adjournments thereof.
Please note that you may have the choice of voting over the Internet or
by telephone. Follow the instructions on your proxy card or, if your shares are
held in the name of a bank or broker, follow the instructions on the form you
receive from your bank or broker.
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ALL SHAREHOLDERS ARE URGED TO CAST THEIR VOTE ON THE INTERNET OR BY
TELEPHONE, OR TO COMPLETE, SIGN, DATE, AND PROMPTLY RETURN THE ENCLOSED PROXY TO
THE COMPANY IN THE ACCOMPANYING POSTAGE-PREPAID ENVELOPE.
By Order of the Board of Directors,
Teresa Zajonczkoski
Corporate Secretary
August 00, 1999
Herndon, Virginia
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PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 28, 1999
SOLICITATION ON BEHALF OF THE
BOARD OF DIRECTORS OF PSINET INC.
This Proxy Statement is being mailed to holders of PSINet Common Stock
("Shareholders") on or about August 24, 1999, in connection with the
solicitation of proxies by the Board of Directors of PSINet Inc., a New York
corporation ("PSINet" or the "Company"), to be used at the Special Meeting of
Shareholders of the Company (the "Special Meeting"), to be held on September 28,
1999. Accompanying this Proxy Statement is a Notice of Special Meeting of
Shareholders and a form of proxy for such meeting.
All proxies which are properly completed, signed and returned to the
Company, or cast electronically or by telephone in accordance with the
instructions provided, in time will be voted in accordance with the instructions
thereon. Proxies may be revoked by any shareholder upon written notice to the
Secretary of the Company prior to the exercise thereof and Shareholders who are
present at the Special Meeting may withdraw their proxies and vote in person if
they so desire. You may elect to vote in favor of, against or abstain from
voting on any proposal.
The expense of preparing, assembling, printing and mailing the form of
proxy and the material used in the solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
to solicit proxies personally and by telephone and electronic means. The Company
has requested banks, brokers and other custodians, nominees and fiduciaries to
forward copies of the proxy materials to their principals and to request
authority for the execution of proxies and will reimburse such persons for their
services in doing so. The cost of such additional solicitation incurred
otherwise than by use of the mails is estimated not to exceed $5,000. In
addition, the Company has engaged the firm of MacKenzie Partners, Inc. as its
proxy solicitor in connection with the Special Meeting for an amount not to
exceed $4,000 plus reasonable costs incurred by MacKenzie.
The Board of Directors has fixed the close of business on August 18,
1999, as the record date for the determination of Shareholders who are entitled
to notice of and to vote at the Special Meeting and any adjournments thereof. As
of the record date, the Company had outstanding approximately ___________ shares
of its common stock, $.01 par value (the
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"Common Stock"). Holders of the Company's Common Stock are entitled to one vote
per whole share. Holders of fractional shares are entitled to exercise voting
rights in proportion to their fractional holdings.
A majority of the outstanding shares of the Company's Common Stock
entitled to vote at the Special Meeting is required to establish a quorum at the
Special Meeting. The affirmative vote of the holders of a majority of the shares
of the Company's Common Stock voting with respect to the proposals at the
Special Meeting is required for the approval of the proposed Employee Stock
Purchase Plan and related International Employee Stock Purchase Plan and the
amendments to the Company's Executive Stock Incentive Plan and Strategic Stock
Incentive Plan. In addition, the affirmative vote of a majority of all
outstanding shares entitled to vote is required for the approval of the
resolution regarding dividends on the Series C Preferred Stock and each of the
two proposed amendments to the Company's Certificate of Incorporation.
Abstentions may be specified with respect to any of the proposals. The
Company believes that abstentions are shares present and entitled to vote, but
do not constitute votes cast in respect of a particular matter. The Company,
therefore, intends to count abstentions for purposes of determining the presence
or absence of a quorum for the transaction of business at the Special Meeting,
but not as votes having been cast in respect of the voting on any proposal.
Broker non-votes (that is, proxies from brokers or nominees indicating that such
persons have not received instructions from the beneficial owners or other
persons entitled to vote shares on a particular matter as to which the brokers
or nominees do not have discretionary power) may be counted as present or
represented for purposes of determining the presence or absence of a quorum for
the transaction of business, but not for purposes of determining the voting
power present with respect to proposals in respect of which brokers do not have
discretion (non-discretionary proposals). The Company believes that all
proposals being presented to Shareholders at the Special Meeting are
non-discretionary proposals, other then Proposal 4 with respect to an amendment
to the Company's certificate of incorporation increasing the number of
authorized shares of Common Stock. Accordingly, any broker non-votes in respect
of these proposals will be treated as abstentions with respect to each proposal,
which will not affect the outcome of the votes with respect to Proposals 1, 5,
and 6, but will have the effect of a vote against proposals 2 and 3.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of PSINet's
Common Stock, as of July 31, 1999, by (1) each person who is known by us to own
beneficially more than five percent of the Company's Common Stock; (2) each
director of PSINet who owns shares of the Company's Common Stock; (3) the
executive officers of the Company named in the Summary Compensation Table
appearing under the heading "Executive Compensation"; and (4) all directors and
executive officers of PSINet as a group.
AMOUNT BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS
- - ------------------------------------- ------------------- -----------
IXC Internet Services, Inc.................. 10,229,789(2) 15.8%
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William L. Schrader......................... 5,709,677(3) 8.8
T. Rowe Price Associates, Inc............... 5,168,600(4) 8.0
Harold S. Wills............................. 454,528(5) *
David N. Kunkel............................. 395,388(6) *
Edward D. Postal............................ 209,021(7) *
Harry G. Hobbs.............................. 104,585(8) *
William H. Baumer........................... 94,488(9) *
Ralph J. Swett.............................. 13,750(10) *
Ian P. Sharp................................ 10,000(11) *
Executive officers and directors as a group
(12 persons)............................. 7,044,278(12) 10.9
- - -------------
* Less than 1%
(1) The persons named in the table have sole voting and dispositive power with
respect to all shares of the Company's Common Stock shown as beneficially
owned by them, subject to the information contained in the notes to the
table and to community property laws, where applicable.
(2) These shares could be deemed to be beneficially owned by the members of
the Board of Directors of IXC, consisting of Jeffrey C. Smith and Stuart
K. Coppens, as well as by the members of the Board of Directors of IXC
Communications Inc. ("IXC Communications"), the parent company of IXC,
consisting of Wolfe (Bill) H. Bragin, Joe C. Culp, Richard D. Irwin, Carl
W. McKinzie, Ralph J. Swett, Phillip L. Williams and John M. Zrno. IXC's
address is City View Center, 1122 Capitol of Texas Highway South, Austin,
Texas 78746. See "Certain Relationships and Transactions--Strategic
Alliance with IXC--IXC Shares." Includes an aggregate of 3,000,000 shares,
1,500,000 of which, according to IXC's Schedule 13D Amendment No. 1 dated
June 11, 1999, IXC loaned to Merrill Lynch International ("MLI") in June
1999 in respect of a forward-purchase agreement with MLI, to be settled in
the second quarter of 2002 or sooner upon the occurrence of certain
specified events, pursuant to which MLI made a payment to IXC of
$51,963,068.36, and 1,500,000 of which, according to IXC's Schedule 13D
Amendment No. 3 dated July 16, 1999, IXC loaned to MLI in July 1999 in
respect of a forward-purchase agreement with MLI, to be settled in the
first quarter of 2002 or sooner upon the occurrence of certain specified
events, pursuant to which MLI made a payment to IXC of $59,750,806.68. In
the amendments to its Schedule 13D, IXC stated, among other things, that
it has waived the right to vote any of the loaned shares during the term
of these transactions.
(3) Includes 5,557,457 shares which are pledged with NationsBank in respect of
four lines of credit providing Mr. Schrader with up to $20.1 million on an
aggregate basis, of which approximately $17.6 million (including principal
and interest) was outstanding as of July 31, 1999, at an interest rate
equal to the 30 day LIBOR rate plus 1.65% per annum. Includes 1,000 shares
held by Mr. Schrader and his wife as joint tenants with rights of
survivorship. Also includes 150,000 shares held by a limited liability
company of which Mr. Schrader and his wife have shared voting and
dispositive power. Does not include 1,062,612 shares beneficially owned by
Mr. Schrader's wife, nor 111,882 shares held by two trusts (of which Mr.
Schrader's wife is trustee) for the benefit of two minor children of Mr.
Schrader's. Mr. Schrader disclaims beneficial ownership of the shares
beneficially owned by his wife and held in trust for his minor children.
Mr. Schrader's address is c/o PSINet Inc., 510 Huntmar Park Drive,
Herndon, Virginia, 20170.
(4) In a Schedule 13G dated February 12, 1999, T. Rowe Price Associates, Inc.
claimed sole voting power over 385,000 shares, sole dispositive power over
5,168,600 shares and no shared voting or shared dispositive power over any
shares. T. Rowe Price and Associates, Inc.'s address is 100 East Pratt
Street, Baltimore, Maryland 21202.
(5) Includes 448,437 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
406,334 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
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(6) Includes 392,859 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
253,334 shares issuable upon the exercise of options which are not deemed
to be presently exercisable or 29,571 shares beneficially owned by Mr.
Kunkel's wife. Mr. Kunkel disclaims beneficial ownership of the shares
beneficially owned by his wife.
(7) Includes 194,221 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
280,779 shares issuable upon the exercise of options which are not deemed
to be presently exercisable.
(8) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 225,415 shares issuable upon the exercise of options which
are not deemed to be presently exercisable.
(9) Includes 50,000 shares issuable upon the exercise of outstanding warrants
and 4,500 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable. Does not include 7,500
shares issuable upon the exercise of options which are not deemed to be
presently exercisable.
(10) Includes 3,750 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
11,250 shares issuable upon the exercise of options which are not deemed
to be presently exercisable, and does not include 10,229,789 shares
beneficially owned by IXC, of which Mr. Swett is a director and was the
chairman of the board. Mr. Swett disclaims beneficial ownership of the
shares beneficially owned by IXC. See "Certain Relationships and
Transactions--Strategic Alliance With IXC."
(11) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 10,000 shares issuable upon the exercise of options which
are not deemed to be presently exercisable.
(12) See notes (3) and (5) through (11) above. Includes also approximately
94,583 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable granted to four executive
officers. Does not include approximately 364,917 shares issuable upon the
exercise of outstanding options granted to four executive officers which
are not deemed to be presently exercisable.
MANAGEMENT
The following sets forth certain information as of July 31, 1999
concerning the directors and executive officers of PSINet.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- --- --------
EXECUTIVE OFFICERS:
<S> <C> <C>
William L. Schrader (1)(3).......... 47 Chairman of the Board of Directors and Chief
Executive Officer (Founder)
Harold S. Wills..................... 57 President, Chief Operating Officer and
Director
David N. Kunkel..................... 56 Executive Vice President, General Counsel and
Director
Edward D. Postal.................... 43 Senior Vice President and Chief Financial
Officer
E. A. Davis......................... 53 Senior Vice President and President,
PSINetworks Company
Harry G. Hobbs...................... 45 Senior Vice President and President, PSINet
Europe
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Philippe J. Kuperman................ 55 Senior Vice President and President, PSINet
Latin America
Chi H. Kwan......................... 47 Senior Vice President and President, PSINet
Asia/Pacific
Michael J. Malesardi................ 39 Vice President and Controller
NON-EXECUTIVE DIRECTORS:
William H. Baumer(1)(2)(3).......... 66 Director
Ian P. Sharp(2)(3).................. 67 Director
Ralph J. Swett(1)(2)................ 64 Director
- - ------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Financing Committee.
</TABLE>
William L. Schrader is the founder of PSINet and has served as Chairman
of the Board of Directors and Chief Executive Officer since the Company's
inception and as President from the Company's inception to September 1998. Prior
to forming PSINet, Mr. Schrader served as President and Chief Executive Officer
of NYSERNet Inc., a provider of data networking services in New York State
("NYSERNet"), from January 1986 to December 1989. Mr. Schrader also was a
co-founder, and, from May 1984 until February 1987, served as Executive Director
of the Cornell Theory Center, a National Science Foundation supercomputer
center. Mr. Schrader's term of office as a director of PSINet expires in 2001.
Harold S. Wills has served as President since September 1998 and as a
director of PSINet and the Company's Chief Operating Officer since April 1996,
and served as Executive Vice President from April 1996 to September 1998. Mr.
Wills served as Chief Operating Officer of Hospitality Information Networks,
Inc., a provider of information services for the hospitality industry, from July
1995 through January 1996. Mr. Wills also held various positions including,
Managing Director, International Computer Services, Technical Service Director
and Sales Director of Granada Group PLC, a computer services provider, from
September 1991 through September 1995. Mr. Wills's term of office as a director
of PSINet expires in 2000.
David N. Kunkel has served as Executive Vice President since 1998, as a
director of PSINet since September 1995, and as the Company's as General Counsel
since June 1995. Mr. Kunkel also served as Senior Vice President from September
1996 to September 1998, as the Company's Secretary from 1995 to September 1998,
and as the Company's Vice President of International Operations from Vice
President from July 1995 to September 1996. He was Senior Counsel to Nixon,
Hargrave, Devans & Doyle LLP (now known as Nixon Peabody LLP), outside counsel
to PSINet, from July 1995 through December 1995. Prior to July 1995, Mr. Kunkel
was a partner with the law firm of Nixon, Hargrave, Devans & Doyle LLP for 16
years and served as outside counsel to NYSERNet from 1986 until 1989 and to
PSINet from the Company's inception until July 1995. Mr. Kunkel's term of office
as a director of PSINet expires in 2001.
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Edward D. Postal has served as Senior Vice President since 1998 and
Chief Financial Officer since August 1997. Mr. Postal served as the Company's
Vice President from October 1996 to August 1998. He served as Senior Vice
President, Chief Financial Officer and a director of The Hunter Group, Inc., a
systems integration consulting firm, from March 1995 to October 1996, as Vice
President and Chief Financial Officer of The Wyatt Company, an international
employee benefits and human resources consulting firm (currently Watson Wyatt
Worldwide), from December 1991 to October 1994 and as controller/treasurer of
The Wyatt Company from November 1985 to December 1991. From 1981 to November
1985, Mr. Postal served in various financial management positions at Satellite
Business Systems, a satellite communications company acquired by MCI in 1985,
and, prior thereto, held various positions at Touche Ross & Co. (currently
Deloitte & Touche LLP).
E. A. "Ted" Davis has served as Senior Vice President and President,
PSINetworks Company since October 1998. Prior to joining the Company, Mr. Davis
served as Vice President of Customer Technical Support for Lucent Technologies
(formerly the network services division of AT&T Corp.), from January 1995 to
April 1998. Prior thereto, Mr. Davis served in various technical and management
positions with AT&T Corp. since beginning his career there in June 1968.
Harry G. Hobbs has served as Senior Vice President and President,
PSINet Europe since September 1998 and served as Vice President, Customer
Administration from September 1997 to September 1998. Mr. Hobbs served as Vice
President, Customer Care for American Personal Communications, LP, a provider of
wireless communications services and an affiliate of Sprint Spectrum, from
February 1995 to August 1997. Prior thereto, Mr. Hobbs served in various
positions in the Customer Service, Operations and Large Account Support groups
at MCI, including Vice President, Global Customer Service from September 1993 to
February 1995, Director, Operations from March 1992 to February 1995 and
Director, Large Account Group from November 1990 to March 1992.
Philippe Kuperman has served as Senior Vice President and President,
PSINet Latin America since May 1999. Mr. Kuperman served as Vice President
Americas and Asia for the Language Technology Division of Lernout & Hauspie
Speech Products N.V., a developer of translation software, from October 1998 to
February 1999. Mr. Kuperman was employed by Globalink Inc., which was acquired
by Lernout & Hauspie, as Executive Vice President of Worldwide Sales and
Marketing from July 1996 to January 1997 and as Senior Vice President of
International Operations from January 1997 to September 1998. Mr. Kuperman
served in various positions at Software AG, a developer of database, networking
and application software, from 1989 to May 1996, most recently as Senior Vice
President, Indirect Sales Worldwide.
Chi H. Kwan has served as Senior Vice President and President, PSINet
Asia/Pacific since October 1998. Mr. Kwan served as Vice Chairman and
Representative Director of Montblanc Japan K.K., a maker of luxury branded
products, from May 1997 to September 1998. Mr. Kwan served in several executive
management positions with Pitney Bowes Corporation and its affiliates, including
Vice Chairman and Director and Vice President Market Development, Asia Pacific,
from October 1995 to April 1997, and President and Representative Director of
Dodwell Pitney Bowes Corporation from April 1992 to September 1995. From 1975 to
April
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1992, Mr. Kwan held various senior management positions with Nicolet Japan,
K.K., Finnegan-Mat Instruments Inc. and H.B. Fuller Japan Inc.
Michael J. Malesardi has served as Vice President and Controller of
PSINet since July 1997. Mr. Malesardi served as Director of Financial
Administration of Watson Wyatt Worldwide, an international employee benefits and
human resources consulting firm ("Watson Wyatt"), from April 1995 to May 1997
and as Controller of Watson Wyatt from February 1992 to April 1995. From
September 1982 to February 1992, Mr. Malesardi held various positions at Price
Waterhouse LLP (currently PricewaterhouseCoopers LLP), the latest as Senior
Audit Manager.
William H. Baumer has served as a director of PSINet since 1993. Mr.
Baumer has been a Professor of Philosophy at the University at Buffalo since
1971 and was the Acting Chairman of the Department of Economics at the
University at Buffalo from June 1992 until June 1995. Mr. Baumer also served as
Treasurer and Vice President of NYSERNet from January 1986 to December 1990 and
from December 1989 to December 1990, respectively. Mr. Baumer's term of office
as a director of PSINet expires in 2000.
Ian P. Sharp has served as a director of PSINet since September 1996.
Mr. Sharp is currently retired and was the President and founder of I.P. Sharp
Associates, a software development company, from December 1964 through July
1989. Mr. Sharp's term of office as a director of PSINet expires in 2001.
Ralph J. Swett has served as a director of PSINet since February 1998.
Mr. Swett is currently Vice Chairman of IXC Communications and was Chairman of
IXC Communications from its formation in July 1992 through April 1998, and
served as Chief Executive Officer and President of IXC Communications from July
1992 to October 1997. Mr. Swett served as Chairman of the Board and Chief
Executive Officer of Communications Transmission, Inc. ("CTI") from 1986 to
1992. From 1969 to 1986, Mr. Swett served in increasingly senior positions (Vice
President, President and Chairman) of Times Mirror Cable Television ("TMCT"), a
subsidiary of Times Mirror and a previous owner of IXC Carrier, and as a Vice
President of Times Mirror from 1981 to 1986. Mr. Swett served as Chairman of IXC
Carrier from 1979 through April 1998, and served as its Chief Executive Officer
from 1986 to October 1997 and its President from 1991 to October 1997. Mr. Swett
has managed communications businesses for the past 26 years. Mr. Swett's term of
office as a director of PSINet expires in 2000. See "Certain Relationships and
Transactions--Strategic Alliance With IXC."
Pursuant to the IRU Purchase Agreement between the Company and IXC,
Ralph J. Swett, the former Chairman of IXC Communications, was elected,
effective as of the closing of the transaction, to the Company's Board of
Directors. The IRU Purchase Agreement provides that the Company's Chairman will
recommend that Mr. Swett continue to be re-elected to the Board for so long as
IXC continues to own at least 95% of the shares of the Company's Common Stock
the Company issued to IXC in connection with the transaction. IXC has recently
entered into transactions that may cause or have caused this provision to no
longer be effective. See "Stock Ownership of Certain Beneficial Owners and
Management." IXC is an indirect wholly owned subsidiary of IXC Communications.
See "Certain Relationships and Transactions--Strategic Alliance With IXC."
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The Company's Board of Directors is divided into two classes of at
least three directors each and as nearly equal in number as possible, and
directors are elected for terms of two years on a staggered basis. The Board of
Directors is currently composed of six directors, three of whose terms expire in
2000 and three whose terms expire in 2001 and until their respective successors
have been elected and qualified. Each of the Company's executive officers serves
at the pleasure of the Board of Directors.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
STRATEGIC ALLIANCE WITH IXC
General Terms. In February 1998, the Company acquired from IXC 20-year
noncancellable indefeasible rights of use for specified purposes in up to 10,000
equivalent route miles of fiber-based OC-48 network bandwidth (the "PSINet
IRUs") in selected portions across the IXC fiber optic telecommunications system
within the United States (the "Available System"). The PSINet IRUs were acquired
in exchange for the issuance to IXC of 10,229,789 shares of the Company's Common
Stock, representing approximately 20% of the Company's issued and outstanding
Common Stock after giving effect to such issuance and having an aggregate market
value of $78.6 million based on the closing market price per share of the Common
Stock as reported by The Nasdaq Stock Market on such date of $7.6875 (the "IXC
Shares"), pursuant to an IRU and Stock Purchase Agreement, dated as of July 22,
1997, between PSINet and IXC, as amended (the "IRU Purchase Agreement").
IXC Shares. IXC has been granted demand and "piggyback" registration
rights with respect to the IXC Shares pursuant to a registration rights
agreement between the Company and IXC. In the event IXC proposes to sell or
otherwise dispose of any of the IXC Shares, other than pursuant to a pledge to
an unaffiliated third party lender, the Company has a right of first offer to
acquire the shares proposed to be sold at the closing market price per share of
the Company's Common Stock as reported by The Nasdaq Stock Market or the
principal securities exchange on which the Company's Common Stock is then listed
on the date notice of such proposed sale is given to the Company. Other than as
set forth above and except for transfer restrictions existing from time to time
under applicable federal and state securities laws, the IXC Shares are not
subject to any transfer restrictions or to any voting restrictions or other
agreements with PSINet. The IXC Shares are currently eligible for sale in the
public market subject to compliance with the volume limitations, manner of sale
provisions, notice requirements and other requirements of Rule 144 under the
Securities Act of 1933.
PSINet IRUs. The total amount of bandwidth corresponding to the PSINet
IRUs is contemplated to be delivered to the Company, to the extent then
available, in specified increments every six months during the two year period
following the closing. As of June 30, 1999, approximately 13,412 route miles of
OC-12 (equivalent to approximately 3,353 route miles of OC-48) bandwidth
corresponding to the PSINet IRUs, connecting New York, Washington, D.C.,
Atlanta, Chicago, Dallas, Houston, Phoenix, Las Vegas, Los Angeles, Seattle and
San Francisco and certain major cities in between, have been placed into
operation on the PSINet network. PSINet currently anticipates delivery of the
remaining bandwidth corresponding to the PSINet IRUs over the next 12 to 18
months. IXC has granted the Company
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a security interest in, among other collateral, a portion of the IRUs underlying
the PSINet IRUs granted to IXC by IXC Carrier, Inc., its direct parent company
and in a portion of certain other IRUs in IXC's fiber optic telecommunications
system to secure the performance of IXC's obligations under the IRU Purchase
Agreement to deliver the PSINet IRUs. IXC will provide customary operation and
maintenance services with respect to the bandwidth delivered to the Company at
specified prices and terms, the total cost of which to the Company on an annual
basis is expected to be approximately $1.2 million per each 1,000 equivalent
route miles of OC-48 bandwidth accepted under the IRU Purchase Agreement. IXC
also will furnish multiplexing, reconfiguration and collocation services with
respect to such bandwidth as requested by the Company at agreed upon fees.
Joint Marketing and Services Agreement. In connection with this
transaction, the Company and IXC also entered into a Joint Marketing and
Services Agreement (the "Marketing Agreement") pursuant to which each party is
entitled to market the products and services of the other under its own brand.
Pursuant to the Marketing Agreement, PSINet has agreed to provide IXC with
managed connectivity services, value-added services and opportunity consulting
services for specified fees which, in light of the strategic importance to the
Company of the PSINet IRUs and the Company's other arrangements with IXC
described herein, PSINet has agreed will be, or will be equal to, the lowest
offered by the Company. To date, no products or services have been provided
under the Marketing Agreement.
Other Transactions. In addition to the transactions described above,
IXC Communications or its affiliates and PSINet are parties to transactions in
the ordinary course of business which the Company believes are on terms no more
favorable than could be obtained on an arms' length basis with independent third
parties. On July 21, 1999, IXC Communications announced that it had agreed to
merge with Cincinnati Bell, Inc.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors met 14 times during the year ended December 31,
1998. Each of the directors except for Mr. Swett attended 75% or more of the
meetings held by the Board of Directors and any Committees of the Board of
Directors on which such person served during the last fiscal year.
The Company's Board of Directors has three standing committees: the
Audit Committee, the Compensation Committee and the Financing Committee. The
Board does not have a standing nominating committee.
The Audit Committee met five times during the year ended December 31,
1998. The Audit Committee, among other things, recommends the firm to be
appointed as independent accountants to audit the Company's financial
statements, discusses the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants the
Company's interim and year-end operating results, considers the adequacy of the
internal accounting controls and audit procedures of the Company and reviews the
non-audit services to be performed by the independent accountants. The current
members of the Audit Committee are Messrs. Baumer, Sharp and Swett.
<PAGE>
-10-
The Compensation Committee met eight times during the year ended
December 31, 1998. The Compensation Committee reviews and recommends the
compensation arrangements for management of the Company and administers the
Company's Executive Stock Option Plan, Executive Stock Incentive Plan and
Strategic Stock Incentive Plan. The current members of the Compensation
Committee are Messrs. Baumer, Schrader and Swett.
The Financing Committee did not meet during the year ended December 31,
1998, although certain matters within the purview of such committee, including
debt issuances, were approved by the full Board of Directors. The Financing
Committee may authorize and approve financings of debt securities by the
Company, lease financings and equity financings subject to certain limitations.
The current members of the Financing Committee are Messrs. Baumer, Schrader and
Sharp.
COMPENSATION OF DIRECTORS
Directors, other than those who also are employees or consultants of
the Company or are serving on the Board of Directors as representatives of a
shareholder, receive annual fees of $15,000, with Committee Chairmen receiving
an additional amount of $3,000 each per year, and are eligible for awards under
the Company's Directors Stock Incentive Plan (the "Directors' Plan"). The
Directors' Plan provides for initial option grants with respect to 10,000 shares
of Common Stock ("Initial Grants") to be made to each eligible director upon his
or her first election to the Company's Board of Directors and, thereafter, for
annual grants of options to purchase 5,000 shares of Common Stock to be made to
each eligible director who has served on the Company's Board of Directors for at
least 12 months. Options are exercisable for 10 years after the date of grant.
The exercise price for any option under the plan shall be equal to the fair
market value of the Common Stock at the time such option is granted. The plan
provides that Initial Grants thereunder vest over a four-year period in respect
of the exercise of one-sixteenth of the shares subject thereto on the last day
of each calendar quarter following such grant, and that annual option awards
vest over a two-year period in respect of one-half of the shares subject thereto
on each of the first and second anniversaries of the grant date. Each of Messrs.
Sharp and Swett received Initial Grants upon their election to the Company's
Board of Directors in accordance with the Directors' Plan. In addition,
directors who are not also officers of the Company receive fees of $1,000 per
day for Board and Committee meetings, $200 per day for Board and Committee
conference calls and $1,250 per day for on-site consultations not in conjunction
with a Board of Directors meeting. Committee Chairmen receive an additional $250
for each Committee meeting attended and $50 for each Committee conference call
attended. Directors also are reimbursed for certain reasonable expenses incurred
in attending Board or Committee meetings. The Company has issued to Mr. Baumer
warrants to purchase 25,000 shares of Common Stock for $1.60 per share in return
for Mr. Baumer's services as a director of the Company through 1996. Mr. Baumer
also holds warrants to purchase an additional 25,000 shares in return for
consulting services previously rendered to the Company by Mr. Baumer. Each of
these warrants became fully vested effective September 9, 1996. Other than these
fees and awards and the warrants issued to Mr. Baumer, no member of the Board of
Directors receives any fees or other compensation for serving in such capacity.
<PAGE>
-11-
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth in summary form
the compensation paid by the Company to its chief executive officer and to each
of its four most highly compensated executive officers other than the chief
executive officer as of December 31, 1998 for services rendered to the Company
in all capacities.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- -------------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1)($) COMPENSATION ($) OPTIONS (#) COMPENSATION($)
- - ------------------ ---- ------ ------------ ---------------- ----------- ---------------
(1)($)
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader 1998 $314,519 $200,000 $ 5,905 (2) -- $ 1,195 (3)
Chairman and 1997 248,519 150,000 7,457(2) -- 3,135 (3)
Chief Executive Officer 1996 194,471 2,438 2,015(2) -- 3,135 (3)
Harold S. Wills (4) 1998 $360,500 $150,000 $ 9,354 (5) 225,000 (6) $ 3,250 (7)
President and 1997 252,654 100,000 9,929 (5) 250,000 (6) 3,125 (7)
Chief Operating Officer 1996 146,154 77,500 30,825 (5) 250,000 (6) --
David N. Kunkel 1998 $334,192 $150,000 $ 4,288 (8) 200,000 (9) $ 3,250 (7)
Executive Vice President 1997 299,327 100,000 6,550 (8) 100,000 (9) 3,125 (7)
and General Counsel 1996 272,596 103,438 88,474 (8) 251,193 (9) --
Edward D. Postal (10) 1998 $252,288 $115,000 $ 5,590 (11) 200,000 (12) $ 3,250 (7)
Senior Vice President and 1997 204,077 75,000 6,880 (11) 75,000 (12) 3,125 (7)
Chief Financial Officer 1996 34,865 60,872 -- 100,000 (12) --
Harry G. Hobbs (13) 1998 $197,847 $112,500 $23,143 (14) 250,000 (15) $ 3,250 (7)
Senior Vice President and 1997 5,385 25,000 -- 50,000 (15) --
President, PSINet Europe
- - -------------------------------
(1) Amounts reported in respect of a particular fiscal year reflect amounts
earned for services rendered in that fiscal year regardless of when paid.
(2) Consists of (i) $1,034 and $5,107 paid to Mr. Schrader with respect to
installation of a security system at Mr. Schrader's home in 1998 and 1997,
respectively, (ii) a car allowance of $3,290, $2,350 and $2,015 in 1998,
1997 and 1996, respectively, and (iii) a $1,581 taxable trip provided by
the Company to Mr. Schrader in 1998.
(3) Consists of: (i) insurance premiums in the amount of $2,135 paid by the
Company in each of 1997 and 1996 with respect to the proportionate
beneficial interest of Mr. Schrader's spouse in an insurance policy on Mr.
Schrader's life and (ii) matching contributions made to Mr. Schrader's
account under the Company's 401(k) Plan in the amount of $1,195 in 1998
and in the amount of $1,000 in each of 1997 and 1996.
<PAGE>
-12-
(4) Mr. Wills joined the Company as Executive Vice President and Chief
Operating Officer in April 1996. Accordingly, no information is provided
for periods prior thereto with respect to Mr. Wills.
(5) Consists of (i) $473 and $6,051 paid to Mr. Wills for installation of a
security system at his home in 1998 and 1997, respectively, (ii) car
allowances of $3,173, $3,878 and $256 paid to Mr. Wills in 1998, 1997 and
1996, respectively, (iii) a $5,708 taxable trip provided by the Company to
Mr. Wills in 1998, and (iv) payments made to Mr. Wills in 1996 in
connection with his relocation as follows: $15,271 for certain closing
costs on his new home and $15,298 for moving expenses.
(6) Consists of (i) 125,000 options issued under the Company's Strategic Stock
Incentive Plan in 1998, (ii) 125,000, 50,000 and 250,000 options issued
under the Company's Executive Stock Incentive Plan in 1998, 1997 and 1996,
respectively, and (iii) 200,000 options issued under the Company's
Executive Stock Option Plan in 1997. Does not include options with respect
to 100,000 shares of Common Stock granted in November 1996 which were
cancelled as of December 31, 1996 due to a failure to satisfy certain
vesting conditions.
(7) Consists of matching contributions made to the named officer's account
under the Company's 401(k) Plan in the years indicated.
(8) Consists of (i) car allowances of $4,288 and $3,544 paid to Mr. Kunkel in
1998 and 1997, respectively, (ii) payments made to Mr. Kunkel in
connection with his relocation as follows: $830 for certain closing costs
on the sale of his primary residence paid to Mr. Kunkel in 1997, $2,176
and $36,299 for certain carrying costs for his residence pending such sale
paid to Mr. Kunkel in 1997 and 1996, respectively, and (iii) $52,175 paid
to Mr. Kunkel in 1996 pursuant to an agreement to guarantee Mr. Kunkel a
minimum price on the sale of his primary residence.
(9) Consists of (i) 100,000 options issued under the Company's Strategic Stock
Incentive Plan in 1998, (ii) 100,000 options issued under the Company's
Executive Stock Incentive Plan in 1998, (iii) 100,000 options issued
pursuant to the Company's Executive Stock Option Plan in 1997, and (iv)
options issued in connection with a company-wide repricing of certain
previously granted options in 1996. Does not include options with respect
to 18,494 shares granted in February 1996 (with respect to 1995) which
were replaced in connection with such repricing or options with respect to
75,000 shares of Common Stock granted in November 1996 which were
cancelled as of December 31, 1996 due to a failure to satisfy certain
vesting conditions. Does not include options with respect to 251,193
shares issued under the Company's Executive Stock Incentive Plan pursuant
to Mr. Kunkel's employment agreement with the Company which were replaced
in connection with a company-wide repricing as of April 5, 1996.
(10) Mr. Postal joined the Company as Vice President and Chief Financial
Officer in October 1996. Accordingly, no information is provided for
periods prior thereto with respect to Mr. Postal.
(11) Represents a car allowance to Mr. Postal.
<PAGE>
-13-
(12) Consists of (i) 100,000 options issued under the Company's Strategic Stock
Incentive Plan in 1998, (ii) 100,000, 36,050 and 100,000 options issued
under the Company's Executive Stock Incentive Plan in 1998, 1997 and 1996,
respectively, and (iii) 38,950 options issued under the Company's
Executive Stock Option Plan in 1997.
(13) Mr. Hobbs joined the Company as Vice President, Customer Administration in
August 1997. Accordingly, no information is provided for periods prior
thereto with respect to Mr. Hobbs. Mr. Hobbs was promoted to Senior Vice
President of the Company and President of PSINet Europe in October 1998.
(14) Consists of (i) a payment of $21,562 made to Mr. Hobbs pursuant to his
employment agreement in connection with his relocation to Switzerland,
which amount is equal to one-month of Mr. Hobbs' salary ($18,750) plus a
15% Cost of Living Adjustment ($2,812) , and (ii) a $1,581 taxable trip
provided by the Company to Mr.
Hobbs.
(15) Consists of (i) 100,000 options issued in 1998 under the Company's
Strategic Stock Incentive Plan and (ii) 150,000 and 50,000 options issued
in 1998 and 1997, respectively, under the Company's Executive Stock
Incentive Plan.
</TABLE>
Option Grants. The following table sets forth certain information, as
of December 31, 1998, concerning individual grants of stock options made during
the fiscal year ended December 31, 1998 to each of the persons named in the
Summary Compensation Table above.
<TABLE>
<CAPTION>
OPTION GRANTS
Individual Grants
-------------------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE
SECURITIES PERCENT OF TOTAL EXERCISE VALUE AT ASSUMED
UNDERLYING OPTIONS GRANTED OR BASE ANNUAL RATES OF STOCK
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION PRICE APPRECIATION
NAME GRANTED (#) FISCAL YEAR (1) ($/SH) DATE FOR OPTION TERM
- - ---- --------------- ---------------- ------- --------- ---------------------
5%($) 10%($)
----- ------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader 0 0 $0 -- $0 $0
Harold S. Wills 100,000 (2) 1.54% $7.6250 02/20/08 $479,532 $1,215,229
125,000 (3) 1.93 10.6875 06/10/08 840,164 2,129,140
David N. Kunkel 100,000 (2) 1.54% $7.6250 02/20/08 $479,532 $1,215,229
100,000 (3) 1.54 10.6875 06/10/08 672,131 1,703,312
Edward D. Postal 100,000 (2) 1.54% $7.6250 02/20/08 $479,532 $1,215,229
100,000 (3) 1.54 10.6875 06/10/08 672,131 1,703,312
Harry G. Hobbs 50,000 (2) 0.77% $7.7188 02/27/08 $242,716 $ 615,089
100,000 (3) 1.54 10.6875 06/10/08 672,131 1,703,312
100,000 (2) 1.54 10.5000 08/31/08 660,339 1,673,430
- - ---------------------------
<PAGE>
-14-
(1) Based upon total grants of options in respect of 6,483,804 shares of
Common Stock made during 1998.
(2) Granted under the Company's Executive Stock Incentive Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to continued
employment by the Company on each of such dates.
(3) Granted under the Company's Strategic Stock Incentive Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to the continued
employment by the Company on each of such dates. Under each of the
Company's Executive Stock Incentive Plan, Executive Stock Option Plan,
Directors Stock Incentive Plan and Strategic Stock Incentive Plan, upon
the acquisition of beneficial ownership of 30% or more of the Company's
outstanding Common Stock by any person other than a wholly-owned
subsidiary of the Company or the occurrence of certain other change in
control events specified in such plans, including certain mergers,
consolidations and transfers of all or substantially all of the Company's
assets, all options and stock appreciation rights will become fully
exercisable and all restricted stock awards will become immediately
vested.
</TABLE>
Aggregate Year-End Option Values. The following table provides
information concerning the number of unexercised options held by each of the
individuals named in the Summary Compensation Table as of December 31, 1998.
Also reported are the values for "in the money" options, which represent the
positive spread between the exercise price and the fair market value of the
Company's Common Stock as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998(#) AT DECEMBER 31, 1998 ($)(1)
----------------------- ---------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader -- -- 427,000 0 $8,090,425 --
Harold S. Wills -- -- 301,041 423,959 $3,744,327 $5,191,610
David N. Kunkel -- -- 296,414 254,779 $3,532,722 $3,087,248
Edward D. Postal -- -- 115,055 259,945 $1,361,632 $3,065,180
Harry G. Hobbs -- -- 47,917 252,083 $ 560,222 $2,781,963
- - ---------------
(1) Based upon a closing price of $20.875 on December 31, 1998, as reported on
The Nasdaq Stock Market.
</TABLE>
<PAGE>
-15-
Employment Agreements. The Company has employment agreements with each
of Messrs. Wills, Kunkel, Postal and Hobbs. The Company also has employment
agreements with most of its other officers other than Mr. Schrader pursuant to
which they serve in their respective capacities.
Mr. Wills's employment agreement provides for a four-year term ending
October 2002 and a current annual base salary of $425,000, and also provides for
a performance bonus of $150,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chairman.
Mr. Kunkel's employment agreement provides for a four-year term ending
in October 2002 and a current annual base salary of $350,000, and also provides
for a performance bonus of $150,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chairman.
Mr. Postal's employment agreement provides for a four-year term ending
October 2002 and a current annual base salary of $265,000, and also provides for
a performance bonus of $115,000 in 1998 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chairman.
Mr. Hobbs's employment agreement provides for a 27-month term ending
December 2000 and a current annual base salary of $225,000, and also provides
for a performance bonus of up to $112,500 in 1998 and for performance bonuses in
subsequent years, subject to achievement of certain performance objectives
established by the Company's Chief Operating Officer. Mr. Hobbs's employment
agreement also provides for certain payments relating to Mr. Hobbs's relocation
to the Company's European office in Switzerland, including housing and
automobile expenses and a Cost of Living Adjustment to Mr. Hobbs's monthly
salary not to exceed 15% of such salary.
These employment agreements also provide for standard employee
benefits, including, without limitation, participation in the Company's 401(k)
plan and bonus plan as well as life, health, accident and disability insurance.
These agreements also provide for a 24-month non-competition period. If the
Company elects to enforce such non-competition restrictions, these officers are
entitled, for a period of 24 months after termination of their employment, 12 to
receive their then current base salary and all benefits being provided to them
at the time of termination. Each of these employment agreements (other than that
of Mr. Hobbs) provides that options awarded pursuant thereto are subject to
immediate vesting upon the occurrence of certain change in control events.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee currently is composed of Messrs. Baumer and
Swett, each a non-employee director of the Company, and Mr. Schrader. The
Compensation Committee is responsible, subject to the approval of the Board of
Directors, for establishing the Company's compensation program.
<PAGE>
-16-
COMPENSATION PHILOSOPHY AND POLICY.
The Company's compensation program generally is designed to motivate
and reward the Company's executive officers and other personnel responsible for
attaining financial, operational and strategic objectives that will contribute
to the overall goal of enhancing shareholder value. In administering the plan,
the Compensation Committee assesses the performance of individuals and the
Company relative to those objectives. The Company's compensation program
generally provides incentives to achieve annual and longer term objectives. The
principal elements of the compensation plan include base salary, cash bonus
awards and stock awards in the form of grants of stock options and restricted
Common Stock. These elements generally are blended in order to provide
compensation packages which provide competitive pay, reward the achievement of
financial, operational and strategic objectives and align the interests of the
Company's executive officers and other high level personnel with those of the
Company's Shareholders.
Base Salary. During 1998, the Company had employment agreements with
each of Messrs. Wills, Kunkel, Postal and Hobbs, as well as with most of the
other individuals who served as officers during such period, other than Mr.
Schrader. Mr. Schrader's compensation was determined based upon his leadership
of the Company in setting and pursuing its financial, operational and strategic
objectives. Mr. Schrader did not participate as a member of the Compensation
Committee in determining his compensation.
The Company considers the experience of the individual, the scope and
complexity of the position and the size and growth rate of the Company, the
salary payable to Mr. Schrader as well as the compensation paid by the Company's
competitors are setting base salaries for officers and employees. Due to the
increasingly competitive nature of the Company's industry segment, compensation
amounts paid by the Company's competitors are expected to continue to grow in
importance to the Company as it assesses its compensation structure in the
future in order to ensure its ability to continue to attract and retain highly
qualified executives.
Bonuses. All full-time employees of the Company, including executive
officers to the extent they are not already entitled to receive a bonus pursuant
to the terms of their respective employment agreements, are eligible to receive
bonuses from the Company subject to satisfaction of specified performance
criteria. For 1998, Messrs. Wills, Kunkel, Postal and Hobbs received bonuses
pursuant to the terms of their respective employment agreements. See "Executive
Compensation--Employment Agreements." In determining the level of bonus paid to
Mr. Schrader in 1998, the Compensation Committee, in addition to consideration
of Mr. Schrader's individual performance, took particular note of the Company's
overall increased revenues and successful debt offerings during 1998, as well as
the Company's continued expansion through the successful completion of the
acquisition of 18 Internet Service Providers in the U.S., Canada, Asia and
Europe during the fifteen months ended December 31, 1998.
Stock Awards. To promote the Company's long-term objectives, stock
awards are made to directors, officers and employees who are in a position to
make a significant contribution to the Company's long-term success. The stock
awards are made to officers and employees pursuant to the Company's Executive
Stock Option Plan, in the form of incentive stock options and non-qualified
stock options, pursuant to the Company's Executive Stock Incentive Plan, in the
form of incentive stock options, non-qualified stock options, stock appreciation
rights and
<PAGE>
-17-
restricted stock awards, and to directors pursuant to the Company's Directors
Stock Incentive Plan, in the form of non-qualified stock options. The Company
also makes awards in the form of incentive stock options, non-qualified stock
options, stock appreciation rights and restricted stock grants to key personnel
in connection with acquisitions, mergers, strategic alliances and other business
combinations pursuant to its Strategic Stock Incentive Plan.
Stock options represent rights to purchase shares of the Company's
Common Stock in varying amounts pursuant to a vesting schedule determined by the
Compensation Committee at a price per share specified on the date of grant of
the option (which may not be less than the fair market value on the date of the
grant). Stock options expire at the conclusion of a fixed term (generally 10
years).
Stock appreciation rights may be granted in tandem with options and,
upon exercise, entitle the holder to receive cash, Common Stock or a combination
thereof (at the discretion of the Compensation Committee) having a value equal
to the excess of fair market value per share of the Common Stock on the exercise
date multiplied by the number of shares with respect to which the right is
exercised over the option exercise price for such number of shares.
Restricted stock awards consist of a specified number of shares of the
Company's Common Stock with an appropriate restrictive legend affixed thereto.
Shares of restricted stock may not be sold or otherwise transferred until
ownership vests in the recipient, at the time and in the manner specified by the
Compensation Committee at the time of the award. Since the stock options, stock
appreciation rights and restricted stock awards vest and may grow in value over
time, these components of the Company's compensation plan are designed to reward
performance over a sustained period and to enhance shareholder value through the
achievement of corporate objectives. The Company intends that these awards will
strengthen the focus of its directors, officers and employees on managing the
Company from the perspective of a person with an equity stake in the Company.
In selecting recipients and the size of grants, the Compensation
Committee considers various factors such as the potential of the recipient, the
salary of the recipient and competitive factors affecting the Company's ability
to attract and retain employees, prior grants, a comparison of awards made to
officers in comparable positions at similar companies and Company performance.
No stock awards were made during 1998 to Mr. Schrader. During 1998,
Messrs. Wills, Kunkel and Postal were each awarded options to purchase 100,000
shares of the Company's Common Stock under the Company's Executive Stock
Incentive Plan, and Mr. Hobbs was awarded options to purchase 150,000 shares of
the Company's Common Stock under such plan. In addition, during 1998, Messrs.
Kunkel, Postal and Hobbs were awarded options to purchase 100,000 shares of the
Company's Common Stock under the Company's Strategic Stock Incentive Plan, and
Mr. Wills was awarded options to purchase 125,000 shares of the Company's Common
Stock under such plan. Awards made to other executive officers during 1998
consisted of options to purchase an aggregate of 268,500 shares under the
Company's Executive Stock Incentive Plan and 16,000 shares under the Company's
Strategic Stock Incentive Plan. Total option awards under the Company's
Executive Stock Option Plan and the Company's Executive Stock Incentive Plan
were made during 1998 with respect to 23,500 and 4,444,760 shares of Common
Stock,
<PAGE>
-18-
respectively. Options to purchase 1,990,544 shares of Common Stock were awarded
under the Company's Strategic Stock Incentive Plan during 1998. Awards made to
directors during 1998 consisted of options with respect to 25,000 shares of
Common Stock under the Company's Directors Stock Incentive Plan.
Tax Deductibility of Executive Compensation. Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), imposes
limitations upon the federal income tax deductibility of compensation paid to
the Company's chief executive officer and to each of the other four most highly
compensated executive officers of the Company. Under these limitations, the
Company may deduct such compensation only to the extent that during any fiscal
year the compensation paid to any such officer does not exceed $1,000,000 or
meets certain specified conditions (such as certain performance-based
compensation that has been approved by the Company's Shareholders). Based on the
Company's current compensation plans and policies and proposed regulations
interpreting the Internal Revenue Code, the Company and the Compensation
Committee believe that, for the near future, there is not a significant risk
that the Company will lose any significant tax deduction for executive
compensation. The Company's compensation plans and policies will be modified to
ensure full deductibility of executive compensation if the Company and the
Compensation Committee determine that such an action is in the best interests of
the Company.
COMPENSATION COMMITTEE
William H. Baumer, Chairman
William L. Schrader
Ralph J. Swett
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules promulgated thereunder require
the Company's officers and directors and persons who own more than ten percent
of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and to furnish to the Company copies of all such filings. The Company
has determined, based solely upon a review of those reports and amendments
thereto furnished to the Company during and with respect to the year ended
December 31, 1998 and written representations from certain reporting persons,
that Mr. Swett was inadvertently late in filing a Form 4 reporting a purchase of
10,000 shares of the Company's Common Stock on June 4, 1998. In addition, Sandra
L. Blaisdell and James A. Haid, who were at that time classified by the Company
as executive officers and thus were subject to Section 16(a) filing
requirements, were inadvertently late in filing Forms 3, each of which was due
October 1, 1998 and filed October 16, 1998.
<PAGE>
-19-
STOCK PRICE PERFORMANCE
Set forth below is a line graph comparing the cumulative total
shareholder return on the Company's Common Stock, based upon the market price of
the Company's Common Stock as reported by The Nasdaq Stock Market, with the
cumulative total return of companies in the Nasdaq Composite Index and the
Nasdaq Telecommunications Index for the period from May 1, 1995 through December
31, 1998. Prior to May 1, 1995, the Company's Common Stock was not publicly
traded.
A GRAPH APPEARS HERE
<TABLE>
<CAPTION>
5/2/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PSINet, Inc. 100.00 99.61 140.98 150.00 63.52 75.41 71.31 71.31
NASDAQ Composite Index 100.00 110.97 124.04 125.10 131.64 142.38 147.45 154.70
NASDAQ Telecom Index 100.00 109.80 123.74 125.66 132.17 136.32 128.23 128.45
3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
------ ------- ------- -------- ------- ------- ------- --------
PSINet, Inc. 48.36 49.18 52.87 33.61 72.95 85.25 91.40 136.89
NASDAQ Composite Index 146.38 173.21 202.51 189.92 221.83 228.25 206.64 266.51
NASDAQ Telecom Index 119.43 149.92 174.03 189.80 240.75 256.98 228.53 310.58
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1998, the members of the
Compensation Committee of the Company's Board of Directors consisted initially
of Messrs. Baumer and Schrader and Mr. William Wilson, who resigned from the
Company's Board of Directors effective as of February 25, 1998. Effective as of
February 25, 1998, Mr. Wilson was replaced on the Compensation Committee by Mr.
Swett. Mr. Schrader is the Chairman of the Company's Board of Directors and
Chief Executive Officer of the Company. None of such persons other than Mr.
Schrader is an executive officer or employee of the Company.
PROPOSAL 1 - APPROVAL OF 1999 EMPLOYEE STOCK PURCHASE PLAN AND
RELATED 1999 INTERNATIONAL EMPLOYEE STOCK PURCHASE
PLAN
The 1999 Employee Stock Purchase Plan and the 1999 International
Employee Stock Purchase Plan (the "Purchase Plans") were adopted by the Board of
Directors in June 1999 to encourage employees of the Company and its
subsidiaries to acquire a proprietary interest in the Company by purchasing
Common Stock through voluntary payroll deductions. The U.S. Purchase Plan is
designed as an "employee stock purchase plan" within the meaning of Section
423(b) of the Internal Revenue Code, and to qualify thereunder must be approved
by the Company's Shareholders. The International Employee Stock Purchase Plan
for non-U.S.
<PAGE>
-20-
employees does not provide the same tax incentives due to differences in
applicable law. The Board believes this opportunity for employee equity
participation will enhance the Company ability to attract, and to promote the
retention and motivation of, employees. An aggregate of 1,057,500 shares of the
Company's Common Stock has been reserved for issuance under the Purchase Plans.
Administration
The Board of Directors has appointed a committee of Company executives
to serve as the plan administrators of the Purchase Plans. All questions of
interpretation or application of the Purchase Plans are determined by the
Committee, whose decisions are final, conclusive and binding upon all
participants.
Eligibility and Participation
Any person regularly employed by the Company or a subsidiary of the
Company designated by the Committee 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 result of participation in the U.S. Purchase
Plan would own or hold options or rights to acquire, 5% or more of the Company's
Common Stock may participate in the Purchase Plans. As of August __, 1999,
approximately 1,015 U.S. employees were eligible to participate in the U.S.
Purchase Plan. The International Stock Purchase Plan covers certain of the
Company's 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.
Offering Periods
Each offering period is a calendar quarter, with the first offering
period under the U.S. Purchase Plan commencing in the fourth quarter of 1999.
Purchase of Shares
Eligible U.S. employees who wish to participate in the U.S. Purchase
Plan allocate a portion of their after-tax payroll to the U.S. Purchase Plan,
which amount is deducted from the employee's paycheck by the Company and
directed to the employee's accumulation account. At the end of each quarter, the
employee funds in the accumulation account are used to purchase Common Stock.
The Internal Revenue Code imposes a $25,000 market value limit per employee per
calendar year on the combined value of the Common Stock purchased through the
Purchase Plan as calculated at the beginning of each quarterly purchase period.
If an employee reaches this limit at any quarterly purchase date, any remaining
funds in the accumulation account will be retained and applied to the next
eligible quarterly purchase date.
Eligible non-U.S. employees who wish to participate in the
International Purchase Plan may do so through payroll deduction or through
payments to their employer or the Company as established under the International
Purchase Plan and/or requirements of applicable local law.
<PAGE>
-21-
The employee's stock account is credited with any cash dividends paid
on his or her Common Stock in the account. These dividends are automatically
reinvested in additional Common Stock at no cost to the employee as the Company
pays the transaction fees; the amount of such cash dividends, however, are
taxable to the employee. Any stock dividends are also automatically added to the
employee's stock account.
The Company may make a pro rata reduction in the number of shares
purchasable if such number exceeds the number of shares available for issuance
under the Purchase Plan. When an employee withdraws his or her participation in
a Purchase Plan by giving written notice to the Company of his or her election
to withdraw, all accumulated payroll deductions will be used to purchase shares
of Common Stock on the next purchase date or returned to the employee, if the
employee makes the election no later than prior to the payroll period preceding
the next purchase date. Upon withdrawal, future payroll deductions will cease.
An employee's withdrawal from the Purchase Plan prior to the end of a given
offering period does not affect his or her eligibility to participate in
succeeding offering periods.
Purchase Price
The purchase price per share at which shares of Common Stock are sold
to participating employees is 85% of the lower of the fair market value per
share of Common Stock on (1) the 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 Market.
Payroll Deductions for U.S. Employees
The funds for purchasing shares for U.S. employees are accumulated by
payroll deductions, the rate of which may be increased or decreased by the
employee during the offering period. Payroll deductions do not accrue interest.
An employee's participation in the Purchase Plan, including the rate of payroll
deductions, remains in effect for successive offering periods unless the
employee withdraws or amends such participation or such employee's employment is
terminated. An employee may discontinue his or her payroll deductions and
participation in the Purchase Plans at any time.
Termination of Participation
An employee's participation in the Purchase Plans is terminated when
the employee either voluntarily elects to withdraw his or her entire account, or
his or her employment is terminated. Once an employee's participation is
terminated, the employee is not entitled to again participate in the Purchase
Plans until the first day of the next offering period. Upon termination of
participation, the employee is entitled to receive the shares and any funds in
his or her individual account. Upon termination of an employee's employment,
amounts in that employee's accumulation account will be paid to the employee and
his or her participate in the Purchase Plan will cease.
Capital Changes
<PAGE>
-22-
In the event any change is made in the Company's capitalization during
an offering period, such as a stock split, reverse stock split or stock
dividend, which results in an increase or decrease in the number of shares of
Common Stock outstanding without receipt of consideration by the Company,
appropriate adjustment will be made in the purchase price and in the number of
shares purchasable under the Purchase Plans.
The Purchase Plans will terminate automatically in the event of a
dissolution or liquidation of the Company and any funds in the Purchase Plan
account will be refunded to employees without interest.
Amendment and Termination of the Purchase Plans
The Board of Directors may amend the Purchase Plans at any time from
time to time or may terminate the Purchase Plan without approval of the
Shareholders. However, no such action by the Board of Directors may alter or
impair any shares purchased or rights previously granted under the Purchase
Plans without the consent of the affected employees.
The Purchase Plans provide that shareholder approval of any amendment
to the Purchase Plans is required to increase the number of shares which can be
purchased thereunder, materially modify the eligibility provisions, materially
increase the benefits, or reduce the purchase price formula.
U.S. Federal Income Tax Information
No income will be taxable to an employee participating in the U.S.
Purchase Plan at the time of purchase of the shares of Common Stock at the
formula discount from fair market value. Upon disposition of the shares, the
employee will generally be subject to tax. If the shares have been held by the
employee for more than two years after the date of the onset of the offering
period and more than one year after the purchase date of the shares, the lesser
of (i) the excess of the fair market value of the shares at the time of such
disposition over the purchase price, or (ii) 15% of the fair market value of the
shares on the first day of the offering period will be taxable as ordinary
income, and any further gain will be treated as long-term capital gain. If the
shares are disposed of before the expiration of the holding periods described
above, the excess of the fair market value of the shares on the purchase date
over the purchase price will be treated as ordinary income, and further gain or
loss on such disposition will be capital gain or loss. Different rules may apply
with respect to participating employees subject to Section 16(b) of the
Securities Exchange Act of 1934. The Company is not entitled to a deduction for
amounts taxable to an employee except to the extent of the ordinary income
taxable to an employee upon disposition of shares prior to the expiration of the
holding periods described above.
This is only a summary of the U.S. federal income tax consequences of
the Purchase Plan to employees and the Company and this summary does not purport
to be complete. Reference should be made to applicable provisions of the
Internal Revenue Code. In addition, the summary does not discuss the tax
consequences of an employee's death or the income tax laws of any municipality,
state or foreign country in which the employee may reside.
VOTE REQUIRED
<PAGE>
-23-
Approval of each of the 1999 Employee Stock Purchase Plan and the 1999
International Employee Stock Purchase Plan require the affirmative vote of a
majority of the votes cast at the Special Meeting. Unless marked to the
contrary, proxies received will be voted for approval of the Purchase Plans.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
EMPLOYEE STOCK PURCHASE PLANS.
PROPOSAL 2 - APPROVAL OF A RESOLUTION PERMITTING THE COMPANY TO ISSUE COMMON
STOCK AS A DIVIDEND ON ITS 6 3/4% SERIES C
PREFERRED STOCK
On April 28, 1999, the Board of Directors approved and adopted an
Amendment to the Company's Certificate of Incorporation. This amendment is dated
April 30, 1998 and was filed as part of the Certificate of Incorporation on May
3, 1999 (the "Amendment"). In part, it authorized the Company to establish and
issue a series of Preferred Stock of the Corporation to be designated 6 3/4%
Series C Cumulative Convertible Preferred Stock ("Series C Preferred Stock").
The Amendment also authorized the Company to pay dividends on the Series C
Preferred Stock at a yearly rate of 6 3/4% of the Liquidation Preference of
$50.00 per share. In addition, the Amendment authorized the Company to pay
dividends on the Preferred Stock in the form of shares of the Company's Common
Stock subject to applicable law. The creation of the Series C Preferred Stock
was effective at the time the Amendment was adopted, but the proposed resolution
to permit distribution of Common Stock as a dividend on the Series C Preferred
Stock (the "Series C Dividend Resolution"), which is permitted under recent
amendments to the New York Business Corporation Law which governs the Company's
corporate existence, requires the approval of the majority of the outstanding
shares of Common Stock to become effective.
If the Shareholders approve the Series C Dividend Resolution, the Board
of Directors will have discretion to distribute authorized but unissued shares
of the Company's Common Stock as dividends to holders of the Series C Preferred
Stock. The Board of Directors normally has the power to issue additional
authorized shares of the Common Stock, but shareholder approval is required by
the New York Business Corporation Law when the Company seeks to distribute
shares of one class of stock to holders of another class of stock. Approval of
the Series C Dividend Resolution would not require that the Board of Directors
pay dividends on the Series C Preferred Stock with shares of Common Stock, since
the Board of Directors would continue to have discretion to issue dividends on
the Preferred Stock in the form of cash (or, as a third alternative, as a
combination of cash and shares of the Common Stock).
The approval of the Series C Dividend Resolution will not have any
effect on the rights and interests of the holders of the Common Stock. However,
the issuance of additional shares of the Common Stock could, depending on the
circumstances, dilute earnings per share and decrease the book value per share,
and each shareholder's percentage ownership of the Company may be
proportionately reduced. As of the record date, the Company has approximately
__________ shares of its Common Stock issued and outstanding, and an additional
number of approximately __________ shares of its Common Stock authorized but
unissued.
<PAGE>
-24-
The Board of Directors recommends the approval of the Series C Dividend
Resolution because it will allow the Company to issue Common Stock as a dividend
on the Series C Preferred Stock at the Board's discretion. This will allow the
Company greater flexibility to use its cash assets for other purposes, including
the acquisition of new capital assets.
Approval of the Series C Dividend Resolution requires the affirmative
vote by holders of a majority of the outstanding shares of Common Stock. Unless
marked to the contrary, proxies received will be voted for approval of the
Dividend Provision.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE SERIES C DIVIDEND RESOLUTION, PERMITTING THE COMPANY TO ISSUE SHARES OF
ITS COMMON STOCK AS A DIVIDEND ON ITS SERIES C PREFERRED STOCK.
PROPOSALS 3 AND 4 - AMENDMENTS TO CERTIFICATE OF INCORPORATION
The Board of Directors has voted unanimously to approve certain
amendments to provisions of the Company's Certificate of Incorporation and to
recommend such amendments to the Shareholders. The proposed amendments, if
authorized, would: (i) permit the Company to issue shares of one class or series
of its capital stock to as a distribution to holders of any other class or
series of its capital stock (Proposal 3); and (ii) increase the aggregate number
of authorized shares of capital stock (Proposal 4). The text of the proposed
amendments is attached to this Proxy Statement as Exhibit A. If authorized by
the Shareholders, the proposed amendments to the Company's Certificate of
Incorporation will become effective upon the filing of one or more Certificates
of Amendment with the Secretary of State of New York, which will occur as soon
as practicable after authorization.
PROPOSAL 3 - APPROVAL OF AN AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION ALLOWING THE COMPANY F
TO ISSUE SHARES OF ONE CLASS OF ITS STOCK AS A
DISTRIBUTION TO HOLDERS OF ANOTHER CLASS OF ITS
STOCK
The Board of Directors has adopted a resolution approving and
recommending to the Company's Shareholders an amendment to the Company's
Certificate of Incorporation granting to the Board of Directors the discretion
to issue shares of one class or series of the Company's capital stock as a
distribution to holders of another class or series of the Company's capital
stock (the "Stock Dividend Amendment"). Recently-enacted amendments to the New
York Business Corporation Law, effective in 1998, give the board of directors of
a new-formed corporation discretion to, among other things, make such
distributions unless expressly prohibited by its certificate of incorporation.
Since PSINet Inc. was formed before the statutory amendments were adopted, an
amendment to the Company's Certificate of Incorporation is necessary to grant
this discretion to the Company's Board of Directors. Otherwise, any such
distribution must be approved at a shareholder's meeting. A majority vote of the
outstanding shares is necessary to pass the
<PAGE>
-25-
proposed Stock Dividend Amendment and allow the Company to take advantage of the
newly modernized New York law.
If the Shareholders approve the Stock Dividend Amendment, the Board of
Directors will have discretion to distribute authorized but unissued shares of
any class of stock to holders of shares of any class of stock, without the
expense and delay of a shareholder's meeting. For example, the distribution of
Common Stock as a dividend on Series C Preferred Stock, which the Shareholders
are considering under Proposal 2 at this Special Meeting, would be a matter over
which the Board of Directors would have authority if the Stock Dividend
Amendment is approved.
As of the record date, the Company has approximately __________ shares
of its Common Stock issued and outstanding, and approximately __________ shares
of its Common Stock authorized but unissued. The Company also has approximately
__________ shares of its Series C Preferred Stock issued and outstanding, and an
additional number of approximately __________ shares of its Preferred Stock
authorized but unissued.
The approval of the Stock Dividend Amendment itself will not have any
effect on the interests of the holders of the Company's stock. The Stock
Dividend Amendment changes the rights of the holders of the Common Stock only
with respect to the right to approve share distributions like the one in
question. However, the issuance of additional shares of a series or class of the
Company's stock could, depending on the circumstances, dilute earnings per
share, and decrease the book value per share, and each shareholder's percentage
ownership of the Company may be proportionately reduced.
The distribution of newly issued shares to the Company's Shareholders
would give the Company greater flexibility in the payment of dividends and the
use of resources. This will allow the Company to use its cash assets for other
purposes if necessary, including the acquisition of new capital assets, to the
benefit of the Shareholders of the Company.
Approval of the Stock Dividend Amendment requires the affirmative vote
by holders of a majority of the outstanding shares of Common Stock. Unless
marked to the contrary, proxies received will be voted for approval of the Stock
Dividend Amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE STOCK DIVIDEND AMENDMENT, ALLOWING THE BOARD OF DIRECTORS TO ISSUE SHARES
OF ONE CLASS OR SERIES OF THE COMPANY'S STOCK AS A DISTRIBUTION TO HOLDERS OF
SHARES OF A DIFFERENT CLASS OR SERIES.
PROPOSAL 4 - APPROVAL OF AN AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION INCREASING THE NUMBER
OF AUTHORIZED SHARES OF CAPITAL STOCK
<PAGE>
-26-
The proposed amendment to Paragraph FOURTH of the Company's Certificate
of Incorporation, if approved by the Shareholders, will increase the number of
authorized shares of the Company's capital stock from 280 million to 530 million
shares and the number of authorized shares of the Company's Common Stock from
250 million to 500 million shares.
The Certificate of Incorporation of the Company currently authorizes
the issuance of 280 million shares, of which 250 million shares are authorized
to be issued as Common Stock and 30 million shares are authorized to be issued
as Preferred Stock. As of the Record Date, August 18, 1999, there were
approximately __________ shares of Common Stock outstanding. In addition,
_______ shares are reserved for issuance upon conversion of the Company's Series
C Preferred Stock, approximately 13,727,764 shares of Common Stock were reserved
for issuance in connection with outstanding stock options, __________ shares
were reserved for issuance in connection with outstanding warrants to purchase
Common Stock and a total of __________ additional shares were reserved for
issuance under the Company's Executive Stock Option Plan, Executive Stock
Incentive Plan, Directors Stock Incentive Plan and Strategic Stock Incentive
Plan. As a result, the Company has available for issuance __________ shares of
Common Stock. If the proposed Employee Stock Purchase Plans are approved (see
Proposal 1), the Company will be required to reserve an additional 1,057,500
shares for issuance under those Purchase Plans. If the proposed amendments to
the Company's Executive Stock Incentive Plan and Directors Stock Incentive Plan
are adopted (see Proposals 5 and 6), the Company will be required to reserve an
additional 7,500,000 shares. Assuming all of the Plan proposals are approved
and based upon the number of shares authorized for issuance as of August 18,
1999, the Company would have available for issuance only __________ additional
shares of Common Stock.
The Company anticipates that it will continue to seek to acquire assets
and businesses of companies providing services complementary to its existing
business in furtherance of its strategy to maintain a leadership position as a
full service global Internet service provider. In connection with these
acquisitions, the Company may issue Common Stock or Preferred Stock that is
convertible into Common Stock. The Board of Directors believes that it is
advantageous for the Company to be able to act promptly with respect to
investment and acquisition opportunities as well as other transactions and that
the proposed increase in the number of authorized shares of Common Stock is
desirable in order to have the additional authorized shares of Common Stock
available, as needed, for possible future financing and acquisition
transactions, stock dividends or splits, employee stock plans and for other
general corporate purposes determined by the Board of Directors to be in the
best interests of the Company. Having such additional authorized shares
available for issuance in the future would give the Company greater flexibility
and allow shares of Common Stock, convertible Preferred Stock or other
securities exercisable, exchangeable or convertible into Common Stock to be
issued without the expense and delay of a Shareholders' meeting, except as may
be required by applicable law or regulations. The holders of Common Stock do not
have any preemptive rights to subscribe for or purchase any additional shares of
Common Stock that may be issued. The issuance of additional shares might reduce
the Shareholders' proportional interest in the Company.
The increase in authorized shares is not being proposed to provide
additional authorized shares of Common Stock that could be issued in an attempt
to make more difficult a change in
<PAGE>
-27-
control or takeover of the Company, and the Company has no present intention of
issuing additional shares of Common Stock for that purpose. Nevertheless, the
additional authorized shares of Common Stock could be issued to make any attempt
to change control of the Company more difficult if the Board were to determine
that such an attempt was not in the best interests of the Company.
Approval of the proposed amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
capital stock requires the affirmative vote by holders of a majority of the
outstanding shares of Common Stock. Unless marked to the contrary, proxies
received will be voted for approval of this proposed amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
INCREASING THE NUMBER OF AUTHORIZED SHARES OF ITS CAPITAL STOCK.
PROPOSALS 5 AND 6 - APPROVAL OF AMENDMENTS TO EACH OF THE
EXECUTIVE STOCK INCENTIVE PLAN AND THE
STRATEGIC STOCK INCENTIVE PLAN
Executive Stock Incentive Plan. The Board of Directors has unanimously
adopted and recommends that the Shareholders approve an amendment to the
Company's Executive Stock Incentive Plan to increase the number of shares of the
Company's Common Stock available for issuance thereunder from a maximum of
11,800,000 shares (subject to adjustment in the event of any stock dividend,
stock split, recapitalization or similar event) to a maximum of 15,800,000
shares (subject to adjustment in the event of any stock dividend, stock split,
recapitalization or similar event). The effective date of the proposed amendment
will be the date on which such amendment is approved by the Shareholders.
Approval of the adoption of the amendment to the Executive Stock
Incentive Plan requires the affirmative vote of the holders of a majority of
shares of the Company's Common Stock present in person or by proxy and entitled
to vote at the Special Meeting. Abstentions and broker non-votes will be counted
as present for purposes of determining whether a quorum is present, and broker
non-votes will not be treated as entitled to vote on this matter at the Special
Meeting.
As of August 18, 1999, options to purchase an aggregate of 10,087,778
shares of the Company's Common Stock were outstanding under the Executive Stock
Incentive Plan and, without taking into account the proposed amendments to the
plan, 115,861 shares remained available for future grants under the plan.
The table under the caption "Option Grants in 1998" provides information with
respect to the grant of options under the Executive Stock Incentive Plan during
fiscal year 1998 to the executive officers of the Company appearing in the
Summary Compensation Table appearing under the heading "Executive Compensation."
The following table sets forth additional information with respect to options
granted under the Executive Stock Incentive Plan during fiscal year 1998, and
1999 year-to-date, to certain groups:
<PAGE>
-28-
<TABLE>
<CAPTION>
Fiscal Year 1998 1999 Year-to Date
------------------------------------------------------------ ---------------------------------
IDENTITY OF WEIGHTED AVERAGE WEIGHTED AVERAGE
GROUP EXERCISE PRICE ($/SH) GRANTED(#) EXERCISE PRICE ($/SH) GRANTED(#)
- - ----------- ----------------- ---------- -------------------- ---------
<S> <C> <C> <C> <C>
All executive officers $9.01 718,500 $48.63 100,000
as a group (9 persons)
Non-executive directors $0.00 0 0.00 0
as a group (3 persons)
Non-executive officer $9.08 3,726,260 $46.98 2,170,860
employees as a group
(approximately 830 persons
in 1998 and approximately
790 persons in 1999)
</TABLE>
The purpose of the Executive Stock Incentive Plan is to enable the
Company to attract and retain employees and consultants and provide them with an
incentive to maintain and enhance the Company's long-term performance record. In
the view of the Board of Directors, the plan as well as predecessor plans have
been successful in achieving these objectives. In light of the Company's recent
expansion and strategy for continued growth, the Board of Directors believes
that the proposed amendments to the plan are necessary to ensure that an
adequate number of shares are available for awards so that the plan can continue
to make a significant contribution to the morale and motivation of the Company's
and its subsidiaries' employees and consultants in the future. The Company's
Executive Stock Incentive Plan was adopted by the Company's Board of Directors
on March 1, 1995 and approved by the Shareholders of the Company in April 1995.
The plan was amended to increase the number of shares of the Company's Common
Stock eligible for issuance thereunder in November 1995, and again in May 1999.
The plan presently provides that up to 11,800,000 shares of the Company's Common
Stock (subject to adjustment in the event of any stock dividend, stock split,
recapitalization or similar event) will be available for awards under the plan.
As noted above, the proposed amendment would increase the maximum number of
shares available for awards under the plan to 15,800,000 (subject to adjustment
in the event of any stock dividend, stock split, recapitalization or similar
event). Awards under the plan will be made to persons who have the capability of
making a substantial contribution to the success of the Company and may be in
the form of incentive stock options, non-qualified stock options, stock
appreciation rights or restricted stock awards. Employees may be awarded any
type of award under the plan. Consultants may be awarded any type of award
except incentive stock options.
Strategic Stock Incentive Plan. The Board of Directors has unanimously
adopted and recommends that the Shareholders approve an amendment to the
Company's Strategic Stock Incentive Plan to increase the number of shares of the
Company's Common Stock available for issuance thereunder from a maximum of
4,500,000 shares (subject to adjustment in the event of any stock dividend,
stock split, recapitalization or similar event) to a maximum of 8,000,000 shares
(subject to adjustment in the event of any stock dividend, stock split,
recapitalization or similar event). The effective date of the proposed amendment
will be the date on which such amendment is approved by the Shareholders.
Approval of the adoption of the amendment to the Strategic Stock
Incentive Plan requires the affirmative vote of the holders of a majority of
shares of the Company's Common Stock present in person or by proxy and entitled
to vote at the Special Meeting. Abstentions and broker
<PAGE>
-29-
non-votes will be counted as present for purposes of determining whether a
quorum is present, and broker non-votes will not be treated as entitled to vote
on this matter at the Special Meeting.
As of August 18, 1999, options to purchase an aggregate of 3,649,986
shares of the Company's Common Stock were outstanding under the Strategic Stock
Incentive Plan and, without taking into account the proposed amendments to the
plan, 617,274 shares remained available for future grants under the plan. The
table under the caption "Option Grants in 1998" provides information with
respect to the grant of options under the Strategic Stock Incentive Plan during
fiscal year 1998 to the executive officers of the Company appearing in the
Summary Compensation Table appearing under "Executive Compensation." The
following table sets forth additional information with respect to options
granted under the Strategic Stock Incentive Plan during fiscal year 1998, and in
1999 through the Record Date, to certain groups:
<TABLE>
<CAPTION>
Fiscal Year 1998 1999 Year-to-Date
------------------------------------------------------------ ----------------------------
IDENTITY OF WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE OPTIONS
GROUP EXERCISE PRICE ($/sh) GRANTED(#) EXERCISE PRICE ($/sh) GRANTED(#)
- - ----------------- ---------- -------- ------------------- -------
<S> <C> <C> <C> <C>
All executive officers $10.72 441,000 $46.46 435,000
as a group (9 persons)
Non-executive directors $ 0.00 0 $ 0.00 0
as a group (3 persons)
Non-executive officer $11.72 1,549,544 $48.20 1,541,988
employees as a group
(approximately 830 persons
in 1998 and approximately
1,140 persons in 1999)
</TABLE>
The purpose of the Strategic Stock Incentive Plan is to enable the
Company and its subsidiaries in connection with acquisitions, mergers, strategic
alliances, joint ventures and other business combination transactions, to
attract and retain employees and consultants and provide them with an incentive
to maintain and enhance the Company's and its subsidiaries' long-term
performance record by creating a long-term mutuality of interests among the
employees and consultants and the Shareholders of the Company. The plan provides
for the issuance to persons who have the capability of making a substantial
contribution to the success of the Company or any one or more of its
subsidiaries of incentive stock options, non-qualified stock options, stock
appreciation rights and restricted stock grants in connection with acquisitions,
mergers, strategic alliances and other business combinations and transactions
effected by the Company and/or one or more of its subsidiaries.
In light of the Company's recent expansion, especially through mergers
and acquisitions, and strategy for continued growth, the Board of Directors
believes that the proposed amendments to the plan are necessary to ensure that
an adequate number of shares are available for awards so that the plan can
continue to make a significant contribution to the morale and motivation of the
Company's and its subsidiaries' employees and consultants in the future. The
Company's Strategic Stock Incentive Plan was adopted by the Company's Board of
Directors on June 5, 1995 and approved by the Shareholders of the Company in
November 1995 and additional shares were authorized to be issued under the Plan
in May 1999. Currently, awards under the plan may be made in respect of up to
4,500,000 shares of the Company's Common Stock (subject to
<PAGE>
-30-
adjustment in the event of any stock dividend, stock split, recapitalization or
similar event). As noted above, the proposed amendment would increase the
maximum number of shares available for awards under the plan to 8,000,000
(subject to adjustment in the event of any stock dividend, stock split,
recapitalization or similar event). The total number of shares with respect to
which restricted stock awards may be granted to any one participant shall not
exceed 10,000 per calendar year (subject to substitution or adjustment in the
event to any stock dividend, stock split, recapitalization or similar event).
Employees may be awarded any type of award offered under the plan. Consultants
may be awarded any type of award except incentive stock options. No awards may
be made under the plan after the tenth anniversary thereof.
The following is a summary of certain features common to both the
Executive Stock Incentive Plan and the Strategic Stock Incentive Plan (together,
the "Plans"). The summary is qualified in its entirety by reference to the
Plans, copies of which will be provided upon request. The Plans are also filed
with the Securities and Exchange Commission.
Administration. The Plans are administered by the Compensation
Committee of the Board of Directors, none of the members of which, during the
one-year period prior to commencement of service thereon or during such service,
has been or will be granted any awards pursuant to either of the Plans, subject
to certain permitted exceptions. The Compensation Committee has the power to
determine the persons to whom, and the time or times at which, awards shall be
granted, the type of award to be granted and the number of shares to be subject
to each award, to interpret the Plans and to prescribe rules, regulations and
procedures in connection with the operation of the Plans. All questions of
interpretation and application of the Plans, or as to awards granted under the
Plans, are subject to the determination of the Compensation Committee, which
will be conclusive and binding.
Awards. Awards granted under the Plans are evidenced by agreements
between the individual employee or consultant and the Company. Incentive stock
options within the meaning of Section 422 of the Internal Revenue Code as well
as options which do not meet the requirements of that section may be granted
alone or in tandem with stock appreciation rights. All options will expire not
more than 10 years after the date of grant except for incentive stock options
granted to holders of more than 10% of the voting power of the Company, which
will expire not more than five years after the date of grant. The exercise price
for any option issued under the Plans shall be equal to the fair market value of
the Company's Common Stock at the time such option is granted provided that, in
the case of incentive stock options granted to holders of more than 10% of the
voting power of the Company, the exercise price shall equal at least 110% of
fair market value. Payment of an option's exercise price may be made in cash, by
check or, in certain circumstances, by delivery of shares of Common Stock
assigned to the Company, or by a combination of the foregoing. The Company may
loan employees amounts in respect of the exercise of options under the Plans
provided that such loans are evidenced by interest bearing promissory notes and
secured by a pledge of the Company's Common Stock having an aggregate purchase
price on the date of exercise at least equal to the principal amount of the
note. Options are not transferable other than by will or by the laws of descent
and distribution, pursuant to a qualified domestic relations order or, to the
extent permitted under the option agreement or under interpretation of the
Compensation Committee under Rule 16b-3 of the Exchange Act, by gift to family
members or other permitted transferees. Options may be exercised only by the
optionee, his or her guardian, his or her legal representative or his or her
<PAGE>
-31-
permitted transferee. Stock appreciation rights may be granted in tandem with
options granted under the Plans. Upon exercise of a stock appreciation right,
the grantee will receive from the Company cash, Common Stock or a combination
thereof (at the discretion of the Compensation Committee) having a value equal
to the excess of the fair market value per share of the Company's Common Stock
on the exercise date multiplied by the number of shares with respect to which
the right is being exercised over the option exercise price for such number of
shares. Restricted stock also may be granted under the Plans provided that any
one participant may not receive awards in respect to more than 10,000 shares per
year. The Compensation Committee will determine the restrictions that apply to
each such grant. During the restricted period, the grantee may not sell or
otherwise transfer the restricted stock, but will have the right to vote the
restricted stock and to receive dividends, if any. Upon the acquisition of
beneficial ownership of 30% or more of the Company's Common Stock by any person
other than a wholly-owned subsidiary of the Company or the occurrence of certain
other change of control events specified in the Plans, including certain mergers
and consolidations and transfers of all or substantially all of the Company's
assets, all options and stock appreciation rights shall become fully exercisable
and all restricted stock awards shall become immediately vested.
Amendments. The Plans may be amended by the Compensation Committee or
the Shareholders, provided that the Compensation Committee may not, without
shareholder approval, materially increase the benefits accruing to participants
under the Plans, materially increase the maximum number of shares as to which
awards may be granted under the Plans, increase the number of restricted stock
grants per year per participant or change the basis of making performance-based
awards for participants whose compensation is subject to Section 162(m) of the
Internal Revenue Code, change the minimum exercise price of options or stock
appreciation rights, change the class of eligible persons, extend the period for
which awards may be granted or exercised or withdraw the authority to administer
one or both of the Plans from the Compensation Committee.
Certain Income Tax Consequences. A participant who is awarded a stock
option will not realize any income, nor will the Company be entitled to any
deduction, at the time of grant. If a participant who is not an "insider"
subject to Section 16(b) of the Exchange Act exercises a non-qualified option,
he or she will realize ordinary income equal to the difference between the
option price and the fair market value of the shares on the date of exercise and
the holding period for capital gain and loss purposes will begin on the date of
exercise. In the case of a participant who is a Section 16(b) insider, upon
exercise of an option, he or she will realize ordinary income on the first day
on which a sale of shares at a profit would not expose the participant to
Section 16(b) liability (the "date of taxation"). The amount of income
recognized will be equal to the excess of the fair market value of the shares on
the date of taxation over the option price and the holding period for capital
gains and losses will begin on the date of taxation. An insider may elect to be
taxed according to the rules applicable to non-insiders by filing an election
with the Internal Revenue Service under Section 83(b) of the Internal Revenue
Code within 30 days from the date of exercise.
If the exercise price of a non-qualified option is paid by surrendering
stock of the Company, the participant will recognize no gain or loss on the
shares that he or she surrenders to pay the option price (the "surrendered
shares"). The number of shares that the participant receives upon exercise of
the option in excess of the surrendered shares are considered
<PAGE>
-32-
"additional shares." The participant will recognize ordinary income upon
exercise equal to the fair market value of the additional shares on the date of
exercise, less any cash paid towards the exercise price. The basis of the
additional shares will be equal to their fair market value on the date of
exercise, and their holding period will begin on that date. The shares that the
participant receives upon exercise equal to the surrendered shares will have a
basis and holding period equal to that of the surrendered shares.
If a participant exercises an incentive stock option, he or she will
not recognize any income at that time (although the difference between the
option price and the fair market value of shares may be subject to the
alternative minimum tax) and the Company will not be entitled to any tax
deduction. If the option price of an incentive stock option is paid by
surrendering stock of the Company, the Internal Revenue Service treats such an
exchange as if there were two transactions. The first transaction is treated as
a non-taxable exchange of the previously acquired shares for an equal number of
new shares, both having the same market value. The basis of the new shares will
be the same as that of the shares surrendered and the holding period will
include the holding period of the shares surrendered. The second transaction
concerns the additional shares that a participant will receive pursuant to the
exercise. This exchange also results in no gain or loss being recognized at the
time of the exchange. The basis of these additional shares, however will equal
zero (i.e., the participant is treated as having paid nothing for these shares).
The holding period for the additional shares begins on the date of the exchange.
The Company will be entitled to a deduction for federal tax purposes at
the same time and in the same amount as the participant is considered to have
realized ordinary income with respect to any option. When a participant disposes
of Common Stock acquired through the exercise of a non-qualified option, any
amount received in excess of the fair market value of the shares on the date of
exercise will be subject to taxation as long-term or short-term capital gains,
depending on the holding period of the shares. If the amount received is less
than such fair market value of the shares, the difference will be treated as a
capital loss for tax purposes. When a participant ultimately sells Common Stock
acquired through exercise of an incentive stock option, he or she will recognize
long-term capital gain or loss on the difference between the amount received
upon disposition and the option price of the shares on the date of exercise
provided that the requisite holding periods are satisfied.
Under current federal tax laws, no income will be recognized by a
participant at the time a stock appreciation right is granted to the
participant. Ordinary income will be recognized by the participant upon exercise
of a stock appreciation right equal to the amount of cash received plus the fair
market value, on the date of exercise, of any shares issued. The Company will be
entitled to a deduction equal to the amount the participant recognizes as
ordinary income and at the time the participant recognizes income.
The basis of a share acquired pursuant to the exercise of a stock
appreciation right will be the amount included in income due to receipt of the
share. When the participant disposes of shares acquired pursuant to the exercise
of a stock appreciation right, any amount realized in excess of the basis of the
shares will be treated as long-term or short-term capital gain, depending on the
holding period of the shares. If the amount realized is less than the basis of
the shares, the loss will be treated as long-term or short-term capital loss,
depending on the holding period of the shares.
<PAGE>
-33-
Unless the participant otherwise elects, receipt of a grant of
restricted shares of Common Stock will not result in the recognition of income
by the participant. At the time of vesting of ownership of any such shares, the
participant will recognize ordinary income equal to the fair market value of
such shares. At that time, the Company will be entitled to a deduction. The
deduction will be equal to the amount which is taxable to the participant as
ordinary income.
The participant may elect to recognize ordinary income at the time of
grant. Any such election must be made within 30 days of grant pursuant to
regulations issued under Section 83(b) of the Internal Revenue Code. The amount
of such income will be equal to the fair market value of the shares of stock
without regard to the restrictions. In such a case, the Company would be
entitled to a deduction equal to the amount which is taxable to the participant
as ordinary income.
The basis of a share acquired under a restricted stock grant will be
the amount included in ordinary income due to receipt of the share. When the
participant disposes of shares acquired under a restricted stock grant, any
amount realized in excess of the basis of the shares will be treated as
long-term or short-term capital gain, depending on the holding period of the
shares (measured from the time the participant recognized ordinary income from
the receipt of such shares). If the amount realized is less than the basis of
the shares, the loss will be treated as long-term or short-term loss, depending
on the holding period of the shares.
Vote Required. Approval of the amendments to each of the Executive
Stock Incentive Plan and the Strategic Stock Incentive Plan require the
affirmative vote of a majority of the votes cast at the Special Meeting by the
holders of the Company's Common Stock.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL
OF THE ADOPTION BY THE BOARD OF DIRECTORS OF THE AMENDMENTS TO EACH OF THE
EXECUTIVE STOCK INCENTIVE PLAN AND THE STRATEGIC STOCK INCENTIVE PLAN.
SHAREHOLDER PROPOSALS
The Company's Certificate of Incorporation and By-laws require any
shareholder who wishes to bring any proposal before a meeting of Shareholders or
to nominate a person to serve as a director to give written notice thereof and
certain related information to the Company at least 60 days prior to the date
one year from the date of the immediately preceding annual meeting, if such
proposal or nomination is to be submitted at an annual meeting, and within ten
days of the giving of notice to the Shareholders, if such proposal or nomination
is to be submitted at a special meeting. The written notice must set forth with
particularity (i) the name and business address of the shareholder submitting
such proposal and all persons acting in concert with such shareholder; (ii) the
name and address of the persons identified in clause (i), as they appear on the
Company's books (if they so appear); (iii) the class and number of shares of the
Company's stock beneficially owned by the persons identified in clause (i); (iv)
a description of the proposal containing all material information relating
thereto, including, without limitation, the reasons for submitting such
proposal; and (v) such other information as the Board of
<PAGE>
-34-
Directors reasonably determines is necessary or appropriate to enable the Board
of Directors and Shareholders of the Company to consider such proposal.
Management does not know of any matters which are likely to be brought
before the Special Meeting other than those referred to in this Proxy Statement.
However, in the event that any other matters properly come before the Special
Meeting, the persons named in the enclosed proxy will vote in accordance with
their judgment on such matters.
The presiding officer at the Special Meeting may determine that any
shareholder proposal was not permissible under or was not made in accordance
with the foregoing procedures or is otherwise not in accordance with law and, if
he so determines, he may refuse to allow the shareholder proposal or nomination
to be considered at the Special Meeting.
Under the rules of the SEC, shareholder proposals intended to be
presented at the next annual meeting (to be held in 2000) must be received by
the Company on or before December 7, 1999 in order to be included in the proxy
statement and proxy for that meeting. Proposals should be directed to the
Corporate Secretary, PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia
20170.
A copy of the Company's Annual Report to Shareholders, which includes
financial statements and related data, is available upon request directed to the
Corporate Secretary, PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia
20170. According to SEC rules, the information presented in this Proxy Statement
under the captions "Compensation Committee Report on Executive Compensation" and
"Stock Price Performance" shall not be deemed to be "soliciting material" or to
be filed with the SEC under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and nothing contained in any previous filings made by the
Company under such Acts shall be interpreted as incorporating by reference the
information presented under the specified captions.
<PAGE>
EXHIBIT A
PROPOSED AMENDMENTS TO CERTIFICATE OF INCORPORATION OF PSINET, INC.
Proposal 3
A new sixth sentence is hereby added to Paragraph A of Article FOURTH of the
Certificate of Incorporation to read in its entirety as follows:
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 the holders of the same or any other
class or series of shares.
Proposal 4
The first three sentences of Paragraph A of Article FOURTH of the Certificate of
Incorporation would be amended to read in their 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 that
the Corporation shall have authority to issue is Five Hundred Million
(500,000,000).
(Front Side of Proxy)
PROXY
PSINET INC.
510 Huntmar Parl Drive
Herndon, Virginia 20170
SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF
SHAREHOLDERS ON SEPTEMBER 28, 1999
The undersigned hereby appoints as Proxies, Harold S. Wills and Edward
D. Postal, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all shares of Common Stock
of PSINet Inc. (the "Company") held of record by the undersigned on August 18,
1999 at the Special Meeting of Shareholders to be held on September 28, 1999 and
any adjournments thereof.
(SEE REVERSE SIDE)
- - --------------------------------------------------------------------------------
[FOLD AND DETACH HERE]
<PAGE>
You may also vote the shares held in this account by telephone or
electronically through the Internet. Voting by telephone or through the Internet
will eliminate the need to mail voted proxy card(s) representing shares held in
this account. To vote by telephone or electronically please follow the steps
below, and be sure to obtain confirmation that your vote was registered:
* Have your proxy card and social security number available.
* Be ready to enter the PIN number inducated on the reverse side of
the card just below the perforation.
To vote using the telephone:
* Using a touch-tone telephone. dial 1-800-OK-VOTE (1-800-652-8683)
24 hours a day 7 days a week.
To Vote using the Internet:
* Log on to the Internet and go to the website
http://www.vote-by-net.com.
Both voting systems preserve the confidentiality of your vote and will
confirm your voting instructions with you. You may also change your selections
on any or all of the proposals to be voted.
YOUR VOTE IS IMPORTANT TO US. THANK YOU FOR VOTING
(Back Side of Proxy)
/X/ Please mark your
votes as in this example.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED, IF NO
DIRECTION IS GIVEN WITH RESPECT TO A PARTICULAR PROPOSAL. THIS PROXY WILL BE
VOTED FOR SUCH PROPOSAL.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3, 4, 5, 6 AND 7
FOR AGAINST ABSTAIN
/ / / / / /
1. APPROVAL OF 1999 EMPLOYEE STOCK
PURCHASE PLAN AND RELATED 1999
INTERNATIONAL EMPLOYEE STOCK PURCHASE
PLAN
FOR AGAINST ABSTAIN
/ / / / / /
2. APPROVAL FOR THE COMPANY TO ISSUE
COMMON STOCK AS A DIVIDEND ON ITS
SERIES C PREFERRED STOCK
FOR AGAINST ABSTAIN
/ / / / / /
3. APPROVAL OF AN AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION
TO ALLOW THE COMPANY TO ISSUE SHARES OF
ONE CLASS OF ITS STOCK AS DISTRIBUTION TO
HOLDERS OF ANOTHER CLASS OF ITS STOCK
FOR AGAINST ABSTAIN
/ / / / / /
4. APPROVAL OF AN AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF ITS CAPITAL STOCK
FOR AGAINST ABSTAIN
/ / / / / /
5. APPROVAL OF AMENDMENTS TO THE
COMPANY'S EXECUTIVE STOCK INCENTIVE PLAN
<PAGE>
FOR AGAINST ABSTAIN
/ / / / / /
6. APPROVAL OF AMENDMENTS TO THE
COMPANY'S STRATEGIC STOCK
INCENTIVE PLAN
7. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO
VOTE UPON ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE
THE MEETING.
I PLAN TO ATTEND THE SPECIAL MEETING / /
If shares are registered in more than one name, the
signatures of all such persons are required. A
corporation should sign in its full corporate
name by a duly authorized officer stating his
title. Trustees, guardians, executors and
other fiduciaries should sign in their official
capacity giving their full title as such.
If a partnership, please sign in the partnership
name by authorized persons.
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON.
-------------------------------------------
-------------------------------------------
SIGNATURE(S) DATE
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES OF AMERICA.
-------------------------------------------------------------------------------
[FOLD AND DETACH HERE]
<PAGE>
PSINET INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
PSINet Inc. (the "Company") hereby establishes its 1999 Employee Stock
Purchase Plan (the "Plan") as follows:
1. Purpose of the Plan. This Plan is adopted to provide eligible
employees who wish to become shareholders in the Company and/or to increase
their share ownership with a convenient method of doing so through accumulated
payroll deductions. The Company's management and Board of Directors believe that
employee participation in the ownership of the business is to the mutual benefit
of the employees and the Company. The Company intends that the rights to
purchase stock of the Company granted under the Plan be considered options
issued under an "employee stock purchase plan" as that term is defined in
Section 423(b) of the Code.
2. Certain Definitions.
2.1 "Accumulation Account" means the funds accumulated with respect to
an eligible Employee as a result of deductions from such Employee's paycheck for
the purpose of purchasing stock under this Plan.
2.1 "Board" means the Board of Directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended.
2.3 "Committee" means a Committee designated by the Board to
administer the Plan or, if at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be exercised by the Board
and any references herein to the Committee shall be construed as references to
the Board.
2.4 "Common Stock" means the Company's common stock, $0.01 par
value.
2.5 "Compensation" means regular base pay and variable
compensation for sales personnel and shall exclude other compensation, including
bonuses.
2.6 "Designated Subsidiary" means any Subsidiary which has been
designated by the Committee from time to time in its sole discretion as eligible
to have its employees participate in the Plan.
2.7 "ESPP Agent" means the financial services or brokerage firm
designated by the Company to act as administrative agent of the Plan.
2.8 "Effective Date" means the date of approval of the Plan by the
shareholders of the Company.
<PAGE>
-2-
2.9 "Employee" shall mean any individual employed by the Company
or any Designated Subsidiary, including any individual on leave or other leave
of absence approved by the Company; provided that where the period of leave
exceeds 90 days and the individual's right to re-employment is not guaranteed
either by statute or by contract, the employment relationship will be deemed to
have terminated on the 91st day of such leave.
2.9 "Enrollment Date" means the first day of each Offering Period.
2.10 "Exercise Date" means the last day of each Offering Period.
2.11 "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows: (a) the last reported sale of the Common Stock of
the Company on the NASDAQ National Market System or, if no such reported sale
takes place on any such day, the average of the closing bid and asked prices, or
(b) if such Common Stock is listed on a national securities exchange, the last
reported sale price or, if no such reported sale takes place on any such day,
the average of the closing bid and asked prices on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or (c) if such Common Stock is not quoted on such National Market System nor
listed or admitted to trading on a national securities exchange, then the
average of the closing bid and asked prices, as reported by The Wall Street
Journal for the over-the-counter market, or (d) if none of the foregoing is
applicable, then the fair market value of a share of Common Stock as determined
by the Committee in its discretion.
2.12 "Offering Period" or "Offering" means the period beginning
with the date an option is granted under the Plan and ending with the date
determined by the Committee. During the term of the Plan there will be a series
of separate consecutive six-month Offering Periods, with the first Offering
Period commencing on the first pay period of the fourth quarter of 1999, and
thereafter, Offering Periods will commence on the first pay period of the second
quarter and the fourth quarter of each subsequent calendar year, provided that
the final Offering Period will end prior to the termination of the Plan.
2.13 "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
2.14 "Stock Account" shall mean the account established to hold
Common Stock purchased by an Employee pursuant to Section 11.1.
2.15 "Subsidiary" shall mean any corporation, domestic or foreign,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or by a Subsidiary, in an unbroken chain of corporations
beginning with the Company if, at the time the option is granted, each of the
corporations other than the last corporation in an unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
<PAGE>
-3-
3. Administration.
3.1 The Plan will be administered by the Committee. The Committee
will have the final power to determine all questions of policy and
administrative procedure that may arise in the administration of the Plan and
will administer, or will direct the ESPP Agent to administer, the Plan to
qualify as an "employee stock purchase plan" under Section 423 of the Code and
the regulations thereunder, as amended from time to time.
3.2 The Committee has the power, subject to the express provisions
of the Plan, to: (a) determine whether a grant of options to purchase Common
Stock will be made at the commencement of each Offering Period; (b) designate
from time to time which Subsidiaries of the Company will be eligible to have
their employees participate in the Plan; and (c) construe and interpret the Plan
and options granted under it, and to establish, amend and revoke rules and
regulations for its administration, including correcting any defect, omission or
inconsistency in the Plan, in a manner and to the extent it shall deem
appropriate to make the Plan fully effective; (d) amend the Plan, or recommend
to the Board any Plan amendments which require shareholder approval, as provided
in Section 17; (e) exercise such other powers and to perform such acts in
connection with the Plan as the Committee determines will promote the best
interests of the Company.
4. Shares Subject to the Plan.
4.1 The number of shares of Common Stock for which options may be
granted under the Plan is 1,057,500 shares less any shares issued under the
Company's 1999 International Employee Stock Purchase Plan. If any option granted
under the Plan terminates for any reason without having been exercised, the
Common Stock not purchased under such option will again become available for
issuance under the Plan.
4.2 The Common Stock subject to the Plan may be unissued shares or
reacquired shares, purchased on the market or otherwise. If the total number of
shares for which options are to be granted on any date exceeds the number of
shares then available under the Plan (after deduction of all shares for which
options have been exercised or are then outstanding), the Committee will make a
pro rata allocation of the shares remaining available in as nearly a uniform
manner as is practicable and equitable. In such event, the payroll deductions to
be made will be reduced accordingly.
5. Eligibility.
5.1 Any Employee who is employed by the Company or a Designated
Subsidiary on a given Enrollment Date will be eligible to participate in the
Plan for that Offering Period, except as otherwise provided in the Plan.
5.2 An Employee will not be granted an option under the Plan (a)
if, immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own stock and/or hold outstanding options to purchase stock possessing
five percent (5%) or more of the total combined voting power or value of all
classes of stock of the Company or of any Subsidiary of the Company, or
<PAGE>
-4-
(b) if such option, together with any other options granted under any employee
stock purchase plan of the Company or its Subsidiaries results in such Employee
having the right to purchase in a calendar year stock whose Fair Market Value
exceeds $25,000 (determined based on the Fair Market Value of the shares at the
time such option is granted) as provided in Section 423(b)(8) of the Code.
5.3 Officers of the Company are eligible to participate in
Offerings under the Plan, provided, however, that the Committee may provide in
an Offering that certain employees who are highly compensated employees within
the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to
participate.
5.4 For purposes of this Plan, an eligible Employee shall not
include any individual who performs services for the Company or a Designated
Subsidiary solely as an independent contractor, consultant or employee of a
third party employment or leasing agency.
6. Grant of Options. The Committee will determine, prior to the
Enrollment Date for any Offering Period, whether to grant options to purchase
Common Stock of the Company under the Plan to eligible Employees. Unless
otherwise determined by the Committee, the options will be granted on each
Enrollment Date on the terms and conditions and to the participating Employees
as set forth in this Plan.
7. Participation.
7.1 An eligible Employee may become a participant in any Offering
Period under the Plan by completing an enrollment agreement authorizing payroll
deductions in form and substance satisfactory to the Committee and filing the
enrollment agreement with the Company or, if so designated by the Committee,
with the ESPP Agent, by the applicable Enrollment Date.
7.2 Payroll deductions for an Employee shall commence on the first
payday following the Enrollment Date and will continue through the Offering
Period unless terminated by the Employee as provided in Section 12 or unless the
Plan is terminated as provided in Section 17.
8. Payroll Deductions.
8.1 At the time an Employee files the enrollment agreement, the
Employee will elect to have payroll deductions made on each payday during the
Offering Period in an amount not exceeding a total of 15% (or such other
percentage as the Committee may determine) of the Compensation which the
Employee receives on each payday during the Offering Period.
8.2 All payroll deductions made for an Employee shall be credited
to his or her Accumulation Account under the Plan. An Employee may not make any
additional payments into the Accumulation Account. The funds allocated to an
Employee's Accumulation Account shall remain the property of the Employee at all
times but may be commingled with the general funds of the Company until used to
purchase Common Stock on an Exercise Date or returned to the Employee. No
interest will be paid or accrued on any money in the Accumulation Accounts of
participating Employees.
<PAGE>
-5-
8.3 An Employee may discontinue such Employee's participation in
the Plan as provided in Section 12. An Employee's enrollment agreement shall be
effective for successive Offering Periods unless terminated as provided in
Section 12. To increase or decrease the rate of payroll deductions (within the
limitations of the Plan), with respect to the next Offering Period, an Employee
must complete and file with the Company prior to the Enrollment Date for such
Offering Period, a new enrollment agreement authorizing a change in payroll
deduction rate. Such change in rate of payroll deduction shall be effective at
the beginning of the next Offering Period following the Company's receipt of the
new enrollment agreement.
8.4 To the extent necessary to comply with Section 423(b)(8) of
the Code and Section 5.2 of this Plan, an Employee's payroll deductions will be
decreased by the Company at such time during any Offering Period which is
scheduled to end during the current calendar year (the "Current Offering
Period") if the aggregate of all such Employee's payroll deductions which were
previously used to purchase Common Stock under the Plan (and any other employee
stock purchase plans of the Company) in a prior Offering Period which ended
during the current calendar year plus all payroll deductions accumulated with
respect to the Current Offering Period exceeds the applicable limits of Code
Section 423(b)(8). Payroll deductions shall recommence at the rate provided in
such Employee's enrollment agreement at the beginning of the first Offering
Period which is scheduled to end in a subsequent calendar year, unless
terminated by the Employee as provided in Section 12 or termination of the Plan
as provided in Section 17.
8.5 On the Exercise Date, or at the time some or all of the
Company's Common Stock issued under the Plan is disposed of by the Employee, the
Employee must make adequate provision for the Company's federal, state, or other
tax withholding obligations, if any, which arise upon the exercise of the option
or the disposition of the Common Stock. At any time, the Company may, but will
not be obligated to, withhold from the Employee's compensation the amount
necessary for the Company to meet applicable withholding obligations, including
any withholding required to make available to the Company any tax deductions or
benefit attributable to sale or early disposition by the Employee of Common
Stock under the Plan.
9. Exercise of the Option on the Exercise Date. Each Employee who
continues to be an Employee in an Offering on the Exercise Date will be deemed
to have exercised his option on such date and to have purchased from the Company
the number of full shares of Common Stock reserved for the purpose of the Plan
as his accumulated payroll deductions on such date will pay for at the option
price, provided that the maximum number of shares that an Employee can purchase
in any single Offering Period cannot exceed ______.
10. Employee's Rights as a Shareholder. No Employee will have any
right as a shareholder with respect to any shares until the shares have been
purchased in accordance with Section 11 above and the Common Stock has been
issued by the Company.
11. Evidence of Stock Ownership.
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11.1 Promptly following each Exercise Date, the number of shares of
Common Stock purchased by each Employee shall be deposited into a Stock Account
established in the Employee's name at the ESPP Agent.
11.2 The Employee may direct, by written notice to the Company at
the time of the Employee's enrollment in the Plan, that the Stock Account with
the ESPP Agent be established in the names of the Employee and one other person
designated by the Employee, as joint tenants with right of survivorship, tenants
in common, or community property, to the extent and in the manner permitted by
applicable law.
11.3 An Employee may undertake a disposition (as that term is
defined in Section 424(c) of the Code) of the shares in the a Stock Account
established with the ESPP Agent at any time, whether by sale, exchange, gift, or
other transfer of legal title, but in the absence of such a disposition of the
shares, the shares must remain in the Employee's Stock Account at the ESPP Agent
until the holding period set forth in Section 423(a) of the Code has been
satisfied. With respect to shares for which the Section 423(a) holding period
has been satisfied, the Employee may move those shares to another brokerage
account of Employee's choosing or request that a stock certificate be issued and
delivered to him.
12. Withdrawal.
12.1 An Employee may withdraw from an Offering in whole but not in
part, at any time prior to the beginning of the payroll period immediately
preceding the next Exercise Date by delivering a withdrawal notice to the
Company or, if so directed by the Company, with the ESPP Agent, in which event
the Company will refund the entire balance of his deductions as soon as
practicable thereafter.
12.2 To re-enter the Plan, an Employee who has previously withdrawn
must file a new enrollment agreement in accordance with Section 7.1. The
Employee's re-entry into the Plan will not become effective before the beginning
of the next Offering following his withdrawal.
13. Carryover of Enrollment. At the termination of each Offering,
the Employee will automatically be re-enrolled in the next Offering, and the
balance in the Employee's Accumulation Account shall be used for option
exercises in the new Offering, unless the Employee has withdrawn from the
Offering by providing proper notice to Company. Upon termination of the Plan,
the balance of each Employee's Accumulation Account shall be refunded to him.
14. No Employment Rights. Neither the Plan nor any option granted
hereunder will confer upon the Employee any right with respect to continuance of
employment by the Company or any Subsidiary nor shall the Plan or any option
granted under the Plan interfere in any way with the right of the Company or any
Subsidiary to terminate the employment of the Employee at any time, with or
without cause consistent with applicable law.
15. Rights Not Transferable. No Employee may sell, assign,
transfer, pledge, or otherwise dispose of or encumber either the payroll
deductions credited to such Employee's
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Accumulation Account or any rights with regard to the exercise of an option or
to receive shares under the Plan other than by will or the laws of descent and
distribution, and such right and interest shall not be liable for, or subject
to, the debts, contracts, or liabilities of the Employee. If any such action is
taken by the Employee, or any claim is asserted by any other party in respect of
such right and interest whether by garnishment, levy, attachment or otherwise,
such action or claim will be treated as an election to withdraw funds in
accordance with Section 12. An option can only be exercised by the Employee to
whom the option has been granted.
16. Termination of Employment. Upon termination of employment for
any reason whatsoever, including but not limited to death or retirement, any
outstanding option shall terminate and the balance in the Accumulation Account
of Employee whose employment has terminated will be paid to the Employee or, in
the event of the Employee's death, to his estate.
17. Amendment or Discontinuance of the Plan. The Committee will
have the right to amend, modify, or terminate the Plan at any time without
notice, provided that no Employee's existing rights under any Offering already
made under Section 6 hereof may be adversely affected thereby, and provided that
any amendment will be subject to shareholder approval if shareholder approval is
required under the Code or other applicable law.
18. Changes in Capitalization. In the event of reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, offerings of rights, or any other change in the structure of the
common shares of the Company, the Board may make such adjustment, if any, as it
may deem appropriate in the number, kind, and the price of shares available for
purchase under the Plan, and in the number of shares which an Employee is
entitled to purchase.
19. Notices. All notices or other communications by an Employee to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received by Shareholder Services of the Company or when received
in the form specified by the Company at the location, or by the person,
including the ESPP Agent, designated by the Company for the receipt thereof.
20. Change of Control.
20.1 Notwithstanding other provisions of the Plan, in the event of
a "Change in Control" of the Company (as defined in Section 20.3 below), all of
the options of a participating Employee shall become immediately exercisable,
unless directed otherwise by a resolution of the Board or an appropriate
committee thereof adopted prior to and specifically relating to the occurrence
of such change in control.
20.2 In the event of a Change in Control, unless otherwise
determined by the Board as provided in Section 20.1 or by required law, each
participating Employee shall have the right at any time thereafter to and
including the original Exercise Date for such option to exercise the option in
full notwithstanding any limitation or restriction in any option agreement or in
the Plan
20.3 For purposes of this Section 20, "Change in Control" means:
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(a) there shall be consummated
(i) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to
which any shares of the Company's common stock are to be converted into
cash, securities or other property, provided that the consolidation or
merger is not with a corporation which was a wholly-owned subsidiary of
the Company immediately before the consolidation or merger, or
(ii) any sale, lease, exchange, or other transfer (in one
transaction or a series or related transactions) of all, or
substantially all, or the assets of the Company (other than to one or
more directly or indirectly wholly-owned subsidiaries of the Company);
or
(b) the shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
(c) any person (as such term is used in Sections 13(c) and 14(d)
of the Exchange Act of 1934, as amended) shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act),
directly or indirectly, of 30% or more the Company's then outstanding
common stock, provided that such person shall not be a wholly-owned
subsidiary of the Company immediately before it become such 30%
beneficial owner; or
(d) individuals who constitute the Company's Board of Directors on
the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least three-quarters of the directors comprising the
Incumbent Broad (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee
for director, without objection to such nomination shall be, for
purposes of this clause (d), considered as though such person were a
member of the Incumbent Board.
21. Termination of the Plan. This Plan shall terminate at the
earliest of the following: (a) December 31, 2009; (b) the date the Committee
acts to terminate the Plan in accordance with Section 17 above; or (c) the date
when all shares reserved under the Plan have been purchased. Prior to the
occurrence of such events, on such date as the Committee may determine, the
Company may permit a participating Employee to exercise the option to purchase
shares of Common Stock for as many full shares as the balance of his
Accumulation Account will allow at the lower of Fair Market Value on the
Enrollment Date or the date on which the option is permitted to be exercised. If
the Employee elects to purchase shares, the remaining balance of his
Accumulation Account will be refunded to the Employee after such purchase;
22. Limitations on Sale of Common Stock Purchased Under the Plan.
The Plan is intended to provide Common Stock for investment and not for resale.
The Company does not, however, intend to restrict or influence any Employee in
the conduct of his own affairs. An Employee, therefore, may sell stock purchased
under the Plan at any time he chooses, subject to
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compliance with the terms of the Plan, any applicable Federal or state
securities laws and applicable withholding taxes. THE EMPLOYEE ASSUMES THE RISK
OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
23. Governmental Regulation. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance, or sale of such shares of Common Stock.
Adopted by the Board of Directors: ______________
Approved by Shareholders: ____________________
<PAGE>
PSINET INC.
1999 INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN
PSINet Inc. (the "Company") hereby establishes its 1999 International
Employee Stock Purchase Plan (the "International Plan") as follows:
1. Purpose of the International Plan. This International Plan is
adopted to provide eligible employees who wish to become shareholders in the
Company and/or to increase their share ownership with a convenient method of
doing so. The Company's management and Board of Directors believe that employee
participation in the ownership of the business is to the mutual benefit of the
employees and the Company. The Company adopts this International Plan as a
companion and supplement with flexibility required under local law for non-U.S.
employees to its 1999 Employee Stock Purchase Plan.
2. Certain Definitions.
2.1 "Accumulation Account" means the funds accumulated with
respect to an eligible Employee as a result of deductions from such Employee's
paycheck or by check or wire transfer from the Employee to the individual's
employer or the Company, as the case may be, for the purpose of purchasing stock
under this International Plan.
2.1 "Board" means the Board of Directors of the Company.
2.2 "Committee" means a Committee of the Board or appropriate
officers or employees of the Company or a Designated Subsidiary designated by
the Board to administer the International Plan or, if at any time no Committee
shall be in office, then the functions of the Committee specified in the
International Plan shall be exercised by the Board and any references herein to
the Committee shall be construed as references to the Board.
2.3 "Common Stock" means the Company's common stock, $0.01 par
value.
2.4 "Compensation" means regular base pay and variable
compensation for sales personnel and shall exclude other compensation, including
bonuses.
2.5 "Designated Subsidiary" means any Subsidiary which has been
designated by the Committee from time to time in its sole discretion as eligible
to have its employees participate in the International Plan.
2.6 "ESPP Agent" means the financial services or brokerage firm
designated by the Company to act as administrative agent of the International
Plan.
2.7 "Effective Date" means the date, after approval of the
International Plan by the shareholders of the Company, approved by the Board or
the Committee for implementation of the International Plan in the country where
the Employee is employed by the Company or a Designated Subsidiary.
<PAGE>
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2.8 "Employee" shall mean any individual employed by the Company
or any Designated Subsidiary, including any individual on leave or other leave
of absence approved by the Company; provided that where the period of leave
exceeds 90 days and the individual's right to re-employment is not guaranteed
either by statute or by contract, the employment relationship will be deemed to
have terminated on the 91st day of such leave, subject to such variations as the
Board or the Committee may deem necessary or desirable under Local Law.
2.9 "Enrollment Date" means the first day of each Offering Period.
2.10 "Exercise Date" means the last day of each Offering Period.
2.11 "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows: (a) the last reported sale of the Common Stock of
the Company on the NASDAQ National Market System or, if no such reported sale
takes place on any such day, the average of the closing bid and asked prices, or
(b) if such Common Stock is listed on a national securities exchange, the last
reported sale price or, if no such reported sale takes place on any such day,
the average of the closing bid and asked prices on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or (c) if such Common Stock is not quoted on such National Market System nor
listed or admitted to trading on a national securities exchange, then the
average of the closing bid and asked prices, as reported by The Wall Street
Journal for the over-the-counter market, or (d) if none of the foregoing is
applicable, then the fair market value of a share of Common Stock as determined
by the Committee in its discretion.
2.12 "Local Law" means the laws and regulations of the country or
local jurisdiction in which the Employee is employed or resides, as applicable
to this International Plan.
2.13 "Offering Period" or "Offering" means the period beginning
with the date an option is granted under the International Plan and ending with
the date determined by the Committee. During the term of the International Plan
there will be a series of separate consecutive six-month Offering Periods, with
the first Offering Period commencing on the first pay period of the calendar
quarter after the Effective Date of the International Plan in the applicable
jurisdiction. The final Offering Period will end prior to the termination of the
International Plan.
2.14 "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
2.15 "Stock Account" shall mean the account established to hold
Common Stock purchased by an Employee pursuant to Section 11.1.
2.16 "Subsidiary" shall mean any corporation, domestic or foreign,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or by a Subsidiary, in an unbroken chain of corporations
beginning with the Company if, at the time the option is granted, each of the
corporations other than the last corporation in an unbroken chain owns stock
<PAGE>
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possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
3. Administration.
3.1 The International Plan will be administered by the Committee.
The Committee will have the final power to determine all questions of policy and
administrative procedure that may arise in the administration of the
International Plan and will administer, or will direct the ESPP Agent to
administer, the International Plan to comply with applicable Local Law,
including, without limitation, form of payment by the Employee, withholding for
applicable taxes, etc.
3.2 The Committee has the power, subject to the express provisions
of the International Plan, to: (a) determine whether a grant of options to
purchase Common Stock will be made at the commencement of each Offering Period;
(b) designate from time to time which Subsidiaries of the Company will be
eligible to have their employees participate in the International Plan; and (c)
construe and interpret the International Plan and options granted under it, and
to establish, amend and revoke rules and regulations for its administration,
including correcting any defect, omission or inconsistency in the International
Plan, in a manner and to the extent it shall deem appropriate to make the
International Plan fully effective; (d) amend the International Plan, or
recommend to the Board any International Plan amendments which require
shareholder approval, as provided in Section 17; (e) exercise such other powers
and to perform such acts in connection with the International Plan as the
Committee determines will promote the best interests of the Company.
4. Shares Subject to the International Plan.
4.1 The number of shares of Common Stock for which options may be
granted under the International Plan is 1,057,500 shares less any shares issued
under the Company's 1999 Employee Stock Purchase Plan. If any option granted
under the International Plan terminates for any reason without having been
exercised, the Common Stock not purchased under such option will again become
available for issuance under the International Plan.
4.2 The Common Stock subject to the International Plan may be
unissued shares or reacquired shares, purchased on the market or otherwise. If
the total number of shares for which options are to be granted on any date
exceeds the number of shares then available under the International Plan (after
deduction of all shares for which options have been exercised or are then
outstanding), the Committee will make a pro rata allocation of the shares
remaining available in as nearly a uniform manner as is practicable and
equitable. In such event, the payroll deductions to be made will be reduced
accordingly.
5. Eligibility.
5.1 Any Employee who is employed by the Company or a Designated
Subsidiary on a given Enrollment Date occurring after the Effective Date of the
Plan in the jurisdiction where the Employee is employed,will be eligible to
participate in the International Plan for that Offering Period, except as
otherwise required by Local Law.
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5.2 An Employee will not be granted an option under the
International Plan (a) if, immediately after the grant, such Employee would own
stock and/or hold outstanding options to purchase stock possessing five percent
(5%) or more of the total combined voting power or value of all classes of stock
of the Company or of any Subsidiary of the Company, or (b) if such option,
together with any other options granted under any employee stock purchase plan
of the Company or its Subsidiaries results in such Employee having the right to
purchase in a calendar year stock whose Fair Market Value exceeds $25,000
(determined based on the Fair Market Value of the shares at the time such option
is granted).
5.3 Officers of the Company are eligible to participate in
Offerings under the International Plan, provided, however, that the Committee
may provide in an Offering that certain employees who are highly compensated
employees within the meaning of the U.S. Internal Revenue Code shall not be
eligible to participate.
5.4 For purposes of this International Plan, an eligible Employee
shall not include any individual who performs services for the Company or a
Designated Subsidiary solely as an independent contractor, consultant or
employee of a third party employment or leasing agency.
6. Grant of Options. The Committee will determine, prior to the
Enrollment Date for any Offering Period, whether to grant options to purchase
Common Stock of the Company under the International Plan to eligible Employees.
Unless otherwise determined by the Committee, the options will be granted on
each Enrollment Date on the terms and conditions and to the participating
Employees as set forth in this International Plan.
7. Participation.
7.1 An eligible Employee may become a participant in any Offering
Period under the International Plan by completing an enrollment agreement
complying with Local Law and in form and substance satisfactory to the Committee
and filing the enrollment agreement with the Company or, if so designated by the
Committee, with the ESPP Agent, by the applicable Enrollment Date.
7.2 Payroll deductions, if permitted under Local Law, for an
Employee shall commence on the first payday following the Enrollment Date and
will continue through the Offering Period unless terminated by the Employee as
provided in Section 12 or unless the International Plan is terminated as
provided in Section 17.
8. Payroll Deductions.
8.1 At the time an Employee files the enrollment agreement, if
permitted under Local Law, the Employee will elect to have payroll deductions
made on each payday during the Offering Period in an amount not exceeding a
total of 15% (or such other percentage as the Committee may determine) of the
Compensation which the Employee receives on each payday during the Offering
Period or the Employee may pay such amounts to such individual's employer or the
Company as determined by the Committee in compliance with Local Law.
<PAGE>
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8.2 Any payroll deductions made for, or payments made by, an Employee
shall be credited to his or her Accumulation Account under the International
Plan. An Employee may not make any additional payments into the Accumulation
Account. The funds allocated to an Employee's Accumulation Account shall remain
the property of the Employee at all times but may be commingled with the general
funds of the Company until used to purchase Common Stock on an Exercise Date or
returned to the Employee, unless otherwise required under Local Law. No interest
will be paid or accrued on any money in the Accumulation Accounts of
participating Employees unless otherwise required under Local Law.
8.3 An Employee may discontinue such Employee's participation in
the International Plan as provided in Section 12. An Employee's enrollment
agreement shall be effective for successive Offering Periods unless terminated
as provided in Section 12. To increase or decrease the rate of payroll
deductions or direct payments by the Employee, as applicable, (within the
limitations of the International Plan), with respect to the next Offering
Period, an Employee must complete and file with the Company prior to the
Enrollment Date for such Offering Period, a new enrollment agreement authorizing
a change in payroll deduction rate. Such change in rate of payroll deduction
shall be effective at the beginning of the next Offering Period following the
Company's receipt of the new enrollment agreement.
8.4 To the extent necessary to comply with Section 5.2 of this
International Plan, an Employee's payroll deductions or permitted payments will
be decreased by the Company at such time during any Offering Period which is
scheduled to end during the current calendar year (the "Current Offering
Period") if the aggregate of all such Employee's payroll deductions which were
previously used to purchase Common Stock under the International Plan (and any
other employee stock purchase plans of the Company) in a prior Offering Period
which ended during the current calendar year plus all payroll deductions
accumulated with respect to the Current Offering Period exceeds the applicable
limits of Code Section 423(b)(8). Payroll deductions shall, and permitted
payments may, recommence at the rate provided in such Employee's enrollment
agreement at the beginning of the first Offering Period which is scheduled to
end in a subsequent calendar year, unless terminated by the Employee as provided
in Section 12 or termination of the International Plan as provided in Section
17.
8.5 On the Exercise Date, or at the time some or all of the
Company's Common Stock issued under the International Plan is disposed of by the
Employee, the Employee must make adequate provision for the Company's tax or
other withholding obligations, if any, which arise upon the exercise of the
option or the disposition of the Common Stock. At any time, the Company may, to
the extent permitted under Local Law, but will not be obligated to, withhold
from the Employee's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefit attributable to sale or
early disposition by the Employee of Common Stock under the International Plan.
9. Exercise of the Option on the Exercise Date. Each Employee who
continues to be an Employee in an Offering on the Exercise Date will be deemed
to have exercised his option on such date and to have purchased from the Company
the number of full shares of Common Stock
<PAGE>
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reserved for the purpose of the International Plan as his accumulated payroll
deductions or payments on such date will pay for at the option price, provided
that the maximum number of shares that an Employee can purchase in any single
Offering Period cannot exceed ______.
10. Employee's Rights as a Shareholder. No Employee will have any
right as a shareholder with respect to any shares until the shares have been
purchased in accordance with Section 11 above and the Common Stock has been
issued by the Company.
11. Evidence of Stock Ownership.
11.1 Promptly following each Exercise Date, the number of shares of
Common Stock purchased by each Employee shall be deposited into a Stock Account
established in the Employee's name at the ESPP Agent.
11.2 The Employee may direct, by written notice to the Company at
the time of the Employee's enrollment in the International Plan, that the Stock
Account with the ESPP Agent be established in the names of the Employee and one
other person designated by the Employee, as joint tenants with right of
survivorship, tenants in common, or community property, to the extent and in the
manner permitted by applicable Local Law.
11.3 An Employee may undertake a disposition of the shares in the a
Stock Account established with the ESPP Agent at any time, whether by sale,
exchange, gift, or other transfer of legal title, but in the absence of such a
disposition of the shares, the shares must remain in the Employee's Stock
Account at the ESPP Agent until any applicable holding period set forth in Local
Law has been satisfied. With respect to shares for which the applicable holding
period, if any, has been satisfied, the Employee may move those shares to
another brokerage account of Employee's choosing or request that a stock
certificate be issued and delivered to him.
12. Withdrawal.
12.1 An Employee may withdraw from an Offering in whole but not in
part, at any time prior to the beginning of the payroll period immediately
preceding the next Exercise Date by delivering a withdrawal notice to the
Company or, if so directed by the Company, with the ESPP Agent, in which event
the Company will refund the entire balance of his deductions as soon as
practicable thereafter.
12.2 To re-enter the International Plan, an Employee who has
previously withdrawn must file a new enrollment agreement in accordance with
Section 7.1. The Employee's re-entry into the International Plan will not become
effective before the beginning of the next Offering following his withdrawal.
13. Carryover of Enrollment. At the termination of each Offering,
the Employee will automatically be re-enrolled in the next Offering, and the
balance in the Employee's Accumulation Account shall be used for option
exercises in the new Offering, unless the Employee has withdrawn from the
Offering by providing proper notice to Company. Upon
<PAGE>
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termination of the International Plan, the balance of each Employee's
Accumulation Account shall be refunded to him.
14. No Employment Rights. Neither the International Plan nor any
option granted hereunder will confer upon the Employee any right with respect to
continuance of employment by the Company or any Subsidiary nor shall the
International Plan or any option granted under the International Plan interfere
in any way with the right of the Company or any Subsidiary to terminate the
employment of the Employee at any time, with or without cause consistent with
applicable law.
15. Rights Not Transferable. No Employee may sell, assign,
transfer, pledge, or otherwise dispose of or encumber either the payroll
deductions credited to such Employee's Accumulation Account or any rights with
regard to the exercise of an option or to receive shares under the International
Plan other than by will or the laws of descent and distribution, and such right
and interest shall not be liable for, or subject to, the debts, contracts, or
liabilities of the Employee, except as otherwise required under Local Law. If
any such action is taken by the Employee, or any claim is asserted by any other
party in respect of such right and interest whether by garnishment, levy,
attachment or otherwise, such action or claim will be treated as an election to
withdraw funds in accordance with Section 12. An option can only be exercised by
the Employee to whom the option has been granted.
16. Termination of Employment. Upon termination of employment for
any reason whatsoever, including but not limited to death or retirement, any
outstanding option shall terminate and the balance in the Accumulation Account
of Employee whose employment has terminated will be paid to the Employee or, in
the event of the Employee's death, to his estate.
17. Amendment or Discontinuance of the International Plan. The
Committee will have the right to amend, modify, or terminate the International
Plan as to all Employees, or as to any Employees or all Employees of any
Subsidiary as required or permitted by Local Law, at any time without notice,
provided that no Employee's existing rights under any Offering already made
under Section 6 hereof may be adversely affected thereby unless such otherwise
required by Local Law, and provided that any amendment will be subject to
shareholder approval if shareholder approval is required under applicable law.
18. Changes in Capitalization. In the event of reorganization,
recapitalization, stock split, stock dividend, combination of shares, merger,
consolidation, offerings of rights, or any other change in the structure of the
common shares of the Company, the Board may make such adjustment, if any, as it
may deem appropriate in the number, kind, and the price of shares available for
purchase under the International Plan, and in the number of shares which an
Employee is entitled to purchase.
19. Notices. All notices or other communications by an Employee to
the Company under or in connection with the International Plan shall be deemed
to have been duly given when received by Shareholder Services of the Company or
when received in the form specified by the Company at the location, or by the
person, including the ESPP Agent, designated by the Company for the receipt
thereof.
<PAGE>
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20. Change of Control.
20.1 Notwithstanding other provisions of the International Plan, in
the event of a "Change in Control" of the Company (as defined in Section 20.3
below), all of the options of a participating Employee shall become immediately
exercisable, unless directed otherwise by a resolution of the Board or an
appropriate committee thereof adopted prior to and specifically relating to the
occurrence of such change in control.
20.2 In the event of a Change in Control, unless otherwise
determined by the Board as provided in Section 20.1 or by required law, each
participating Employee shall have the right at any time thereafter to and
including the original Exercise Date for such option to exercise the option in
full notwithstanding any limitation or restriction in any option agreement or in
the International Plan
20.3 For purposes of this Section 20, "Change in Control" means:
(a) there shall be consummated
(i) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to
which any shares of the Company's common stock are to be converted into
cash, securities or other property, provided that the consolidation or
merger is not with a corporation which was a wholly-owned subsidiary of
the Company immediately before the consolidation or merger, or
(ii) any sale, lease, exchange, or other transfer (in one
transaction or a series or related transactions) of all, or
substantially all, or the assets of the Company (other than to one or
more directly or indirectly wholly-owned subsidiaries of the Company);
or
(b) the shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
(c) any person (as such term is used in Sections 13(c) and 14(d)
of the Exchange Act of 1934, as amended) shall become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act),
directly or indirectly, of 30% or more the Company's then outstanding
common stock, provided that such person shall not be a wholly-owned
subsidiary of the Company immediately before it become such 30%
beneficial owner; or
(d) individuals who constitute the Company's Board of Directors
on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least three-quarters of the directors comprising the
Incumbent Broad (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee
for director, without objection to such nomination shall be,
<PAGE>
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for purposes of this clause (d), considered as though such person were
a member of the Incumbent Board.
21. Termination of the International Plan. This International Plan
shall terminate at the earliest of the following: (a) December 31, 2009; (b) the
date the Committee acts to terminate the International Plan in accordance with
Section 17 above; or (c) the date when all shares reserved under the
International Plan have been purchased. Prior to the occurrence of such events,
on such date as the Committee may determine, the Company may permit a
participating Employee to exercise the option to purchase shares of Common Stock
for as many full shares as the balance of his Accumulation Account will allow at
the lower of Fair Market Value on the Enrollment Date or the date on which the
option is permitted to be exercised. If the Employee elects to purchase shares,
the remaining balance of his Accumulation Account will be refunded to the
Employee after such purchase;
22. Limitations on Sale of Common Stock Purchased Under the
International Plan. The International Plan is intended to provide Common Stock
for investment and not for resale. The Company does not, however, intend to
restrict or influence any Employee in the conduct of his own affairs. An
Employee, therefore, may sell stock purchased under the International Plan at
any time he chooses, subject to compliance with the terms of the International
Plan, any applicable securities laws and applicable withholding taxes or other
requirements of Local Law. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET
FLUCTUATIONS IN THE PRICE OF THE STOCK.
23. Governmental Regulation. The Company's obligation to sell and
deliver shares of the Common Stock under this International Plan is subject to
the approval of any governmental authority required in connection with the
authorization, issuance, or sale of such shares of Common Stock.
Adopted by the Board of Directors: ______________
Approved by Shareholders: ____________________
