<PAGE>
As filed with the Securities and Exchange Commission on January 18, 2000
Registration No. 333 - 92157
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
PSINet Inc.
(Exact name of registrant as specified in its charter)
New York 16-1353600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 Huntmar Park Drive, Herndon, Virginia 20170
(703) 904-4100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Kathleen B. Horne, Esq.
Senior Vice President and General Counsel
PSINet Inc.
510 Huntmar Park Drive, Herndon, Virginia 20170
Telephone No.: (703) 904-4100/Facsimile No.: (703) 904-9527
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_____________
Copies To:
Nixon Peabody LLP
437 Madison Avenue, New York, New York 10022
Attention: Richard F. Langan, Jr., Esq.
Deborah McLean Quinn, Esq.
Bruce E. Rosenthal, Esq.
Telephone No.: (212) 940-3140/Facsimile No.: (212) 940-3111
_____________
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
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CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Securities to be Amount to be Offering Price Aggregate Offering Amount of
Registered Registered Per Security(1) Price (1) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 3,000,000 $51.81 $155,430,000 $41,033.52(3)
shares(2)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to the provisions of Rule 457(c) under the Securities Act of 1933, as
amended, based on the average of the high and low per share prices of the
Registrant's common stock on the Nasdaq Stock Market's National Market on
December 1, 1999.
(2) Pursuant to Rule 416(a) of the Securities Act of 1933, this includes
such indeterminate number of shares as may be issued by reason of any stock
split, stock dividend, recapitalization or similar transaction effected without
the receipt of consideration which results in an increase in the number of
outstanding shares of PSINet common stock.
(3) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission relating to these securities is declared
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
THE INFORMATION IN THIS PROSPECTUS WILL BE
AMENDED OR COMPLETED; DATED JANUARY 18, 2000.
PSINet Inc.
3,000,000 Shares of
Common Stock
__________________________________
PSINet:
. We are a leading independent global provider of Internet and eCommerce
solutions to businesses.
. PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
(703) 904-4100
The Offering:
This prospectus relates to the offer and sale of up to 3,000,000 shares of
our common stock, par value $.01 per share, by our shareholder IXC Internet
Services Inc., which we refer to as IXC. We are registering IXC's shares in
order to provide IXC with freely tradable shares of our common stock. We will
not receive any proceeds from the sale of IXC's shares of our common stock.
The 3,000,000 shares of common stock covered by this prospectus are part of
the 10,229,789 shares of common stock purchased by IXC from us pursuant to an
IRU and Stock Purchase Agreement in consideration of our acquisition of 20-year
non-cancellable indefeasible rights of use of fiber-based OC-48 network
bandwidth in portions of the IXC fiber optic telecommunications system. The
shares are being registered pursuant to a registration rights agreement between
us and IXC, which obligates us to register the shares being offered by this
prospectus.
The shares of our common stock offered under this prospectus may be sold by
IXC, its pledgees, donees, transferees and successors-in-interest, including
parties who borrow shares to settle short sales, directly or through agents,
underwriters or broker/dealers as designated from time to time, through public
or private transactions, on or off the Nasdaq Stock Market's National Market, or
through a combination of methods. To the extent required, the specific number of
shares to be sold, the terms of the offering, including price, the names of any
agent, broker/dealer or underwriter, and any applicable commission, discount or
other compensation with respect to a particular sale will be set forth in an
accompanying prospectus supplement.
Our common stock is listed for trading on the Nasdaq Stock Market's
National Market under the symbol "PSIX." On January 14, 2000, the last reported
sale price of our common stock was $85 7/64.
__________________________
Investment in the shares of our common stock offered under this prospectus
involves risk. See "Risk Factors" beginning on page 4 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities being offered under this
prospectus, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
_________________________
January , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUMMARY........................................... 1
RISK FACTORS................................................. 4
USE OF PROCEEDS.............................................. 24
CAPITALIZATION............................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 26
BUSINESS..................................................... 50
DESCRIPTION OF CAPITAL STOCK................................. 79
DESCRIPTION OF INDEBTEDNESS.................................. 87
SELLING SHAREHOLDER.......................................... 90
PLAN OF DISTRIBUTION......................................... 92
LEGAL MATTERS................................................ 94
EXPERTS...................................................... 94
DOCUMENTS INCORPORATED BY REFERENCE.......................... 94
ABOUT THIS PROSPECTUS........................................ 96
WHERE YOU CAN FIND MORE INFORMATION.......................... 96
</TABLE>
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because this
is a summary, it may not contain all of the information that may be important to
you. You should read the entire prospectus, including the "Risk Factors" section
which begins on page 4 and the documents we incorporate by reference, before
making an investment decision.
PSINET INC.
We are a leading independent global provider of Internet and eCommerce
solutions to businesses. As an Internet Super Carrier, or ISC, we offer global
distribution of PSINet services through wholly-owned subsidiaries, supported by
local language customer service and a worldwide fiber optic network capable of
over three terabits. As of December 31, 1999, we provided Internet connectivity
and Web hosting services to customers in 90 of the 100 largest metropolitan
statistical areas in the U.S. and in each of the 20 largest global
telecommunications markets and were operating in 23 countries. In addition to
these services, we also offer a suite of value-added products and services that
are designed to enable our customers to maximize utilization of the Internet to
communicate more efficiently with their customers, suppliers, business partners
and remote office locations. We conduct our business through operations
organized into four geographic operating segments--U.S./Canada, Latin America,
Europe and Asia/Pacific. Our services and products include access services that
offer dedicated, dial-up, wireless and digital subscriber line, or xDSL,
connections, Web hosting services, intranets, virtual private networks, or VPNs,
electronic commerce, or eCommerce, voice-over-Internet protocol, e-mail and
managed security services. We also provide wholesale and private label network
connectivity and related services to other Internet service providers, known as
ISPs, and telecommunications carriers to further utilize our network capacity.
We operate one of the largest global commercial data communications
networks. Our Internet-optimized network has a footprint that extends around the
globe and is connected to over 700 sites, called points of presence, or POPs,
situated throughout our geographic operating regions that enable our customers
to connect to the Internet. Our network reach allows our customers to access
their corporate network and systems resources through local calls in over 150
countries. Our network architecture consists of high capacity frame relay
switches and routers designed to deliver superior Internet connections, reliable
packet control and intelligent data traffic routing and is compatible with all
of the most widely deployed transmission technologies. We further expand the
reach of our network by connecting with other large ISPs at 163 points through
67 contractual arrangements, called peering agreements, that permit exchange of
information between our network and the networks of our peering partners. As
part of our ISC strategy, we have opened six global Internet and eCommerce
hosting facilities in Herndon, Virginia, Switzerland, Canada, the United
Kingdom, New York City and Amsterdam, containing a total of approximately
155,000 square feet. We currently anticipate opening an additional Internet and
eCommerce hosting facility in Los Angeles in January 2000, which will contain
approximately 42,000 square feet. We have two network operating centers that
monitor and manage network traffic 24-hours per day, seven days per week.
<PAGE>
PURPOSE OF THE OFFERING
This prospectus relates to the offer and sale of up to 3,000,000 shares of
our common stock, by our shareholder, IXC Internet Services Inc., which we refer
to as IXC. We are registering IXC's shares in order to provide IXC with freely
tradable shares of our common stock. We will not receive any proceeds from the
sale of IXC's shares of our common stock.
The 3,000,000 shares of common stock covered by this prospectus are part of
the 10,229,789 shares of common stock purchased by IXC from us pursuant to an
IRU and Stock Purchase Agreement in consideration for our acquisition from IXC
of 20-year non-cancellable indefeasible rights of use in up to 10,000 equivalent
route miles of fiber-based OC-48 network bandwidth in portions of the IXC fiber
optic telecommunications system. The shares are being registered pursuant to a
registration rights agreement between us and IXC, which obligates us to register
the shares being offered by this prospectus.
RECENT DEVELOPMENTS
Acquisition of Transaction Network Services. On November 23, 1999, we
acquired Transaction Network Services, Inc., which we refer to as TNI. The
aggregate consideration paid to TNI shareholders consisted of approximately
$340.8 million in cash and approximately 7.6 million shares of our common stock,
which represents an aggregate value of approximately $687.0 million, assuming a
price per share of our common stock of $45.719. In addition, we assumed options
to acquire approximately 463,000 shares of TNI common stock, representing an
aggregate value of approximately $13.0 million, which have become exercisable
for an aggregate of approximately 463,000 shares of our common stock.
Additionally, we repaid principal and interest outstanding under TNI's revolving
credit facility in the amount of $52.1 million. The source of the cash
consideration for the TNI merger will be, and the cash for the repayment of the
TNI revolving credit facility obligation was, from cash on hand. TNI
shareholders could elect to receive cash, shares of our common stock, or both
cash and shares, subject to adjustments.
10 1/2% Senior Notes. In December 1999, we completed an offering of $600.0
million aggregate principal amount of 10 1/2% senior notes due 2006 and Euro
150.0 million aggregate principal amount of 10 1/2% senior notes due 2006. The
net proceeds of the offering, after deducting estimated discounts and
commissions of the initial purchasers and estimated expenses payable by us, were
approximately $736.2 million, assuming an exchange rate of Euro 0.9692 to U.S.
$1.00. Gross proceeds from the offering of dollar notes and euro notes were
$600.0 million and $154.8 million, respectively, assuming such exchange rate.
Other Acquisitions. As part of our growth strategy, for the six months
ended through December 31, 1999, we acquired the following 30 ISPs in eleven of
the 20 largest global telecommunications markets. The aggregate amount of the
purchase prices and related payments for these acquisitions was approximately
$221.8 million, exclusive of indebtedness assumed in connection with such
acquisitions. Of such amount, we have retained $36.1 million as of December 31,
1999 to secure performance by certain sellers of indemnification or other
contractual obligations. The following table summarizes certain information
concerning these recent acquisitions:
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<TABLE>
<CAPTION>
Ranking
Among
20 Largest
Name of Acquired SOHO/ Global
Company Date of Principal Business Consumer Telecom
- ---------------- Acquisition Market Accounts (1) Accounts (1) Markets (1)
----------- ------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Intercomputer 7/99 Spain 40 19,100 11
Abaforum 7/99 Spain 10 3,100 11
Netwing 7/99 Austria 10 1,700 N/A
Global Link 7/99 Hong Kong 40 2,100 19
Sinfonet 8/99 Panama 320 11,700 N/A
Domain 8/99 Brazil 20 12,600 9
Netsystem 8/99 Argentina -- 50 16
Netline 8/99 Chile 20 9,600 N/A
Vision Network 9/99 Hong Kong 410 1,900 19
ServNet 9/99 Brazil 10 10,200 9
Elender 9/99 Hungary 380 19,600 N/A
Infase and Ciberia 9/99 Spain 700 17,000 11
Internet Network Technologies 9/99 U.S. 90 300 1
Site Internet LTDA 9/99 Brazil 50 18,100 9
TotalNet 9/99 Canada -- 57,900 10
Terzomillennio 9/99 Italy 50 500 6
OrbiNet 9/99 Panama 120 2,600 N/A
ZebraNet 10/99 U.S. 20 13,600 1
SPIN 10/99 Switzerland 2,200 700 14
Zircon 10/99 Australia 500 3,300 8
Mlink 10/99 Canada 440 3,650 10
NetUp 11/99 Chile 60 2,300 N/A
Lyceum Internet 11/99 U.S. 150 20 1
Telalink 11/99 U.S. 720 1,200 1
Alpha Dot Net 12/99 U.S. 310 -- 1
Netgate 12/99 Uruguay 4,010 2,200 N/A
JoinNet 12/99 Taiwan 10 9,720 17
CorreioNet 12/99 Brazil -- 10,670 9
Lynx 12/99 Lebanon 10 3,000 N/A
Pacwan 12/99 France 20 4,390 5
------ -------
Total 10,720 242,800
====== =======
</TABLE>
__________________________
(1) As of the respective dates of acquisition.
___________________
We are a New York corporation and our principal executive offices are
located at 510 Huntmar Park Drive, Herndon, Virginia 20170. Our telephone number
is (703) 904-4100.
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<PAGE>
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks, including the ones listed below. You should carefully consider
these risk factors, as well as the other information contained in this
prospectus and our periodic reports and documents filed with the Securities and
Exchange Commission, in evaluating an investment in our securities.
We have significant indebtedness and we may not be able to meet our obligations
We are highly leveraged and have significant debt service requirements. As
of September 30, 1999, after giving pro forma effect to our acquisition of
Transaction Network Services, Inc., which we refer to as TNI, and our issuance
in December 1999 of $600.0 million aggregate principal amount of 10 1/2% senior
notes due 2006 and Euro 150.0 million aggregate principal amount of 10 1/2% of
senior notes due 2006, our total indebtedness would have been $3.2 billion,
representing approximately 80% of total capitalization. For the year ended
December 31, 1998 and for the nine months ended September 30, 1999, on a pro
forma basis after giving effect to our acquisition of TNI, TNI's acquisition
from AT&T Corp. of certain assets related to AT&T's Transaction Access Service,
which we refer to as the TAS Acquisition, and the other acquisitions which were
consummated in 1999, our interest expense would have been $68.1 million and
$121.8 million, respectively. Our annual interest expense on our senior notes
will be $323.7 million, assuming, with respect to the euro denominated senior
notes, an exchange rate of Euro 0.93 to U.S. $1.00, which was the average
exchange rate for the period from January 1 to September 30, 1999. We will have
additional interest expense attributable to our other debt and equipment lease
arrangements.
Our high level of indebtedness could have several important effects on our
future operations, which, in turn, could have important consequences for the
holders of our securities, including the following:
. a substantial portion of our cash flow from operations must be used to
pay interest on our indebtedness and, therefore, will not be available
for other business purposes;
. covenants contained in the agreements evidencing our debt obligations
require us to meet many financial tests, and other restrictions limit
our ability to borrow additional funds or to dispose of assets and may
affect our flexibility in planning for, and reacting to, changes in our
business, including possible acquisition activities and capital
expenditures; and
. our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.
Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance and on economic,
financial, competitive, regulatory and other factors affecting our operations.
Many of these factors are beyond our control and our future operating
performance could be adversely affected by some or all of these factors. We
historically have been unable to generate sufficient cash flow from operations
to meet our
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<PAGE>
operating needs and have relied on equity, debt and capital lease
financings to fund our operations. However, based on our current level of
operations, management believes that existing working capital, capital lease
financings and proceeds of future equity or debt financings will be adequate to
meet our presently anticipated future requirements for working capital, capital
expenditures and scheduled payments of interest on our debt. We cannot assure
you, however, that our business will generate sufficient cash flow from
operations or that future working capital borrowings will be available in an
amount sufficient to enable us to service our debt, or to make necessary capital
expenditures. In addition, we cannot assure you that we will be able to raise
additional capital for any refinancing of our debt in the future.
We have experienced continuing losses, negative cash flow and fluctuations in
operating results
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, we must, among other things, respond to
competitive developments, continue to attract and retain qualified persons,
continue to upgrade our management and financial systems, and continue to
upgrade our technologies and commercialize our network services incorporating
such technologies. We cannot assure you that we will be successful in addressing
such risks, and the failure to do so could have a material adverse effect on our
business, financial condition, results of operations and ability to pay when due
principal, interest and other amounts in respect of our debt. Although we have
experienced revenue growth on an annual basis with revenue increasing from $84.4
million in 1996 to $121.9 million in 1997, to $259.6 million in 1998, and to
$369.3 million for the nine months ended September 30, 1999, we have incurred
losses and experienced negative EBITDA during each of those periods. We may
continue to operate at a net loss and may experience negative EBITDA as we
continue our acquisition program and the expansion of our global network
operations. We have incurred net losses available to common shareholders of
$55.1 million, $46.0 million, $264.9 million and $210.4 million, and have
incurred negative EBITDA of $28.0 million, $21.2 million, $42.1 million and $7.4
million for each of the years ended December 31, 1996, 1997 and 1998 and for the
nine months ended September 30, 1999, respectively. During the nine months ended
September 30, 1999, on a pro forma basis after giving effect to our acquisition
of TNI, the TAS Acquisition and the other acquisitions, we would have incurred a
net loss available to common shareholders of $240.8 million and positive EBITDA
of $30.9 million. At September 30, 1999, on a pro forma basis after giving
effect to our acquisition of TNI, we would have had an accumulated deficit of
$671.5 million. We cannot assure you that we will be able to achieve or sustain
profitability or positive EBITDA.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future as a result of a variety of factors, some of which
are outside our control. These factors include, among others:
. general economic conditions and specific economic conditions in the
Internet access industry;
. user demand for Internet services;
. capital expenditures and other costs relating to the expansion of
operations of our network
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<PAGE>
. the introduction of new services by us or our competitors;
. the mix of services sold and the mix of channels through which those
services are sold;
. pricing changes and new product introductions by us and our competitors;
. delays in obtaining sufficient supplies of sole or limited source
equipment and telecom facilities; and
. potential adverse legislative and regulatory developments.
As a strategic response to a changing competitive environment, we may elect
from time to time to make pricing, service or marketing decisions that could
have a material adverse effect on our business, results of operations and cash
flow.
We will depend on the cash flows of our subsidiaries in order to satisfy our
obligations
We are an operating entity which also conducts a significant portion of our
business through our subsidiaries. Our operating cash flow and consequently our
ability to service our debt, is therefore partially dependent upon our
subsidiaries' earnings and their distributions of those earnings to us. It may
also be dependent upon loans, advances or other payments of funds to us by those
subsidiaries. Our subsidiaries are separate legal entities and have no
obligation, contingent or otherwise, to pay any amount due pursuant to our
senior notes or to make any funds available for that purpose. Our subsidiaries'
ability to make payments may be subject to the availability of sufficient
surplus funds, the terms of such subsidiaries' indebtedness, applicable laws and
other factors.
We may not be able to fund the expansion we will need to remain competitive
In order to maintain our competitive position, enhance our capabilities as
an Internet Super Carrier and continue to meet the increasing demands for
service quality, availability and competitive pricing, we expect to make
significant capital expenditures. At December 31, 1999, we were obligated to
make future cash payments that total $392.5 million for acquisitions of global
fiber-based and satellite telecommunications bandwidth, including IRUs or other
rights. In addition, if a supplier makes delivery of certain additional fiber-
based bandwidth, which is expected in 2001, we will be committed to make cash
payments at that time of between $120.0 million and $180.0 million, the actual
price to depend on the timing of delivery of the additional bandwidth. We also
expect that there will be additional costs, such as connectivity and equipment
charges, in connection with taking full advantage of such acquired bandwidth and
IRUs. Certain of this fiber-based and satellite telecommunications bandwidth may
require the acquisition and installation of equipment necessary to access and
light the bandwidth in order to make it operational. At December 31, 1999, we
were obligated to make capital expenditures for such equipment of $245.8
million. In addition, we were obligated to make expenditures in connection with
our build-out of new Internet and eCommerce hosting centers in key financial and
business centers throughout the world and the purchase of other facilities of
approximately $611.0 million at December 31, 1999. As a result of the foregoing,
we currently believe that our capital expenditures in 2000 will be substantially
greater than those in 1999, and that, as a result
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<PAGE>
of our debt and equity offerings, our capital expenditure program will be
accelerated. This may occur as we continue to execute our expansion strategy.
We historically have been unable to generate sufficient cash flow from
operations to meet our operating needs and have relied on equity, debt and
capital lease financings to fund our operations. However, we believe that we
will have a reasonable degree of flexibility to adjust the amount and timing of
capital expenditures in response to market conditions, competition, our then
existing financing capabilities, competition and other factors. We also believe
that working capital generated from the use of acquired bandwidth, together with
other existing working capital from capital lease financings, from our recent
debt and equity offerings and from future equity or debt financings will be
sufficient to meet the presently anticipated working capital and capital
expenditure requirements of our operations. We cannot assure you, however, that
we will have sufficient additional capital and/or obtain financing on
satisfactory terms to enable us to meet our capital expenditures and working
capital requirements.
We may need to raise additional funds in order to take advantage of
unanticipated opportunities, more rapid international expansion or acquisitions
of complementary businesses. In addition, we may need to raise additional funds
to develop new products or otherwise respond to changing business conditions or
unanticipated competitive pressures. We cannot assure you that we will be able
to raise such funds on favorable terms. In the event that we are unable to
obtain such additional funds on acceptable terms, we may determine not to enter
into various expansion opportunities.
We face risks associated with acquisitions and strategic alliances and
investments relating to difficulties in integrating combined operations,
incurrence of additional debt to finance acquisitions and operations of acquired
businesses, potential disruption of operations and related negative impact on
earnings, and incurrence of substantial expenses that could adversely affect our
financial condition
Growth through acquisitions represents a principal component of our
business strategy. We acquired 60 ISPs and related businesses from January 1,
1998 through December 31, 1999, which gives us a presence in each of the 20
largest global telecommunications markets. We expect to continue to acquire
assets and businesses principally relating to or complementary to our current
operations. We may also seek to develop strategic alliances and investments
(including venture capital investments) both domestically and internationally.
Any such future acquisitions or strategic alliances and investments would be
accompanied by the risks commonly encountered in acquisitions, strategic
alliances or investments. Such risks include, among other things:
. the difficulty of integrating the operations and personnel of the
companies, particularly in non-U.S. markets;
. the potential disruption of our ongoing business;
. the inability of management to maximize our financial and strategic
position by the successful incorporation of licensed or acquired
technology and rights into our service offerings; and
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<PAGE>
. the inability to maintain uniform standards, controls, procedures and
policies and the impairment of relationships with employees and
customers as a result of changes in management.
We cannot assure you that we will be successful in overcoming these risks
or any other problems encountered in connection with such acquisitions,
strategic alliances or investments. We believe that after eliminating redundant
network architecture and administrative functions and taking other actions to
integrate the operations of acquired companies we will be able to realize cost
savings. However, although we have assembled teams for integration of businesses
acquired by us, we cannot assure you that our integration of acquired companies'
operations will be successfully accomplished. Our ongoing integration actions
and other steps aimed at reducing our cost structure may lead to charges or to
adjustments to the depreciable lives of our assets. Our inability to improve the
operating performance of acquired companies' businesses or to integrate
successfully the operations of acquired companies could have a material adverse
effect on our business, financial condition and results of operations. In
addition, as we proceed with acquisitions in which the consideration consists of
cash, a substantial portion of our available cash will be used to consummate
such acquisitions.
As with each of our recent acquisitions, the purchase price of many of the
businesses that might become attractive acquisition candidates for us likely
will significantly exceed the fair values of the net assets of the acquired
businesses. As a result, material goodwill and other intangible assets would be
required to be recorded which would result in significant amortization charges
in future periods. In addition, an intangible asset that frequently arises in
connection with the acquisition of a technology company is ''acquired in-process
research and development,'' which under U.S. accounting standards, as presently
in effect, must be expensed immediately upon acquisition. Such expenses, in
addition to the financial impact of such acquisitions, could have a material
adverse effect on our business, financial condition and results of operations
and could cause substantial fluctuations in our quarterly and yearly operating
results. Furthermore, in connection with acquisitions or strategic alliances, we
could incur substantial expenses, including the expenses of integrating the
business of the acquired company or the strategic alliance with our existing
business.
We expect that competition for appropriate acquisition candidates may be
significant. We may compete with other telecommunications companies with similar
acquisition strategies, many of which may be larger and have greater financial
and other resources than we have. Competition for Internet companies is based on
a number of factors including price, terms and conditions, size and access to
capital, ability to offer cash, stock or other forms of consideration and other
matters. We cannot assure you that we will be able to successfully identify and
acquire suitable companies on acceptable terms and conditions.
Our growth and expansion may strain our ability to manage our operations and our
financial resources
Our rapid growth has placed a strain on our administrative, operational and
financial resources and has increased demands on our systems and controls. We
have over 700 points-of-presence and we plan to continue to expand the capacity
of existing points-of-presence as customer-driven demand dictates. In addition,
we have completed a number of acquisitions of
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<PAGE>
companies and telecommunications bandwidth during 1998 and 1999 and plan to
continue to do so. We anticipate that we may be required to continue
enhancements to and expand our network. The process of consolidating the
businesses and implementing the strategic integration of these acquired
businesses with our existing business may take a significant amount of time. It
may also place additional strain on our resources and could subject us to
additional expenses. We cannot assure you that we will be able to integrate
these companies successfully or in a timely manner. In addition, we cannot
assure you that our existing operating and financial control systems and
infrastructure will be adequate to maintain and effectively monitor future
growth.
Our continued growth may also increase our need for qualified personnel. We
cannot assure you that we will be successful in attracting, integrating and
retaining such personnel. The following risks, associated with our growth, could
have a material adverse effect on our business, results of operations and
financial condition:
. our inability to continue to upgrade our networking systems or our
operating and financial control systems;
. our inability to recruit and hire necessary personnel or to successfully
integrate new personnel into our operations;
. our inability to successfully integrate the operations of acquired
companies or to manage our growth effectively; or
. our inability to adequately respond to the emergence of unexpected
expansion difficulties.
We face risks associated with our acquisitions of bandwidth from network
suppliers relating to our dependence on their ability to satisfy their
obligations to us, the possibility that we may need to incur significant
expenses to utilize bandwidth and their ability to build out their networks
under construction that could adversely affect our ability to utilize acquired
bandwidth
We are subject to a variety of risks relating to our recent acquisitions of
fiber-based and satellite telecommunications bandwidth from our various global
network suppliers and the delivery, operation and maintenance of such bandwidth.
Such risks include, among other things, the following:
. the risk that financial, legal, technical and/or other matters may
adversely affect such suppliers' ability to perform their respective
operation, maintenance and other services relating to such bandwidth,
which may adversely affect our use of such bandwidth;
. the risk that we will not have access to sufficient additional capital
and/or financing on satisfactory terms to enable us to make the
necessary capital expenditures to take full advantage of such bandwidth;
. the risk that such suppliers may not continue to have the necessary
financial resources to enable them to complete, or may otherwise elect
not to complete, their contemplated buildout of their respective fiber
optic telecommunications systems; and
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. the risk that such buildout may be delayed or otherwise adversely
affected by presently unforeseeable legal, technical and/or other
factors.
We cannot assure you that we will be successful in overcoming these risks
or any other problems encountered in connection with our acquisitions of
bandwidth.
Continued international expansion is a key component of our business strategy
and, if we are unable to complete this expansion, our financial condition may be
adversely affected
A key component of our business strategy is our continued expansion into
international markets. Revenue from our non-U.S. operations continues to
increase as a percentage of consolidated results, comprising 53% of revenue in
the third quarter of 1999. By comparison, our non-U.S. operations comprised 40%
for all of 1998. As a result of our acquisition of TNI, our revenue mix may
change again in 2000. We may need to enter into joint ventures or other
strategic relationships with one or more third parties in order to conduct our
foreign operations successfully. However, we cannot assure you that we will be
able to obtain the permits and operating licenses required for us to operate, to
hire and train employees or to market, sell and deliver high quality services in
these markets. In addition to the uncertainty as to our ability to continue to
expand our international presence, there are risks inherent in doing business on
an international level. Such risks include:
. unexpected changes in or delays resulting from foreign laws, regulatory
requirements, tariffs, customs, duties and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer payment cycles and problems in collecting accounts receivable;
. fluctuations in currency exchange rates and foreign exchange controls
which restrict or prohibit repatriation of funds;
. technology export and import restrictions or prohibitions;
. delays from customs brokers or government agencies;
. seasonal reductions in business activity during the summer months in
Europe and other parts of the world; and
. potentially adverse tax consequences, which could adversely impact the
success of our international operations.
We cannot assure you that such factors will not have an adverse effect on
our future international operations and, consequently, on our business,
financial condition and results of operations. In addition, we cannot assure you
that laws or administrative practice relating to taxation, foreign exchange,
foreign ownership or other matters of countries within which we operate will not
change. Any such change could have a material adverse effect on our business,
financial condition and results of operations.
Asian-Pacific and Latin American countries in which we operate have
experienced economic difficulties and uncertainties during the past few years.
These economic difficulties and uncertainties could have a material adverse
effect on our business, financial condition and results of operations.
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Our financial results and our financial position may be adversely affected by
currency and exchange risks
During the year ended December 31, 1998 and the nine months ended September
30, 1999, 40% and 52%, respectively, of our revenue was derived from operations
outside of the United States and at September 30, 1999 27% of our assets were in
operations outside of the United States. During the year ended December 31, 1998
and the nine months ended September 30, 1999, on a pro forma basis after giving
effect to our acquisition of TNI, the TAS Acquisition and the Other
Acquisitions, 39% and 41%, of our revenue, respectively would have been derived
from operations outside the United States and at September 30, 1999, on a pro
forma basis after giving effect to our acquisition of TNI, 25% of our assets
would have been in operations outside of the United States. We anticipate that a
significant percentage of our future revenue and operating expenses will
continue to be generated from operations outside the United States and we expect
to continue to invest in non-U.S. businesses. Consequently, a substantial
portion of our revenue, operating expenses, assets and liabilities will be
subject to significant foreign currency and exchange risks. Obligations of
customers and of PSINet in foreign currencies will be subject to unpredictable
and indeterminate fluctuations in the event that such currencies change in value
relative to U.S. dollars. Furthermore, those customers and PSINet may be subject
to exchange control regulations which might restrict or prohibit the conversion
of such currencies into U.S. dollars. Although we have not entered into hedging
transactions to limit our foreign currency risks, as a result of the increase in
our foreign operations and our recent issuance of euro-denominated senior notes,
we may implement such practices in the future. We cannot assure you that the
occurrence of any of these factors will not have a material adverse effect on
our business, financial position or results of operations.
We depend on key personnel and could be affected by the loss of their services
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of persons with knowledge of
and experience in the Internet service industry. The process of locating such
personnel with the combination of skills and attributes required to carry out
our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, technical,
marketing and sales personnel and upon the continued contributions of such
management and personnel. In particular, our success is highly dependent upon
the personal abilities of our senior executive management, including William L.
Schrader, our Chairman of the Board and Chief Executive Officer and the founder
of PSINet, Harold S. 'Pete' Wills, our President and Chief Operating Officer,
and Edward D. Postal, our Executive Vice President and Chief Financial Officer.
We have employment agreements with each of these senior executive officers. The
loss of the services of any one of them could have a material adverse effect on
our business, financial condition or results of operations.
We depend on suppliers and could be affected by changes in suppliers or delays
in delivery of their products and services
We have few long-term contracts with our suppliers. We are dependent on
third party suppliers for our leased-line connections or bandwidth. Some of
these suppliers are or may become competitors of ours, and such suppliers are
not subject to any contractual restrictions
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upon their ability to compete with us. If these suppliers change their pricing
structures, we may be adversely affected. Moreover, any failure or delay on the
part of our network providers to deliver bandwidth to us or to provide
operations, maintenance and other services with respect to such bandwidth in a
timely or adequate fashion could adversely affect us.
We are also dependent on third party suppliers of hardware components.
Although we attempt to maintain a minimum of two vendors for each required
product, some components used by us in providing our networking services are
currently acquired or available from only one source. We have from time to time
experienced delays in the receipt of hardware components and telecommunications
facilities, including delays in delivery of Primary Rate Interface, or PRI,
telecommunications facilities, which connect dial-up customers to our network. A
failure by a supplier to deliver quality products on a timely basis, or the
inability to develop alternative sources if and as required, could result in
delays which could have a material adverse effect on us. Our remedies against
suppliers who fail to deliver products on a timely basis are limited by
contractual liability limitations contained in supply agreements and purchase
orders and, in many cases, by practical considerations relating to our desire to
maintain good relationships with the suppliers. As our suppliers revise and
upgrade their equipment technology, we may encounter difficulties in integrating
the new technology into our network.
Many of the vendors from whom we purchase telecommunications bandwidth,
including the regional Bell operating companies, competitive local exchange
carriers and other local exchange carriers, currently are subject to tariff
controls and other price constraints which in the future may be changed. In
addition, recently enacted legislation will produce changes in the market for
telecommunications services. These changes may affect the prices which we are
charged by the regional Bell operating companies and other carriers, which could
have a material adverse effect on our business, financial condition and results
of operations. Moreover, we are subject to the effects of other potential
regulatory actions which, if taken, could increase the cost of our
telecommunications bandwidth through, for example, the imposition of access
charges.
The terms of our financing arrangements may restrict our operations
Our financing arrangements require that we satisfy many financial
covenants. Our ability to satisfy these financial covenants may be affected by
events beyond our control and, as a result, we cannot assure you that we will be
able to continue to satisfy such covenants. These financing arrangements also
currently prohibit us from paying dividends and repurchasing our capital stock
without the lender's consent. Our failure to comply with the covenants and
restrictions in these financing arrangements could lead to a default under the
terms of these agreements. In the event of a default under the financing
arrangements, our lenders would be entitled to accelerate the indebtedness
outstanding thereunder and foreclose upon any assets securing such indebtedness.
They would also be entitled to be repaid from the proceeds of the liquidation of
those secured assets before the assets would be available for distribution to
the holders of our securities, including the holders of our securities.
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Our financial condition may be adversely affected if our systems and those of
our suppliers fail because of Year 2000 problems
The commonly referred to Year 2000, or Y2K, problem results from the fact
that many existing computer programs and systems use only two digits to identify
the year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not corrected,
computer applications that use a two-digit format could fail or create erroneous
results in any computer calculation or other processing involving the Year 2000
or a later date. We have identified two main areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in our
operations; and
2. Computer systems or embedded chips of third parties including,
without limitation, financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others, could be disrupted or fail, causing an interruption or decrease in
our ability to continue our operations.
Prior to entering the year 2000, we developed detailed plans for
implementing, testing and completing any necessary modifications to our key
computer systems and equipment with embedded chips to ensure that they were Y2K
compliant. A third party consultant performed an assessment of our U.S. internal
systems (e.g., accounting, billing, customer support and network operations) to
determine the status of their Y2K compliance. We also developed a test bed of
our U.S. internal systems to implement and complete testing of the requisite
minor changes and completed an inventory of our internal systems that we use
outside of the United States to determine the status of their Y2K compliance.
Each international office had plans in place to upgrade or, if necessary,
replace components of its internal systems to ensure they were Y2K compliant. To
help ensure that our network operations and services to our customers were not
interrupted due to the Y2K problem, we established a network operations team.
This team of operational staff conducted inventories of our network equipment
(software and hardware) and found no material Y2K compliance issues. We also
took steps to ensure that all equipment being purchased for use in the PSINet
network was Y2K compliant. Any equipment that was not Y2K compliant was made Y2K
compliant through minor changes to the software or hardware or, in limited
instances, replaced entirely. Our network team also developed a contingency plan
to address any potential problems that could have occurred with our network as
we entered the year 2000. In addition, we identified and communicated with our
suppliers, vendors, customers, lenders and other material third parties to
determine their Y2K status and any probable impact on us. Our inquiries did not
reveal any significant Y2K noncompliance issue affecting our material third
parties.
Now that we have entered the year 2000, we have tested our key computer
systems and equipment and have confirmed that they are Y2K compliant. To date,
we have not encountered any material Y2K related disruptions or failures of our
systems or services, nor have we been notified of any disruptions or failures in
the systems of any of our third parties. There is an ongoing risk that Y2K
related problems could still occur and we will continue to evaluate these risks,
however, we believe that the Y2K issue will not pose any significant operational
problems for us.
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Our cost of addressing Y2K issues has been minor to date, $2.0 million, or
less than 5% of our 1999 information technology and network operations budgets,
but this amount could increase if we encounter any future Y2K problems. These
costs included equipment, consulting fees, software and hardware upgrades,
testing, remediation and, in limited instances, replacement of equipment. The
total cost of Y2K assessments and remediation to date has been funded through
cash on hand and available from other sources and we expensed these costs, as
appropriate. Although we may still encounter some unexpected risks, the
financial impact of making all required systems changes or other remediation
efforts to date has not been material to our financial position, results of
operations, or cash flows, nor is it expected to be material.
If we become subject to provisions of the Investment Company Act, our business
operations may be restricted
We have significant amounts of cash and, pending our utilization of all the
net proceeds from our recent debt and equity offerings, will have an even
greater amount of cash invested in short term investment grade and government
securities, which investments could conceivably subject us to the provisions of
the Investment Company Act of 1940. We do not propose to engage in investment
activities in a manner or to an extent which would require us to register as an
investment company under the Investment Act of 1940. The Investment Company Act
of 1940 places restrictions on the capital structure and business activities of
companies registered thereunder.
Accordingly, we will seek to limit our holding of "investment securities"
(as defined in such Act) to an amount which is less than 40% of the value of our
total assets as calculated pursuant to the Investment Company Act of 1940. The
Investment Company Act of 1940 permits a company to avoid becoming subject to
such Act for a period of up to one year despite the holding of investment
securities in excess of such amount if, among other things, its board of
directors has adopted a resolution which states that it is not the company's
intention to become an investment company. Our Board of Directors has adopted
such a resolution that would become effective in the event we are deemed to fall
within the definition of an investment company. Application of the provisions of
the Investment Company Act of 1940 would have a material adverse effect on us.
We face a high level of competition in the Internet services industry
The market for Internet connectivity and related services is extremely
competitive. We anticipate that competition will continue to intensify as the
use of the Internet grows. The tremendous growth and potential market size of
the Internet access market has attracted many new start-ups as well as
established businesses from different industries.
Our current and prospective competitors include other national, regional
and local ISPs, long distance and local exchange telecommunications companies,
cable television, direct broadcast satellite, wireless communications providers
and on-line service providers. We believe that our network, products and
customer service distinguish us from these competitors. However, some of these
competitors have significantly greater market presence, brand recognition and
financial, technical and personnel resources than we do.
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We compete with all of the major long distance companies, also known as
interexchange carriers, including AT&T, MCIWorldCom, Sprint and Cable &
Wireless/IMCI, which also offer Internet access services. The recent sweeping
reforms in the federal regulation of the telecommunications industry have
created greater opportunities for local exchange carriers, including the
regional Bell operating companies, to enter the Internet connectivity market. We
believe that there is a move toward horizontal integration through acquisitions
of, joint ventures with, and the wholesale purchase of connectivity from ISPs to
address the Internet connectivity requirements of the current business customers
of long distance and local carriers. The WorldCom/MFS/UUNet consolidation, the
WorldCom/MCI merger, the ICG/NETCOM merger, Cable & Wireless' purchase of the
internetMCI assets, the Intermedia/DIGEX merger, GTE's acquisition of BBN,
Global Crossing's acquisition of Frontier Corp. and Frontier's prior acquisition
of Global Center, Qwest Communication's plans to acquire US West, AT&T's
purchase of IBM's global communications network, America Online's plans to
acquire Time Warner, MCIWorldCom's recently announced plans to merge with
Sprint, and Nextlink Communications recently announced plans to acquire
Concentric Network Corporation are indicative of this trend. Accordingly, we
expect to experience increased competition from the traditional
telecommunications carriers. Many of these telecommunications carriers may have
the ability to bundle Internet access with basic local and long distance
telecommunications services. This bundling of services may have an adverse
effect on our ability to compete effectively with the telecommunications
providers and may result in pricing pressure on us that could have a material
adverse effect on our business, financial condition and results of operations.
Many of the major cable companies have announced that they have begun
offering, or are exploring the possibility of offering Internet connectivity,
relying on the viability of cable modems and economical upgrades to their
networks. Several announcements also have recently been made by other
alternative service companies approaching the Internet connectivity market with
various wireless terrestrial and satellite-based service technologies.
Many of the predominant on-line service providers, including America
Online, CompuServe and Microsoft Network, have entered the Internet access
business by engineering their current proprietary networks to include Internet
access capabilities. We compete to a lesser extent with these on-line service
providers. However, America Online's acquisition of Netscape Communications
Corporation and related strategic alliance with Sun Microsystems will enable it
to offer a broader array of Internet protocol-based services and products that
could significantly enhance its ability to appeal to the business marketplace
and, as a result, compete more directly with us.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies. These services would include new technologies such as cable
modems and DSL. These providers have initially targeted the residential
consumer. However, it is likely that their target markets will expand to
encompass business customers, which is our target market. This expansion could
adversely affect the pricing of our service offerings. Moreover, there has
recently been introduced a number of free ISP services, particularly in non-U.S.
markets, and some ISPs are offering free personal computers to their
subscribers. The FCC has proposed to permit ILECs to provide advanced services,
through structurally separate affiliates on a deregulated basis. While
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these services have been offered primarily to dial-up consumer customers, they
could be extended to dial-up business customers as well. These trends could have
a material adverse effect on our business, financial condition and results of
operations.
As a result of the increase in the number of competitors and the vertical
and horizontal integration in the industry, we currently encounter and expect to
continue to encounter significant pricing pressure and other competition.
Advances in technology as well as changes in the marketplace and the regulatory
environment are constantly occurring, and we cannot predict the effect that
ongoing or future developments may have on us or on the pricing of our products
and services. Increased price or other competition could result in erosion of
our market share and could have a material adverse effect on our business,
financial condition and results of operations. We cannot assure you that we will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
As we continue to expand our operations outside the United States, we will
encounter new competitors and competitive environments. In some cases, we will
be forced to compete with and buy services from government-owned or subsidized
telecommunications providers. Some of these providers may enjoy a monopoly on
telecommunications services essential to our business. We cannot assure you that
we will be able to purchase such services at a reasonable price or at all. In
addition to the risks associated with our previously described competitors,
foreign competitors may pose an even greater risk, as they may possess a better
understanding of their local markets and better working relationships with local
infrastructure providers and others. We cannot assure you that we can obtain
similar levels of local knowledge. Failure to obtain that knowledge could place
us at a significant competitive disadvantage.
Technology trends and evolving industry standards could result in our
competitors developing or obtaining access to bandwidth and technologies that
carry more information faster than our bandwidth and technology and,
consequently, render our bandwidth or technology obsolete
Our products and services are targeted toward users of the Internet, which
has experienced rapid growth. The market for Internet access and related
services is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product and service
introductions. Our future success will depend, in part, on our ability to
effectively use and develop leading technologies.
We cannot assure you that we will be successful in responding to changing
technology or market trends. In addition, services or technologies developed by
others may render our services or technologies uncompetitive or obsolete.
Furthermore, changes to our services in response to market demand may require
the adoption of new technologies that could likewise render many of our assets
technologically uncompetitive or obsolete. As we accept bandwidth from our
various existing global network suppliers or acquire bandwidth or equipment from
other suppliers that may better meet our needs than existing bandwidth or
equipment, many of our assets could be determined to be obsolete or excess. The
disposition of obsolete or excess assets could have a material adverse effect on
our business, financial condition and results of operations.
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Even if we do respond successfully to technological advances and emerging
industry standards, the integration of new technology may require substantial
time and expense, and we cannot assure you that we will succeed in adapting our
network infrastructure in a timely and cost-effective manner.
We may be liable for information disseminated through our network
The law relating to liability of ISPs for information carried on or
disseminated through their networks is not completely settled. A number of
lawsuits have sought to impose such liability for defamatory speech,
infringement of copyrighted materials and other claims. The U.S. Supreme Court
has let stand a lower court ruling which held that an ISP was protected by a
provision of the Communications Decency Act from liability for material posted
on its system. However, the findings in that particular case may not be
applicable in other circumstances with differing facts. Other courts have held
that online service providers and ISPs may, under some circumstances, be subject
to damages for copying or distributing copyrighted materials. However, in an
effort to protect certain qualified ISPs, the Digital Millennium Copyright Act
was signed into law in October 1998. Under certain circumstances, this Act may
provide qualified ISPs with a "safe harbor" from liability for copyright
infringement. We cannot assure you that we currently qualify by the terms,
provisions and interpretations of this Act. In 1998, the Child Online Protection
Act was enacted, requiring limitations on access to pornography and other
material deemed 'harmful to minors.' This legislation has been attacked in court
as a violation of the First Amendment. We are unable to predict the outcome of
this case at this time. The imposition upon ISPs or web server hosts of
potential liability for materials carried on or disseminated through their
systems could require us to implement measures to reduce our exposure to such
liability. Such measures may require that we spend substantial resources or
discontinue some product or service offerings. Any of these actions could have a
material adverse effect on our business, operating results and financial
condition.
We carry errors and omissions insurance with a policy limit of $5.0
million, subject to deductibles and exclusions. Such coverage may not be
adequate or available to compensate us for all liability that may be imposed.
The imposition of liability in excess of, or the unavailability of, such
coverage could have a material adverse effect on our business, financial
condition and results of operations.
The law relating to the regulation and liability of ISPs in relation to
information carried or disseminated also is undergoing a process of development
in other countries. For example, a recent court decision in England held an ISP
liable for certain allegedly indecent content carried through its network under
factual circumstances in which the ISP had been notified by the complainant
about the offending message which the ISP had failed to delete when asked to do
so by the complainant. Decisions, laws, regulations and other activities
regarding regulation and content liability may significantly affect the
development and profitability of companies offering on-line and Internet access
services, including us.
One particular area of uncertainty in this regard results from the entry
into effect of European Union Directive 95/46/EC on the protection of
individuals with regard to the processing of personal data and on the free
movement of such data. The EU Directive imposes obligations in connection with
the protection of personal data collected or processed by third
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parties. Under some circumstances, we may be regarded as subject to the EU
Directive's requirements. The United States and the European Union currently are
negotiating the application of the EU Directive to U.S. companies.
FCC and foreign telecommunications regulations may limit the services we can
offer
Consistent with our growth and acquisition strategy, we are now engaged in,
or will soon be engaged in, activities that subject us to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, telecommunications carriers to the
extent that they involve the provision, origination or termination of
jurisdictionally interstate or international communications. The state
regulatory commissions retain jurisdiction over the same facilities and services
to the extent they involve origination or termination of jurisdictionally
intrastate communications.
Our Internet operations are not currently subject to direct regulation by
the FCC or any other governmental agency, other than regulations applicable to
businesses generally. However, the FCC has indicated that some services offered
over the Internet, such as phone-to-phone Internet protocol telephony, may be
functionally indistinguishable from traditional telecommunications service
offerings and their non-regulated status may have to be re-examined. We are
unable to predict what regulations may be adopted in the future, or to what
extent existing laws and regulations may be found applicable, or the impact of
any new or existing laws may have on our business. We cannot assure you that new
laws or regulations relating to Internet services, or existing laws found to
apply to them, will not have a material adverse effect on us. Although the FCC
has decided not to allow local telephone companies to impose per-minute access
charges on Internet service providers, and that decision has been upheld by the
reviewing court, further regulatory and legislative consideration of this issue
is likely. In addition, some telephone companies are seeking relief through
state regulatory agencies. Such rules, if adopted, would affect our costs of
serving dial-up customers and could have a material adverse effect on our
business, financial condition and results of operations.
In addition to our Internet activities, we have recently focused attention
on acquiring telecommunications assets and facilities, which is a regulated
activity. Our wholly-owned subsidiary, PSINetworks Company, has received an
international Section 214 authorization from the FCC and a Type I facilities
license from the Japanese telecommunications regulatory activity to provide
global facilities-based and global resale telecommunications services. Our
wholly-owned subsidiary, PSINet Telecom UK Limited, has received an
international facilities license from DTI and OFTEL, the responsible
telecommunications regulatory bodies in the United Kingdom. Currently, the FCC
and OFTEL do not closely regulate the charges or practices of non-dominant
carriers, such as our subsidiaries. Nevertheless, these regulatory agencies have
the power to impose more stringent regulatory requirements on us and to change
our regulatory classification, which may adversely affect our business.
Our subsidiaries have also received competitive local exchange carrier, or
CLEC, certification in New York, Virginia, Colorado, California, Texas and
Maryland. We are considering the financial, regulatory and operational
implications of becoming a competitive local exchange carrier in other states.
As a provider of domestic basic telecommunications
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services, particularly competitive local exchange services, we could become
subject to further regulation by the FCC and/or another regulatory agency,
including state and local entities.
An important issue for CLECs is the right to receive reciprocal
compensation for the transport and termination of Internet traffic. Most states
have required incumbent local exchange carriers to pay competitive local
exchange carriers reciprocal compensation. In October 1998, the FCC determined
that dedicated Digital Subscriber Line service is an interstate service and
properly tarriffed at the interstate level. In February 1999, the FCC concluded
that at least a substantial portion of dial-up ISP traffic is jurisdictionally
interstate. The FCC also concluded that its jurisdictional decision does not
alter the exemption from access charges currently enjoyed by ISPs. The FCC
established a proceeding to consider an appropriate compensation mechanism for
interstate Internet traffic. Pending the adoption of that mechanism, the FCC saw
no reason to interfere with existing interconnection agreements and reciprocal
compensation arrangements. The FCC order has been appealed, briefing was in
September 1999, and oral arguments are expected to be heard in early 2000. In
light of the FCC's order, state commissions that previously addressed this issue
and required reciprocal compensation to be paid for ISP traffic may reconsider
and may modify their prior rulings. Several incumbent local exchange carriers
are seeking to overturn prior orders, or seek refunds of, or authority to
escrow, payments that they claim are inconsistent with the FCCs' February 1999
order. In response to these and other challenges, some state commissions have
opened inquiries as to the appropriate compensation mechanisms in the context of
ISP traffic. Of the state commissions that have considered the issue since the
FCC's February 1999 order, the majority of these states has upheld the
requirement to pay reciprocal compensation for ISP traffic. We cannot assure you
that any future court, state regulatory or FCC decision on this matter will
favor our position. An unfavorable result may have an adverse impact on our
potential future revenues as a CLEC, as well as increasing our costs for PRIs
generally.
If we experience system failure or shutdown, we may not be able to deliver
services
Our success depends upon our ability to deliver reliable, high-speed access
to the Internet and upon the ability and willingness of our telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. Our network, and other networks providing services to us, are
vulnerable to damage or cessation of operations from fire, earthquakes, severe
storms, power loss, telecommunications failures and similar events, particularly
if such events occur within a high traffic location of the network. We have
designed our network to minimize the risk of such system failure, for instance,
with redundant circuits among POPs to allow traffic rerouting. In addition, we
perform lab and field testing before integrating new and emerging technology
into the network, and we engage in capacity planning. Nonetheless, we cannot
assure you that we will not experience failures or shutdowns relating to
individual POPs or even catastrophic failure of the entire network.
We carry business personal property insurance at both scheduled locations
and unscheduled locations to protect us against losses due to property damage
and business interruption. Such coverage, however, may not be adequate or
available to compensate us for all losses that may occur. In addition, we
generally attempt to limit our liability to customers arising out of network
failures by contractually disclaiming all such liability. In respect of many
services, we have also contractually limited liability to a usage credit based
upon the amount of
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time that the system was not operational. We cannot assure you, however, that
such limitations will be enforceable. In any event, significant or prolonged
system failures or shutdowns could damage our reputation and result in the loss
of customers.
Although we have implemented network security measures, our network may be
susceptible to viruses, break-ins or disruptions
We have implemented many network security measures, such as limiting
physical and network access to our routers. Nonetheless, our network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by our customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. Furthermore,
such inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers. This could, in turn, deter potential customers and
adversely affect our existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center at
Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on us.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of such problems may result in
claims against us or liability on our part. Such claims, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on our business or reputation or on our ability to attract and
retain customers for our products. Moreover, until more consumer reliance is
placed on security technologies available, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet service
industry and our customer base and revenues.
Risk associated with dependence on technology and with proprietary rights
Our success and ability to compete is dependent in part upon our technology
and technical expertise and, to a lesser degree, on our proprietary rights. In
order to establish and protect our technology, we rely on a combination of
copyright, trademark and trade secret laws and contractual restrictions.
Nevertheless, we cannot assure you that such measures are adequate to protect
our proprietary technology. It may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization or to
develop similar technology independently. In addition, our products may be
licensed or otherwise utilized in foreign countries where laws may not protect
our proprietary rights to the same extent as do laws in the United States. It is
our policy to require employees and consultants and, when obtainable, suppliers
to execute confidentiality agreements upon the commencement of their
relationships with us. Nonetheless, we cannot assure you that these precautions
will be adequate to prevent
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misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
In addition, we are also subject to the risk of adverse claims and
litigation alleging infringement by us of the intellectual property rights of
others. From time to time, we have received claims that we have infringed other
parties' proprietary rights. While we do not believe that we have infringed the
proprietary rights of other parties, we cannot assure you that third parties
will not assert infringement claims in the future with respect to our current or
future products. Such claims may require that we enter into license arrangements
or may result in protracted and costly litigation, regardless of the merits of
such claims. We cannot assure you that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms.
We have recently introduced new enterprise service offerings, including
value-added, Internet protocol-based enterprise communication services and DSL-
based Internet access services. The failure of these services to gain market
acceptance in a timely manner or at all, or the failure of DSL-based services,
in particular, to achieve significant market coverage could have a material
adverse effect on our business, financial condition and results of operations.
If we introduce new or enhanced services with reliability, quality or
compatibility problems, it could significantly delay or hinder market acceptance
of such services, which could adversely affect our ability to attract new
customers and subscribers. Our services may contain undetected errors or defects
when first introduced or as enhancements are introduced. Despite testing by us
or our customers, we cannot assure you that errors will not be found in new
services after commencement of commercial deployment. Such errors could result
in additional development costs, loss of or delays in market acceptance,
diversion of technical and other resources from our other development efforts
and the loss of credibility with our customers and subscribers. Any such event
could have a material adverse effect on our business, financial condition and
results of operations.
Additionally, if we are unable to match our network capacity to customer
demand for our services, our network could become congested during periods of
peak customer demand. Such congestion could adversely affect the quality of
service we are able to provide. Conversely, due to the high fixed cost nature of
our infrastructure, if our network is under-utilized, it could adversely affect
our ability to provide cost-efficient services. Our failure to match network
capacity to demand could have a material adverse effect on our business,
financial condition or results of operations.
The market price and trading volume of our stock may be volatile
The market price and trading volume of our common stock has been and may
continue to be highly volatile. Factors such as variations in our revenue,
earnings and cash flow and announcements of new service offerings, technological
innovations, strategic alliances and/or acquisitions involving our competitors
or price reductions by us, our competitors or providers of alternative services
could cause the market price of our common stock to fluctuate substantially. In
addition, the stock markets recently have experienced significant price and
volume fluctuations that particularly have affected technology-based companies
and resulted in changes in the market prices of the stocks of many companies
that have not been directly related to the
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operating performance of those companies. Such broad market fluctuations have
adversely affected and may continue to adversely affect the market price of our
common stock.
We do not anticipate that we will pay cash dividends on our common stock
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. In addition, our debt securities contain limitations on our ability to
declare and pay cash dividends.
We may encounter a number of risks and uncertainties in connection with our
acquisition of TNI, including the following:
. TNI derives a substantial portion of its revenue from a small number of
customers
For the year ended December 31, 1998, approximately 44% of TNI's total
revenues were derived from its five largest customers, and for the nine months
ended September 30, 1999, approximately 45% of TNI's total revenues were derived
from these customers. The loss of any one or more of these customers could have
a material adverse effect on TNI's business, results of operations and financial
condition and, as a result, potentially ours. TNI has multi-year contracts with
these customers. These contracts expire between June 2000 and May 2002. We
cannot assure you that these contracts will be maintained or renewed.
. TNI depends on market expansion and on its expansion into new markets
Although TNI has grown rapidly since it became operational in June 1991,
TNI's future growth and profitability will depend in part on:
. the further expansion of:
. the point-of-sale/point-of-service, or POS, transaction network
services market;
. the telecommunications services market;
. the financial services market;
. the emergence of other markets for:
. electronic transaction network services;
. services for automated teller machine processing;
. services for healthcare claims processing;
. services for electronic benefits transfer; and
. TNI's ability to penetrate these markets both domestically and
internationally.
Further market expansion depends on the continued growth in the number of
transactions and the continued automation of traditional paper-based processing
systems. We cannot assure you that markets for the TNI network and
telecommunications services will continue to expand and develop or that TNI will
succeed in penetrating new markets.
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. TNI's business is seasonal and TNI experiences fluctuations in quarterly
results
Merchant credit card transactions account for a major percentage of the
transaction volume processed by TNI's customers. We expect the volume of those
transactions on TNI's network to be greater in the fourth quarter holiday season
than during the rest of the year. Consequently, revenues and earnings from
merchant credit card transactions in the first quarter generally are expected to
be lower than revenues and earnings from merchant credit card transactions in
the fourth quarter of the immediately preceding year. Although the financial
services, healthcare claims processing and electronic benefits transfer markets,
as well as other potential markets that TNI has targeted for future expansion,
are anticipated to be less seasonal, we expect that TNI's operating results in
the foreseeable future will be significantly affected by seasonal trends in the
merchant credit card transaction market. As a result, our financial results may
be more sensitive to seasonal trends.
Forward-looking statements
Some of the information contained in this prospectus may contain forward-
looking statements. Such statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or similar words, or by discussions of strategy
that involve risks and uncertainties. These statements may discuss our future
expectations or contain projections of our results of operations or financial
condition or expected benefits to us resulting from acquisitions or
transactions. We cannot assure that the future results indicated, whether
expressed or implied, will be achieved. The risk factors noted in this section
and other factors noted throughout this prospectus, including risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.
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USE OF PROCEEDS
The shares of our common stock covered by this prospectus are being offered
by IXC and not by us. Consequently, we will not receive any proceeds from the
sale of the shares of our common stock offered hereby.
CAPITALIZATION
The following table sets forth the cash, cash equivalents, short-term
investments and marketable securities, restricted cash and short-term
investments and capitalization of PSINet as of September 30, 1999 on:
(1) an actual basis; and
(2) a pro forma basis, which adjusts the actual amounts to give effect to
the following as if each had occurred on September 30, 1999;
. Our acquisition of TNI on November 23, 1999. The aggregate
consideration paid to TNI shareholders consisted of
approximately $340.8 million of cash, approximately 7.6 million
shares of our common stock and the assumption of TNI options to
acquire approximately 463,000 shares of TNI common stock which
have become exercisable for an aggregate of approximately 463,000
shares of our common stock. Additionally, we repaid principal and
interest outstanding under TNI's revolving credit facility in the
amount of $52.1 million.
. Our 10 1/2% senior notes offering in December 1999 for net
proceeds of approximately $736.2 million.
This table should be read in conjunction with the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Structure," "Unaudited Pro Forma Consolidated Financial
Information" and "Use of Proceeds" and our consolidated financial statements and
notes thereto and other financial and operating data included or incorporated by
reference in this prospectus.
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<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------
Actual Pro Forma
---------------- -----------------
(In Millions of U.S. Dollars)
<S> <C> <C>
Cash, cash equivalents, short-term investments and marketable
securities.............................................................. $1,573.3 $1,922.9
======== ========
Restricted cash and short-term investments................................ $ 137.5 $ 137.5
======== ========
Current portion of long-term debt......................................... $ 89.5 $ 89.6
-------- --------
Long-term debt:
10% Senior Notes........................................................ 600.0 600.0
11 1/2% Senior Notes (plus unamortized premium of $2,725)............... 352.7 352.7
11% Senior Notes (Euro 150,000)(1)...................................... 160.3 160.3
11% Senior Notes........................................................ 1,050.0 1,050.0
10 1/2% Senior Notes.................................................... -- 600.0
10 1/2% Senior Notes (Euro 150,000)(2).................................. -- 154.8
Notes payable........................................................... 30.8 30.8
Capital lease obligations............................................... 209.0 209.1
-------- --------
Total long-term debt.................................................. 2,402.8 3,157.7
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value; 30,000,000 shares authorized
Preferred stock, Series A, 1,000,000 shares designated and no --
shares issued and outstanding actual and pro forma..................
Convertible preferred stock, Series C, 9,200,000 shares 368.8 368.8
designated, issued, outstanding actual and pro forma..............
Common stock, $.01 par value; 500,000,000 authorized 0.7 0.7
64,973,873 shares outstanding actual; 72,773,873 shares
outstanding pro forma (3).............................................
Capital in excess of par value.......................................... 825.9 1,182.4
Accumulated deficit..................................................... (638.0) (671.5)
Treasury stock, 99,556 shares, at cost.................................. (2.0) (2.0)
Accumulated other comprehensive income.................................. 54.0 54.0
Bandwidth asset to be delivered under IXC agreement..................... (122.9) (122.9)
-------- --------
Total shareholders' equity...................................... 486.5 809.5
-------- --------
Total capitalization............................................ $2,978.8 $4,056.8
======== ========
</TABLE>
- ----------------------------------
(1) Assuming an exchange rate of 0.9360 to $1.00 as of September 30, 1999.
(2) Assuming an exchange rate of 0.9692 to $1.00 as of November 23, 1999.
(3) Effective as of November 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and notes thereto incorporated by reference
herein. The results shown herein are not necessarily indicative of the results
to be expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and uncertainties.
Actual results and the timing of events could differ materially from the
forward-looking statements as a result of a number of factors. For a discussion
of the risk factors that could cause actual results to differ materially from
the forward-looking statements, you should read "Risk Factors" included in this
prospectus.
General
We are a leading independent global provider of Internet and eCommerce
solutions to businesses. As an ISC, we offer global distribution of PSINet
services through wholly-owned subsidiaries, supported by local language customer
service and a worldwide fiber optic network capable of speeds of over three
terabits. We define the elements of an ISC to include:
. Multiple Internet and eCommerce hosting centers--We currently have or
are building Internet and eCommerce hosting centers in key financial
and business centers around the world, including Amsterdam, Atlanta,
Frankfurt, Hong Kong, London, Los Angeles, New York, Paris, Sao Paulo,
Toronto, Tokyo and Washington, D.C.;
. Extensive global distribution--We have over 1,000 sales personnel and
over 2,500 value-added resellers, or VARs, systems integrators and Web
design professionals in 22 countries throughout the world;
. Global brand name recognition--Our brand name is increasingly
recognized throughout the world for Internet-protocol services and
applications that meet the needs of business customers, supported by
local language sales, provisioning and service; and
. Worldwide fiber network and related optronic equipment--We operate one
of the largest global data communications networks that enables or in
the future is expected to enable our customers to connect to the
Internet and access their corporate networks and systems resources
from most of the world's major business and population centers.
We offer a suite of value-added products and services that are designed to
enable our customers to maximize utilization of the Internet to communicate more
efficiently with their customers, suppliers, business partners and remote office
locations. We conduct our business through operations organized into four
geographic operating segments--U.S./Canada, Latin America, Europe and
Asia/Pacific. Our services and products include access services that offer
dedicated, dial-up, wireless and DSL, connections, Web hosting services,
intranets, virtual private networks, or VPNs, eCommerce, voice-over-IP, email
and managed security services. We also provide wholesale and private label
network connectivity and related services to other ISPs and telecommunications
carriers to further utilize our network capacity.
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As of December 31, 1999, we provide Internet connectivity and Web hosting
services to customers in 90 of the 100 largest metropolitan statistical areas in
the U.S. and in each of the 20 largest global telecommunications markets and
were operating in 23 countries. During 1999, we had operations in four separate
geographic segments, structured as follows:
. U.S./Canada;
. Latin America (Argentina, Brazil, Chile, Mexico, Panama and Uruguay);
. Europe (Austria, Belgium, France, Germany, Hungary, Italy, Luxembourg,
the Netherlands, Spain, Switzerland, and the United Kingdom); and
. Asia/Pacific (Australia, Hong Kong, Japan, the Republic of Korea and
Taiwan).
We typically enter a new market through the acquisition of an existing
company within the particular market, and then further expand through a
combination of organic growth supplemented by further acquisitions. Revenue from
non-U.S. operations as a percentage of consolidated results comprised 53% of
revenue in the third quarter of 1999, which is consistent with the 51% of
revenue generated by non-U.S. operations in the second quarter of 1999. By
comparison, non-U.S. operations comprised 40% of revenue for all of 1998. As a
result of our acquisition of TNI, our revenue mix may change again in 2000.
We operate one of the largest global commercial data communications
networks. Our Internet-optimized network extends around the globe and is
connected to over 700 sites, called points of presence or POPs, situated
throughout our geographic operating regions that enable our customers to connect
to the Internet. Our network reach allows our customers to access their
corporate network and systems resources through local calls in over 150
countries. We further expand the reach of our network by connecting with other
large ISPs at 163 points through 67 contractual arrangements, called peering
agreements that permit the exchange of information between our network and the
networks of our peering partners. As part of our ISC strategy, we have opened
six global Internet hosting facilities in Herndon, Virginia, Switzerland,
Canada, the United Kingdom, New York City and Amsterdam, containing a total of
approximately 155,000 square feet. We currently anticipate opening an additional
Internet and eCommerce hosting facility in Los Angeles in January 2000, which
will contain approximately 42,000 square feet. We have two network operating
centers that monitor and manage network traffic 24-hours per day, seven-days per
week.
Since the commencement of our operations, we have undertaken a program of
developing and expanding our data communications network. In connection with
this program, we have made significant investments in telecommunications
circuits and equipment to produce a geographically-dispersed, Asynchronous
Transfer Mode (ATM), Integrated Service Digital Network (ISDN) and Switched
Multimegabit Data Service (SMDS) compatible frame relay network specially
designed to optimize Internet traffic. ATM, ISDN and SMDS are among the most
widely used switching standards. These investments generally are made in advance
of obtaining customers and resulting revenue.
As part of our ongoing efforts to further expand and enhance our network,
we have acquired or agreed to acquire significant amounts of global
telecommunications bandwidth in order to build a worldwide fiber optic network
capable of speeds of over three terabits. These
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include long-term rights, typically for ten years or more, called indefeasible
rights of use, or IRUs, or other rights, in dark fiber, lit fiber, and satellite
transponder capacity. The acquisition of these telecommunications bandwidth
assets has increased our network capacity by a substantial magnitude while
reducing significantly our data communications and operations costs per
equivalent mile. The increased network capacity should enable us to expand our
offering of higher-speed or more bandwidth intensive Internet and Internet-
related services to a larger customer base.
Nine Months Ended September 30, 1999 As Compared To The Nine Months Ended
September 30, 1998
Results of Operations
Revenue. We generate revenue primarily from the sale of Internet access,
eCommerce and related services to businesses. Revenue was $369.3 million for the
nine months ended September 30, 1999, an increase of $203.6 million, or 123%,
from $165.7 million for the nine months ended September 30, 1998. Revenue growth
of 14% from the second quarter of 1999 consisted of organic (internally
generated) growth of 10% and growth from acquisitions of 4%. Our internally
generated revenue growth is attributable to a number of factors, including an
increase in the number of business customer and ISP accounts and an increases in
the average annual revenue realized per new business customer account, which are
offset by a decrease in hardware sales to customers. While most revenue is
recurring in nature, from time to time we generate non-recurring revenue from
consulting and other arrangements that may or may not continue in the future. To
date, such amounts have not been material to revenue.
Our business customer account base increased by 71% to 79,900 business
accounts at September 30, 1999 from 46,700 business accounts at September 30,
1998. By comparison, at June 30, 1999, we had 73,400 accounts. Of the total
business account growth from September 30, 1998, 20,085 accounts were
attributable to the existing customer base of the companies we acquired.
Accounts outside the U.S. represented 60% of our customer account base at
September 30, 1999, compared to 51% at September 30, 1998. The total number of
our Carrier and ISP customers grew to 644 at September 30, 1999, and, together
with our small office/home office ('SOHO') and consumer customers, provided
service to over 1.2 million customers. This compares with 141 Carrier and ISP
customers and 665,000 SOHO and consumer customers at September 30, 1998. Average
annual new contract value for business accounts increased to $6,600 for the nine
months ended September 30, 1999 from $5,800 for the nine months ended September
30, 1998 and $6,000 for the full year 1998, which we believe reflects an
increasing demand for value-added services and higher levels of bandwidth. The
average annual new contract value of $6,700 for the three months ended September
30, 1999 represents a decrease in comparison to the $7,300 average annual value
for the quarter ended June 30, 1999, due to the effect of non-U.S. acquisitions
in some less mature business markets. Our business account retention rate
remained strong at 80% for the three months ended September 30, 1999 and
compared with a full-year retention rate in 1998 of 79%.
Data Communications and Operations. Data communications and operations
expenses consist primarily of leased long distance and local circuit costs as
well as personnel and related operating expenses associated with network
operations, customer support and field service. Data
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communications and operations expenses were $261.3 million (70.8 of revenue) for
the nine months ended September 30, 1999, an increase of $130.8 million, or
100.2%, from $130.5 million (78.8% of revenue) for the nine months ended
September 30, 1998. The increase in expenses related principally to increases
in:
. the number of leased backbone, dedicated customer and dial-up circuits;
. expenditures for additional primary rate interface, or PRI, circuits to
support the growth of our Carrier and ISP customer business;
. personnel costs resulting from the expansion of our network operations,
customer support and field service staff, including through
acquisitions; and
. operating and maintenance charges on telecommunications bandwidth.
Our dedicated access customer account base grew to 21,400 at September 30,
1999 from 11,400 at September 30, 1998, an increase of 88%. Comparing the nine
months ended September 30, 1999 to the nine months ended September 30, 1998,
backbone circuit costs increased $37.9 million, or 123%, dedicated customer
circuit costs increased $19.5 million, or 114%, PRI expense increased $19.2
million, or 86%, personnel and related operating expenses associated with
network operations, customer support and field service increased $27.2 million,
or 90% and operating and maintenance charges on our bandwidth increased $5.6
million, or 727%. Circuit costs relating to our new and expanded POPs and PRIs
generally are incurred by us in advance of obtaining customers and resulting
revenue. Historically, the organic growth of our Carrier and ISP customer
business is highest beginning late in the fourth quarter due to seasonal impacts
from holiday sales of computers. In order to prepare for this demand, in
addition to improving service to existing customers, we have expended a
considerable amount of effort during the past six months in building an
inventory of PRIs. As a result, our monthly direct costs in the U.S. for PRIs
have increased from approximately $3.0 million in the month of March 1999 to
approximately $5.0 million in the month of September 1999. Based on current
capacity and customer usage rates, we believe that we are now able to service
approximately twice as many dial-up customers in the U.S. than we serviced with
these PRIs as of September 30, 1999.
Although we expect that data communications and operations expenses will
continue to increase as our customer base grows, we anticipate that such
expenses will continue to decrease over time as a percentage of revenue as we
acquire network bandwidth under IRU or capital lease agreements due to decreases
in unit costs as a result of continued increases in network utilization. Network
bandwidth acquired under IRU or capital lease agreements is recorded as an asset
and amortized over its useful life. This will, in turn, result in an increase in
the operations and maintenance expense component of data communications costs,
increases in costs for other leased circuits connected to the bandwidth, as well
as increases in depreciation and amortization expense over the useful life of
the bandwidth, typically 10 to 20 years.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, advertising costs, distribution costs and related occupancy
costs. Sales and marketing expenses were $68.0 million (18.4% of revenue) for
the nine months ended September 30, 1999, an increase of $30.1 million, or
79.4%, from $37.9 million (22.9% of revenue) for the nine months ended September
30, 1998. The increase is principally attributable to costs associated with the
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expansion of our sales force internationally in conjunction with our growth and
acquisitions, implementation of our newly regionalized sales and marketing
organization in the U.S. and to advertising costs, including costs associated
with our naming rights and sponsorship agreements for PSINet Stadium with the
Baltimore Ravens of the National Football League and the launch of our NFL
television advertising campaign.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for executive, financial, legal and
administrative personnel and provision for uncollectible accounts receivable.
General and administrative expenses were $47.3 million (12.8% of revenue) for
the nine months ended September 30, 1999, an increase of $17.9 million, or
60.7%, from $29.4 million (17.8% of revenue) for the nine months ended September
30, 1998. The increase resulted from an approximately $11.7 million increase
relating to general and administrative expenses of companies acquired after
September 30, 1998 and an increase of expenses relating to our organic growth of
approximately $6.9 million due to the addition of management staff and other
related operating expenses across our organization. We are finalizing plans to
consolidate most of our Virginia locations into one facility. As a result,
various costs associated with the termination of various facility leases and the
relocation of employees are likely to be incurred over the next two quarters.
Depreciation and Amortization. Depreciation and amortization costs were
$102.8 million (27.8% of revenue) for the nine months ended September 30, 1999,
an increase of $65.8 million, or 178%, from $37.0 million (22.3% of revenue) for
the nine months ended September 30, 1998.
Depreciation and amortization costs have increased as a result of capital
expenditures associated with network infrastructure enhancements, including
telecommunications bandwidth acquisitions, and depreciation and amortization of
tangible and intangible assets related to business acquisitions. We anticipate
that our depreciation and amortization expenses will continue to increase
significantly as we acquire network bandwidth under IRU or capital lease
agreements, and as we record depreciation and amortization on tangible and
intangible assets related to business combinations and expansion of our
operations. In connection with finalizing our plans to consolidate most of our
Virginia locations into one facility, the useful lives of certain of our assets
may be shortened over the next two quarters.
Our rapid growth over the past year through acquisitions and through the
expansion of our global data communications network has led to a significant
increase in the carrying value of our tangible and intangible assets. In
conjunction with the process of integrating these assets into our business, we
may identify opportunities where we can streamline our operations and improve
network quality through the elimination of redundant or underperforming assets.
Our ongoing integration actions and other steps aimed at reducing our cost
structure may lead to charges or to adjustments to the depreciable lives of our
assets in the future.
Acquired In-Process Research and Development. The results for the nine
months ended September 30, 1999 include no charges for acquired in-process
research and development related to acquisitions completed during the period.
The results for the nine months ended September 30, 1998 include a $40.4 million
charge (24.4% of revenue) for acquired in-process research and development. The
charges in 1998 were based on independent valuations and reflect
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technologies acquired prior to technological feasibility and for which there was
no alternative future use. We are in the process of finalizing valuations for
1999 acquisitions and the allocation of the purchase price for such acquisitions
is preliminary. We expect that final allocations for these acquisitions will be
completed before the 1999 results are finalized. We do not expect any change in
the current allocation, including any charge for acquired in-process research
and development, to have a material impact on our results of operations.
We have recently engaged an independent third party to determine the
allocation of the total purchase price of our acquisition of TNI and other 1999
completed acquisitions. The preliminary evaluation for TNI indicates there are
the following intangible assets present: existing technology including software,
patents, unpatented technology and know-how, tradenames, customer contracts and
relationships, existing workforce and goodwill, with useful lives up to 20
years. Although the preliminary valuation indicated approximately $35.0 million
of purchased in-process research and development, current estimates are expected
to be up to $90.0 million. To the extent that a different portion of the
purchase price is allocated to in-process research and development, a different
charge against operating results would be recognized in the fourth quarter of
1999, the period in which the acquisition of TNI was completed. Such charge may
be material.
Interest Expense. Interest expense was $120.9 million (32.7% of revenue)
for the nine months ended September 30, 1999, an increase of $82.7 million, or
216%, from $38.2 million (23.0% of revenue) for the nine months ended September
30, 1998. The increase was due to interest related to our 10% senior notes
issued in April 1998, 11 1/2% senior notes issued in November 1998 and 11%
senior notes issued in July 1999, as well as to increased borrowings and capital
lease obligations incurred to finance our network expansion and to fund our
working capital requirements.
Interest Income. Interest income was $32.5 million (8.8% of revenue) for
the nine months ended September 30, 1999, an increase of $21.2 million, or 186%,
from $11.4 million (6.9% of revenue) for the nine months ended September 30,
1998. The increase was due to interest received on the net proceeds of our
various financing activities during 1998 and 1999, which we invest in short-term
investment grade and government securities until such time as we use them for
other purposes.
Net Loss Available to Common Shareholders and Loss per Share. Our net
loss available to common shareholders was $210.4 million, or $3.50 basic and
diluted loss per share, for the nine months ended September 30, 1999, an
increase of $78.0 million, or 58.9%, from $132.4 million, or $2.70 basic and
diluted loss per share, for the nine months ended September 30, 1998.
The primary reasons for the increase were:
. operating losses from certain acquired businesses;
. an increase in interest expense due to the issuance of our senior
notes;
. acquisitions of fiber-based and satellite telecommunications bandwidth,
leading to an increase in depreciation, personnel and other operating
costs to manage the bandwidth;
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<PAGE>
. an increase in depreciation and amortization related to acquisitions,
offset by the reduction in charges for acquired in-process research and
development; and
. an increase in expenditures for dial-up circuits (e.g., PRIs).
The return to preferred shareholders is subtracted from net loss in
determining the net loss available to common shareholders. Because inclusion of
common stock equivalents is antidilutive, basic and diluted loss per share are
the same for each period presented.
Year Ended December 31, 1998 As Compared To The Year Ended December 31, 1997
Results of Operations
Revenue. Revenue was $259.6 million in 1998, an increase of $137.7
million, or 113%, from $121.9 million in 1997. The 113% revenue growth is broken
down into 58% from those operations that were in existence at the end of 1997
and 55% from the companies we acquired in 1998. Our organic growth is
attributable to a number of factors, including an increase in the number of
business customer and ISP accounts, an increase in the average annual revenue
realized per new business customer account, and an increase in the business
account retention rate.
Our business customer account base increased by 107% to 54,700 business
accounts at the end of 1998 from 26,400 business accounts at the end of 1997. Of
the total business account growth in 1998, 8,100 business accounts resulted from
organic growth and 20,200 business accounts were attributable to the companies
we acquired. The total number of our Carrier and ISP customers grew to 168,
serving 863,000 SOHO and consumer customers at the end of 1998, from 47 ISPs
serving 264,000 SOHO/consumer customers at the end of 1997. Average annual new
contract value for business accounts increased to $6,000 in 1998 from $5,500 in
1997, which we believe reflects an increasing demand for value-added services
and higher levels of bandwidth. Our business account retention rate improved to
79% in 1998 from 76% in 1997.
Data Communications and Operations. Data communications and operations
expenses were $199.4 million (76.8% of revenue) for 1998, an increase of $105.0
million from $94.4 million (77.4% of revenue) for 1997. The increase in expenses
related principally to increases in:
(1) the number of leased long distance, dedicated customer and dial-up
circuits,
(2) expenditures for additional PRI circuits to support the growth of our
Carrier and ISP Services business,
(3) personnel costs resulting from the expansion of our network operations,
customer support and field service staff, including through
acquisitions, and
(4) operating and maintenance charges on telecommunications bandwidth.
Our dedicated customer account base grew to 14,000 at December 31, 1998
from 7,500 at December 31, 1997, an increase of 87%. Comparing 1998 to 1997,
backbone circuit costs increased $30.2 million (or 141%), dedicated customer
circuit costs increased $18.4 million (or 77%), PRI expense increased $16.7
million (or 112%), and personnel and related operating
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<PAGE>
expenses associated with network operations, customer support and field service
increased $23.8 million (or 109%). Circuit costs relating to our new and
expanded POPs and PRIs generally are incurred by us in advance of obtaining
customers and resulting revenue.
Sales and Marketing. Sales and marketing expenses were $57.0 million
(22.0% of revenue) for 1998, an increase of $31.2 million from $25.8 million
(21.2% of revenue) for 1997. The increase is principally attributable to costs
related to a branding and advertising campaign resulting in additional
advertising expense of $10.6 million and from costs associated with the growth
of our sales force in conjunction with our growth and acquisitions.
General and Administrative. General and administrative expenses were
$45.3 million (17.4% of revenue) for 1998, an increase of $22.4 million from
$22.9 million (18.8% of revenue) for 1997. The increase resulted from the
addition of management staff and related operating expenses across the
organization, including increases in conjunction with our growth and
acquisitions.
Depreciation and Amortization. Depreciation and amortization costs were
$63.4 million (24.4% of revenue) for 1998, an increase of $35.1 million from
$28.3 million (23.3% of revenue) for 1997.
Acquired In-Process Research and Development. The results for 1998
include $70.8 million (27.3% of revenue) in charges for acquired in-process
research and development. The charges were based on independent valuations and
reflect technologies acquired prior to technological feasibility and for which
there was no alternative future use. The technologies exist at eight of the
companies we acquired, specifically iSTAR, INX, ioNET, LinkAge, Interlog,
Rimnet, iNet, and Tokyo Internet, comprising approximately 18% of the total fair
value of assets acquired. We have included a detailed description of the
specific technologies acquired, their value, cost to complete, expected
completion date and remaining tasks in the notes to our consolidated financial
statements incorporated by reference in this prospectus.
The value of the in-process projects was adjusted to reflect the relative
value and contribution of the acquired research and development. In doing so, we
gave consideration to the stage of completion, the complexity of the work
completed to date, the difficulty of completing the remaining development, costs
already incurred, and the projected cost to complete the projects. The value
assigned to purchased in-process technology was based on key assumptions that
included:
. Estimated revenue associated with the respective business enterprise
valuations assuming five-year compound annual revenue growth rates of
between 22% and 45%.
. Revenue growth rates for each technology considering, among other
things, current and expected industry trends, acceptance of the
technologies and historical growth rates for similar industry
products. Estimated revenues from the purchased in-process technology
projects were generally assumed to peak in the year 2003 and decline
through 2014 or earlier as other new products are expected to be
introduced. These revenue projections were based on management's
estimates of market size and growth, expected trends in technology and
the expected timing of new product introductions.
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<PAGE>
. Estimated net cash flows discounted back to their present value using
a discount rate of between 17.0% and 27.5%, which represents a premium
to our cost of capital.
. Estimated percentage-of-completion of the various in-process research
and development projects ranged from 50% to 85% complete.
If none of these projects is successfully developed, our sales and
profitability may be adversely affected in future periods. However, the failure
of any particular individual project in-process would not have a material impact
on our financial condition or our results of operations. The failure of any
particular individual project in-process could impair the value of other
intangible assets acquired.
There were no comparable charges in 1997.
Interest Expense. Interest expense was $63.9 million for 1998, an
increase of $58.5 million from $5.4 million for 1997. The increase was due to
interest on our issuance of $600.0 million aggregate principal amount of 10%
senior notes in April 1998 and our issuance of $350.0 million aggregate
principal amount of 11 1/2% senior notes in November 1998, as well as to
increased borrowings and capital lease obligations incurred to finance our
network expansion and to fund our working capital requirements.
Interest Income. Interest income was $19.6 million for 1998, an increase
of $16.5 million from $3.1 million for 1997. The increase was due to interest
received on the net proceeds of our offerings of the 10% senior notes and 11
1/2% senior notes, which we invest in short-term investment grade and government
securities until such time as we use them for other purposes.
Other Income, Net. Other income, net, was $6.8 million for 1998, which
primarily relates to a $5.6 million realized gain on equity securities that we
sold during the third quarter. The total of $5.8 million in 1997 primarily
related to the sale in the first quarter of 1997 of our software subsidiary.
Non-Recurring Arbitration Charge. The results for 1998 include a $49.0
million charge for an arbitration award and related costs associated with a
dispute between PSINet and The Chatterjee Management Company, which was paid in
April 1999. The charge relates to a joint venture agreement executed by the
parties in 1996 and we have no ongoing relationship with Chatterjee. There were
no similar charges in 1997.
Net Loss Available to Common Shareholders and Loss per Share. Our net
loss available to common shareholders for 1998 was $264.9 million, or $5.32
basic and diluted loss per share, a $218.9 million, or 476%, increase from a net
loss available to common shareholders for 1997 of $46.0 million, or $1.14 basic
and diluted loss per share. The primary reasons for the increase were:
(1) operating losses of acquired companies,
(2) the increase in data communications costs,
(3) the first portions of our acquired IRUs were installed, leading to
an increase in depreciation and personnel costs to manage the IRUs,
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<PAGE>
(4) the charge for acquired in-process research and development
relating to acquisitions in 1998,
(5) the increase in interest expense due to the issuance of the 10%
senior notes and 11 1/2% senior notes, and
(6) the non-recurring arbitration charge.
The return to preferred shareholders, which comprises the dividends with
respect to our Series B 8% convertible preferred stock and accretion of the
related conversion premium, is subtracted from net loss in determining the net
loss available to common shareholders. Because inclusion of common stock
equivalents is antidilutive, basic and diluted loss per share are the same for
each period presented.
Year Ended December 31, 1997 As Compared To The Year Ended December 31, 1996
Results of Operations
Revenue. Revenue was $121.9 million in 1997, an increase of $37.5
million, or 45%, from $84.4 million in 1996. The increase was attributable to a
number of factors, including an increase in the number of business customer and
ISP accounts, an increase in the average annual revenue realized per new
business customer account and an increase in sales by our international
subsidiaries. The growth was driven by an expansion of our sales force and
greater public awareness and utilization of the Internet.
In comparison with 1996, revenue for 1997 was affected by the sale in 1996
of our individual consumer accounts and related assets and by the sale in 1997
of our software subsidiary, which together provided $15.6 million of revenue in
1996 but only $0.3 million in 1997. If such revenue was excluded from 1996
revenue, our growth in revenue from 1996 to 1997 would have been 77% instead of
45%. Revenue growth in 1997 was also impacted by a drop in our annualized
business customer retention rate from 79% in 1996 to 76% in 1997, which was
attributable in part to an initiative by us to remove certain non-performing
accounts.
Our business customer account base increased by 48% to 26,400 business
accounts at December 31, 1997, including 47 ISPs, from 17,800 business accounts,
including 22 ISPs, at December 31, 1996. Our revenue from international
operations increased by 165% to $18.0 million in 1997 from $6.8 million in 1996,
principally as a result of significant growth in our operations in the United
Kingdom, Japan and Canada.
Other Income, Net. We did not have other income, net, in 1997, compared
with $5.4 million during 1996, consisting of the consideration received, net of
related asset costs and expenses, relating to the sale of our individual
consumer subscribers and certain related tangible and intangible assets during
the second and third quarters of 1996.
Data Communications and Operations. Data communications and operations
expenses were $94.4 million (77.4% of revenue) during 1997, an increase of $24.3
million from $70.1 million (83.1% of revenue) during 1996. The increase in
expenses related principally to increases in:
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<PAGE>
. the number of leased long distance, dedicated customer and dial-up
circuits;
. expenditures for additional primary rate interfaces to support the
growth of our Carrier and ISP Services business; and
. personnel costs resulting from the expansion of our network
operations, customer support and field service staff.
Sales and Marketing. Sales and marketing expenses were $25.8 million
(21.2% of revenue) during 1997, a decrease of $1.3 million from $27.1 million
(32.1% of revenue) during 1996. The decrease resulted principally from
reductions in costs following the sale of our individual consumer subscribers
and related infrastructure in 1996 and the sale of our software operations in
1997, which were offset in part by an increase in sales and marketing expenses
relating to the expansion of our operations.
General and Administrative. General and administrative expenses were
$22.9 million (18.8% of revenue) during 1997, an increase of $2.3 million from
$20.6 million (24.5% of revenue) during 1996. The increase resulted from the
addition of management staff and related operating expenses across the
organization, including in conjunction with our expansion outside of the United
States, and increases in the provision for doubtful accounts receivable. These
expenses were in part offset by decreased expenses following the sale of our
individual consumer subscribers and related assets in 1996 and the sale of our
software operations in 1997.
Depreciation and Amortization. Depreciation and amortization costs were
$28.3 million (23.3% of revenue) during 1997, an increase of $0.3 million from
$28.0 million (33.2% of revenue) during 1996. Depreciation costs increased due
to additional capital expenditures associated with network infrastructure
enhancements, which were partially offset by decreases in costs resulting from
the elimination of depreciation and amortization that had been associated with
the individual consumer subscriber assets sold in 1996 and the software assets
sold in 1997.
Interest Expense. Interest expense was $5.4 million during 1997, an
increase of $0.4 million from $5.0 million in 1996. The increase was principally
due to increased borrowings and capital lease obligations incurred by us to
finance network expansion and to fund working capital requirements.
Interest Income. Interest income was $3.1 million during 1997, a decrease
of $0.7 million from $3.8 million in 1996. The decrease was principally due to a
reduction in the amount of cash and short-term, interest-bearing investments
held by us.
Other Income, Net. Other income, net, was $5.8 million for 1997, which
primarily related to the sale in the first quarter of 1997 of our software
subsidiary.
Net Loss Available to Common Shareholders and Loss Per Share. As a result
of the factors discussed above, our net loss available to common shareholders
for 1997 was $46.0 million (37.7% of revenue), or $1.14 basic and diluted loss
per share, a $9.1 million improvement from a net loss available to common
shareholders in 1996 of $55.1 million (65.3% of revenue), or $1.40 basic and
diluted loss per share. The return to preferred shareholders, which comprises
the dividends with respect to our Series B 8% convertible preferred stock and
accretion of the related conversion premium, is subtracted from net loss in
determining the net
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<PAGE>
loss available to common shareholders. Because inclusion of common stock
equivalents is antidilutive, basic and diluted loss per share are the same for
each year presented.
Income Taxes
In 1998, we generated a pretax U.S. book loss of approximately $134.6
million and pretax non-U.S. book loss of approximately $128.1 million. As of
December 31, 1998, we had net operating loss carryforwards of approximately
$216.7 million for U.S. income tax purposes. The use of the U.S. net operating
loss carryforwards may be subject to limitations under the rules regarding a
change in stock ownership as determined by the Internal Revenue Code. These net
operating loss carryforwards may be carried forward in varying amounts until
2018. Additionally, at December 31, 1998, we had net operating loss
carryforwards for tax purposes in various jurisdictions outside the United
States amounting to approximately $158.6 million. The majority of non-U.S. loss
carryforwards will expire in varying amounts in 2003 to 2005. Some of the non-
U.S. loss carryforwards will never expire under local country tax rules.
We have provided a valuation allowance against our deferred tax assets
since realization of these benefits cannot be reasonably assured. The change in
valuation allowance was an increase of $101.7 million and $18.8 million in 1998
and 1997, respectively.
We recognized deferred income tax benefits of $0.8 million in 1998, $0.5
million in 1997, and $0.2 million in 1996, resulting primarily from deferred tax
liabilities of companies we acquired outside of the U.S. We did not recognize
any current income tax expense or benefit for any of those three years.
Segment Information
Our operations are currently organized into four geographic operating
segments--U.S./Canada, Latin America, Europe and Asia/Pacific. Prior to 1999, we
organized our operations into four geographic operating segments--U.S., Canada,
Europe and Asia.
We evaluate the performance of our operating segments and allocate
resources to them based on revenue and EBITDA, which we define as earnings
(losses) before interest expense and interest income, taxes, depreciation and
amortization, other non-operating income and expense, and charge for acquired
in-process research and development. Since acquisitions are such an integral
part of the growth of our business over the last year, the following table
highlights the components of our revenue growth by breaking it into organic and
acquisitive growth.
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<PAGE>
Key changes in the metrics we report in our segment disclosure footnote are
as follows:
<TABLE>
<CAPTION>
Latin
U.S./Canada America Europe Asia/Pacific Total
--------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenue growth--3Q98 to 3Q99............................. 53 % ** 108 % 386 % 108 %
Revenue growth--YTD98 to YTD99........................... 57 % ** 130 % 816 % 123 %
EBITDA as % of Revenue--3Q99............................. (8)% 15% -- % 14 % -- %
EBITDA as % of Revenue--3Q98............................. (13)% ** (12)% (39)% (16)%
EBITDA as % of Revenue--YTD99............................ (9)% 18% (5)% 12 % (2)%
EBITDA as % of Revenue--YTD98............................ (19)% ** (17)% (26)% (19)%
Asset growth--9/30/98 to 9/30/99......................... 292 % ** 491 % 95 % 276 %
Capital expenditure growth--3Q98 to 3Q99................. 161 % ** 519 % 907 % 212 %
Capital expenditure growth--YTD98 to YTD99............... 139 % ** 631 % 1,433 % 191 %
</TABLE>
- -----------------------------
** Latin America became a new segment in 1999 as a result of acquisitions.
All of our operating segments have experienced significant changes in
revenue, EBITDA, assets and capital expenditures during 1999 as compared with
1998 due to organic growth, to significant acquisitions primarily outside of the
U.S., and to investments in our network as described elsewhere in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Our loss from operations differs from EBITDA only by depreciation and
amortization and the charge for acquired in-process research and development;
therefore, loss from operations in each segment reflects the same underlying
trends as those impacting EBITDA as a percentage of revenue.
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<PAGE>
Quarterly Results
The following tables set forth certain unaudited quarterly financial data,
and such data expressed as a percentage of revenue, for the seven quarters ended
September 30, 1999. In the opinion of management, the unaudited financial
information set forth below has been prepared on the same basis as the audited
financial information included elsewhere herein and includes all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
information set forth. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
1998 1999
-------------------------------------- ----------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
-------- -------- -------- -------- -------- -------- --------
(In millions of dollars, except per share and share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............................................ $ 44.5 $ 53.7 $ 67.6 $ 93.9 $ 104.8 $ 123.8 $ 140.6
Operating costs and expenses:
Data communications and operations............... 36.7 41.9 51.9 68.9 76.0 86.7 98.5
Sales and marketing.............................. 10.7 12.5 14.7 19.1 18.6 21.9 27.5
General and administrative....................... 7.6 10.3 11.6 15.8 17.1 15.4 14.9
Depreciation and amortization.................... 9.5 12.9 14.7 26.4 26.8 34.4 41.6
Charge for acquired in-process research and
development..................................... 7.0 20.0 13.4 30.4 -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating costs and expenses................. 71.5 97.6 106.3 160.6 138.5 158.4 182.5
------- ------- ------- ------- ------- ------- -------
Loss from operations............................... (27.0) (43.9) (38.7) (66.7) (33.7) (34.6) (41.9)
Interest expense................................... (2.6) (16.9) (18.7) (25.7) (29.6) (31.9) (59.4)
Interest income.................................... 0.5 6.0 4.8 8.2 4.7 8.1 19.8
Other income, net.................................. -- 1.2 5.3 0.5 (0.1) (0.2) (1.1)
Non-recurring arbitration charge................... -- -- -- (49.0) -- -- --
------- ------- ------- ------- ------- ------- -------
Loss before income taxes........................... (29.1) (53.6) (47.3) (132.7) (58.7) (58.6) (82.6)
Income tax benefit................................. -- -- -- (0.9) -- (0.4) (0.3)
------- ------- ------- ------- ------- ------- -------
Net loss........................................... (29.1) (53.6) (47.3) (131.8) (58.7) (58.2) (82.3)
Return to preferred shareholders................... (0.8) (0.8) (0.8) (0.8) (0.6) (4.2) (6.4)
------- ------- ------- ------- ------- ------- -------
Net loss available to common shareholders.......... $ (29.9) $ (54.4) $ (48.1) $(132.6) $ (59.3) $ (62.4) $ (88.7)
======= ======= ======= ======= ======= ======= =======
Basic and diluted loss per share (1)............... $ (0.67) $ (1.06) $ (0.93) $ (2.56) $ (1.11) $ (1.01) $ (1.37)
======= ======= ======= ======= ======= ======= =======
Shares used in computing basic and diluted loss
per share (in thousands)......................... 44,596 51,111 51,659 51,871 53,358 61,956 64,844
======= ======= ======= ======= ======= ======= =======
</TABLE>
_____________
(1) Since there are changes in the weighted average number of shares
outstanding each quarter, the sum of the loss per share by quarter does not
equal the loss per share for 1998 and 1999.
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<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
1998 1999
----------------------------------- -------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30
------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100% 100%
Operating costs and expenses:
Data communications and operations.......................... 82.5 78.1 76.8 73.3 72.5 70.0 70.1
Sales and marketing......................................... 24.1 23.2 21.8 20.3 17.7 17.7 19.6
General and administrative.................................. 17.1 19.2 17.1 16.9 16.3 12.4 10.6
Depreciation and amortization............................... 21.3 24.0 21.7 28.1 25.6 27.8 29.6
Charge for acquired in-process research and development..... 15.7 37.2 19.8 32.4 -- -- --
------ ------ ------ ------ ------ ------ ------
Total operating costs and expenses............................. 160.7 181.7 157.3 171.0 132.1 127.9 129.8
------ ------ ------ ------ ------ ------ ------
Loss from operations........................................... (60.7) (81.7) (57.3) (71.0) (32.1) (27.9) (29.8)
Interest expense............................................... (5.8) (31.4) (27.7) (27.4) (28.2) (25.8) (42.2)
Interest income................................................ 1.3 11.3 7.0 8.8 4.5 6.5 14.1
Other income, net.............................................. (0.2) 2.0 7.9 0.5 (0.1) (0.2) (0.8)
Non-recurring arbitration charge............................... -- -- -- (52.2) -- -- --
------ ------ ------ ------ ------ ------ ------
Loss before income taxes....................................... (65.4) (99.8) (70.1) (141.3) (56.0) (47.3) (58.7)
Income tax benefit............................................. -- -- -- (0.9) -- (0.3) (0.2)
------ ------ ------ ------- ------ ------ ------
Net loss....................................................... (65.4)% (99.8)% (70.1)% (140.4)% (56.0)% (47.0)% (58.5)%
====== ====== ====== ====== ====== ====== ======
</TABLE>
Our quarterly operating results have fluctuated and will continue to
fluctuate from period to period for the foreseeable future depending upon such
factors as:
. the timing of acquisitions,
. the success of our efforts to expand our customer base, and to sell
enhanced and value added services to existing customers,
. changes in and the timing of expenditures relating to the continued
expansion of our network,
. the delivery of bandwidth from our global network providers,
. the development of new services,
. changes in pricing policies by us or our competitors, and
. the seasonality of TNI's business, which tends to be greater in the
fourth quarter holiday season than during the rest of the year, as
well as a portion of the rest of our business.
In view of the significant historical growth of our operations, we believe
that period-to-period comparisons of our financial results should not be relied
upon as an indication of future performance and that we may experience
significant period-to-period fluctuations in operating results in the future. We
expect to focus in the near term on building and increasing our customer base
and increasing our network utilization both through internal growth and through
acquisitions which may require us from time to time to increase our expenditures
for personnel, marketing, network infrastructure and the development of new
services.
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<PAGE>
Liquidity And Capital Resources
We historically have had losses from operations, which have been funded
primarily through borrowings and capital lease financings from vendors,
financial institutions and other third parties, and through the issuance of debt
and equity securities. In 1999, we have to date received net proceeds of
approximately $2.7 billion from debt and equity financings. At September 30,
1999, we had $1.7 billion of cash, cash equivalents, short-term investments and
marketable securities, including restricted amounts (excluding the net proceeds
of approximately $736.2 million from the 10 1/2% senior notes offering in
December 1999).
Cash Flows for the Nine Months Ended September 30, 1999 and 1998
Cash flows used in operating activities were $203.5 million and $76.9
million for the nine months ended September 30, 1999 and 1998, respectively.
Cash flows from operating activities can vary significantly from period to
period depending upon the timing of operating cash receipts and payments and
other working capital changes, especially accounts receivable, prepaid expenses
and other assets, and accounts payable and accrued liabilities. In both of these
nine-month periods, our net losses were the primary component of cash used in
operating activities, offset by significant non-cash depreciation and
amortization expenses relating to our network and intangible assets. Operating
cash flows in 1999 also include the $48.0 million arbitration award payment.
Cash flows used in investing activities were $1.2 billion and $326.0
million for the nine months ended September 30, 1999 and 1998, respectively.
Investments in certain businesses resulted in the use of $238.5 million of cash
for the nine months ended September 30, 1999, net of cash acquired. Investments
in our network and facilities during the first nine months of 1999 resulted in
total additions to fixed assets of $380.8 million. Of this amount, $127.9
million was financed under vendor or other financing arrangements, $35.7 million
of non-cash additions related to the OC-48 bandwidth acquired from IXC Internet
Services, Inc. ('IXC'), and $217.2 million was expended in cash. For the nine
months ended September 30, 1998, total additions were $130.9 million, of which
$54.9 million was financed under equipment financing agreements, $27.4 million
of non-cash additions related to the OC-48 bandwidth acquired from IXC and $48.6
million was expended in cash. Purchases of short-term investments during the
first nine months of 1999 were an aggregate of $1.07 billion, offset by proceeds
from the sale and maturity of short-term investments of $262.6 million.
Purchases of short-term investments during the nine months of 1998 were an
aggregate of $247.2 million offset by proceeds from the sale and maturity of
short-term investments of $200.0 million. Investing cash flows in the first nine
months of 1999 and 1998 were increased by $25.0 million and decreased by $106.2
million, respectively, from changes in restricted cash and short-term
investments related to various financing and acquisition activities.
Cash flows provided by financing activities were $1.88 billion and $654.2
million for the nine months ended September 30, 1999 and 1998, respectively. In
the first nine months of 1999, we received $1.28 billion from the issuance of
notes and $742.0 million from equity offerings. In the first nine months of
1998, we received net proceeds from the issuance of notes of $718.6 million. We
made repayments aggregating $152.7 million and $67.1 million for the nine months
ended September 30, 1999 and 1998, respectively, on our lines of credit, capital
lease obligations
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<PAGE>
and notes payable. During the nine months ended September 30, 1999 and 1998, we
received proceeds from the exercise of stock options of $11.2 million and $4.6
million, respectively.
Cash Flows For The Years Ended December 31, 1998, 1997 and 1996
Cash flows used in operating activities were $87.6 million in 1998, $15.6
million in 1997 and $32.5 million in 1996. In all three years, our net losses
were the primary component of cash used in operating activities, offset by
significant non-cash depreciation and amortization expenses relating to our
network and intangible assets and, in 1998, our charge for acquired in-process
research and development.
Cash flows used in investing activities were $783.9 million for 1998, $15.6
million for 1997 and $7.9 million for 1996. Acquisition activities resulted in
the use of $268.0 million of cash for 1998, net of cash acquired. Investments in
our network and facilities during 1998 resulted in total additions to fixed
assets of $303.6 million. Of this amount, $113.3 million was financed under
vendor or other financing arrangements, $27.4 million of non-cash additions
related to the bandwidth acquired from IXC, $44.9 million related to other
network facilities that remained in accounts payable at year end, and $118.0
million was expended in cash. For 1997, total additions were $50.1 million, of
which $37.5 million was financed under equipment financing agreements and $12.6
million was expended in cash, and for 1996, additions were $38.4 million, with
$25.6 million financed and $12.8 million expended in cash. Purchases of short-
term investments with the proceeds of our 10% senior notes and 11 1/2% senior
notes offerings during 1998 were an aggregate of $511.7 million, offset by
proceeds from the sale and maturity of short-term investments of $251.2 million.
Investing cash flows in 1998 and 1997 were reduced by $141.0 million and $19.7
million, respectively, from increases in restricted cash and short-term
investments related to various financing alternatives.
Cash flows provided by (used in) financing activities were $874.2 million
for 1998, $12.6 million for 1997, and ($10.5) million for 1996. In 1998, 1997
and 1996, we received net proceeds from the issuance of notes payable of
$1,060.6 million, $10.1 million and $8.3 million, respectively. In 1997, we
completed a private placement of 600,000 shares of our Series B convertible
preferred stock for gross proceeds of $30.0 million. In 1998, 1997 and 1996, we
made repayments aggregating $189.5 million, $27.7 million, and $20.8 million,
respectively, on our capital lease obligations and notes payable.
As of December 31, 1998, we had $485.0 million of cash, cash equivalents,
restricted cash, short-term investments and marketable securities.
Capital Structure
Our capital structure at September 30, 1999 consisted of a revolving credit
facility, other lines of credit, capital lease obligations, senior notes,
convertible preferred stock and common stock.
Total borrowings at September 30, 1999 were $2.5 billion, which included
$0.1 billion in current obligations and $2.4 billion in long-term debt, capital
lease obligations and notes payable. At September 30, 1999, no amounts were
outstanding, $9.7 million was being utilized
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for letters of credit, and $100.3 million was available to draw under the credit
facility. We terminated our credit facility effective December 31, 1999.
In addition, as of September 30, 1999, $293.5 million was available for
purchases of equipment and other fixed assets under various other financing
arrangements, after designating $27.0 million of payables for various equipment
purchases that we intend to finance under these agreements.
At September 30, 1999, we had outstanding $600.0 million aggregate
principal amount of 10% senior notes due 2005, $350.0 million aggregate
principal amount of 11 1/2% senior notes due 2008 and $1.05 billion aggregate
principal amount and Euro 150.0 million aggregate principal amount of 11% senior
notes due 2009. In December 1999, we issued $600.0 million aggregate principal
amount of 10 1/2% senior notes due 2006 and Euro 150.0 million aggregate
principal amount of 10 1/2% senior notes due 2006. At September 30, 1999, we
had on deposit in an escrow account restricted cash and short-term investments
of $66.7 million to fund, when due, the next two semi-annual interest payments
on the 10% senior notes.
The indentures governing each of the senior notes contain many covenants
with which we must comply relating to, among other things, the following
matters:
. a limitation on our payment of cash dividends, repurchase of capital
stock, payment of principal on subordinated indebtedness and making of
certain investments, unless after giving effect to each such payment,
repurchase or investment, certain operating cash flow coverage tests are
met, excluding permitted payments and investments;
. a limitation on our incurrence and our subsidiaries' incurrence of
additional indebtedness, unless at the time of such incurrence, our
ratio of debt to annualized operating cash flow would be less than or
equal to 6.0 to 1.0 prior to April 1, 2001 and less than or equal to 5.5
to 1.0 on or after April 1, 2001, excluding permitted incurrences of
debt;
. a limitation on our incurrence and our subsidiaries' incurrence of
liens, unless the 10% senior notes, the 11 1/2% senior notes and the 11%
senior notes are secured equally and ratably with the obligation or
liability secured by such lien, excluding permitted liens;
. a limitation on the ability of any of our subsidiaries to create or
otherwise cause to exist any encumbrance or restriction on the payment
of dividends or other distributions on their capital stock, payment of
indebtedness owed to us or to any of our other subsidiaries, making of
investments in us or in any of our other subsidiaries, or transfer of
any of their properties or assets to us or any of our other
subsidiaries, excluding certain permitted encumbrances and restrictions;
. a limitation on certain mergers, consolidations and sales of assets by
us or our subsidiaries; a limitation on transactions with our
affiliates;
. a limitation on the ability of any of our subsidiaries to guarantee or
otherwise become liable with respect to any of our indebtedness unless
such subsidiary provides for a
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guarantee of the 10% senior notes, the 11 1/2% senior notes and the 11%
senior notes on the same terms as the guarantee of such indebtedness;
. a limitation on sale and leaseback transactions by us or our
subsidiaries;
. a limitation on issuances and sales of capital stock of our
subsidiaries; and
. a limitation on the ability of us or our subsidiaries to engage in any
business not substantially related to a telecommunications business.
At September 30, 1999, we were in compliance with all such covenants.
In May 1999, we completed a public offering of 8,000,000 shares of our
common stock at $50.50 per share for net proceeds of approximately $383.8
million, after underwriting discounts and commissions and other offering
expenses.
In May 1999, we completed a public offering of 9,200,000 shares of our 6
3/4% Series C Cumulative Convertible Preferred Stock ("Series C Preferred
Stock") for net proceeds of approximately $358.2 million after underwriting
discounts and commissions and other offering expenses. The Series C Preferred
Stock has a liquidation preference of $50 per share.
At closing, the purchasers of the Series C Preferred Stock deposited
approximately $85.8 million into an account established with a deposit agent
("Deposit Account"). The Deposit Account is not an asset of ours. Funds in the
Deposit Account will be paid to the holders of the Series C Preferred Stock each
quarter in the amount of $0.84375 per share in cash or may be used, at our
option, to purchase shares of common stock at 95% of the market price of the
common stock on that date for delivery to holders of Series C Preferred Stock in
lieu of cash payments. Holders of Series C Preferred Stock received quarterly
payments from the Deposit Account of approximately $7.8 million on each of
August 15 and November 15, 1999. The funds placed in the Deposit Account by the
purchasers of the Series C Preferred Stock will, together with the earnings on
those funds, be sufficient to make payments, in cash or stock, through May 15,
2002. Until the expiration of the Deposit Account, we will accrete a return to
preferred shareholders each quarter from the date of issuance at an annual rate
of approximately 6 3/4% of the liquidation preference per share. Such amount
will be recorded as a deduction from net income to determine net income
available to common shareholders. Upon the expiration of the Deposit Account,
which is expected to occur on May 15, 2002 unless earlier terminated, the Series
C Preferred Stock will begin to accrue dividends at an annual rate of 6 3/4% of
the liquidation preference payable in cash or, at our option, in shares of our
common stock at 95% of the market price of the common stock on that date. Under
certain circumstances, we can elect to terminate the Deposit Account prior to
May 15, 2002, at which time the remaining funds in the Deposit Account would be
distributed to us and the Series C Preferred Stock would begin to accrue
dividends.
Each share of Series C Preferred Stock is convertible at any time at the
option of the holders thereof into 0.8017 shares of our common stock, equal to
an initial conversion price of $62.3675 per share, subject to adjustment upon
the occurrence of specified events. The Series C Preferred Stock is redeemable,
at our option, at a redemption premium of 101.929% of the liquidation preference
(plus accumulated and unpaid dividends) on or after November 15, 2000
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and prior to May 15, 2002 if the trading price for the Series C Preferred Stock
exceeds $124.74 per share for a specified trading period. Additional payments
will also be made from the Deposit Account or by us to the holders of the Series
C Preferred Stock if we redeem Series C Preferred Stock under the foregoing
circumstances. Except in the foregoing circumstances, we may not redeem the
Series C Preferred Stock prior to May 15, 2002. Beginning on May 15, 2002, we
may redeem shares of Series C Preferred Stock at an initial redemption premium
of 103.857% of the liquidation preference, declining to 100.00% on May 15, 2006
and thereafter, plus in each case all accumulated and unpaid dividends to the
redemption date. We may effect any redemption, in whole or in part, at our
option, in cash by delivery of fully paid and nonassessable shares of our common
stock or a combination thereof (subject to applicable law), by delivering notice
to the holders of the Series C Preferred Stock.
In the event of a change of control of PSINet (as defined in the charter
amendment designating the Series C Preferred Stock), holders of Series C
Preferred Stock will, if the market value of our common stock at such time is
less than the conversion price for the Series C Preferred Stock, have a one time
option to convert all of their outstanding shares of Series C Preferred Stock
into shares of our common stock at an adjusted conversion price equal to the
greater of (1) the market value of our common stock as of the date of the change
in control and (2) $38.73. In lieu of issuing shares of common stock issuable
upon conversion in the event of a change of control, we may, at our option, make
a cash payment equal to the market value of the common stock otherwise issuable.
Commitments, Capital Expenditures And Future Financing Requirements
At December 31, 1999, we had commitments to certain telecommunications
vendors under operating lease agreements totaling $142.7 million payable
in various years through 2011. Additionally, we have various agreements to lease
office space, facilities and equipment and, at December 31, 1999, were obligated
to make future minimum lease payments of $50.8 million under such non-
cancelable operating leases expiring in various years through 2009.
The aggregate consideration paid to TNI shareholders consisted of
approximately $340.8 million in cash and approximately 7.6 million shares of
PSINet common stock, which represents an aggregate value of approximately $687.0
million, assuming a price per share of PSINet common stock of $45.719. In
addition, we assumed options to acquire approximately 463,000 shares of TNI
common stock, representing an aggregate value of approximately $13.0 million,
which have become exercisable for an aggregate of approximately 463,000 shares
of our common stock. Additionally, principal and interest outstanding under
TNI's revolving credit facility, in the amount of $52.1 million, were repaid as
a condition to closing.
For most of our acquisitions, we have retained a portion of the purchase
price under holdback provisions of the purchase agreements to secure performance
by certain sellers of indemnification or other contractual obligations of the
sellers. These holdback amounts are generally payable up to 24 months after the
date of closing of the related acquisitions. Acquisition holdback amounts
totaled $80.9 million at December 31, 1999, the majority of which is reported in
other liabilities.
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In connection with our previously announced naming rights and sponsorship
agreements with the Baltimore Ravens of the National Football League, we will
make payments over the next 19 years totaling approximately $81.7 million.
In order to maintain our competitive position, enhance our capabilities as
an Internet Super Carrier and continue to meet the increasing demands for
service quality, availability and competitive pricing, we expect to make
significant capital expenditures. At December 31, 1999, we were obligated to
make future cash payments that total $392.5 million for acquisitions of global
fiber-based and satellite telecommunications bandwidth, including IRUs or other
rights. In addition, if a supplier makes delivery of certain additional fiber-
based bandwidth, which is expected in 2001, we will be committed to make cash
payments at that time of between $120.0 million and $180.0 million, the actual
price to depend on the timing of delivery of the additional bandwidth. We also
expect that there will be additional costs, such as connectivity and equipment
charges, in connection with taking full advantage of such acquired bandwidth and
IRUs. Certain of this fiber-based and satellite telecommunications bandwidth may
require the acquisition and installation of equipment necessary to access and
light the bandwidth in order to make it operational. At December 31, 1999, we
were obligated to make capital expenditures for such equipment of $245.8
million. In addition, we were obligated to make expenditures in connection with
our build-out of new Internet and eCommerce hosting centers in key financial and
business centers throughout the world and the purchase of other facilities of
approximately $611.0 million at December 31, 1999. As a result of the foregoing,
we currently believe that our capital expenditures in 2000 will be substantially
greater than those in 1999 and that, as a result of the completion of our recent
debt and equity offerings, our capital expenditure program will be accelerated.
This may occur as we continue to execute our expansion strategy.
We presently believe, based on the flexibility we expect to have in the
timing of orders of bandwidth, in outfitting our POPs with appropriate
telecommunications and computer equipment, and in controlling the pace and scope
of our anticipated buildout of our international data communications network and
eCommerce Web hosting centers, that we will have a reasonable degree of
flexibility to adjust the amount and timing of such capital expenditures in
response to our then existing financing capabilities, market conditions,
competition and other factors. Accordingly, we believe that working capital
generated from the use of acquired bandwidth, together with other working
capital, working capital from capital lease financings, from our recent debt and
equity offerings and from future equity or debt financings, which we presently
expect to be able to obtain when needed, will be sufficient to meet the
currently anticipated working capital and capital expenditure requirements of
our operations. We cannot assure you, however, that we will have access to
sufficient additional capital and/or financing on satisfactory terms to enable
us to meet our capital expenditure and working capital requirements. We
regularly review our capital commitments and needs and the availability of
financing through institutional sources and the capital markets. We expect to
pursue opportunities to raise additional capital from time to time as we
determine to be advisable based upon our capital needs, financing capabilities
and market conditions.
Other Possible Strategic Relationships And Acquisitions
We anticipate that we will continue to seek to develop relationships with
strategic partners, both domestically and internationally, and to acquire
assets, including, without
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limitation, additional telecommunications bandwidth, and businesses, and make
investments (including venture capital investments) principally relating to or
complimentary to our existing business. In this regard, we have entered into
several non-binding letters of intent pursuant to which we and the other parties
thereto have agreed to negotiate the terms and conditions of definitive
agreements relating to our acquisition of additional U.S. and non-U.S. ISPs. We
are also currently evaluating additional acquisitions and investments. However,
we cannot assure you that we will successfully complete all or any of such
acquisitions currently subject to letters of intent or acquisitions or
investments otherwise being contemplated, or what the consequences thereof could
be. Certain of these strategic relationships may involve other
telecommunications companies that desire to enter into joint marketing and
services arrangements with us pursuant to which we would provide Internet and
Internet-related services to such companies. Such transactions, if deemed
appropriate by us, may also be effected in conjunction with an equity or debt
investment by such companies in us. Such relationships and acquisitions may
require additional financing and may be subject to the consent of our lenders
and other third parties.
Derivatives and Foreign Currency Exposure
We have not entered into any material financial instruments to serve as
hedges against certain financial and currency risks or for trading. However, as
a result of the increase in our foreign operations and the issuance of our euro-
denominated senior notes, we may begin to use various financial instruments,
including derivative financial instruments, in the ordinary course of business,
for purposes other than trading. These instruments could include letters of
credit, guarantees of debt, interest rate swap agreements and foreign currency
exchange contracts relating to intercompany payables of foreign subsidiaries. We
do not intend to use derivative financial instruments for speculative purposes.
Foreign currency exchange contracts would be used to mitigate foreign currency
exposure and with the intent of protecting the U.S. dollar value of certain
currency positions and future foreign currency transactions. Interest rate swap
agreements would be used to reduce our exposure to risks associated with
interest rate fluctuations. By their nature, all such instruments would involve
risk, including the risk of nonperformance by counterparties. We would attempt
to control our exposure to counterparty credit risk through monitoring
procedures and by entering into multiple contracts.
Risks Associated With Year 2000
The commonly referred to Year 2000, or Y2K, problem results from the fact
that many existing computer programs and systems use only two digits to identify
the year in the date field. These programs were designed and developed without
considering the impact of a change in the century designation. If not corrected,
computer applications that use a two-digit format could fail or create erroneous
results in any computer calculation or other processing involving the Year 2000
or a later date. We have identified two main areas of Y2K risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in our
operations; and
2. Computer systems or embedded chips of third parties including,
without limitation, financial institutions, suppliers, vendors, landlords,
customers, international
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suppliers of telecommunications services and others, could be disrupted or
fail, causing an interruption or decrease in our ability to continue our
operations.
Prior to entering the year 2000, we developed detailed plans for
implementing, testing and completing any necessary modifications to our key
computer systems and equipment with embedded chips to ensure that they were Y2K
compliant. A third party consultant performed an assessment of our U.S. internal
systems (e.g., accounting, billing, customer support and network operations) to
determine the status of their Y2K compliance. We also developed a test bed of
our U.S. internal systems to implement and complete testing of the requisite
minor changes and completed an inventory of our internal systems that we use
outside of the United States to determine the status of their Y2K compliance.
Each international office had plans in place to upgrade or, if necessary,
replace components of its internal systems to ensure they were Y2K compliant.
To help ensure that our network operations and services to our customers were
not interrupted due to the Y2K problem, we established a network operations
team. This team of operational staff conducted inventories of our network
equipment (software and hardware) and found no material Y2K compliance issues.
We also took steps to ensure that all equipment being purchased for use in the
PSINet network was Y2K compliant. Any equipment that was not Y2K compliant was
made Y2K compliant through minor changes to the software or hardware or, in
limited instances, replaced entirely. Our network team also developed a
contingency plan to address any potential problems that could have occurred with
our network as we entered the year 2000. In addition, we identified and
communicated with our suppliers, vendors, customers, lenders and other material
third parties to determine their Y2K status and any probable impact on us. Our
inquiries did not reveal any significant Y2K noncompliance issue affecting our
material third parties.
Now that we have entered the year 2000, we have tested our key computer
systems and equipment and have confirmed that they are Y2K compliant. To date,
we have not encountered any material Y2K related disruptions or failures of our
systems or services, nor have we been notified of any disruptions or failures in
the systems of any of our third parties. There is an ongoing risk that Y2K
related problems could still occur and we will continue to evaluate these risks,
however, we believe that the Y2K issue will not pose any significant operational
problems for us.
Our cost of addressing Y2K issues has been minor to date, $2.0 million, or
less than 5% of our 1999 information technology and network operations budgets,
but this amount could increase if we encounter any future Y2K problems. These
costs included equipment, consulting fees, software and hardware upgrades,
testing, remediation and, in limited instances, replacement of equipment. The
total cost of Y2K assessments and remediation to date has been funded through
cash on hand and available from other sources and we expensed these costs, as
appropriate. Although we may still encounter some unexpected risks, the
financial impact of making all required systems changes or other remediation
efforts to date has not been material to our financial position, results of
operations, or cash flows, nor is it expected to be material.
Quantitative and Qualitative Disclosures about Market Risk
At September 30, 1999, we had other financial instruments consisting of
cash, fixed and variable rate debt and short-term investments, which are held
for purposes other than trading.
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The substantial majority of our debt obligations have fixed interest rates and
are denominated in U.S. dollars, which is our reporting currency. However, as
described elsewhere in this prospectus, in December 1999, we issued fixed rate
Euro 150.0 million aggregate principal amount of 10 1/2% senior notes and had
outstanding at September 30, 1999 Euro 150.0 million aggregate principal amount
of 11% senior notes, which are subject to foreign currency exchange risk. The
proceeds from the euro-denominated senior notes are currently invested in euro-
denominated cash and cash equivalents. A 10% change in the exchange rate for the
euro would impact quarterly interest expense by approximately $0.9 million and
the carrying value of the euro-denominated notes and cash and cash equivalents
would each change by approximately $32.0 million. We had no amounts outstanding
under our credit facility at September 30, 1999. Annual maturities of our debt
obligations at September 30, 1999, excluding capital lease obligations and our
credit facility, were as follows: $1.7 million in 1999, $6.9 million in 2000,
$4.1 million in 2001, $2.8 million in 2002, $1.2 million in 2003 and $2,166.6
million thereafter. At September 30, 1999, the carrying value of our debt
obligations, excluding capital lease obligations, was $2,183.3 million and the
fair value was $2,159.6 million. The weighted-average interest rate of our debt
obligations, excluding capital lease obligations, at September 30, 1999 was
10.8%. Our investments are generally fixed rate short-term investment grade and
government securities denominated in U.S. dollars. At September 30, 1999, all of
our investments in debt securities are due to mature within twelve months and
the carrying value of all of our investments approximates fair value. At
September 30, 1999, $137.5 million of our cash and short-term investments were
restricted in accordance with the terms of our financing arrangements and
certain acquisition holdback agreements. We actively monitor the capital and
investing markets in analyzing our capital raising and investing decisions.
Recent Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative instruments, including some
derivative instruments embedded in other contracts, and for hedging securities.
To the extent we begin to enter into such transactions in the future, we will
adopt the Statement's disclosure requirements in the quarterly and annual
financial statements for the year ending December 31, 2001.
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BUSINESS
We are a leading independent global provider of Internet and eCommerce
solutions to businesses. As an ISC, we offer global distribution of PSINet
services through wholly-owned subsidiaries, supported by local language customer
service and a worldwide fiber optic network capable of speeds of over three
terabits. We define the elements of an ISC to include:
. Multiple Internet and eCommerce Web hosting centers--We currently have
or are building or planning to build Internet and eCommerce Web hosting
centers in key financial and business centers around the world,
including Amsterdam, Atlanta, Frankfurt, Hong Kong, London, Los Angeles,
New York, Paris, Sao Paulo, Toronto, Tokyo and Washington, D.C.
. Extensive global distribution--We have over 1,000 sales personnel and
over 2,500 VARs, systems integrators and Web design professionals in 23
countries throughout the world.
. Global brand name recognition--Our brand name is increasingly recognized
throughout the world for IP services and applications that meet the
needs of business customers, supported by local language sales,
provisioning and service.
. Worldwide fiber network and related optronic equipment--We operate one
of the largest global data communications networks that enables or in
the future is expected to enable our customers to connect to the
Internet and access their corporate networks and systems resources from
most of the world's major business and population centers.
As of December 31, 1999, we provided Internet connectivity and Web hosting
services to customers in 90 of the 100 largest metropolitan statistical areas in
the U.S. and in each of the 20 largest global telecommunications markets and
were operating in 23 countries. In addition to these services, we also offer a
suite of value-added products and services that are designed to enable our
customers to maximize utilization of the Internet to more efficiently
communicate with their customers, suppliers, business partners and remote office
locations. We conduct our business through operations organized into four
geographic operating segments--U.S./Canada, Latin America, Europe and
Asia/Pacific. Our services and products include access services that offer
dedicated, dial-up, wireless and xDSL connections, Web hosting services,
intranets, VPNs, e-commerce, voice-over-IP, e-mail and managed security
services. We also provide wholesale and private label network connectivity and
related services to other ISPs and telecommunications carriers to further
utilize our network capacity.
We operate one of the largest global commercial data communications
networks. Our Internet-optimized extends around the globe and is connected to
over 700 POPs situated throughout our geographic operating regions that enable
our customers to connect to the Internet. Our network reach allows our customers
to access their corporate network and systems resources through local calls in
over 150 countries. We further expand the reach of our network by connecting
with other large ISPs at 163 points through 67 contractual arrangements, called
peering agreements, that permit the exchange of information between our network
and the networks of our peering partners. As part of our ISC strategy, we have
opened six global
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Internet and eCommerce hosting facilities in Herndon, Virginia, Switzerland,
Canada, the United Kingdom, New York City and Amsterdam, containing a total of
approximately 155,000 square feet. We currently anticipate opening an additional
Internet and eCommerce hosting facility in Los Angeles in January 2000, which
will contain approximately 42,000 square feet. We have two network operating
centers that monitor and manage network traffic 24-hours per day, seven-days per
week.
Our mission is to build a premier IP-based communications company. We have
grown by using multiple sales channels, including direct sales and resellers,
and by acquiring other ISPs and related businesses in key markets. We have
increased revenues by providing services and products that enhance our
customers' business processes by helping them to effectively use the Internet
and related tools. We served, as of September 30, 1999, approximately 79,900
business accounts, including 644 ISPs.
Some of our corporate customers include American Express Company,
Electronic Data Systems (EDS), Hewlett-Packard Company, Kmart Corp., Major
League Baseball, Motorola and Xerox Corporation. Some of our ISP customers
include EarthLink, FlashNet, IDT, Microsoft's WebTV and MindSpring.
Industry Overview
Overview. Internet access services is one of the fastest growing segments
of the global telecommunication services market place. For example, Gartner
Group forecasts that worldwide Internet access revenues are forecasted to grow
from $10.1 billion in 1997 to $34.6 billion in 2002. Internet access services
represent the means by which ISPs interconnect either businesses or individual
consumers to the Internet's resources or to corporate intranets and extranets.
Access services include dial-up access for individuals and small businesses, and
high-speed dedicated access used primarily by mid-sized and larger
organizations. In addition to Internet access services, business-focused ISPs
are increasingly providing a range of value-added services, including managed
access (i.e., intranets), shared and dedicated Web hosting, security services,
and advanced applications such as IP-based voice, fax and video services. These
services are being used by business customers to enhance productivity, ensure
reliability and reduce costs.
The ISP market is segmented into large national or multinational ISPs
("Tier 1 ISPs"), which are typically full-service providers that offer a broad
range of Internet access and value-added services to businesses, and regional
and local ISPs ("Tier 2" and "Tier 3 ISPs"), which typically offer a smaller
range of products and services to both individuals and business customers and
may specialize in the provision of one IP-based product or service. We are a
Tier 1 ISP. Tier 1 ISPs also provide wholesale services by reselling capacity on
their networks to smaller regional and local ISPs, thereby enabling these
smaller ISPs to provide Internet services on a private label basis without
building their own facilities. Tier 1 ISPs exchange Internet traffic at multiple
public peering points known as network access points and through private peering
arrangements. As the number of ISPs has grown, Tier 1 ISPs have increased their
requirements for peering arrangements thereby increasing the barriers to entry
into the top-tier. Tier 2 and Tier 3 ISPs generally rely on Tier 1 ISPs for
Internet access and interconnection. The ISP market is highly fragmented with,
according to industry sources, over 6,700 providers estimated to be doing
business in the U.S. and Canada alone. Because of the low barriers to entry,
there are
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many local and regional ISPs entering the market, which has caused the level of
competition to intensify. In addition, there recently have been several
acquisitions of large ISPs by multinational telecommunications companies seeking
to offer a more complete package of telecommunications products to their
customers.
Market Size and Growth. The Internet services market is forecast to
continue its rapid growth for the foreseeable future. Gartner Group estimates
that worldwide revenues for Internet services will grow from $11.3 billion in
1997 to $39.8 billion in 2002, reflecting a compounded annual growth rate of
29%. According to Gartner Group, in 1997, access services represented 89% or
$10.1 billion of this total market.
Growth in demand for business connectivity is being driven by a number of
factors, including an increase in online market penetration, particularly in the
small and medium-sized business segments, and increased use of the Internet by
businesses. Specifically, Gartner Group estimates that business access services
represented 47% or $4.7 billion of the total access services market in 1997, but
will increase their percentage to 62% of the $34.6 billion total Internet access
services market in 2002. In addition, as more businesses evolve from
establishing an Internet presence to utilizing secure connectivity between
geographically-dispersed locations, remote access to corporate networks and
business-to-business commerce solutions, the demand for high quality Internet
connectivity and value-added services should grow. Gartner Group forecasts that
worldwide web hosting services revenue will grow at a compound rate of 40% per
annum from $579 million in 1997 to $3.1 billion in 2002.
Reflecting the globalization of the Internet, Gartner Group estimates that
47% or $16.3 billion of the $34.6 billion access services opportunity in 2002 is
expected to come from North America. It is estimated that Asia will represent
26% or $8.9 billion, Europe will represent 20% or $6.8 billion, and the rest of
the world will comprise the remaining 7% or $2.5 billion. In North America,
Gartner Group forecasts that businesses will represent 57% of the total Internet
access services market of $16.3 billion. In Asia, Gartner Group estimates that
businesses will represent 65% of the total Internet access services market of
$8.9 billion. In Europe, Gartner Group forecasts that businesses will represent
63% of the total Internet access services market of $6.8 billion.
Growth in Business Use of the Internet. Since the commercialization of the
Internet in the early 1990s, businesses have rapidly established corporate
Internet sites and connectivity as a means to expand customer reach and improve
communications efficiency. Currently, many businesses are utilizing the Internet
as a lower-cost alternative to certain traditional telecommunications services.
For example, many corporations are connecting their remote locations using
intranets and VPNs to enable efficient communications with employees, customers
and suppliers worldwide, providing remote access for a mobile workforce,
reducing telecommunications costs by using value-added services such as IP-based
fax and videoconferencing, and migrating legacy database applications to run
over IP-based networks. Businesses of all sizes are demanding advanced, highly
reliable solutions designed specifically to enhance productivity and improve
efficiency. Moreover, businesses are seeking national and global ISPs that can
securely and efficiently connect multiple, geographically-dispersed locations,
provide global remote access capabilities and offer a full range of value-added
services that meet their particular networking needs.
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The PSINet Solution
We provide high quality global IP-based services and products that are
tailored to meet the needs of businesses. We believe that the business market is
particularly attractive due to its low customer churn characteristics, high
revenue per user, relatively low penetration and, in international markets,
early stage of development. In addition, we believe that within the business
access marketplace there is a significant opportunity to upsell to higher
service levels and provide additional value-added services as businesses grow
from establishing basic Internet connectivity and corporate Web sites to
utilizing the Internet, corporate intranets and VPNs for more advanced, mission-
critical applications. Further, we believe that small and medium-sized
businesses will continue to seek to outsource certain information technology
functions to large full-service ISPs to reduce costs and improve service levels.
Moreover, we believe that regional and local ISPs will continue to seek business
relationships with large, Tier 1 ISPs that enable them to sell Internet
connectivity services without making significant investments in facilities.
The PSINet Strategy
Our objective is to be one of the top three providers of Internet access
services and related communications services and products in each of the 20
largest global telecommunications markets. The principal elements of our
business strategy are summarized below:
. Leverage Multiple Sales Channels. We are pursuing growth opportunities
through multiple channels consisting of our direct sales force, a
reseller and referral program and strategic alliances with selected
telecommunications services and equipment suppliers, networking
service companies, systems integrators and computer retailers. We have
built a direct sales force, which, as of September 30, 1999, consisted
of over 1,000 individuals worldwide, more than half of whom are
employed outside of the U.S. As of September 30, 1999, our reseller
and referral program consisted of over 2,500 resellers and referral
sources. This program enables us to leverage the sales and marketing
resources of our resellers and referral sources to offer PSINet
Internet access services and products to a broader and more diverse
prospect base. We also seek to establish strategic alliances with
selected telecommunications carriers, such as we have with American
Communications Network, Inc., ATX Telecommunications Services, e.Spire
Communications, Inc. and NEXTLINK Communications Inc., to offer our I
based services and products to the carriers' customer base on a
private label or co-branded basis. In addition, we are pursuing
agreements with computer retailers as a means for offering our
services and products through retail sales channels.
. Increase Sales of Value-Added Services and New Products. We intend to
capitalize on the trend of companies seeking to increasingly outsource
their critical business applications and integrate Web-based services
and products by aggressively marketing value-added services and
products to our existing account base and prospective business
customers. We currently offer a number of value-added services, such
as Web hosting and collocation, intranets, VPNs, multi-currency e-
commerce, voice-over IP services, e-mail outsourcing, streaming media,
security and remote user
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access. We are aggressively expanding our Web hosting and managed
services operations. As part of our ISC strategy, we have opened six
new global Internet and eCommerce hosting centers in Herndon,
Virginia; Neuchatel, Switzerland; Toronto, Ontario; London, United
Kingdom; New York, New York; and Amsterdam, the Netherlands,
containing a total of approximately 155,000 square feet. We currently
anticipate opening an additional Internet and eCommerce hosting
facility in Los Angeles in January 2000, which will contain
approximately 42,000 square feet. Additionally, we continue to
evaluate and implement new alternative broadband local loop services,
including wireless, DSL and cable modem solutions.
. Accelerate Growth Through Targeted Acquisitions. We intend to continue
to accelerate our growth in the U.S. and expand our presence in key
markets internationally by acquiring primarily business-focused ISPs
and related businesses and assets. We intend to make strategic
investments in or acquire:
. local or regional ISPs in markets where we have an established
POP and can benefit from the increased network utilization and
local sales force;
. ISPs in the 20 largest global telecommunications markets where we
currently do not have a presence or in those global
telecommunications markets where our current presence would be
significantly enhanced;
. related or complementary businesses, such as our acquisition of
TNI, to broaden our market presence and expand our strengths in
key product areas, such as Web hosting or data center companies,
or data-processing companies with legacy networks which would
benefit by migrating to IP-based technologies; and
. telecommunication or information technology companies which have
strong relationships with chief technology officers and other
management information service executives at major corporations
worldwide.
. Continue to Invest in our Network. We remain focused on reducing costs
as a percentage of revenue by maintaining a scaleable network and
increasing utilization of and controlling strategic assets, such as
telecommunications bandwidth through IRUs and acquisition of dark
fiber. Our flexible network architecture utilizes advanced ATM, ISDN
and SMDS compatible frame relay equipment, which allows the PSINet
network to cost-effectively scale the number of POPs and the number of
users accessing a POP in response to customer demand. We have enhanced
our network significantly through several strategic acquisitions of
fiber-based telecommunications bandwidth, including acquisitions of or
agreements to acquire IRUs and other rights within and connecting the
U.S., Canada, Latin America, Europe and Asia.
. Enhance Brand Name Recognition. We were the first commercial ISP and
have established significant brand recognition among information
technology professionals in the U.S. In 1998, we launched a major
program to develop and enhance the PSINet brand name as a leading
global facilities-based ISP. Our branding program includes the
rebranding of acquired ISP operations and services under the PSINet
name, the select use of television commercials, print ads and direct
mailings which target key decision makers in the United States and
abroad, and the acquisition of corporate
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sponsorship rights, such as our acquisition of the naming rights to
the NFL Stadium of the Baltimore Ravens and related marketing rights.
By combining this branding program with our multiple sales channel
distribution strategy, superior customer service and technical support
available 24-hours per day, seven-days per week, we seek to expand
market share, increase customer loyalty and develop brand recognition
in the global Internet market.
Acquisition of Transaction Network Services, Inc.
On November 23, 1999, we acquired TNI. TNI is a leading worldwide provider
of eCommerce data communications and transports more than 19 million POS
transactions daily. We anticipate that our acquisition of TNI will strengthen
our position as a leading provider of global Internet and eCommerce solutions to
businesses. The aggregate consideration paid to TNI shareholders consisted of
approximately $340.8 million in cash and approximately 7.6 million shares of our
common stock, which represents an aggregate value of approximately $687.0
million, assuming a price per share of our common stock of $45.719. In
addition, we assumed options to acquire approximately 463,000 shares of TNI
common stock, representing an aggregate value of approximately $13.0 million,
which have become exercisable for an aggregate of approximately 463,000 shares
of our common stock. Additionally, principal and interest outstanding under
TNI's revolving credit facility, in the amount of $52.1 million, were repaid as
a condition to closing. TNI shareholders elected to receive cash, shares of our
stock, or both cash and stock, subject to certain adjustments.
TNI currently operates four divisions:
. the POS Division which includes TNI's TransXpress(R) network services
for the POS transaction processing industry;
. the Telecom Services Division which includes TNI's CARD*TEL(R)
telephone call billing validation and fraud control services and other
services targeting primarily the telecommunications industry;
. the Financial Services Division which provides integrated data and
voice services including the TNI FastLink(R) Data Service in support
of the Financial Information eXchange messaging protocol and other
transaction oriented trading applications primarily to the financial
services industry; and
. the International Systems Division which markets TNI's products and
services internationally.
The majority of TNI's revenues are derived from the transmission of POS
transactions (predominantly credit and debit card transactions) which are
processed electronically by a small number of third party transaction
processors. TNI's TransXpress network services utilize proprietary technology
that provides a fast communications link between the merchant site and the
transaction processor at a cost generally lower than current alternatives. TNI
markets its TransXpress network services directly to third party POS transaction
processors, who in turn resell TNI's network services as a part of the
processors' own services. Several leading third
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party POS transaction processors in the nation, including First Data
Corporation, Electronic Payment Services, Inc., Alliance Data Systems, First
USA/Paymentech, Global Payments, National Data Corporation, American Express,
NOVUS Services, Inc. and Vital Processing Services, purchase TNI's network
services.
All descriptions of TNI contained in this prospectus are based on
information contained in documents filed by TNI with the Securities and Exchange
Commission.
PSINet Services
We offer a broad range of reliable, high-speed Internet access options and
related services in the U.S., Canada, Latin America, Europe and Asia at a
variety of prices designed to meet the requirements of commercial, educational,
governmental and other organizations that link their computers, networks and
information servers to, or otherwise seek to benefit from the use of, the
Internet. We provide Internet solutions to help business and other organizations
reduce costs, increase productivity and access new markets. Access options range
from dial-up services to high-speed continuous access provided by dedicated
circuits. We believe that our broad range of competitively priced Internet
services and products allows us to compete effectively in the Internet access
market for corporate and other institutional customers. We have organized our
core operations into three customer-focused business units--Corporate Network
Services, which focuses on sales of Internet access services, Applications and
Web Services, which focuses on sales of Web and value-added services, and
Carrier and ISP Services, which focuses on sales of Internet access and related
services to telecommunications carriers and consumer-based ISPs--in order to
more closely align our operations with the needs of the emerging Internet
marketplace.
Internet Access Services. We offer in the U.S./Canada, Latin America,
Europe and Asia/Pacific global connectivity services, including a variety of
dial-up and dedicated access solutions in bundled and unbundled packages, which
provide high-speed continuous access to the Internet for businesses' local area
networks or LANs. We provide turnkey configuration solutions encompassing such
services as domain name registration, line ordering and installation, IP address
assignment, router configuration, installation and management, security planning
and management and technical consultation services. All of our connectivity
customers receive 24-hours per day, seven-days per week technical support. We
also offer a full range of customer premise equipment required to connect to the
Internet, including routers, channel service units/data service units, software
and other products, as needed. Due to our business relationships with a variety
of vendors, we are able to offer competitive hardware pricing and bundled
services to our customers.
. Dedicated Access. We offer a broad line of high-speed dedicated
connectivity services which provide business customers with direct
access to a full range of Internet applications. Our flagship access
service, InterFrame, provides companies with robust, full-time,
dedicated Internet connectivity in a range of access speeds, from 56
Kbps to 45 Mbps. InterFrame is designed to offer comprehensive network
security and to help ensure bandwidth availability for priority
business applications. We believe that the traffic-management
advantages of the frame relay technology deployed in the PSINet
network provide our customers with fully integrated Internet access
and improved performance. For higher bandwidth needs, we provide our
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InterMAN(R) access service in major U.S. cities in connection speeds
ranging from 1.5 Mbps to 45 Mbps. InterMAN is a turnkey solution in
which we provide, install and maintain equipment at the customers'
premises. InterMAN affords cost advantages over competitive dedicated
access services by utilizing high-speed SMDS and ATM data transmission
technologies.
. DSL Access. We offer high-speed Internet access services using digital
subscriber line or DSL technology. DSL is a new technology being
deployed by telephone companies and competitive local exchange
carriers, or CLECs, that permits high speed digital transmission over
the existing copper wiring of regular telephone lines. We have entered
into agreements with two leading providers of DSL services to ISPs, to
deliver DSL access services to our customers. We recently announced
our offering of DSL services in 21 major metropolitan areas throughout
the U.S. with expansion to other major metropolitan areas expected to
occur later in 1999 and 2000. Our DSL services are available in a wide
range of dedicated access speeds, from 144 Kbps to 1.5 Mbps. Our DSL
services are designed to appeal to the small-to-medium sized business
market by providing high quality Internet access at speeds faster than
ISDN and at flat-rate prices that are low relative to traditional
dedicated access charges.
. Wireless Access. Our Wireless Internet Solutions service offers
dedicated high-speed "fixed wireless" Internet access utilizing
digital microwave technology. Speeds of up to 128 Kbps are currently
available with faster capabilities of up to 256 Kbps anticipated to be
made available prior to the end of 1999 and of up to 512 Kbps
anticipated to be made available in the second quarter of 2000. Our
Wireless Internet Solutions0 service is currently operational in
certain cities in Alabama, Florida, North Carolina and Tennessee, with
expansion to additional areas in the southeastern U.S. expected to
occur in the second quarter of 2000. Wireless Internet Solutions
provides an affordable, high-speed alternative to traditional land-
based Internet services, commonly referred to as "local loop
connections," offered by telecommunications carriers.
. Dial-up Access. Our LAN-Dial(R) dial-up services offer a cost-
effective, entry-level Internet solution that provides access to
PSINet's advanced network backbone via ordinary telephone lines at
speeds of up to 56 Kbps. Our LAN-ISDN service provides dial-up access
through digital ISDN lines at speeds of up to 128 Kbps.
Web and Value-Added Services. We believe that business customers on a
worldwide basis will continue to increase their use of the Internet as a
business tool and will increasingly rely upon an expanding range of value-added
services to enhance productivity, reduce costs and improve service reliability.
We offer in the U.S., Canada, Latin America, Europe and Asia a variety of value-
added services, including Web hosting and collocation, intranets, VPNs, multi-
currency e-commerce, voice-over-IP, e-mail outsourcing, streaming media,
security and remote user access services designed to meet the diverse networking
needs of businesses. In addition, in order to capitalize on our technologically
advanced, high-capacity network, we intend to continue to develop new IP-based
services and products that increase customer use of the Internet, including
bandwidth-intensive multimedia services such as video conferencing over the
Internet.
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. Web Hosting. We provide a line of Web hosting and multimedia streaming
services that permit companies to market themselves and their products
on the Internet without having to invest significantly in technology
infrastructure and operations staff. The PSIWeb(R) services are backed
by our 100% uptime guarantee, the industry's first, and by our
advanced network backbone, which provides highly reliable Internet
connectivity. PSIWeb offers options such as complete electronic
commerce solutions as well as "TV on the WEB LIVE," a joint service
offering from PSINet and Gardy McGrath International, which is an end-
to-end solution for video broadcasting of live events over the
Internet. We have recently introduced a line of management application
services to enable our customers to outsource their Web management
requirements to our highly trained systems administrators and support
staff.
. Collocation. Our PSIWeb Co-Locate(SM) service enables companies to
house business-critical servers in secure off-site facilities with
improved bandwidth management and reliable connections. Collocation
facilities are situated on the highest bandwidth portions of our
infrastructure in order to facilitate optimal performance and high-
speed capabilities.
. VPNs/Intranets. Our IP-optimized network allows us to create private
IP networks, known as "intranets" or "virtual private networks," that
are designed to securely isolate internal network traffic from public
Internet traffic and provide each site on the intranet access to other
sites on the intranet as well as to the Internet. Our PSI IntraNet(R)
service integrates an organization's multiple sites in different
countries throughout the world by providing IP connectivity with
access speeds ranging from 56 Kbps to 2 Mbps. By combining the
security and control of a private network with cost-effective
Internet-compatible connectivity, PSI IntraNet provides a turnkey
solution for equipment management support and offers significant
savings over traditional wide area network or WAN solutions.
. Multi-Currency E-Commerce. Our PSIWeb eCommerce(SM) service provides a
turnkey solution to create and manage "Virtual Storefronts" and is
designed to give shoppers the ability to make secure purchases in
their local currency using the Web. PSIWeb eCommerce integrates
payment systems engineered for security with virtual store technology,
through alliances with CyberCash, Inc. and Mercantec, Inc., to
facilitate a seamless shopping experience. In addition, PSIWeb
Worldpay(SM) provides a cost-effective electronic commerce solution
for selling goods and services to an international audience. Developed
in association with Worldpay Ltd., an electronic commerce transaction
clearing house, and National Westminster Bank PLC, PSIWeb Worldpay
enables customers around the world to make real-time purchases using
the Web in over 100 currencies.
. Voice-Over-IP. PSIVoice(SM) enables companies with multiple business
locations to communicate by voice among these sites and with select
third parties, such as business partners, customers and suppliers,
outside their corporate intranets or VPNs via low-cost IP telephony
links. PSIVoice is a turnkey service allowing for such enhanced
features as desktop faxing, conference calling and unified messaging
services and includes all the hardware and network management services
required for high quality, private-line voice connections among
geographically dispersed offices.
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By providing voice and Internet traffic on the same circuit, customers
are able to use existing bandwidth more efficiently, resulting in
savings of 20%-50% over traditional long-distance telephone calling.
. E-Mail. PSIMail(SM) enables customers to outsource their e-mail
service and its management to our highly trained systems
administrators and support staff. For a monthly fee, we establish
accounts, manage the servers and provide full accessibility to e-mail
for our customers while saving them the investment in additional
servers and staff.
. Security Solutions. The proprietary nature of business Internet
traffic demands protection from unauthorized access. We deliver a
range of managed security services that were developed in conjunction
with certain strategic partners and are backed by the expertise of our
Security Planning and Response Team. Our RouteWaller(R) service
provides cost-effective perimeter defense with sophisticated remote
user authentication that helps to ensure that no strategic
applications or data can be accessed until the user has proven his or
her access clearance. SecureEnterprise(R) is our management service
designed to protect enterprises with a full-featured, application-
layer firewall.
. Faxing. Since a significant portion of telecommunications traffic
consists of fax transmissions, companies are looking for ways to
better manage fax costs. Our InternetPaper(SM) service supports hard-
copy distribution of electronic documents from desktop PCs to any fax
machine in the world. This service offers centralized management of
document distribution, thereby significantly reducing transmission
costs.
. Remote Access. Today's work force increasingly operates outside the
traditional office setting. Our InterRamp(R) Remote Access service
enables mobile personnel to access their corporate network and systems
resources using the Internet from over 2,400 POPs in over 150
countries through our strategic relationship with iPass, an
international data communications network. In most locations where
business is conducted, InterRamp Remote Access offers full Internet
access through a local telephone call. As part of InterRamp Remote
Access service, we provide our customers with a special account
management system that enables customers' MIS administrators to
control user access and monitor usage statistics.
Carrier and ISP Services. In 1996, to maximize utilization of our network,
we formed our Carrier and ISP Services business unit to provide dial-up Internet
access to telecommunications carriers and consumer-based ISPs in the U.S. and
Canada, such as Earthlink Network, Inc. and Microsoft's WebTV, whose customers
typically access the network during evening hours when business use tends to be
minimal. We have expanded this business unit to offer peering and transit
services to telecommunications carriers and other ISPs and to offer our
connectivity and value-added services for resale, on a private label basis, to
larger telecommunications carriers and other ISPs that require high quality
business services and products to enhance their product portfolio. Through such
services, we have the opportunity to significantly increase our distribution
channel.
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. ISP and Consumer Dial-up Access. We provide dial-up access to
consumer-oriented ISPs enabling them to expand their geographic reach
and network capacity by purchasing from us access to our IP-optimized
network through over 375 POPs in the United States and Canada as of
September 30, 1999. We offer programs that provide smaller ISPs the
opportunity to increase their user base over time and provide larger
ISPs the opportunity to cost-effectively manage their rapid growth. In
addition, in certain domestic and international markets, we provide
dial-up access services directly to individual customers.
. Commercial Private Label/Virtual ISP Services. We provide our market-
tested services on a private label or "virtual ISP" basis to companies
with which we have strategic alliances and other companies that desire
to offer consumer Internet access services but do not have the
resources or network facilities to provide these services. This allows
these companies to market and resell PSINet services under their own
brand while leveraging our nationwide network and expertise in service
delivery. We assist in training the sales and support staffs of these
companies and provide technical support to facilitate their resale
efforts.
. Peering and Transit. In order to support the exchange of information
between ISPs, which is critical to the effective operation of the
Internet, we offer free private peering for all U.S.-based ISPs.
Private peering allows other ISPs' traffic to directly reach our
customers, which improves network performance and, we believe, thereby
promotes customer satisfaction. Furthermore, we offer, for a fee,
transit service, which allows an ISP to transfer traffic through the
PSINet network to another ISP. Transit service enables ISPs to reduce
their data communications expense by leasing network utilization from
us in lieu of leasing point-to-point circuits from other
telecommunications providers.
. Web Filtering. PSIChoice(SM) enables our carrier and ISP customers to
offer their consumers the option to protect themselves from content
they find objectionable on the World Wide Web by restricting access to
sites that contain undesirable information. PSIChoice is hosted on the
technologically advanced PSINet network and utilizes content proxy
services to screen Web content accessed by end-users. PSIChoice
requires no software implementation on the consumer's computer and is
presently available in the United States.
Services and Product Development. As part of our ongoing efforts to develop
IP-based services and products that enable businesses to take maximum advantage
of their corporate networks and the Internet, we have continually invested in
service and product development programs. Since our inception, we have
introduced to the Internet marketplace several major new services, including the
first LAN-based dial-up TCP/IP access service, the first managed Internet
security service, the first ISP electronic commerce service and the first ISP
intranet service. Major services and products currently under development
include multimedia services, such as next-generation video conferencing over the
Internet, and higher speed connectivity services.
PSINet's Network
Overview. We operate a global high capacity, IP-optimized network which, as
of September 30, 1999, was comprised of over 700 POPs, of which 340 were within
the United
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States with the remainder located throughout Canada, Latin America, Europe and
Asia/Pacific. Our network employs architecture designed to deliver superior
dedicated or dial-up Internet connections, reliable packet control and
intelligent data traffic routing. We have strengthened our position as a leading
facilities-based ISP through several recent acquisitions of high capacity, fiber
optic telecommunications bandwidth and other strategic network assets that have
significantly reduced our incremental data communications costs. The combination
of our technologically advanced network architecture and global network
infrastructure has positioned us to deliver the high level of IP-based services,
such as Web hosting and a broad array of multimedia Internet services,
increasingly demanded by businesses.
Network Architecture. We have engineered an IP-optimized network by
integrating advanced Internet routers with high-speed frame relay switching
equipment that is compatible with ATM, ISDN and SMDS transmission technologies.
We have planned for growth by ensuring that the network is scaleable, flexible,
fault tolerant, open standards-based and remotely manageable.
. Scaleable. Our flexible, multi-layer network architecture utilizes a
high-speed switching fabric which enables us to grow the number of
POPs and the number of users served in an incremental manner that
matches investment with demand. The network's scalability extends
beyond the currently installed base of over 700 POPs to allow for
growth to 2,000 POPs without fundamental design changes.
. Flexible. Our network architecture consists of an Internet routing
infrastructure overlaid upon a fast packet switching fabric that
enables us to provide reliable, high-speed connections and provide our
customers the ability to manage bandwidth by type of application and
to accommodate applications that are delay-sensitive. We are able to
use our flexible network architecture in concert with our remote
monitoring capability to accommodate changing customer usage patterns
and patterns of traffic that, if left unmanaged, could otherwise
degrade network performance.
. Fault Tolerant. Redundancy and adaptive technology in our network
reduces the impact of isolated failures on the customer's experience.
Adaptive technology incorporated into our Internet router
infrastructure compensates automatically for circuit failures that
might otherwise interrupt the flow of customer traffic. Key switching
and router elements are redundantly configured to further reduce the
impact of individual component failures. In addition, typically we
have an uninterruptible power supply at each POP, limiting the impact
of local power outages on the PSINet network.
. Open. The PSINet network is based on the open internetworking protocol
standard TCP/IP and on relevant international standards relating to
transmission and modulation technologies. We are able to install a
variety of equipment types and capacities without impacting network
interoperability. As a result, our network can be upgraded
incrementally and benefit from multi-vendor supply strategies.
. Manageable. From our NOCs, we are able to monitor the network
remotely, perform network diagnostics and equipment surveillance, and
initialize customers. As a result of our network architecture and our
experience in Internet network management, these tasks can be
performed remotely regardless of POP location or
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network status. This capability allows us to respond quickly to
network problems and to control costs associated with on-site network
configuration and repair.
Global Network Infrastructure. As part of our ongoing efforts to control
strategic assets and further expand and enhance our network, we have recently
acquired or agreed to acquire IRUs and other rights in significant amounts of
fiber-based telecommunications bandwidth located throughout the world. The
following table summarizes our bandwidth facilities as of December 31, 1999.
<TABLE>
<CAPTION>
Location Capacity Connection Points Ownership
- -------- -------- ----------------- ---------
<S> <C> <C> <C>
North America 15,840 route miles of OC-12 New York--Chicago--Dallas--Phoenix--Las Vegas IRU
--Los Angeles--Philadelphia--Washington, DC
--Atlanta--Houston (operational)
Seattle--San Francisco (partially operational)
18 high capacity dark fibers New York--Washington, DC (operational) Capital lease
4 high capacity dark fibers San Francisco Bay Area (beginning in Q2 2000) Capital lease
20 high capacity dark fibers Vancouver, B.C.--Seattle, WA (beginning in Q1 2000) IRU
16 high capacity dark fibers 53 cities throughout continental U.S. (beginning in Q1
2001) IRU
T-3 Intercontinental (operational) Leased
2300 miles of OC-48 Vancouver-Calgary-Winnipeg-Chicago (Q1 2000) IRU
4 high capacity dark fibers Atlanta, Georgia (Q1 2000) IRU
Transatlantic and 14,000 km of 5 STM-1S (OC-3) New York--U.K.--Amsterdam (1 STM-1 operational; IRU
Europe 4 STM-1s in Q1 2000)
12,600 km of STM-1 New York--U.K. (operational) IRU
21,000 km of STM-1 30 European cities (initial portions operational) IRU
6,000 km of STM-1 New York--London (prior to 2000) (operational) IRU
2 high capacity dark fibers New York--London--Paris (beginning in Q2 2001) IRU
E-1 Intercontinental (operational) Leased
Transpacific 6,000 miles of 6 DS-3s US--Korea--Japan (5 DS-3s operational; IRU/Capital lease
and Asia 1 DS-3 prior to Q2 2000)
22 STM-1s (increasing to 30) Japan-Hawaii-US (Q3 2000) IRU
27,300 km of STM-1 Japan-China-Southeast Asia-India-Middle East-Europe IRU
(initial portions operational)
7,643 miles of DS-3 US--Korea (operational) IRU
21,000 km of 2 STM-1s Los Angeles--Tokyo (Q1 2000) IRU
Transpacific and 3,200 km of STM-1 Los Angeles--Mexico City (Q1 2000) IRU
Latin America
6,300 km of STM-1 Los Angeles--Panama City (Q1 2000) IRU
Two 54 MHz transponders United States--Latin America (interim connectivity Capital Lease
of Ku hand satellite capacity operational; one transponder in Q1 2000, the second
transponder in Q3 2000)
</TABLE>
. Acquired bandwidth facilities in North America:
. In February 1998, we acquired from IXC IRUs in up to 10,000
equivalent route miles of OC-48 network bandwidth across the
United States, including such major metropolitan areas as
Atlanta, Chicago, Cleveland, Dallas, Houston, Los Angeles, Las
Vegas, New York, Philadelphia, Phoenix, Seattle, San Francisco
and Washington, D.C., in exchange for approximately 20% of our
common stock. As of December 31, 1999, approximately 15,840 route
miles of OC-12 (equivalent to approximately 3,960 route miles of
OC-48) bandwidth, connecting New York, Washington, D.C., Atlanta,
Chicago, Dallas, Houston, Phoenix, San Francisco and Los Angeles
and certain major cities in between, have been placed into
operation on the PSINet network. We currently anticipate delivery
of the remaining OC-48 bandwidth from IXC over the next 12 to 18
months.
. In May 1998, we acquired from Metromedia Fiber Network Services,
Inc. ('MFN') long-term rights in 18 dark fiber optic strands
connecting the New York City and Washington, D.C. metropolitan
areas and major metropolitan areas in between. Using currently
available technology, this fiber will be capable of carrying 96
Gbps of data in the New York City to Washington, D.C. corridor,
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which currently handles approximately 35% of the
telecommunications traffic in the United States and is a vital
route connecting Internet traffic between Europe and the United
States. As of December 31, 1999, all of this bandwidth has been
placed into operation.
. In December 1998, we acquired from MFN long-term rights in four
dark fiber optic strands connecting multiple cities in the San
Francisco Bay area along a circular route extending south to the
Silicon Valley, including San Jose and Santa Clara, and east to
Hayward. This market is an important financial and technology
corridor and is expected to generate high demand for Internet
services well into the future. We expect to place into operation
portions of this fiber prior to the end of the second quarter of
2000, with full delivery anticipated prior to the end of 2000.
. In January 1999, we entered into an agreement to acquire from
Starcom Service Corporation IRUs in 20 dark fiber optic strands
connecting the Vancouver, British Columbia and Seattle,
Washington metropolitan areas, a high-demand international
telecommunications corridor. We expect to place into operation
portions of this fiber prior to the end of the first quarter of
2000.
. In September 1999, we entered into an agreement to acquire from
IXC Communications IRUs in 16 dark fiber optic strands connecting
53 cities over 13,000 route miles across the continental United
States. We expect to place into operation the first four strands
of this fiber during the first and second quarters of 2001.
. In November 1999, we entered into an agreement to acquire from
ACSI Network Technologies, Inc. (a wholly owned subsidiary of
e.spire Communications, Inc.) IRUs in 4 dark fiber optic strands
connecting locations within Atlanta, Georgia. We expect to place
this fiber into operation during the first quarter of 2000.
. In December 1999, we entered into an agreement to acquire from
Worlwide Fiber Network Services Ltd. ("Worldwide Fiber") IRUs in
OC-48 network bandwidth configured along an approximately 2,300
mile route connecting Vancouver, Calgary, Winnipeg and Chicago.
We expect to place into operation portions of this fiber prior to
the end of the first quarter of 2000.
. Acquired Transatlantic and European bandwidth facilities:
. In March 1998, we acquired from Global Crossing Ltd. IRUs in STM-
1 (equivalent to OC-3) network bandwidth configured along an
approximately 14,000 kilometer route on the Atlantic Crossing
undersea fiber optic system connecting the United States, the
United Kingdom and continental Europe. As of December 31, 1999,
the portion of this bandwidth linking New York City, the United
Kingdom and Amsterdam is operational and integrated with the OC-
12 bandwidth previously acquired from IXC.
. In January 1999, we acquired from Hermes Europe Railtel (Ireland)
Limited IRUs in STM-1 network bandwidth configured as multiple
rings along an approximately 21,000 kilometer route, which when
completed, is expected to link 30 European cities. As of December
31, 1999, we have connected a portion of this bandwidth to our
existing operations in England, the Netherlands, France, Germany,
Sweden and Switzerland. We expect to expand our bandwidth on the
Hermes network to additional cities in Austria, Spain and Hungary
prior to the end of 2000.
. In March 1999, we acquired from Cable & Wireless, Inc. an IRU in
STM-1 network bandwidth configured along an approximately 12,600
kilometer route on the Gemini Submarine cable system connecting
the United States and the United
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Kingdom. As of December 31, 1999, all of this bandwidth has been
placed into operation.
. As of July 1999, we acquired an IRU in STM-1 network bandwidth
configured along an approximately 6,000 kilometer route
connecting New York and London. As of December 31, 1999, all of
this bandwidth has been placed into operation.
. In November 1999, we entered into an agreement to acquire from
FLAG Limited (Fiberoptic Link Around the Globe) IRUs in two
diversely routed dark fiber pairs along an approximately 14,500
kilometer route on the FA-1 transatlantic cable system connecting
New York, Paris and London. We expect to place this fiber into
operation during the second quarter of 2001.
. In December 1999, we entered into an agreement to acquire from
Global Crossing USA Inc. ("Global Crossing") IRUs in various
fiber optic cable systems throughout the world. Under the initial
commitment, we have acquired IRUs in four STM-1s of network
bandwidth configured along an approximately 14,000 kilometer
route on an undersea fiber optic system connecting New York, the
United Kingdom and Amsterdam. We expect to place this bandwidth
into operation prior to the end of the first quarter of 2000. We
also acquired additional network bandwidth connecting the U.S.
and Tokyo and the U.S. and Latin America, as further described
below.
. Acquired Transpacific and Asian bandwidth facilities:
. In September 1998, we acquired from International Digital
Communications Inc. in the United States and from International
Digital Communications, Inc. and Cable & Wireless Plc in Japan
bandwidth capacity equivalent to six DS-3s in the North Pacific
Cable undersea fiber optic system connecting the United States
and Japan through a combination of IRUs and long-term capital
leases. As of December 31, 1999, three DS-3s connecting Portland,
Oregon and Tokyo, Japan and two DS-3s connecting the United
States and the Republic of Korea are operational. We expect the
remainder of this DS-3 capacity to become operational in the
first half of 2000 and, when integrated with the bandwidth from
FLAG Limited (described below) we recently placed in operation,
will extend the reach of the PSINet network into the Republic of
Korea and Hong Kong.
. In July 1998, we entered into an agreement with a group of
leading telecommunications companies to build the Japan-U.S.
Cable Network, an undersea cable system connecting the United
States (through California and Hawaii) and Japan, on which we
will own IRUs in 22 STM-1s, increasing to 30 STM-1s as the
network is upgraded, of bandwidth. Upon completion, the
Japan-U.S. Cable Network will initially operate at 80 Gbps,
increasing to 155 Gbps as the network is upgraded, and is
currently anticipated to become operational in the third quarter
of 2000. Completion of the undersea cable system is subject to a
number of risks associated with construction projects.
. In December 1998, we acquired from FLAG Limited (Fiberoptic Link
Around the Globe) IRUs in STM-1 network bandwidth configured
along an approximately 27,300 kilometer route having the
capability of connecting Japan, China, Southeast Asia, India, the
Middle East, Europe and the United Kingdom. With this
acquisition, the PSINet network became the first independent
Internet network to fully circle the globe, serving customers on
three continents. Our agreement with FLAG also enables us to
purchase additional capacity and insert new connections along the
FLAG cable route to accommodate future demand. We have placed
into operation portions of this bandwidth, which when integrated
with our capacity on the North Pacific Cable system, will extend
the reach of the PSINet network into the Republic of Korea and
Hong Kong.
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. In July 1999, we acquired an IRU in DS-3 network bandwidth
capacity along a 7,643 mile route connecting the United States and
the Republic of Korea. As of December 31, 1999, all of this
bandwidth has been placed into operation.
. In December 1999, under our agreement with Global Crossing, we have
acquired IRUs in two STM-1s of network bandwidth configued along an
approximately 21,000 kilometer route on an undersea fiber optic
system connecting Los Angeles and Tokyo. We expect to place this
bandwidth into operation prior to the end of the first quarter of
2000.
. Acquired Transpacific and Latin American bandwidth facilities:
. In December 1999, under our agreement with Global Crossing, we have
acquired two IRUs in STM-1 network bandwidth configured along
routes on two undersea fiber optic systems. One STM-1 of
approximately 3,200 kilometers connects Los Angeles and Mexico City,
and the other STM-1 of approximately 6,300 kilometers connects Los
Angeles and Panama City. We expect to place this bandwidth into
operation prior to the end of the first quarter of 2000.
In September 1999, we acquired from Loral Orion Services, Inc. a 12 year
(which is expected to be the life of the satellite) right to use two 54 MHz
transponders of Ku band capacity on the Orion 2 satellite. As of December 31,
1999, we had established interim satellite connectivity under this agreement.
Permanent satellite capacity on the first transponder is expected to begin in
the first quarter of 2000, with the deployment of capacity on the second
transponder scheduled to be completed by the end of the third quarter of 2000.
The satellite capacity will initially be provided between the U.S. and Brazil.
The agreement provides us with a portability option to transfer the capacity to
other Loral Orion satellites. The portability option, subject to certain
restrictions, provides us with the opportunity to re-deploy this capacity to
other regions of the world which have coverage by Loral Orion satellites.
We expect to further expand our network in the U.S./Canada, Europe,
Asia/Pacific, and Latin America, as well as in other select international
markets, and to acquire fiber-based IRUs and other rights in telecommunications
bandwidth in these regions to support demand growth and reduce costs. We are
targeting cities with a high concentration of businesses for global expansion
with the objective, over the long-term, of providing local access to our
services and products to 80% of the businesses in those cities. In furtherance
of this plan, we have entered into agreements in Germany and Switzerland that
enable us to offer local telephone call access to our services and products
throughout each of these countries. We already offer local call access to 80% of
the business markets in the United States, Canada, France, the Netherlands, Hong
Kong and Japan. See 'Risk Factors--We face risks associated with our
acquisitions of bandwidth from network suppliers relating to our dependence on
their ability to satisfy their obligations to us, the possibility that we may
need to incur significant expenses to utilize bandwidth and their ability to
buildout their networks under construction that could adversely affect our
ability to utilize acquired bandwidth.'
Internet and eCommerce Hosting Centers. We have technologically advanced
global Internet and eCommerce hosting facilities in the following locations:
. 10,000 square feet in Herndon, Virginia
. 10,000 square feet in Neuchatel, Switzerland
. 5,000 square feet in Toronto
. 100,000 square feet in London
. 13,000 square feet in New York City
. 17,000 square feet in Amsterdam
In addition, we anticipate opening a 42,000 square foot global Internet and
eCommerce hosting facility in Los Angeles in January 2000, an 88,000 square foot
Internet and eCommerce hosting facility in Atlanta in early 2000, and have plans
for construction of additional global Internet and eCommerce hosting facilities
throughout the world, including in the United States and in each of Berlin, Hong
Kong, Paris, Seoul and Tokyo. The additional facilities will range from
approximately 10,000-150,000 square feet, will be specifically designed for
dedicated Web
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hosting, application hosting, collocation services and high
capacity access to the PSINet network, and will be equipped with uninterruptible
power supply and backup generators, fire suppression, raised floors, HVAC, 24-
hours per day, seven-days per week operations and physical security. Our
partnership with Hewlett-Packard Company further supports our ability to provide
high-end Web services consisting of shared hosting, dedicated hosting and
collocation hosting.
PRI Circuits. In key geographically-dispersed cities located along the
configuration of the PSINet network, we are also investing in PRI circuits,
which provide dial-up access to our POPs, in order to increase the capacity
available for our consumer-oriented ISP customers. Through agreements with
select CLECs we have lowered our average cost per PRI by approximately 15-20%
over the last twelve months. As of September 30, 1999, we have more than doubled
our dial-up capacity from May 31, 1998 as a result of our investment in PRIs,
which we believe will enhance revenue growth in our Carrier and ISP Services
business unit. As of September 30, 1999, nearly 100% of our dial-up capacity is
accessible at 56 Kbps modem speeds. We anticipate that all newly deployed modems
will support this technology.
Peering Arrangements. We maintain peering relationships with national,
regional and local ISPs by either private peering with the ISPs or by
participation in various public peering locations, known as network access
points. As of November 18, 1999, we maintained more than 4,485 Mbps (4.4 Gbps)
of peering connectivity with 146 private agreements and seventeen public
connections strategically placed throughout the United States, the United
Kingdom, Canada, Japan and Europe. Recently, some companies that have previously
offered peering have cut back or eliminated peering relations and are
establishing new, more restrictive criteria for peering. We expect that, due to
our offering of peering with any of the estimated 4,000 ISPs in the United
States without settlement charges, we will substantially increase the number of
ISPs with which we peer over the next two years. We believe that by entering
into direct peering relationships with a large number of ISPs, our business
customers will receive better service and the highest quality network
performance.
Global Network Management. We believe that we offer superior network
management capabilities which enhance customer satisfaction. We have established
a 24-hours per day, seven-days per week NOC in the United States that allows for
continuous monitoring of our international network, managing of traffic, and
customer problem resolution. Back-up operating facilities manned by trained
personnel are available at our offices in Herndon, Virginia and Cambridge,
England in the event the U.S. NOC experiences service interruptions or other
difficulties. We have recently opened our European Technical Center in
Switzerland as a second NOC with global capabilities equivalent to those in the
U.S. NOC. Furthermore, we have recently commenced construction of a third NOC in
Seoul, Republic of Korea.
Sales and Marketing
We have built a multi-channel sales and marketing infrastructure throughout
the U.S., Canada, Europe, Asia and Latin America in an effort to respond
effectively to the growing opportunities in the business Internet market. We
seek to attract and retain customers by offering our services and products
through our direct sales force and our authorized reseller and referral program
and by seeking to forge strategic relationships with selected telecommunications
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carriers. We believe that this multi-channel approach will enable us to utilize
the technical skills and experience of our direct sales force to penetrate our
targeted customer base while utilizing the potentially greater sales and
marketing resources of the resellers, referral sources and companies with which
we have strategic alliances to offer our services and products to a broader and
more diverse potential customer base.
Direct Sales. We have built a direct sales force, which, as of September
30, 1999, consisted of approximately 1,000 individuals (more than half of whom
are employed outside of the U.S.) who have a strong Internet technical
background and knowledge of potential applications of the Internet to meet the
critical needs of targeted business customers. Direct sales tactics include
direct contacts with targeted ISPs and potential significant corporate accounts
by our sales representatives and systems engineers, inbound and outbound
telemarketing, direct mail efforts, seminars and trade show participation. We
have developed programs to attract and train high quality, motivated sales
representatives who, in addition to having strong Internet technical skills and
knowledge of potential applications of the Internet, have consultative sales
experience. These programs include technical sales training, consultative
selling technique training, sales compensation plan development and sales
representative recruiting profile identification. Sales representatives from our
U.S. and international operations jointly attend training programs in order to
ensure an integrated sales approach domestically and internationally.
Reseller and Referral Program. We have forged an authorized reseller and
referral program with selected telecommunications service companies, equipment
suppliers, networking service companies, systems integrators and computer
retailers. This program, through which we have established as of September 30,
1999 approximately 2,500 arrangements, affords us an indirect distribution
mechanism in our targeted markets and is designed to enable us to utilize the
potentially greater sales and marketing resources of the resellers and referral
sources to offer PSINet services and products to a broader and more diverse
potential customer base. Participants in our reseller and referral program
include Hewlett-Packard Company, a provider of computer hardware and networking
products. We provide training and ongoing support to the sales representatives
of companies with which we have reseller and referral relationships in order to
strengthen the sales representatives' knowledge of our services and products and
brand loyalty to PSINet. We believe that the reseller and referral program has
enabled us to achieve greater market reach with reduced overhead costs and to
use the reseller and referral sources to assist in the delivery of complete
solutions to meet customer needs.
Strategic Alliances. In 1997, we launched our strategic alliance program,
pursuant to which we seek to establish strategic alliances with selected
telecommunications carriers which may afford us access to recurring revenue from
the carriers' customer base, while enabling the carriers to offer their
customers an integrated package of telecommunications and Internet services and
products. We also formed an alliance with the Baltimore Ravens of the National
Football League pursuant to which, among other things, we have the right to
develop a Web site and provide related Internet subscriber services for the
Baltimore Ravens. We believe that these strategic alliances may facilitate the
cost-effective acquisition of customers and increase utilization of our network.
It is anticipated that, in most cases, the companies with which we have
strategic alliances will offer our services and products on an unbranded or co-
branded basis or under only their own trademark. As with the reseller and
referral program, we provide training
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and ongoing support to the sales representatives of companies with which we have
strategic alliances in order to strengthen the sales representatives' knowledge
of our services and products and brand loyalty to PSINet.
Marketing. Our marketing program is intended to build national and local
strength and awareness of the PSINet brand. We use radio and print advertising
in targeted markets and publications to enhance awareness and acquire leads for
our direct sales team and companies with which we have resale, referral or
strategic alliance relationships. Our print advertisements are placed in trade
journals and special-interest publications. We employ public relations personnel
in-house and work with an outside public relations agency to provide broad
coverage in the Internet and computer networking fields. We also attempt to
create brand awareness by securing corporate sponsorship rights, such as our
acquisition of the naming rights to the NFL stadium of the Baltimore Ravens and
related sponsorship, promotion, advertising and marketing rights, and by
participating in industry trade shows such as Networld, Interop, InterNet World
and ISPCon, based on the size and vertical makeup of the trade show audience,
and relationships with industry groups and the media. We also use direct
mailings, telemarketing programs, Web marketing, co-marketing agreements and
joint promotional efforts to reach new corporate customers. We attempt to retain
our customers through active and responsive customer support as well as by
continually offering new value-added services.
Customers
We had, as of September 30, 1999, approximately 79,900 business customers,
including 644 ISP customers. Our customers include businesses in the aerospace,
finance, communications, computer data processing and related industries,
governmental agencies and educational and research institutions, as well as
other ISPs.
Customer Support
High quality customer service and support is critical to our objective of
retaining and developing our customers. We have made significant investments in
customer service personnel and systems that enhance customer care and service
throughout the complete customer life cycle from order entry and billing to
selling of value-added services. To ensure consistency in the quality and
approach to customer care, both domestic and international associates attend an
intensive technical training and certification program at our U.S. NOC. Our U.S.
NOC monitors and responds to customer needs by providing 24-hours per day,
seven-days per week technical support and service. Our customer support group
utilizes a leading customer support trouble ticketing and workflow management
system from Remedy Corporation to track, route and report on customer service
issues. Network operations can remotely service customer connections to the
PSINet network. In addition, field service personnel are dispatched in the event
of an equipment failure that cannot be serviced remotely. As part of our
international expansion strategy, we have opened a fully redundant NOC in
Switzerland and have recently commenced construction of a third in Seoul,
Republic of Korea. In connection with our customer care initiatives, we seek to
continuously improve systems that increase productivity and enhance customer
satisfaction. We have recently reengineered our customer care program to address
the complex needs of our business customers and are scaling our customer care
resources to keep pace with projected increases in customer requirements. By
maintaining centralized support
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services, we seek to increase operational efficiencies and enhance the quality,
consistency and scalability of customer care. We are currently in the process of
implementing a new high quality, cost-effective and scaleable billing system to
replace our existing system in order to provide customers on a global basis with
uniform and easy-to-understand invoicing.
Acquisitions and Strategic Investments
As a key component of our growth strategy, we acquired 60 ISPs and related
businesses from January 1, 1998 through December 31, 1999, which gives us a
presence in each of the 20 largest global telecommunications markets. The
aggregate amount of the purchase prices and related payments for these
acquisitions was approximately $629.2 million, exclusive of indebtedness assumed
in connection with such acquisitions. Of such amount, we have retained $80.9
million as of December 31, 1999 to secure performance by certain sellers of
indemnification or other contractual obligations. In connection with these
acquisitions, we acquired, among other things, valuable technologies including
some under development which we plan to complete. In addition, we have entered
into several non-binding letters of intent pursuant to which we and the other
parties thereto have agreed to negotiate the terms and conditions of definitive
agreements relating to our acquisition of additional U.S. and non-U.S. ISPs. We
are also currently evaluating additional acquisitions as well. However, we
cannot assure you that we will successfully complete all or any of such
acquisitions currently subject to letters of intent or otherwise being
contemplated, or what the consequences thereof would be.
In general, we seek acquisition targets that, once integrated into our
existing operations, generally will be accretive to EBITDA. After we have
acquired an ISP, we typically act to generate economies of scale and cost
savings by eliminating redundant operations and network architecture and
migrating the acquired ISP's customers on to the PSINet network. Connecting an
acquired ISP's customers to the PSINet network typically entails minimal
incremental data communication costs and enables us to significantly reduce our
transit costs. We seek to generate cost savings by centralizing back office
operations, such as network monitoring, customer billing, human resources and
accounting. We also endeavor to realize efficiencies by consolidating an
acquired ISP's purchasing, product development and marketing and sales
operations into our established programs. We believe this integration of
operations improves the quality, breadth, consistency and scaleability of the
services and products offered to customers of acquired ISPs. We believe that our
entrepreneurial environment is attractive to and helps us retain key employees
of acquired ISPs.
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The following table summarizes basic information concerning our
acquisitions of ISPs during the 11 months ended December 31, 1999:
<TABLE>
<CAPTION>
Ranking
Among 20
Largest
SOHO/ Global
Date of Business Consumer Telecom
Name of Acquired Company Acquisition Principal Market Accounts(1) Accounts(1) Markets(1)
- ----------------------------------------- ----------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Planete.net......................... 2/99 France 190 780 5
Satelnet............................ 2/99 France 110 -- 5
Horizontes Internet................. 4/99 Brazil 220 10,000 9
Openlink............................ 4/99 Brazil 1,100 18,000 9
STI................................. 5/99 Brazil 400 34,000 9
Internet de Mexico.................. 5/99 Mexico 260 11,800 15
DataNet............................. 5/99 Mexico 430 7,500 15
TIC................................. 5/99 Switzerland 1,340 3,800 14
Caribbean Internet.................. 6/99 U.S. (Puerto Rico) 210 12,800 1
TIAC................................ 6/99 U.S. 6,300 33,200 1
Argentina On-Line................... 6/99 Argentina 70 2,900 16
CSO.net............................. 6/99 Austria 240 1,400 N/A
Intercomputer....................... 7/99 Spain 40 19,100 11
Abaforum............................ 7/99 Spain 10 3,100 11
Netwing............................. 7/99 Austria 10 1,700 N/A
Global Link......................... 7/99 Hong Kong 40 2,100 19
Sinfonet............................ 8/99 Panama 320 11,700 N/A
Domain.............................. 8/99 Brazil 20 12,600 9
Netsystem........................... 8/99 Argentina -- 50 16
Netline............................. 8/99 Chile 20 9,600 N/A
Vision Network...................... 9/99 Hong Kong 410 1,900 19
ServNet............................. 9/99 Brazil 10 10,200 9
Elender............................. 9/99 Hungary 380 19,600 N/A
Infase and Ciberia.................. 9/99 Spain 700 17,000 11
Internet Network Technologies....... 9/99 U.S. 90 300 1
Site Internet LTDA.................. 9/99 Brazil 50 18,100 9
TotalNet............................ 9/99 Canada 0 57,900 10
Terzomillennio...................... 9/99 Italy 50 500 6
OrbiNet............................. 9/99 Panama 120 2,600 N/A
ZebraNet............................ 10/99 U.S. 20 13,600 1
SPIN................................ 10/99 Switzerland 2,200 700 14
Zircon.............................. 10/99 Australia 500 3,300 8
Mlink............................... 10/99 Canada 440 3,650 10
NetUp............................... 11/99 Chile 60 2,300 N/A
Lyceum Internet..................... 11/99 U.S. 150 20 1
Telalink............................ 11/99 U.S. 720 1,200 1
Alpha Dot Net....................... 12/99 U.S. 310 -- 1
Netgate............................. 12/99 Uruguay 4,010 2,200 N/A
JoinNet............................. 12/99 Taiwan 10 9,720 17
CorreioNet.......................... 12/99 Brazil -- 10,670 9
Lynx................................ 12/99 Lebanon 10 3,000 N/A
Pacwan.............................. 12/99 France 20 4,390 5
------ -------
Total.......................... 21,590 378,980
====== =======
</TABLE>
__________________________
(1) As of the respective dates of acquisition.
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An additional component of our growth strategy includes taking strategic
positions in companies involved in the Internet, eCommerce, global
telecommunications and related industries that we believe present possible
synergies with our core businesses and service offerings. This strategy also is
designed to create opportunities for strategic and other business relationships
with those companies.
Competition
The market for Internet connectivity and related services is extremely
competitive. We anticipate that competition will continue to intensify as the
use of the Internet grows. The tremendous growth and potential market size of
the Internet access market has attracted many new start-ups as well as existing
businesses from different industries.
We believe that a reliable international network, knowledgeable salespeople
and the quality of technical support currently are the primary competitive
factors in our targeted market and that price is usually secondary to these
factors.
Our current and prospective competitors include, in addition to other
national, regional and local ISPs, long distance and local exchange
telecommunications companies, cable television, direct broadcast satellite,
wireless communications providers and on-line service providers. While we
believe that our network, products and customer service distinguish us from
these competitors, some of these competitors have significantly greater market
presence, brand recognition, and financial, technical and personnel resources
than we do.
ISPs. According to industry sources, there were over 6,700 ISPs in the
United States and Canada in 1998, consisting of national, regional and local
providers. Our current primary competitors include other ISPs with a significant
national presence which focus on business customers, such as UUNet Technologies,
Inc., GTE Internetworking (formerly BBN), Concentric Network and DIGEX. While we
believe that our level of customer service and support and target market focus
distinguish us from these competitors, many of these competitors have greater
market presence, brand recognition, and financial, technical and personnel
resources than us. We also compete with unaffiliated regional and local ISPs in
our targeted geographic regions.
Telecommunications Carriers. The major long distance companies, also
known as interexchange carriers, including AT&T, MCIWorldCom, Cable &
Wireless/IMCI and Sprint, offer Internet access services and compete with us.
Recent sweeping reforms in the federal regulation of the telecommunications
industry have created greater opportunities for incumbent local exchange
carriers, or ILECs, including the Regional Bell Operating Companies, or RBOCs,
and other CLECs, to enter the Internet connectivity market. In order to address
the Internet connectivity requirements of the business customers of long
distance and local carriers, we believe that there is a move toward horizontal
integration by ILECs and CLECs through acquisitions or joint ventures with, and
the wholesale purchase of, connectivity from ISPs to address the Internet
connectivity requirements of long distance and local carriers. The
WorldCom/MFS/UUNet consolidation, the MCI/WorldCom merger, the ICG/NETCO merger,
Cable & Wireless' purchase of the Internet MCI assets, the Intermedia/DIGEX
merger, GTE's acquisition of BBN, Global Crossing's plans to acquire Frontier
Corp., Frontier's prior
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acquisition of Global Center, Qwest Communication's plans to acquire US West,
AT&T's purchase of IBM's global communications network, American Online's plans
to acquire Time Warner, MCIWorldCom's recently announced plans to merge with
Sprint, and Nextlink Communications recently announced plans to acquire
Concentric Network Corporation are indicative of this trend. Accordingly, we
expect that we will experience increased competition from the traditional
telecommunications carriers. Many of these telecommunications carriers, in
addition to their greater network coverage, market presence, and financial,
technical and personnel resources, also have large existing commercial customer
bases.
Cable Companies, Direct Broadcast Satellite and Wireless Communications
Companies. Many of the major cable companies have announced that they are
exploring the possibility of offering Internet connectivity, relying on the
viability of cable modems and economical upgrades to their networks. Continental
Cablevision, Inc., Tele-Communications, Inc. (TCI) and At Home Corporation
(@Home) have announced trials to provide Internet cable service to their
residential customers in select areas. Cable companies, however, are faced with
large-scale upgrades of their existing plant equipment and infrastructure in
order to support connections to the Internet backbone via high-speed cable
access devices. Additionally, their current subscriber base and market focus is
residential which requires that they partner with business-focused providers or
undergo massive sales and marketing and network development efforts in order to
target the business sector. Several announcements also recently have been made
by other alternative service companies approaching the Internet connectivity
market with various wireless terrestrial and satellite-based service
technologies. These include Hughes Network Systems' DirecPC product that
provides high-speed data through direct broadcast satellite technology; CAI
Wireless Systems Inc.'s announcement of a multichannel multipoint distribution
service, or MMDS, wireless cable operator launching data services via 2.5 to 2.7
GHz and high-speed wireless modem technology; Cellularvision's announcement that
it is offering Internet access via high-speed wireless local multipoint
distribution service, or LMDS, technology; and WinStar Communications, a 38 GHz
radio company that wholesales its network capacity to other carriers and now
offers high-speed Internet access to business customers. We believe that there
is a trend toward horizontal integration involving cable companies through
acquisitions or joint ventures between cable companies and telecommunications
carriers. The acquisition of TCI by AT&T and AT&T's proposed acquisition of
MediaOne are indicative of this trend.
On-line Service Providers. The dominant on-line service providers,
including Microsoft Network and America Online, Incorporated, have entered the
Internet access business by engineering their current proprietary networks to
include Internet access capabilities. We compete to a lesser extent with these
service providers, which currently are primarily focused on the consumer
marketplace and offer their own content, including chat rooms, news updates,
searchable reference databases, special interest groups and shopping. However,
America Online's acquisition of Netscape Communications Corporation and related
strategic alliance with Sun Microsystems will enable it to offer a broader array
of IP-based services and products that could significantly enhance its ability
to appeal to the business marketplace and, as a result, compete more directly
with us. While CompuServe has announced it also will target Internet
connectivity for the small to medium-sized business market, this will require a
significant transition from a consumer market focus to a business market focus.
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We believe that our ability to attract business customers and to market
value-added services is a key to our future success. However, we cannot assure
you that our competitors will not introduce comparable services or products at
similar or more attractive prices in the future or that we will not be required
to reduce our prices to match competition. Recently, many competitive ISPs have
shifted their focus from individual customers to business customers. Moreover,
we cannot assure you that more of our competitors will not shift their focus to
attracting business customers, resulting in even more competition for us. We
cannot assure you that we will be able to offset the effects of any such
competition or resulting price reductions. Increased competition could result in
erosion of our market share and could have a material adverse effect on our
business, financial condition and results of operations.
Proprietary Rights
Our success and ability to compete is dependent in part upon our technology
and proprietary rights, although we believe that our success is more dependent
upon our technical expertise than our proprietary rights. We rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect our technology. We cannot assure you that
the steps taken by us will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology. We are also
subject to the risk of adverse claims and litigation alleging infringement of
the intellectual property rights of others.
Regulatory Matters
The following summary of regulatory developments and legislation is not
complete. It does not describe all present and proposed federal, state, local
and foreign regulation and legislation affecting the ISP and telecommunications
industries. Existing laws and regulations are currently subject to judicial
proceedings, legislative hearings, and administrative proposals that could
change, in varying degrees, the manner in which our industries operate. We
cannot predict the outcome of these proceedings or their impact upon the ISP and
telecommunications industries or upon us.
In recent years there have been a number of U.S. and foreign legislative
and other initiatives seeking to control or affect the content of information
provided over the Internet. Some of these initiatives would impose criminal
liability upon persons sending or displaying, in a manner available to minors,
obscene or indecent material or material harmful to minors. Liability would also
be imposed on an entity knowingly permitting facilities under its control to be
used for such activities. These initiatives may decrease demand for Internet
access, chill the development of Internet content, or have other adverse effects
on Internet access providers, including us.
Both the provision of Internet access service and the provision of
underlying telecommunications services are affected by federal, state, local and
foreign regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications carriers in the U.S. to the extent that
they involve the provision, origination or termination of jurisdictionally
interstate or international communications. The state regulatory commissions
retain jurisdiction over the same facilities and services to the extent they
involve origination or
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termination of jurisdictionally intrastate communications. In addition, as a
result of the passage of the Telecommunications Act of 1996, which we refer to
as the 1996 Act, state and federal regulators share responsibility for
implementing and enforcing the domestic pro-competitive policies of the 1996
Act. In particular, state regulatory commissions have substantial oversight over
the provision of interconnection and non-discriminatory network access by ILECs.
Municipal authorities generally have some jurisdiction over access to rights of
way, franchises, zoning and other matters of local concern.
Our Internet operations are not currently subject to direct regulation by
the FCC or any other U.S. governmental agency, other than regulations applicable
to businesses generally. However, the FCC continues to review its regulatory
position on the usage of the basic network and communications facilities by
ISPs. Although in an April 1998 Report, the FCC determined that ISPs should not
be treated as telecommunications carriers and therefore should not be regulated,
it is expected that future ISP regulatory status will continue to be uncertain.
Indeed, in that report, the FCC concluded that certain services offered over the
Internet, such as phone-to-phone IP telephony, may be functionally
indistinguishable from traditional telecommunications service offerings, and
their non-regulated status may have to be re-examined. Our Internet operations
outside the U.S. are subject to direct regulation through licensing from foreign
governmental agencies.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from RBOCs or
other telecommunications companies, could have an adverse effect on our
business. Although the FCC has decided not to allow local telephone companies to
impose per-minute access charges on ISPs, and that decision has been upheld by
the reviewing court, further regulatory and legislative consideration of this
issue is likely. In addition, some telephone companies are seeking relief
through state regulatory agencies. We believe that such rules, if adopted, are
likely to have a greater impact on consumer-oriented Internet access providers
than on business-oriented ISPs, such as us. Nonetheless, the imposition of
access charges would affect our costs of serving dial-up customers and could
have a material adverse effect on our business, financial condition and results
of operations.
In a recent development, the FCC adopted rules that direct ILECs to share
their telephone lines with providers of high speed Internet access and other
data services. This ruling will enable competitive carriers to provide DSL-based
services over the same telephone lines simultaneously used by ILECs to provide
basic telephone service. The new rules are expected to place competitive
carriers on a more equal footing with ILECs in the offering of advanced
telecommunications services, including DSL services.
In addition to our Internet activities, we have recently focused attention
on acquiring telecommunications assets and facilities, involving regulated
activities. Our wholly-owned subsidiary, PSINetworks Company, has received an
international Section 214 authorization from the FCC and a Type I facilities
license from the Japanese telecommunications regulatory authority to provide
global facilities-based and global resale telecommunications services,
subjecting it to regulation as a non-dominant international common carrier,
including the filing of periodic reports with the FCC. In addition, our wholly-
owned subsidiary, PSINet Telecom UK Limited, has received an international
facilities license from DTI and OFTEL, the
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responsible telecommunications regulatory bodies in the United Kingdom.
Generally, the FCC and OFTEL have chosen not to closely regulate the charges or
practices of non-dominant carriers, such as our subsidiaries. Nevertheless,
these regulatory agencies act upon complaints against such carriers for failure
to comply with statutory obligations or with the rules, regulations and policies
of such regulatory agencies. These regulatory agencies also have the power to
impose more stringent regulatory requirements on us and to change our regulatory
classification. We believe that, in the current regulatory environment, such
regulatory agencies are unlikely to do so. As we enter new markets, we
anticipate obtaining similar licenses as required by applicable
telecommunications rules and regulations in order to acquire and maintain
telecommunications assets and facilities in such countries.
The laws relating to the provision of telecommunications services in
countries other than the U.S., and in multinational organizations such as the
International Telecommunications Union, are also undergoing a process of
development. As we continue our program of acquisition and expansion into
international markets, these laws will have an increasing impact on our
operations. There can be no assurance that new or existing laws or regulations
will not have a material adverse effect on us.
Our subsidiaries have also received CLEC certification in New York,
Virginia, Colorado, California, Texas and Maryland. We are considering the
financial, regulatory and operational implications of also becoming a CLEC in
certain other states. The 1996 Act requires CLECs not to prohibit or unduly
restrict resale of their services; to provide dialing parity, number
portability, and nondiscriminatory access to telephone numbers, operator
services, directory assistance, and directory listings; to afford access to
poles, ducts, conduits, and rights-of-way; and to establish reciprocal
compensation arrangements for the transport and termination of
telecommunications traffic. In addition to federal regulation of CLECs, the
states also impose regulatory obligations upon CLECs. While these obligations
vary from state to state, most states require CLECs to file a tariff for their
services and charges; require CLECs to charge just and reasonable rates for
their services, and not to discriminate among similarly-situated customers; to
file periodic reports and pay certain fees; and to comply with certain services
standards and consumer protection laws. As a provider of domestic basic
telecommunications services, particularly competitive local exchange services,
we could become subject to further regulation by the FCC and/or another
regulatory agency, including state and local entities.
The 1996 Act has caused fundamental changes in the markets for local
exchange services. In particular, the 1996 Act and the FCC rules issued pursuant
to it mandate competition in local markets and require that ILECs interconnect
with CLECs. Under the provisions of the 1996 Act, the FCC and state public
utility commissions share jurisdiction over the implementation of local
competition: the FCC was required to promulgate general rules and the state
commissions were required to arbitrate and approve individual interconnection
agreements. The courts have generally upheld the FCC in its promulgation of
rules, including a January 25, 1999 U.S. Supreme Court ruling which determined
that the FCC has jurisdiction to promulgate national rules in pricing for
interconnection.
An important issue for CLECs is the right to receive reciprocal
compensation for the transport and termination of Internet traffic. We believe
that, under the 1996 Act, CLECs are entitled to receive reciprocal compensation
from ILECs. However, some ILECs have disputed
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payment of reciprocal compensation for Internet traffic, arguing that ISP
traffic is not local traffic. Most states have required ILECs to pay CLECs
reciprocal compensation. However, in October 1998, the FCC determined that
dedicated Digital Subscriber Line service is an interstate service and properly
tariffed at the interstate level. In February 1999, the FCC concluded that at
least a substantial portion of dial-up ISP traffic is jurisdictionally
interstate. The FCC also concluded that its jurisdictional decision does not
alter the exemption from access charges currently enjoyed by ISPs. The FCC
established a proceeding to consider an appropriate compensation mechanism for
interstate Internet traffic. Pending the adoption of that mechanism, the FCC saw
no reason to interfere with existing interconnection agreements and reciprocal
compensation arrangements. The FCC order has been appealed, and oral arguments
are expected to be heard in early 2000. In light of the FCC's order, state
commissions that previously addressed this issue and required reciprocal
compensation to be paid for ISP traffic may reconsider and may modify their
prior rulings. Several incumbent LECs are seeking to overturn prior orders that
they claim are inconsistent with the FCCs' February 1999 order. Relief sought
could include repayment of reciprocal compensation amounts previously paid by
incumbent LECs. Recently, the Massachusetts regulatory authority vacated its
earlier decision requiring such payments, although that decision may be subject
to appeals or reconsideration. In addition, at least one incumbent LEC has filed
suit seeking a refund from another carrier of reciprocal compensation which the
incumbent LEC has paid to that carrier. That suit was dismissed by the United
States District Court for lack of subject matter jurisdiction. Another incumbent
LEC has sought to escrow reciprocal compensation payments to carriers. In
response to these and other challenges, some state commissions have opened
inquiries as to the appropriate compensation mechanisms in the context of ISP
traffic. Of the state commissions that have considered the issue since the FCC's
February 1999 order, most, but not all, of these states have upheld the
requirement to pay reciprocal compensation of ISP traffic. We cannot assure you
that any future court, state regulatory or FCC decision on this matter will
favor our position. An unfavorable result may have an adverse impact on our
potential future revenues as a CLEC, as well as increasing our costs for PRIs
generally.
As we become a competitor in local exchange markets, we will become subject
to state requirements regarding provision of intrastate services. This may
include the filing of tariffs containing rates and conditions, and regulation of
rates charged for our services. As a new entrant, without market power, we
expect to face a relatively flexible regulatory environment. Nevertheless, it is
possible that some states could require us to obtain the approval of the public
utilities commission for the issuance of debt or equity or other transactions
which would result in a lien on our property used to provide intrastate
services.
Employees
As of September 30, 1999, we had approximately 3,249 full-time employees:
1,011 in the United States and 2,238 outside of the United States, including
approximately 1,596 in data communications and operational positions, 984 in
sales and marketing, and 669 in general and administrative positions. We believe
that our relations with our employees are good. None of our employees is
represented by a labor union or covered by a collective bargaining agreement,
other than by operation of foreign law, and we have never experienced a work
stoppage.
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Properties
Our principal administrative, operational and marketing and sales
facilities total approximately 46,000 square feet and are located in an office
park in Herndon, Virginia. We occupy this space under four leases which expire
in September 2003 and include five-year renewal options. We also lease:
. approximately 48,480 and 23,000 square feet of office space in two
office parks located in Reston, Virginia;
. approximately 23,760 square feet of office space for our network
operations center in Troy, New York;
. approximately 130,000 square feet of Internet and eCommerce hosting
capacity in London, Herndon, Virginia, New York City and Toronto; and
. approximately 92,000 square feet of Internet and eCommerce hosting
capacity in Los Angeles, Herndon, Virginia and Tokyo.
We have recently purchased 205,000 square feet of office space in Loudoun,
Virginia which will comprise our new corporate headquarters and will replace
most of our existing leased facilities in Virginia.
We own a 17,000 square foot Internet and eCommerce hosting facility in
Amsterdam. We are also currently constructing an aggregate of approximately
220,000 square feet of Internet and eCommerce hosting capacity in facilities
which we will own in Atlanta and Toronto.
All of our regional offices and subsidiaries also lease their facilities,
including our new TNI subsidiary's principal executive offices and primary
network control center consisting of approximately 44,500 square feet in Reston,
Virginia, except for our European Technical Center which includes our principal
European administrative, operational, marketing and sales facilities, which
total approximately 10,000 square feet and is owned by us in Switzerland. We
also lease or are otherwise provided with the right to utilize space in various
geographic locations to provide an operational facility for certain of our POPs.
We believe that these facilities are adequate for our current needs and that
suitable additional space, should it be needed, will be available to accommodate
expansion of our operations on commercially reasonable terms.
Legal Proceedings
From time to time, we have been involved in disputes and threatened with or
named as a defendant in lawsuits and administrative claims. Some of such
disputes, lawsuits and threatened litigation include claims asserting alleged
breach of agreements and some of them may relate to relatively novel or
unresolved issues of law arising out of or relating to the developing nature of
the Internet and on-line services industries.
In addition, from time to time we receive communications from third parties
asserting alleged infringement of patents, trademarks and service marks of
others. Although there is currently no material litigation arising out of any
alleged infringement of patents, trademarks or
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service marks, we cannot assure you that litigation will not be commenced
regarding these or other matters.
We are not involved in any legal proceedings which we believe would, if
adversely determined, have a material adverse effect upon our business,
financial condition or results of operations. We cannot assure you whether these
matters would be determined in a manner which is favorable to us or, if
adversely determined, whether such determination would have a material adverse
effect upon our business, financial condition or results of operations.
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DESCRIPTION OF CAPITAL STOCK
The following summary of our capital stock is subject in all respects to
applicable New York law, our Certificate of Incorporation, By-laws and
Shareholder Rights Plan.
Our authorized capital stock consists of 500,000,000 shares of common
stock, par value $.01 per share, and 30,000,000 shares of preferred stock, par
value $.01 per share.
The following summary of our capital stock and provisions of our
Certificate of Incorporation, By-laws and Shareholders Rights Plan does not
purport to be complete and is qualified in its entirety by reference to the
provisions of our Certificate of Incorporation, By-laws and Shareholders Rights
Plan. Copies of our Certificate of Incorporation, By-laws and Shareholders
Rights Plan have been filed with the Securities and Exchange Commission. See
"Where You Can Find More Information."
Common Stock
As of December 31, 1999, approximately 73,247,878 shares of our common
stock were outstanding. In addition, a total of approximately 14,857,332 shares
of common stock were reserved for issuance in connection with outstanding stock
options, 50,000 shares were reserved for issuance in connection with outstanding
warrants to purchase common stock and a total of 8,840,853 additional shares
were reserved for issuance under our stock option and employee stock purchase
plans.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Holders of our
common stock are not entitled to cumulative voting rights with respect to the
election of directors and, as a consequence, minority shareholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any shares of preferred stock issued in
the future, holders of common stock are entitled to receive ratably such
dividends as may be declared from time to time by our Board of Directors out of
funds legally available for payment. In the event of a liquidation, dissolution
or winding up of PSINet, holders of our common stock are entitled to share
ratably in all of our assets remaining after payment of liabilities and the
liquidation preference of any then outstanding preferred stock. Holders of
common stock have no preemptive rights and no right to convert their common
stock into any other securities. There are no redemption or sinking fund
provisions applicable to our common stock. All shares of our common stock to be
outstanding upon completion of this offering will by fully paid and non-
assessable, subject to Section 630 of the New York Business Corporation Law.
Under Section 630 of the New York Business Corporation Law, the ten largest
shareholders of PSINet may become personally liable for unpaid wages and debts
to our employees if our capital stock ceases to be listed on a national or an
affiliated securities association.
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Preferred Stock
Our Board of Directors has the authority to issue up to 30,000,000 shares
of our preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of such series, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by shareholders.
As of the date of this prospectus, 1,000,000 shares of our preferred stock were
designated as Series A Junior Participating Preferred Stock, $.01 par value per
share, in connection with our Shareholder Rights Plan, no shares of which have
been issued and 9,200,000 shares of our preferred stock were designated as 6
3/4% Series C cumulative convertible preferred stock, all of which are issued
and outstanding. Our Board of Directors may designate and authorize the
issuance of new series of our preferred stock with voting and other rights that
could adversely affect the voting power of holders of our common stock and the
likelihood that such holders will receive dividend payments and payments upon
our liquidation and could have the effect of delaying, deferring or preventing a
change in control of PSINet.
In November 1997, we issued 600,000 shares of our Series B 8% convertible
preferred stock in a private placement for approximately $30.0 million. During
the first quarter of 1999, all outstanding shares of the Series B preferred
stock, which accrued dividends at an annual rate of 8%, were converted into an
aggregate of 3,000,000 shares of our common stock. Effective upon this
conversion, the formerly outstanding shares of Series B preferred stock resumed
the status of authorized and unissued shares of our preferred stock undesignated
as to series, and are available for future issuance as described in the
immediately preceding paragraph.
In May 1999, we issued 9,200,000 shares of our 6 3/4% Series C cumulative
convertible preferred stock in a public offering for net proceeds of $358.2
million after underwriting discounts and commissions and other offering expenses
(excluding amounts paid by the purchasers of the Series C preferred stock into
the Deposit Account described below). Simultaneously with the issuance of the
Series C preferred stock, the purchasers of the Series C preferred stock
deposited funds into an account called the Deposit Account, from which quarterly
cash payments of $0.84375 per share will be made or which may be used at our
option to purchase shares of common stock from us at 95% of the then current
market price of our common stock for delivery to holders of the Series C
preferred stock in lieu of cash payments. The Deposit Account is not an asset
of ours. The funds placed in the Deposit Account by the purchasers of the
Series C preferred stock will, together with the earnings on those funds, be
sufficient to make payments, in cash or stock, through May 15, 2002. Holders of
Series C preferred stock received quarterly payments from the Deposit Account of
approximately $7.8 million on each of August 15 and November 15, 1999. Until
the expiration of the Deposit Account, we will accrete a return to preferred
shareholders each quarter from the date of issuance at an annual rate of
approximately 6 3/4% of the liquidation preference per share. Such amount will
be recorded as a deduction from net income to determine net income available to
common shareholders. Upon the expiration of the Deposit Account, which is
expected to occur on May 15, 2002, unless earlier terminated, the Series C
preferred stock will begin to accrue dividends at an annual rate of 6 3/4% of
the liquidation preference payable, at our option, in cash or in shares of our
common stock at 95% of the market price of our common stock on that date. Under
specified circumstances, we can elect to terminate the Deposit Account prior to
May 15, 2002, at
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which time the remaining funds in the Deposit Account would be distributed to us
and the Series C preferred stock would begin to accrue dividends.
Each share of the Series C preferred stock will be convertible at any time
at the option of the holders into 0.8017 shares of our common stock, equal to an
initial conversion price of $62.3675 per share, subject to adjustment. The
shares of Series C preferred stock will be entitled to a liquidation preference
equal to $50 per share.
We may redeem the Series C preferred stock at a redemption premium of
101.929% of the liquidation preference (plus accumulated and unpaid dividends,
if any) on or after November 15, 2000 and prior to May 15, 2002, if the trading
price for the Series C preferred stock equals or exceeds $124.74 per share for a
specified trading period. Additional payments will also be made from the
Deposit Account or by us to the holders of the Series C preferred stock if we
redeem Series C preferred stock under the foregoing circumstances. Except in
the foregoing circumstances, we may not redeem the Series C preferred stock
prior to May 15, 2002. Beginning on May 15, 2002, we may redeem shares of the
Series C preferred stock at an initial redemption premium of 103.857% of the
liquidation preference, declining to 100.00% on May 15, 2006 and thereafter,
plus in each case all accumulated and unpaid dividends to the redemption date.
We may effect any redemption, in whole or in part, at our option, in cash or by
delivery of fully paid and nonassessable shares of our common stock or a
combination thereof (subject to applicable law), by delivering notice to the
holders of the Series C preferred stock.
Holders of Series C preferred stock have no voting rights, except:
. as required by law,
. if dividends payable on the Series C preferred stock are in arrears
for six quarterly periods, the holders of Series C preferred stock
voting separately as a class with shares of any other preferred stock
or preference securities having similar voting rights will be entitled
to elect two directors to our Board of Directors, and
. the affirmative vote or consent of the holders of at least 66 2/3% of
the outstanding Series C preferred stock will be required to permit us
to issue any class of series of stock, or security convertible into
stock or evidencing a right to purchase any shares of any class or
series of stock ranking senior to the Series C preferred stock as to
dividends, liquidation rights or voting rights, and for amendments to
our charter that would adversely affect the rights of holders of
Series C preferred stock.
In the event of a change of control of PSINet (as defined in the charter
amendment designating the Series C preferred stock), holders of Series C
preferred stock will, if the market value of our common stock at such time is
less than the conversion price for the Series C preferred stock, have a one time
option to convert all of their shares of Series C preferred stock into shares of
our common stock at a conversion price equal to the greater of the market value
of our common stock as of the date of the change in control and $38.73. In lieu
of issuing shares of common stock upon conversion in the event of a change of
control, we may, at our option, make a cash payment equal to the market value of
the common stock otherwise issuable.
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Registration Rights
In connection with our acquisitions of InterCon Systems Corporation in June
1995 and Software Ventures Corporation in July 1995, we granted registration
rights with respect to an aggregate of approximately 1,683,819 shares of our
common stock and options to purchase 543,347 shares of our common stock issued
to former InterCon and Software Ventures shareholders. All such shares of
common stock and other securities are called the "registrable shares". Pursuant
to registration rights agreements between us and the former shareholders of
InterCon and Software Ventures, respectively, the original holders of
registrable shares or their permitted transferees are entitled to registration
rights with respect to their registrable shares. If, prior to May 8, 2000, we
propose to register any of our securities under the Securities Act of 1933, as
amended (the "Securities Act"), the holders of registrable shares will be
entitled to notice thereof and, subject to restrictions, to include their
registrable shares in such registration. Furthermore, one or more holders of
registrable shares may require us on up to five occasions prior to September 30,
2006 to register their shares on Form S-3, subject to specified conditions and
limitations and provided that such holders are not permitted to require such
registration more frequently than once every six months. The former InterCon
shareholders are entitled to three demand registrations and one Form S-3
registration; and some of the former Software Ventures shareholders are entitled
to a single demand registration and a single Form S-3 registration, subject to
specified conditions and limitations and provided that any demand must be at an
aggregate offering price to the public of at least $1.0 million and no demand
may be made within six months of a prior demand. The right of holders of
registrable shares to include their shares in an underwritten registration is
subject to the right of the underwriters to limit the number of shares included
in the offering. Subject to limitations, we are required to bear all
registration, legal (for no more than one independent legal counsel for all
selling holders of registrable shares) and other expenses in connection with
these registrations, other than underwriting discounts and commissions, and must
provide appropriate indemnification. These registration rights rank ratably.
In connection with the private placement of our Series B preferred stock,
we granted registration rights to the holders of our Series B preferred stock
with respect to 600,000 shares of Series B preferred stock, which were recently
converted into an aggregate of 3,000,000 shares of our common stock. These
registration rights rank ratably with and are substantially similar to those
described in the immediately preceding paragraph, except that we were required
to file a registration statement on Form S-3 with respect to the shares of
common stock issuable upon conversion of the Series B Preferred Stock pursuant
to demand registration rights exercised by the holders of the Series B Preferred
Stock, which registration statement was declared effective by the Securities and
Commission on April 24, 1998, and at any time prior to November 17, 2000 when
that registration statement is not effective, the former holders of Series B
Preferred Stock may be entitled to notice and piggyback registration rights,
which are not subject to an underwriter's cutback.
In connection with the transactions contemplated by the IRU and Stock
Purchase Agreement between us and IXC, we granted registration rights to IXC
with respect to the shares of our common stock acquired by IXC pursuant to that
agreement. These registration rights rank ratably with and are substantially
similar to those described in the immediately preceding two paragraphs except
that IXC is entitled to notice and piggyback registration rights at any time.
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IXC may make up to three separate demands to have us file a registration
statement under the Securities Act with respect to an underwritten public
offering, and IXC is entitled to one demand registration on Form S-3 every six
months.
New York Anti-Takeover Law, Certain Charter and By-law Provisions and Other
Anti-takeover Considerations
As a New York corporation, we are subject to the provisions of Section 912
of the New York Business Corporation Law and will continue to be so subject if
and for so long as we have a class of securities registered under Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), at least
25% of our total employees are employed primarily within New York or at least
250 employees are so employed and at least 10% of our voting stock is owned
beneficially by residents of the State of New York. Section 912 provides, with
certain exceptions, which include, among others, transactions with shareholders
who became interested prior to the effective date of an amendment to the New
York corporation's certificate of incorporation providing that the corporation
would be subject to Section 912 if such corporation did not then have a class of
stock registered pursuant to Section 12 of the Exchange Act, that a New York
corporation may not engage in a "business combination" (e.g., merger,
consolidation, recapitalization or disposition of stock) with any "interested
shareholder" for a period of five years from the date that such person first
became an interested shareholder unless:
(1) the transaction resulting in a person becoming an interested
shareholder, or the business combination, was approved by the board of
directors of the corporation prior to that person becoming an interested
shareholder;
(2) the business combination is approved by the holders of a majority
of the outstanding voting stock not beneficially owned by such interested
shareholder; or
(3) the business combination meets certain valuation requirements for
the stock of the New York corporation.
An "interested shareholder" is defined as any person that:
(a) is the beneficial owner of 20% or more of the outstanding voting stock
of a New York corporation; or
(b) is an affiliate or associate of the corporation that at any time
during the prior five years was the beneficial owner, directly or
indirectly, of 20% or more of the then outstanding voting stock.
These provisions are likely to impose greater restrictions on an unaffiliated
shareholder than on the existing shareholders who will continue to own a
majority of our outstanding common stock after this offering.
Our Certificate of Incorporation and Amended and Restated By-laws contain
provisions intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and of the policies formulated by the
Board which may discourage a future unsolicited takeover of PSINet. These
provisions could have the effect of discouraging some attempts to
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acquire PSINet or remove incumbent management, including incumbent members of
our Board of Directors, even if some or a majority of our shareholders deemed
such an attempt to be in their best interests.
Our Certificate of Incorporation or Amended and Restated By-laws, as
applicable, among other things:
(1) provide that the number of directors will be not fewer than three
nor more than nine, with the exact number of directors to be determined
from time to time by resolution adopted by a majority of our Board of
Directors;
(2) provide for a classified Board of Directors consisting of two
classes of directors having staggered terms of two years each, with each of
the classes required to consist of at least three directors;
(3) subject to any rights of holders of our preferred stock which may
be granted by our Board of Directors in the future and except as otherwise
provided by Section 706(d) of the New York Business Corporation Law,
provide that directors may be removed only for cause;
(4) subject to any rights of holders of our preferred stock which may
be granted by our Board of Directors in the future, permit vacancies on the
Board of Directors that may occur between annual meetings and any newly
created seats to be filled only by the Board of Directors and not by the
shareholders;
(5) limit the right of shareholders to call special meetings of
shareholders;
(6) prohibit shareholders from proposing amendments to our
Certificate of Incorporation;
(7) require any shareholder who wished to bring any proposal before a
meeting of our shareholders or to nominate a person to serve as a director
to give written notice thereof and certain related information at least 60
days prior to the date one year from the date of our immediately preceding
annual meeting, if such proposal or nomination is to be submitted at an
annual meeting, and within ten days of the giving of notice to our
shareholders, if such proposal or nomination is to be submitted at a
special meeting;
(8) require the affirmative vote of at least two-thirds of our
capital stock entitled to vote to amend certain provisions of our
Certificate of Incorporation and to amend our Amended and Restated By-laws;
and
(9) provide that our Board of Directors, without action by our
shareholders, may issue and fix the rights and preferences of shares of our
preferred stock.
These provisions may have the effect of delaying, deferring or preventing a
change of control of PSINet without further action by our shareholders, may
discourage bids for our common stock at
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a premium over the market price of our common stock and may adversely affect the
market price of, and the voting and other rights of the holders of, common
stock.
Shareholder Rights Plan
Each outstanding share of our common stock has attached to it a preferred
stock purchase right (a "right"). The rights also attach to most future
issuances of common stock. Subject to exceptions, each right will entitle the
registered holder to buy one one-thousandth of a share of our Series A preferred
stock at an exercise price of $275 per right.
Subject to exceptions, the right will become exercisable upon the
occurrence of the earlier of:
. an announcement that a person or group of affiliated or associated persons
(each, an "acquiring person") has acquired beneficial ownership of 20.50%
or more of our outstanding common stock (other than persons who acquire
ownership pursuant to a tender offer or exchange offer which is for all
outstanding shares of our common stock, or persons who acquire ownership
directly from us, William L. Schrader, our Chairman and Chief Executive
Officer, or his or our affiliates so long as such persons beneficially own
less than 50% of our outstanding common stock); or
. an announcement or commencement of an intention to make a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20.50% or more of the outstanding shares
of our common stock (the earlier of such dates being called the
"distribution date").
In such event, each holder of a right, other than rights beneficially owned by
the acquiring person, will thereafter have the right, subject to exceptions, to
receive upon exercise thereof a number of shares (or portions of shares) of
Series A preferred stock or, at the discretion of our Board of Directors, a
number of additional shares of common stock as set forth in the Rights Plan. The
acquisition of shares of our common stock by IXC or its controlled affiliates
pursuant to the IRU and Stock Purchase Agreement between IXC and us, however,
will not render it an acquiring person. In addition, Ralph J. Swett, the current
Vice Chairman and former Chairman of IXC Communication, Inc., will not become an
acquiring person solely by reason of the issuance or exercise of options, if
any, granted to him in his capacity as a director of PSINet.
All rights expire on November 5, 2009, unless the rights are earlier
redeemed or exchanged by us or expire earlier upon the consummation of certain
transactions. Shares of our Series A preferred stock purchasable upon exercise
of the rights will not be redeemable. Each share of Series A preferred stock
will be entitled, when, as and if declared, to an aggregate dividend of 1,000
times the dividend declared per share of our common stock. No dividend may be
declared on the common stock without the concurrent declaration of a dividend on
the Series A preferred stock. In the event of liquidation, holders of the Series
A preferred stock will be entitled to a minimum preferential liquidation payment
of $1,000 per share, plus any accrued but unpaid dividends, but will be entitled
to an aggregate payment of 1,000 times the payment made per share of common
stock; thereafter, holders of the Series A preferred stock and the holders of
common stock will share pari passu per share in any of our remaining assets.
Each share of our
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Series A preferred stock will have 1,000 votes, voting together with our common
stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of common stock are converted or exchanged, each share of Series
A preferred stock will be entitled to receive 1,000 times the amount received
per share of common stock.
In the event that any person or group of affiliated or associated persons
becomes an acquiring person, each holder of a right, other than rights
beneficially owned by the acquiring person which will thereupon become void,
will thereafter have the right (the "flip-in right") to receive, upon exercise
of a right at the then current exercise price of the right, that number of one
one-thousandths of a share of Series A preferred stock or, in the discretion of
our Board of Directors, that number of shares of common stock or, in certain
circumstances, other of our securities, having a market value of two times the
exercise price of the right. The flip-in right provisions do not apply to a
merger or other business combination with a person who has acquired shares of
our common stock pursuant to certain transactions approved by our Board of
Directors (each, a "permitted offer").
In the event that, after a person or group has become an acquiring person,
we are acquired in a merger or other business combination transaction or 50% or
more of our consolidated assets or earning power are sold or transferred, except
pursuant to a permitted offer, proper provision will be made so that each holder
of a right, other than rights beneficially owned by an acquiring person which
will have become void, will thereafter have the right (the "flip-over right") to
receive, upon the exercise thereof at the then current exercise price of the
right, that number of shares of common stock of the person with which we have
engaged in the foregoing transaction (or its parent), which number of shares at
the time of such transaction will have a market value of two times the exercise
price of the right. The holder of a right will continue to have the flip-over
right whether or not such holder exercises or surrenders the flip-in right.
At any time prior to the earlier to occur of a person becoming an acquiring
person or the expiration of the rights, and under other specified circumstances,
we may redeem the rights at a redemption price of $.01 per right. We may, at
our option, pay the redemption price in shares of our common stock. After the
date that a person becomes an acquiring person, we may redeem the then
outstanding rights, at the redemption price, provided that such redemption is in
connection with a merger or other business combination transaction or series of
transactions involving us in which all holders of shares of common stock are
treated alike.
The rights have anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire us without conditioning
the offer on the rights being redeemed, a substantial number of rights being
acquired, or the offer being deemed a permitted offer under the Rights Plan.
However, the rights should not interfere with any merger or other business
combination in connection with a permitted offer or that is approved by us
because the rights are redeemable under specified circumstances.
Transfer Agent and Registrar
First Chicago Trust Company of New York is the transfer agent and registrar
for our common stock and our Series C preferred stock. Its telephone number for
such purposes is (201) 222-4099.
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DESCRIPTION OF INDEBTEDNESS
The following summaries of our existing indebtedness do not purport to be
complete and are qualified in their entirety by reference to the provisions of
the various agreements and indentures related thereto, copies of which have been
filed with the Securities and Exchange Commission and to which reference is
hereby made. See "Where You Can Find More Information."
10% Senior Notes
We have outstanding $600.0 million aggregate principal amount of our 10%
Senior Notes due 2005. The 10% senior notes are senior unsecured obligations
ranking equivalent in right of payment to all our existing and future unsecured
and unsubordinated indebtedness and senior in right of payment to all our
existing and future subordinated indebtedness. The 10% senior notes were issued
under an Indenture dated as of April 13, 1998 between us and Wilmington Trust
Company, as trustee.
The 10% senior notes will mature on February 15, 2005. Interest on the 10%
senior notes is payable semi-annually on August 15 and February 15 of each year,
commencing August 15, 1998. The 10% senior notes are redeemable at our option,
in whole or in part, at any time on or after February 15 of 2002, 2003 and 2004
at 105%, 102.5% and 100% of the principal amount thereof, respectively, in each
case, plus accrued and unpaid interest to the date of redemption. In addition,
on or prior to February 15, 2001, we may redeem up to 35% of the original
aggregate principal amount of the 10% senior notes at a redemption price of 110%
of the principal amount thereof, plus accrued and unpaid interest to the date of
redemption, with the net cash proceeds of certain public equity offerings or the
sale of stock to one or more strategic investors, provided that at least 65% of
the original aggregate principal amount of the 10% senior notes remains
outstanding immediately after such redemption. Upon the occurrence of a "change
of control" (as defined in the 10% senior notes indenture), we will be required
to make an offer to purchase all of the 10% senior notes at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase. We may not have sufficient funds or the
financial resources necessary to satisfy our obligations to repurchase the 10%
senior notes upon a change of control.
The 10% senior notes indenture contains certain financial covenants with
which we must comply relating to, among other things, the following matters:
(1) limitation on our payment of cash dividends, repurchase of capital
stock, payment of principal on subordinated indebtedness and making of
certain investments, unless after giving effect to each such payment,
repurchase or investment, certain operating cash flow coverage tests are
met, excluding certain permitted payments and investments;
(2) limitation on our and our subsidiaries' incurrence of additional
indebtedness, unless at the time of such incurrence, our ratio of debt to
annualized operating cash flow would be less than or equal to 6.0 to 1.0
prior to April 1, 2001 and less than or equal to 5.5 to 1.0 on or after
April 1, 2001, excluding certain permitted incurrences of debt;
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(3) limitation on our and our subsidiaries' incurrence of liens, unless
the 10% senior notes are secured equally and ratably with the obligation or
liability secured by such lien, excluding certain permitted liens;
(4) limitation on the ability of any of our subsidiaries to create or
otherwise cause to exist any encumbrance or restriction on the payment of
dividends or other distributions on its capital stock, payment of
indebtedness owed to us or any of our other subsidiaries, making of
investments in us or any other of our subsidiaries, or transfer of any
properties or assets to us or any of our other subsidiaries, excluding
permitted encumbrances and restrictions;
(5) limitation on certain mergers, consolidations and sales of assets
by us or our subsidiaries;
(6) limitation on certain transactions with our affiliates;
(7) limitation on the ability of any or our subsidiaries to guarantee
or otherwise become liable with respect to any of our indebtedness unless
such subsidiary provides for a guarantee of the 10% senior notes on the
same terms as the guarantee of such indebtedness;
(8) limitation on certain sale and leaseback transactions by us or our
subsidiaries;
(9) limitation on certain issuances and sales of capital stock of our
subsidiaries; and
(10) limitation on the ability of us or our subsidiaries to engage in
any business not substantially related to a telecommunications business.
The events of default under the 10% senior notes indenture include various
events of default customary for such type of agreement, including, among others,
the failure to pay principal and interest when due on the 10% senior notes,
cross-defaults on other indebtedness for borrowed monies in excess of $10
million, which indebtedness would therefore include certain judgments or orders
for payment of money in excess of $10 million, and certain events of bankruptcy,
insolvency and reorganization.
10 1/2% Senior Notes
We have outstanding approximately $754.8 million aggregate principal amount
of our 10 1/2% senior notes due 2006, consisting of $600.0 million aggregate
principal amount of 10 1/2% senior notes due 2006 and Euro 150.0 million
aggregate principal amount of 10 1/2% senior notes due 2006, assuming an
exchange rate of Euro 0.9692 to U.S. $1.00 as of November 23, 1999. The 10 1/2%
senior notes are our senior unsecured obligations ranking equivalent in right of
payment to all our existing and future unsecured and unsubordinated indebtedness
and senior in right of payment to all our existing and future subordinated
indebtedness. The 10 1/2% senior notes were issued under an indenture dated as
of December 2, 1999 between us and Wilmington Trust Company, as Trustee.
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The 10 1/2% senior notes will mature on December 1, 2006. Interest on the
10 1/2% senior notes is payable semi-annually on June 1 and December 1 of each
year, commencing June 1, 2000. The 10 1/2% senior notes are not redeemable.
Upon the occurrence of a change of control (as defined in the 10 1/2% senior
notes indenture), we will be required to make an offer to purchase all of the
101/2% senior notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
We may not have sufficient funds or the financial resources necessary to satisfy
our obligations to repurchase the 10 1/2% senior notes upon a change of control.
The 10 1/2% senior notes indenture contains certain financial covenants
with which we must comply which are substantially identical to those contained
in the indentures governing our other senior notes. These financial covenants
are described above under "--10% Senior Notes."
The events of default under the 10 1/2% senior notes are substantially
identical to those contained in the indentures governing our 10% senior notes,
our other senior notes and are described above under "--10% Senior Notes."
11% Senior Notes
We have outstanding approximately $1.2 billion aggregate principal amount
of our 11% senior notes due 2009, consisting of $1.05 billion aggregate
principal amount and Euro 150 million aggregate principal amount, assuming an
exchange rate of Euro 0.9692 to U.S. $1.00 as of November 23, 1999. The 11%
senior notes are our senior unsecured obligations ranking equivalent in right of
payment to all our existing and future unsecured and unsubordinated indebtedness
and senior in right of payment to all our existing and future subordinated
indebtedness. The 11% senior notes were issued under an indenture dated as of
July 23, 1999 between us and Wilmington Trust Company, as Trustee.
The 11% senior notes will mature on August 1, 2009. Interest on the 11%
senior notes is payable semi-annually on February 1 and August 1 of each year,
commencing February 1, 2000. The 11% senior notes are redeemable at our option,
in whole or in part, at any time after August 1, 2004, 2005, 2006 and 2007 at
105.500%, 103.667%, 101.833% and 100% of the principal amount thereof,
respectively, in each case, plus accrued and unpaid interest to the date of
redemption. In addition, on or prior to August 1, 2002, we may redeem up to 35%
of the original aggregate principal amount of the 11% senior notes at a
redemption price of 111.000% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption, with the net cash proceeds of certain
public equity offerings or the sale of stock to one or more strategic investors;
provided that at least 65% of the original aggregate principal amount of each of
the euro notes and the dollar notes remains outstanding immediately after such
redemption. Upon the occurrence of a change of control (as defined in the 11%
senior notes indenture), we will be required to make an offer to purchase all of
the 11% senior notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
We may not have sufficient funds or the financial resources necessary to satisfy
our obligations to repurchase the 11% senior notes upon a change of control.
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The 11% senior notes indenture contains certain financial covenants with
which we must comply which are substantially identical to those contained in the
indentures governing our other senior notes. These financial covenants are
described above under "--10% Senior Notes."
The events of default under the 11% senior notes are substantially
identical to those contained in the indentures governing our other senior notes
and are described above under "--10% Senior Notes."
11 1/2% Senior Notes
We have outstanding $350.0 million aggregate principal amount of our
111/2% senior notes due 2008. The 11 1/2% senior notes are our senior unsecured
obligations ranking equivalent in right of payment to all our existing and
future unsecured and unsubordinated indebtedness and senior in right of payment
to all our existing and future subordinated indebtedness. The 11 1/2% senior
notes were issued under an Indenture dated as of November 3, 1998, as amended,
between us and Wilmington Trust Company, as Trustee.
The 11 1/2% senior notes will mature on November 1, 2008. Interest on the
11 1/2% senior notes is payable semi-annually on May 1 and November 1 of each
year, commencing May 1, 1999. The 11 1/2% senior notes are redeemable at our
option, in whole or in part, at any time on or after November 1 of 2003, 2004,
2005 and 2006 at 105.70%, 103.833%, 101.917% and 100% of the principal amount
thereof, respectively, in each case, plus accrued and unpaid interest to the
date of redemption. In addition, on or prior to November 1, 2001, we may redeem
up to 35% of the original aggregate principal amount of the 11 1/2% senior notes
at a redemption price of 111.5% of the principal amount thereof, plus accrued
and unpaid interest to the date of redemption, with the net cash proceeds of
certain public equity offerings or the sale of stock to one or more strategic
investors, provided that at least 65% of the original aggregate principal amount
of the 11 1/2% senior notes remains outstanding immediately after such
redemption. Upon the occurrence of a change of control (as defined in the
111/2% senior notes indenture), we will be required to make an offer to purchase
all of the 11 1/2% senior notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. We may not have sufficient funds or the financial resources
necessary to satisfy our obligations to repurchase the 11 1/2% senior notes upon
a change of control.
The 11 1/2% senior notes indenture contains certain financial covenants
with which we must comply, which are substantially identical to those contained
in the indenture governing our other senior notes described above under "--10%
Senior Notes."
The events of default under the 11 1/2% senior notes indenture are
substantially identical to those contained in the indenture governing our other
senior notes described above under "--10% Senior Notes."
SELLING SHAREHOLDER
The 3,000,000 shares of our common stock covered by this prospectus, which
we refer to as the Shares, are part of the 10,229,789 shares of our common stock
purchased by IXC Internet Services, Inc. from us on February 25, 1998 pursuant
to an IRU and Stock Purchase Agreement
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dated as of July 22, 1997, as amended, which we refer to as the IRU Purchase
Agreement, in consideration for our acquisition from IXC of 20-year non-
cancellable indefeasible rights of use in up to 10,000 equivalent route miles of
fiber-based OC-48 network bandwidth in selected portions across the IXC fiber
optic telecommunications system within the United States.
We are registering the Shares in order to provide IXC with freely tradable
shares of our common stock. The Shares are being registered pursuant to the
terms of a registration rights agreement dated as of February 25, 1998 between
us and IXC. Pursuant to the registration rights agreement, we are obligated to
file with the Securities and Exchange Commission the registration statement of
which this prospectus is a part. We have agreed to use our reasonable best
efforts to maintain a continuously effective registration statement on Form S-3,
of which this prospectus is a part, with respect to the Shares requested by IXC
to be registered for a period of 60 days, so long as the Shares requested to be
registered are not eligible for resale under the provisions of Rule 144(k) under
the Securities Act. IXC, its pledgees, donees, transferees and successors-in-
interest may sell the Shares offered under this prospectus at prices which are
current when the sales take place or at other prices upon which the parties
agree. We will pay all of the expenses associated with the registration of the
Shares and this prospectus.
The table below sets forth (a) the number of shares and percentage of our
outstanding common stock beneficially owned by IXC prior to the offering of the
Shares covered by this prospectus; (b) the number of Shares offered pursuant to
this prospectus by IXC; and (c) the number of shares and percentage of our
outstanding common stock beneficially owned by IXC after giving effect to the
offering of the Shares covered by this prospectus. The information contained in
this table may be amended or supplemented from time to time.
<TABLE>
<CAPTION>
Shares
Shares Beneficially Owned Offered Shares Beneficially Owned
Prior to Offering (1)(2) Hereby(3) After Offering (1)
------------------------- --------- -------------------------
Name Number Percentage Number Percentage
- ---- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
IXC Internet Services, Inc. 10,229,789 15.7% 3,000,000 7,229,789 11.1%
</TABLE>
___________
(1) The shares could be deemed to be beneficially owned by the members of the
Board of Directors of Cincinnati Bell Inc. (doing business as Broadwing
Inc.). Cincinnati Bell's address is 201 East Fourth Street, P.O. Box 2301,
Cincinnati, Ohio 45201.
(2) The Shares include 1,500,000 shares of our common stock, which, according to
IXC's Schedule 13D Amendment No. 1 filed on June 17, 1999, IXC loaned to
Merrill Lynch International, which we refer to as 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. The
Shares also include an additional 1,500,000 shares of our common stock
which, according to IXC's Schedule 13D Amendment No. 3 filed on July 19,
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 $59,750,860.68. In the amendments to its Schedule 13D,
IXC stated that it has waived the right to vote any of the loaned Shares
during the term of these transactions.
(3) MLI has informed IXC and us that MLI will sell the Shares borrowed from IXC
in connection with the hedge of its obligations under the forward-purchase
agreements with IXC. We have agreed to enter into a registration
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agreement with MLI in respect of the shares borrowed from IXC. Under the
registration agreement, we will agree to keep this prospectus updated during
the 60-day period specified in the agreement to allow MLI to satisfy its
prospectus delivery requirements with respect to its sales of the borrowed
shares.
Pursuant to the IRU Purchase Agreement, Ralph J. Swett, the former Chairman
of IXC Communications, was elected, effective as of the closing of the
transactions under the IRU Purchase Agreement, to our Board of Directors. The
IRU Purchase Agreement provides that our Chairman will recommend that Mr. Swett
continue to be re-elected to our Board for so long as IXC continues to own at
least 95% of the shares of our common stock we issued to IXC pursuant to the IRU
Purchase Agreement. The transactions IXC recently entered into with MLI, as
described in the preceding paragraph, may cause or have caused this provision to
be no longer effective. In addition, the sale of 511,490 (i.e., equivalent to 5%
of the 10,229,789 shares of our common stock owned by IXC as of the date of this
prospectus) or more Shares pursuant to this prospectus will also result in this
provision being no longer effective.
In connection with the transactions under the IRU Purchase Agreement, IXC
and we also entered into a Joint Marketing and Services Agreement, which we
refer to as 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, we have 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 us of the OC-48 bandwidth
acquired from IXC and our other arrangements with IXC, we have agreed will be,
or will be equal to, the lowest offered by us.
In September 1999, we entered into an agreement to acquire from Broadwing
Communications Services Inc., formerly IXC Communications Services, Inc., which
we refer to as Broadwing, long-term rights in up to 16 dark fiber optic strands
covering over 13,000 route miles across the continental United States.
Broadwing will also provide us collocation space and interconnection services
with respect to this fiber at agreed upon prices. We expect to place into
operation the first four strands of this fiber prior to the end of 2000.
In addition to the transactions described above, Broadwing or its
affiliates and we are parties to transactions in the ordinary course of business
which we believe are on terms no more favorable than could be obtained on an
arms' length basis with independent third parties. On November 9, 1999, IXC
Communications, Inc. was acquired by Cincinnati Bell, Inc. On January 12, IXC
Communications, Inc. changed its name to Broadwing Communications.
PLAN OF DISTRIBUTION
Any or all of the Shares being registered hereby may be sold from time to
time to purchasers directly by IXC, its pledgees, donees, transferees and
successors-in-interest, including parties who borrow shares to settle short
sales. Alternatively, IXC, its pledgees, donees, transferees and successors-in-
interest may from time to time offer the Shares through underwriters,
broker/dealers or agents who may receive compensation in the form of
underwriting discounts, concessions or commissions from IXC and/or the
purchasers of Shares for whom they may act as agent. IXC, and any such
underwriters, broker/dealers or agents that participate in the distribution of
the Shares, may be deemed to be underwriters, and any profit on the sale of the
Shares by them and any profit on the resale of such Shares purchased by them
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may be deemed to be underwriting discounts, commissions or concessions under the
Securities Act. Any such Shares may, without limitation, be so offered or sold
in the open market, on The Nasdaq Stock Market's National Market, in privately
negotiated transactions, in an underwritten offering, or a combination of such
methods, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. To the extent required,
the number of Shares to be sold, purchase price, public offering price, the name
of any agent, broker/dealer or underwriter and any applicable commission or
discount or other compensation arrangements with respect to a particular
offering will be set forth in an accompanying prospectus supplement. We will
receive no proceeds from the sale of the Shares offered hereby. IXC may also
sell the Shares being registered hereby in accordance with Rule 144 of the
Securities and Exchange Commission, rather than pursuant to this prospectus.
The sale of the Shares may be effected in transactions (which may involve
crosses, block transactions and borrowings, returns and reborrowings of the
Shares pursuant to stock loan agreements to settle short sales of shares of our
common stock):
. on any national securities exchange or quotation service on which the
shares of our common stock may be listed or quoted at the time of the
sale;
. in the over-the-counter market;
. in transactions otherwise than on such exchange or in the over-the-
counter market; or
. through the writing of options.
Shares may also be delivered in connection with the issuance of securities
by issuers other than PSINet that are exchangeable (whether optionally or
mandatorily) or payable in shares of our common stock or pursuant to which such
shares may be distributed. This prospectus shall be available for use by
pledgees, donees, transferees and successors-in-interest of IXC or by other
persons acquiring Shares, including parties who borrow the Shares to settle
short sales.
All registration expenses incurred in connection with the registration of
the Shares to which this prospectus relates will be borne by us. As and when we
are required to update this prospectus, we may incur additional expenses in
excess of this estimated amount. "Registration expenses" means all fees and
expenses incident to the registration of the Shares to which this prospectus
relates, including fees and expenses of counsel to us and IXC (limited, in the
case of counsel to IXC, to $10,000) but excluding, in the case of an
underwritten offering, all fees and disbursements of any underwriters (including
discounts and commissions), their counsel and accountants and all registration
and filing fees.
Under applicable rules and regulations under the Exchange Act, IXC will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of the Shares by IXC.
All of the foregoing may affect the marketability of the Shares.
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LEGAL MATTERS
The validity of the securities offered hereby will be passed upon by Nixon
Peabody LLP, New York, New York, counsel for PSINet. Certain attorneys with
Nixon Peabody LLP currently own in the aggregate less than one percent of our
common stock.
EXPERTS
The consolidated financial statements of PSINet Inc. incorporated in this
prospectus by reference to PSINet's Annual Report on Form 10-K for the year
ended December 31, 1998 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Transaction Network Services, Inc.
("TNI") as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998 are incorporated by reference in this prospectus
from our Current Report on Form 8-K dated November 23, 1999, which incorporates
by reference such consolidated financial statements from TNI's Annual Report on
Form 10-K for the year ended December 31, 1998. Such consolidated financial
statements have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report incorporated by reference in our November
23, 1999 Form 8-K and incorporated by reference herein in reliance upon the
authority of such firm as experts in giving said reports.
DOCUMENTS INCORPORATED BY REFERENCE
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the Commission will automatically update and supersede this information. We are
incorporating by reference in this prospectus the following documents:
1. Our annual report on Form 10-K for our fiscal year ended December 31,
1998. This report contains:
. audited consolidated balance sheets for us and our subsidiaries as
of December 31, 1998 and 1997
. related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended December
31, 1998, 1997 and 1996
2. Our quarterly reports on Form 10-Q for the quarters ended March 31,
1999, June 30, 1999 and September 30, 1999.
3. Our current reports on Form 8-K dated
. January 10, 2000
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. April 27, 1999
. May 7, 1999
. July 6, 1999
. July 16, 1999
. August 22, 1999
. August 22, 1999
. November 5, 1999
. November 17, 1999
. November 23, 1999
. November 23, 1999
. November 24, 1999
. July 31, 1997 (solely insofar as it relates to our Shareholder
Rights Agreement dated May 8, 1996, as amended)
. August 20, 1997
4. Our registration statement on Form 8-A dated April 7, 1995, as amended
(registration no. 0-25812)
5. Our registration statement on Form 8-A dated June 4, 1996, as amended
(registration no. 0-25812)
We are also incorporating by reference in this prospectus all reports and
other documents that we file after the date of this prospectus pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of securities under this prospectus. These reports and
documents will be incorporated by reference in and considered to be a part of
this prospectus as of the date of filing of such reports and documents.
Any statement contained in this prospectus or in a document which is
incorporated by reference herein will be modified or superseded for purposes of
this prospectus to the extent that a statement in any document that we file
after the date of this prospectus that also is incorporated by reference herein
modifies or supersedes such prior statement. Any such statement so modified or
superseded will not, except as so modified or superseded, constitute a part of
this prospectus.
This prospectus incorporates by reference documents which are not presented
in this prospectus or delivered to you with it. You may request, and we will
send to you, without charge, copies of these documents, other than exhibits to
these documents, which we will send to you for a reasonable fee. Requests
should be directed to the Office of the Secretary, PSINet Inc., 510 Huntmar Park
Drive, Herndon, Virginia 20170 (telephone (703) 904-4100).
-95-
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus does not contain all of the information included in the
registration statement. We have omitted parts of the registration statement as
permitted by the rules and regulations of the Commission. For further
information, we refer you to the registration statement on Form S-3, including
its exhibits. Statements contained in this prospectus and any accompanying
prospectus supplement about the provisions or contents of any agreement or other
document are not necessarily complete. If Commission rules and regulations
require that any agreement or document be filed as an exhibit to the
registration statement, you should refer to that agreement or document for a
complete description of these matters. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of each document.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy materials that we have
file with the Commission, including the registration statement, at the following
Commission public reference rooms:
Judiciary Plaza
450 Fifth Street, N.W.
Room 1024
Washington, DC 20549
You can also obtain copies of filed documents, at prescribed rates, by mail
from the Public Reference Section of the Commission at its Judiciary Plaza
location, listed above, or by telephone at 1-800-SEC-0330 or electronically
through the Commission's Web Site at http://www.sec.gov.
Our common stock is listed on the Nasdaq Stock Market's National Market
under the symbol "PSIX," and our Commission filings can also be read and
obtained at the following Nasdaq address:
The Nasdaq Stock Market
Reports Section
1735 K Street, N.W.
Washington, D.C. 20006
We furnish our stockholders with annual reports containing our audited
financial statements and with proxy material for our annual meetings complying
with the proxy requirements of the Exchange Act.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses, other than underwriting
discounts and commissions, estimated to be incurred by us in connection with the
offering of the securities being registered hereunder. All the amounts shown are
estimates except the Commission registration fee.
<TABLE>
<CAPTION>
Item Amount
---- ------
<S> <C>
Securities and Exchange Commission Registration Fee.. $ 41,000
Blue Sky Fees and Expenses........................... 10,000
Printing and Engraving Expenses...................... 25,000
Legal Fees and Expenses.............................. 100,000
Accounting Fees and Expenses......................... 75,000
Miscellaneous........................................ 25,000
TOTAL................................................ 276,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Sections 721 through 725 of the Business Corporation Law of the State
of New York (the "BCL"), the registrant has broad powers to indemnify its
directors, officers and other employees. These sections
(1) provide that the statutory indemnification and advancement of
expenses provision of the BCL are not exclusive, provided that no
indemnification may be made to or on behalf of any director or officer if a
judgment or other final adjudication adverse to the director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action
as adjudicated, or that he personally gained in fact a financial profit or
other advantage to which he was not legally entitled,
(2) establish procedures for indemnification and advancement of
expenses that may be contained in the certificate of incorporation or by-
laws, or, when authorized by either of the foregoing, set forth in a
resolution of the shareholders or directors of an agreement providing for
indemnification and advancement of expenses,
(3) apply a single standard for statutory indemnification for third-
party and derivative suits by providing that indemnification is available
if the director or officer acted in good faith, for a purpose which he
reasonably believed to be in the best interests of the corporation, and, in
criminal actions, had no reasonable cause to believe that his conduct was
unlawful, and
II-1
<PAGE>
(4) permit the advancement of litigation expenses upon receipt of an
undertaking to repay such advance if the director or officer is ultimately
determined not to be entitled to indemnification or to the extent the
expenses advanced exceed the indemnification to which the director or
officer is entitled. Section 726 of the BCL permits the purchase of
insurance to indemnify a corporation or its officers and directors to the
extent permitted.
As permitted by Section 721 of the BCL, the registrant's By-laws provide
that the registrant shall indemnify its officers and directors, as such, to the
fullest extent permitted by applicable law, and that expenses reasonably
incurred by any such officer or director in connection with a threatened or
actual action or proceeding shall be advanced or promptly reimbursed by the
Registrant in advance of the final disposition of such action or proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if and to the extent that it is ultimately determined that such
officer or director is not entitled to indemnification.
Article EIGHTH of the registrant's Certificate of Incorporation provides
that no director of the Registrant shall be held personally liable to the
registrant or its shareholders for damages for any breach of duty in his
capacity as a director occurring after authorization of such Article EIGHTH by
the shareholders unless a judgment or other final adjudication adverse to him
establishes that:
(1) his acts or omissions were in bad faith or involved intentional
misconduct or a knowing violation of law, or
(2) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled, or
(3) his acts violated section 719 of the BCL.
The registrant has entered into Indemnity Agreements with its directors and
certain key officers pursuant to which the registrant generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
BCL as described above. The Company also has purchased directors' and officers'
liability insurance.
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as part of or to be
incorporated by reference in this Registration Statement.
2.1 Agreement and Plan of Merger, dated August 22, 1999, among
PSINet, PSINet Shelf I Inc. and Transaction Network
Services, Inc.
2.2 Amendment No. 1, dated October 14, 1999, to Agreement and
Plan of Merger dated August 22, 1999, among PSINet, PSINet
Shelf I Inc. and Transaction Network Services, Inc.
II-2
<PAGE>
4.1 Form of 10% Senior Notes due 2005.
4.2 Indenture dated as of April 13, 1998 between PSINet and
Wilmington Trust Company, as trustee.
4.3 Form of 11 1/2% Senior Notes due 2008.
4.4 Indenture dated as of November 3, 1998 between PSINet and
Wilmington Trust Company, as trustee.
4.5 First Supplemental Indenture dated as of November 12, 1998
between PSINet and Wilmington Trust Company, as trustee.
4.6 Form of unregistered Dollar-denominated 11% Senior Notes
due 2009.
4.7 Form of unregistered Euro-denominated 11% Senior Notes due
2009.
4.8 Form of registered 11% Senior Notes due 2009.
4.9 Indenture dated as of July 23, 1999 between PSINet and
Wilmington Trust Company, as Trustee.
4.10 Form of Common Stock Certificate.
4.11 Form of Common Stock Certificate (name change).
4.12 Form of 6 3/4% Series C Cumulative Convertible Preferred
Stock Certificate.
4.13 Articles Fourth, Fifth, Sixth, Ninth and Tenth of the
Certificate of Incorporation of PSINet, as amended.
4.14 Article I of the Amended and Restated By-laws of PSINet,
as amended.
4.15 Form of Rights Agreement, dated as of May 8, 1996, between
PSINet and First Chicago Trust Company of New York, as
Rights Agent, which includes as Exhibit A--Certificate of
Amendment; Exhibit B--Form of Rights Certificate; and
Exhibit C--Summary of Rights to Purchase Shares of
Preferred Stock.
4.16 Amendment No. 1, dated as of July 21, 1997, to Rights
Agreement, dated as of May 8, 1996, between PSINet and
First Chicago Trust Company of New York, as Rights Agent.
II-3
<PAGE>
4.17 Amendment No. 2, dated as of July 31, 1997, to Rights
Agreement, dated as of May 8, 1996, between PSINet and
First Chicago Trust Company of New York, as Rights Agent.
4.18 Amendment No. 3, dated as of November 5, 1999, to Rights
Agreement, dated as of May 8, 1996, between PSINet and
First Chicago Trust Company of New York.
4.19 Deposit Agreement dated as of May 4, 1999 between PSINet
and Wilmington Trust Company, as deposit agent.
4.20 Form of unregistered Dollar-denominated 10 1/2% Senior
Notes due 2006.
4.21 Form of unregistered Euro-denominated 10 1/2% Senior Notes
due 2006.
4.22 Indenture dated as of December 2, 1999 between PSINet and
Wilmington Trust Company, as Trustee.
5 Opinion of Nixon Peabody LLP.
23.1 Consent of Nixon Peabody LLP (contained in Exhibit 5).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Arthur Andersen LLP
24 Power of Attorney.
99.1 IRU and Stock Purchase Agreement, dated as of July 22,
1997, between PSINet and IXC.
99.2 First Amendment to IRU and Stock Purchase Agreement dated
as of July 22, 1997 between IXC and PSINet.
99.3 Second Amendment to IRU and Stock Purchase Agreement dated
as of July 22, 1997 between IXC and PSINet.
99.4 Registration Rights Agreement, dated as of February 25,
1998, between IXC and PSINet.
99.5 Joint Marketing and Services Agreement, dated as of July
22, 1997, between IXC and PSINet.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Securities and
Exchange Commission by the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934, as amended, that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall
be deemed to be a part of this registration statement as of the time it was
declared effective.
II-5
<PAGE>
(5) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The registrant hereby further undertakes that, for purposes of determining
any liability under the Securities Act of 1933, as amended, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, as amended (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934, as amended), that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Herndon, Commonwealth of Virginia on January 14,
2000.
PSINet Inc.
By: /s/ William L. Schrader
----------------------------------------
William L. Schrader, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ William L. Schrader Chairman, Chief Executive January 14, 2000
- ---------------------------------- Officer and Director (Principal
William L. Schrader Executive Officer)
/s/ Harold S. Wills President, Chief Operating January 14, 2000
- ---------------------------------- Officer and Director
Harold S. Wills
/s/ David N. Kunkel* Vice Chairman and Executive January 14, 2000
- ---------------------------------- Vice President
David N. Kunkel
/s/ Edward D. Postal Executive Vice President and January 14, 2000
- ---------------------------------- Chief Financial Officer
Edward D. Postal (Principal Financial Officer)
/s/ Michael J. Malesardi Vice President and Controller January 14, 2000
- ---------------------------------- (Principal Accounting Officer)
Michael J. Malesardi
/s/ William H. Baumer Director January 14, 2000
- ----------------------------------
William H. Baumer
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Ralph J. Swett* Director January 14, 2000
- ----------------------------------
Ralph J. Swett
/s/ Ian P. Sharp* Director January 14, 2000
- ----------------------------------
Ian P. Sharp
</TABLE>
*By: /s/ Edward D. Postal
-----------------------
Edward D. Postal
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
2.1 Agreement and Plan of Merger, dated Incorporated by reference from
August 22, 1999, among PSINet, Exhibit 2.1 to PSINet's Current
PSINet Shelf I Inc. and Transaction Report on Form 8-K dated August
Network Services, Inc. 22, 1999 located under
Securities and Exchange
Commission File No. 0-25812
2.2 Amendment No. 1, dated October 14, Incorporated by reference from
1999, to Agreement and Plan of Annex 1 to Amendment No.1 to
Merger dated August 22, 1999, among PSINet's Registration Statement
PSINet, PSINet Shelf I Inc. and on Form S-4 filed on October 19,
Transaction Network Services, Inc. 1999 located under Securities
and Exchange Commission File No.
333-88325
4.1 Form of 10% Senior Notes due 2005 Incorporated by reference from
Exhibit 4.1 to PSINet's Current
Report on Form 8-K dated April
22, 1998 located under
Securities and Exchange
Commission File No. 0-25812
("April 22, 1998 8-K")
4.2 Indenture dated as of April 13, Incorporated by reference from
1998 between PSINet and Wilmington Exhibit 4.2 to the April 22,
Trust Company, as Trustee 1998 8-K
4.3 Form of 11 1/2% Senior Notes Incorporated by reference from
due 2008 PSINet's Registration Statement
on Form S-4 declared effective
on February 16, 1999 located
under Securities and Exchange
Commission File No. 333-68385
4.4 Indenture dated as of November 3, Incorporated by reference from
1998 between PSINet and Wilmington Exhibit 4.1 to PSINet's Current
Trust Company, as trustee Report on Form 8-K dated
November 10, 1998, located under
Securities and Exchange
Commission File No. 0-25812
4.5 First Supplemental Indenture dated Incorporated by reference from
as of November 12, 1998 between Exhibit 4.1 to PSINet's
PSINet and Wilmington Trust Quarterly Report on Form 10-Q
Company, as Trustee for the quarter ended September
30, 1998 located under
Securities and Exchange
Commission File No. 0-25812
("September 1998 10-Q")
4.6 Form of unregistered Incorporated by reference from
Dollar-denominated Exhibit 4.6 to PSINet's
11% Senior Notes due 2009 Registration Statement on Form
S-4 filed on August 6, 1999
located under Securities and
Exchange Commission File No.
333-84721 ("August 1999
Registration Statement")
4.7 Form of unregistered Incorporated by reference from
Euro-denominated Exhibit 4.7 to the August 1999
11% Senior Notes due 2009 Registration Statement
4.8 Form of registered 11% Senior Notes Incorporated by reference from
due 2009 Exhibit 4.8 to the August 1999
Registration Statement
4.9 Indenture dated as of July 23, 1999 Incorporated by reference from
between PSINet and Wilmington Trust Exhibit 4.9 to the August 1999
Company, as Trustee Registration Statement
<PAGE>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
4.10 Form of Common Stock Certificate Incorporated by reference from
Exhibit 4.1 to the May 1995
Registration Statement
4.11 Form of Common Stock Certificate Incorporated by reference from
(name change) Exhibit 4.1A to PSINet's
Registration Statement on Form
S-1 declared effective on
December 14, 1995 located under
Securities and Exchange
Commission File No. 33-99610
("December 1995 Registration
Statement")
4.12 Form of 6 3/4% Series C Cumulative Incorporated by reference from
Convertible Preferred Stock Exhibit 4.1 to the May 7, 1999
Certificate 8-K
4.13 Articles Fourth, Fifth, Sixth, See Exhibits 3.2, 3.3, 3.4, 3.5,
Ninth and Tenth of the Certificate 3.6 and 3.7
of Incorporation of PSINet, as
amended
4.14 Article I of the Amended and See Exhibit 3.9
Restated By-laws of PSINet, as
amended
4.15 Form of Rights Agreement, dated as Incorporated by reference from
of May 8, 1996, between PSINet and Exhibit 1 to PSINet's
First Chicago Trust Company of New Registration Statement on Form
York, as Rights Agent, which 8-A dated June 3, 1996 located
includes as Exhibit A - Certificate under Securities and Exchange
of Amendment; Exhibit B - Form of Commission File No. 0-25812
Rights Certificate; and Exhibit C -
Summary of Rights to Purchase
Shares of Preferred Stock
4.16 Amendment No. 1, dated as of July Incorporated by reference from
21, 1997, to Rights Agreement, Exhibit 4.1.1 to PSINet's
dated as of May 8, 1996, between Current Report on Form 8-K dated
PSINet and First Chicago Trust August 1, 1997 located under
Company of New York, as Rights Securities and Exchange
Agent. Commission File No. 0-25812
4.17 Amendment No. 2, dated as of July Incorporated by reference from
31, 1997, to Rights Agreement, Exhibit 4.1.2 to PSINet's
dated as of May 8, 1996, between Current Report on Form 8-K dated
PSINet and First Chicago Trust August 20, 1997 located under
Company of New York, as Rights Securities and Exchange
Agent. Commission File No. 0-25812
4.18 Amendment No. 3, dated as of Incorporated by reference from
November 5, 1999, to Rights Exhibit 4 to PSINet's
Agreement, dated as of May 8, 1996, Registration Statement on Form
between PSINet and First Chicago 8/A filed on November 5, 1999
Trust Company of New York
4.19 Deposit Agreement dated as of May Incorporated by reference from
4, 1999 between PSINet and Exhibit 4.2 to the May 7, 1999
Wilmington Trust Company, as 8-K
deposit agent
4.20 Indenture dated as of December 2, Incorporated by reference from
1999 between PSINet and Wilmington Exhibit 4.1 to PSINet's Current
Trust Company, as Trustee Report on Form 8-K dated
December 2, 1999 located under
Securities and Exchange
Commission File No. 0-25812
("December 2, 1999 8-K")
-2-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION LOCATION
------ ----------- --------
4.21 Form of unregistered Incorporated by reference from
Dollar-denominated 10 1/2% Senior Exhibit 4.2 to the December 2,
Notes due 2006 1999 8-K
4.22 Form of unregistered Incorporated by reference from
Euro-denominated 10 1/2% Senior Exhibit 4.3 to the December 2,
Notes due 2006 1999 8-K
5 Opinion of Nixon Peabody LLP Filed herewith
12 Statements re Computation of Ratios Incorporated by reference from
Exhibit 12 to PSINet's
Registration Statement on
Form S-4 declared effective on
September 29, 1999 located under
Securities and Exchange
Commission File No. 333-84721
23.1 Consent of Nixon Peabody LLP Contained in Exhibit 5
23.2 Consent of PricewaterhouseCoopers Filed herewith
LLP
23.3 Consent of Arthur Andersen LLP Filed herewith
24 Power of Attorney Included in Signature Page to
the Registration Statement
99.1 IRU and Stock Purchase Agreement Incorporated by reference from
dated as of July 22, 1997 between Exhibit 2.1 to PSINet's
IXC Internet Services, Inc. and Quarterly Report on Form 10-Q
PSINet for the quarter ended June 30,
1997 located under Securities
and Exchange Commission File No.
0-25812 ("June 1997 10-Q")
99.2 First Amendment to IRU and Stock Incorporated by reference from
Purchase Agreement dated as of July Exhibit A to PSINet's Proxy
22, 1997 between IXC Internet Statement on Schedule 14A dated
Services, Inc. and PSINet December 19, 1997 located under
Securities and Exchange
Commission File No. 0-25812
("December 1997 Proxy
Statement")
99.3 Second Amendment to IRU and Stock Incorporated by reference from
Purchase Agreement dated as of July Exhibit A to the December 1997
22, 1997 between IXC Internet Proxy Statement
Services, Inc. and PSINet
99.4 Registration Rights Agreement dated Incorporated by reference from
as of February 25, 1998 between IXC Exhibit 10.62 to PSINet's Annual
and PSINet. Report on Form 10-K for the
fiscal year ended December 31,
1997 located under Securities
and Exchange Commission File No.
0-25812
99.5 Joint Marketing and Services Incorporated by reference to the
Agreement, dated as of July 22, June 1997
1997, between IXC and PSINet. 10-Q
-3-
<PAGE>
Exhibit 5
NIXON PEABODY LLP
437 Madison Avenue
New York, New York 10022
January 18, 2000
PSINet Inc.
510 Huntmar Park Drive
Herndon, Virginia 20170
Ladies and Gentlemen:
We have acted as counsel to PSINet Inc., a New York corporation (the
"Company"), in connection with preparation of a Registration Statement on Form
S-3, No. 333-92157 (the "Registration Statement") filed by the Company on
December 6, 1999 with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), relating to the offer
and sale by IXC Internet Services, Inc. ("IXC") of up to 3,000,000 shares of
common stock of the Company, $.01 par value (the "Shares") originally issued and
sold by the Company to IXC pursuant to an IRU and Stock Purchase Agreement dated
as of July 22, 1997 between the Company and IXC (the "Stock Purchase
Agreement").
This opinion is being delivered to you in connection with the Registration
Statement.
In connection with the foregoing, we have examined the Registration
Statement and the Preliminary Prospectus contained in the Registration Statement
(the "Preliminary Prospectus"). We also have examined originals or copies,
certified or otherwise identified to our satisfaction, of such corporate
records, certificates and other documents and have made such investigations of
law as we have deemed necessary or appropriate as a basis for the opinions
expressed below.
As to questions of fact material to our opinions expressed herein, we
have, when relevant facts were not independently established, relied upon
certificates of, and information received from, the Company and/or
representatives of the Company. We have made no independent investigation of the
facts stated in such certificates or as to any information received from the
Company and/or representatives of the Company and do not opine as to the
accuracy of such factual matters. We also have relied, without investigation,
upon certificates and other documents from, and conversations with, public
officials.
<PAGE>
PSINet Inc.
January 18, 2000
Page 2
In rendering the following opinions, we have assumed, without
investigation, the authenticity of any document or other instrument submitted to
us as an original, the conformity to the originals of any document or other
instrument submitted to us as a copy, the genuineness of all signatures on such
originals or copies, and the legal capacity of natural persons who executed any
such document or instrument at the time of execution thereof.
In rendering the following opinions, we have also assumed, without
investigation, that (i) the cash value of the telecommunications services in
respect of certain On-net and/or Barter Capacity bandwidth received by the
Company at or prior to the issuance, on February 25, 1998, to IXC of shares of
common stock of the Company pursuant to the Stock Purchase Agreement, was at
least equal to the aggregate par value of the shares so issued, (ii) the Stock
Purchase Agreement constitutes a binding obligation on the part of IXC to
perform its obligations thereunder to pay the balance of the purchase price for
the shares issued to IXC pursuant thereto in property and/or to perform services
therefor, and (iii) the Board of Directors of the Company in good faith
determined that the aggregate value of the consideration paid and to be paid by
IXC for the shares of common stock issued to IXC pursuant to the Stock Purchase
Agreement is at least $240,000,000.
Members of our firm involved in the preparation of this opinion are
licensed to practice law in the State of New York and we do not purport to be
experts on, or to express any opinion herein concerning, the laws of any other
jurisdiction other than the laws of the State of New York.
Based upon and subject to the foregoing, and the other qualifications and
limitations contained herein, and after (a) the Commission shall have entered an
appropriate order declaring effective the above-referenced Registration
Statement, as amended, (b) the Shares have, if required, been duly qualified or
registered, as the case may be, for sale under applicable state securities laws,
we are of the opinion that the Shares to be offered pursuant to the Preliminary
Prospectus and in the manner described in the Registration Statement, will be
duly authorized and validly issued and will be fully paid and non-assessable,
subject to Section 630 of the Business Corporation Law of the State of New York.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
caption "Legal Matters" in the Preliminary Prospectus. In giving such consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Act or the rules and regulations of
the Commission thereunder.
We further consent to the filing of this opinion as an exhibit to
applications to the securities commissioners of the various states of the United
States, to the extent so required, in connection with the registration of the
Shares.
This opinion is intended solely for your benefit in connection with the
transactions described above and, except as provided in the two immediately
preceding paragraphs, may not be otherwise communicated to, reproduced, filed
publicly or relied upon by, any other person or entity for any other purpose
without our express prior written consent. This opinion is limited to the
matters stated herein, and no opinion or belief is implied or may be inferred
beyond the matters expressly stated herein.
<PAGE>
PSINet Inc.
January 18, 2000
Page 3
We wish to advise you that Nixon Peabody LLP and certain attorneys with
Nixon Peabody LLP own certain shares of the Company's common stock.
Very truly yours,
/s/ Nixon Peabody LLP
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-3 of our report dated March 9, 1999, except
as to Note 11, which is as of March 25, 1999 relating to the consolidated
financial statements and financial statement schedule of PSINet Inc., which
appears in PSINet Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
Washington, DC
January 14, 2000
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in PSINet Inc.'s Amendment No. 1 to Registration Statement on Form S-3
(File No. 333-92157) of our reports dated February 10, 1999, included in
Transaction Network Services, Inc.'s Form 10-K for the year ended December 31,
1998, which is incorporated by reference in PSINet Inc.'s Current Report on Form
8-K dated November 23, 1999 as filed on December 1, 1999, and all references to
our firm included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
January 11, 2000
