<PAGE>
RULE NO. 424(b)(3)
REGISTRATION NO. 333-35910
PROSPECTUS SUPPLEMENT NO. 1 DATED AUGUST 31, 2000
(To Prospectus dated August 3, 2000)
[LOGO]
16,500,000 shares of 7% Series D Cumulative Convertible Preferred Stock
15,430,800 shares of Common Stock issuable on conversion
5,000,000 shares of Common Stock issuable as dividends
750,000 shares of Common Stock issuable in exchange
for funds held in a deposit account
_____________________________________
This supplement amends and supplements certain information contained in
the prospectus, dated August 3, 2000. This supplement is not complete without,
and may not be delivered or utilized except in connection with, the prospectus,
including any amendment or supplements to the prospectus. The information
contained in this supplement supersedes any contrary statements contained in the
prospectus.
This supplement relates to the sale from time to time by the selling
shareholders of up to 16,500,000 shares of our Series D preferred stock and up
to 15,430,800 shares of our common stock issuable upon conversion of the Series
D preferred stock. In addition, we may issue to the selling shareholders up to
5,000,000 shares of common stock as dividends on the Series D preferred stock
and up to 750,000 shares of common stock in lieu of cash payments otherwise
required under the deposit account arrangement described in the prospectus.
__________________________________
The date of this supplement is August 31, 2000
<PAGE>
SELLING SHAREHOLDERS
In February 2000 we issued an aggregate of 16,500,000 shares of our Series
D preferred stock in an offering made pursuant to Rule 144A under the Securities
Act of 1993. The Series D preferred stock is convertible into shares of our
common stock.
None of the selling shareholders has held any position or office or had a
material relationship with PSINet or any of its affiliates within the past three
years, except for Donaldson, Lufkin & Jenrette Securities Corporation, which,
from time to time, has served as our investment banker and an underwriter and
initial purchaser of our securities and Merrill Lynch, Pierce Fenner and Smith
Inc. which, from time to time, has served as an underwriter and initial
purchaser of our securities.
The following table sets forth information as of August 30, 2000, which has
been provided to us by the selling shareholders, regarding beneficial ownership
of our Series D preferred stock and common stock by each selling shareholder.
<TABLE>
<CAPTION>
Shares Shares That Shares Owned
Beneficially May Be Sold After Offering
Owned(1) Pursuant to This
Prospectus
----------------------- ---------------------- ----------------------
Series D Common Series D Common Series D Common
Preferred Stock(2) Preferred Stock Preferred Stock(3)
Stock Stock Stock
---------- ------------- ---------- ---------- ------ -------
No. of No. of No. of No. of No. of % No. of %
Selling Shareholders Shares Shares Shares Shares Shares --- Shares ---
----------------------------------- ---------- ------------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AIG Soundshore Holdings
Ltd................................ 103,000 253,332 103,000 96,326 -- - 157,006 -
AIG SoundShore Strategic Holding
Fund Ltd.......................... 21,400 58,225 21,400 20,014 -- - 38,212 -
Allstate Insurance Company......... 42,000 39,279 42,000 39,279 -- - -- -
Alscott Investments, LLC........... 56,006 52,377 56,006 52,377 -- - -- -
Alta Partners Holdings, LDC........ 50,000 46,760 50,000 46,760 -- - -- -
Argent Classic Convertible 50,000 46,760
Arbitrage Fund (Bermuda)
L.P................................ 50,000 46,760 50,000 46,760 -- - -- -
Arkansas Teachers Retirement System 42,061 39,336 42,061 39,336 -- - -- -
Aspen Balanced Portfolio........... 289,956 271,167 289,956 271,167 -- - -- -
Aspen Equity Income Portfolio...... 2,201 2,059 2,201 2,059 -- - -- -
Aspen Global Technology Portfolio.. 32,620 30,507 32,620 30,507 -- - -- -
Aspen Growth & Income
Portfolio.......................... 31,446 29,409 31,446 29,409 -- - -- -
Bank America Pension Plan.......... 75,000 70,140 75,000 70,140 -- - -- -
Baptist Health of South Florida.... 2,412 2,256 2,412 2,256 -- - -- -
BNP Arbitrage SNC.................. 27,500 53,218 27,500 25,718 -- - 27,500 -
BNY Hamilton Equity Income Fund.... 120,000 112,224 120,000 112,224 -- - -- -
Boston Museum of Fine Arts......... 1,418 1,327 1,418 1,327 -- - -- -
California Public Employees'
Retirement System................. 165,000 154,308 165,000 154,308 -- - -- -
Champion International Corporation. 11,123 10,403 11,123 10,403 -- - -- -
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares Shares That Shares Owned
Beneficially May Be Sold After Offering
Owned(1) Pursuant to This
Prospectus
----------------------- ---------------------- ----------------------
Series D Common Series D Common Series D Common
Preferred Stock(2) Preferred Stock Preferred Stock(3)
Stock Stock Stock
---------- ------------- ---------- ---------- ------ -------
No. of No. of No. of No. of No. of % No. of %
Selling Shareholders Shares Shares Shares Shares Shares --- Shares ---
----------------------------------- ---------- ------------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chrysler Corporation Master
Retirement Trust.................. 163,800 153,186 163,800 153,186 -- - -- -
Circlet (IMA) Limited.............. 66,700 62,378 66,700 62,378 -- - -- -
Deephaven Domestic Convertible
Trading Ltd....................... 92,500 86,506 92,500 86,506 -- - -- -
Delaware PERS...................... 45,000 42,084 45,000 42,084 -- - -- -
Delta Airlines Inc. Retirement Plan 178,480 166,915 178,400 166,915 -- - -- -
Deeprock & Co...................... 75,000 70,140 75,000 70,140 -- - -- -
Deutsche Bank Securities Inc....... 1,353,000 1,265,326 1,353,000 1,265,326 -- - -- -
Donaldson, Lufkin & Jenrette
Securities Corp................... 690,519 645,774 690,519 645,774 -- - -- -
ECT Investments, Inc............... 150,000 140,280 150,000 140,280 -- - -- -
Engineers Joint Pension Fund....... 5,750 5,378 5,750 5,378 -- - -- -
Family Service Life
Insurance Co....................... 12,000 11,223 12,000 11,223 -- - -- -
Federated Insurance Series, 24,316 26,000 24,316 -- - -- -
on behalf of its Federated Utility
Fund II........................... 26,000 24,316 26,000 24,316 -- - -- -
Federated Utility Fund, Inc........ 197,200 184,422 197,200 184,422 -- - -- -
Fundamental Investors, Inc......... 575,000 537,740 575,000 537,740 -- - -- -
General Motors Welfare Benefit
Trust (L-T Veba).................. 7,500 72,478 77,500 72,478 -- - -- -
General Motors Welfare Benefit
Trust (S-T Veba).................. 50,000 46,760 50,000 46,760 -- - -- -
GLG Partners....................... 700,000 654,640 700,000 654,640 -- - -- -
Golden Rule Financial
Company............................ 54,092 50,587 54,092 50,587 -- - -- -
Goldman Sachs and Company.......... 542 507 542 507 -- - -- -
Granville Capital Corp............. 128,000 119,706 128,000 119,706 -- - -- -
Guardian Life Insurance Co......... 180,000 168,336 180,000 168,336 -- - -- -
Guardian Pension Trust............. 8,000 7,482 8,000 7,482 -- - -- -
ICI American Holdings Trust........ 23,050 21,557 23,050 21,557 -- - -- -
IDEX JCC Balanced Fund............. 36,240 33,892 36,240 33,892 -- - -- -
Income Fund of America, Inc........ 450,000 420,840 450,000 420,840 -- - -- -
JADV Balanced Fund................. 15,904 14,874 15,904 14,874 -- - -- -
JADV Equity Income................. 179 168 179 168 -- - -- -
JADV Growth & Income............... 4,046 3,784 4,046 3,784 -- - -- -
Janus Balanced Fund................ 425,670 398,087 425,670 398,087 -- - -- -
Janus Equity & Income Fund......... 137,940 129,002 137,940 129,002 -- - -- -
Janus Global Tech (Nomura)......... 167,380 156,534 167,380 156,534 -- - -- -
Janus Global Technology Fund....... 1,360,000 1,271,872 1,360,000 1,271,872 -- - -- -
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
Shares Shares That Shares Owned
Beneficially May Be Sold After Offering
Owned(1) Pursuant to This
Prospectus
----------------------- ---------------------- ----------------------
Series D Common Series D Common Series D Common
Preferred Stock(2) Preferred Stock Preferred Stock(3)
Stock Stock Stock
---------- ------------- ---------- ---------- ------ -------
No. of No. of No. of No. of No. of % No. of %
Selling Shareholders Shares Shares Shares Shares Shares --- Shares ---
----------------------------------- ---------- ------------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Janus Growth & Income Fund......... 1,313,953 1,228,809 1,313,953 1,228,809 -- - -- -
JMG Capital Partners, LP........... 509,850 476,812 509,850 476,812 -- - -- -
JMG Triton Offshore Fund
Ltd................................ 1,019,350 953,297 1,019,350 953,297 -- - -- -
JNL/Janus Growth & Income.......... 2,975 2,783 2,975 2,783 -- - -- -
JPVF Balanced Portfolio............ 5,670 5,303 5,670 5,303
JWF Balanced Fund.................. 32,240 30,151 32,240 30,151 -- - -- -
KBC Financial Products
USA Inc............................ 200,000 187,040 200,000 187,040 -- - -- -
KVS Growth and Income Portfolio.... 10,535 9,853 10,535 9,853 -- - -- -
L.A. Fire and Police Pension
Fund............................... 429,000 401,201 429,000 401,201 -- - -- -
LLT, Ltd........................... 12,000 11,223 12,000 11,223 -- - -- -
Lyxor Master Fund.................. 73,300 68,550 73,300 68,550 -- - -- -
Mason Street Funds, Inc. for the
Asset Allocation Fund and High
Yield Bond fund................... 7,000 6,547 7,000 6,547 -- - -- -
MassMutual Corporate
Investors.......................... 15,000 14,028 15,000 14,028 -- - -- -
MassMutual Corporate Value
Partners Limited.................. 40,000 37,408 40,000 37,408 -- - -- -
MassMutual High Yield Partners II
LLC............................... 65,000 60,788 65,000 60,788 -- - -- -
MassMutual Life
Insurance Company.................. 65,000 60,788 65,000 60,788 -- - -- -
Merrill Lynch, Pierce Fenner and
Smith Inc......................... 75,000 103,759 75,000 70,140 -- - 33,619 -
Motion Picture Industry Health
Plan - Active Member Fund......... 19,100 17,863 19,100 17,863 -- - -- -
Motion Picture Industry Health
Plan - Retired Member Fund........ 9,600 8,978 9,600 8,978 -- - -- -
New York Life Insurance
Company........................... 50,000 46,760 50,000 46,760 -- - -- -
New York Life Insurance
and Annuity Corporation........... 55,000 51,436 55,000 51,436 -- - -- -
Nicholas-Applegate Convertible Fund 21,901 20,482 21,901 20,482 -- - -- -
Northwestern Mutual Series Fund,
Inc. for the High Yield Bond
Portfolio......................... 20,000 18,704 20,000 18,704 -- - -- -
OCM Convertible Trust.............. 88,500 82,766 88,500 82,766 -- - -- -
Palladin Securities LLC............ 17,000 15,899 17,000 15,899 -- - -- -
Partner Reinsurance Company Ltd.... 32,200 30,114 32,200 30,114 -- - -- -
Peoples Benefit Life Insurance
Company........................... 144,700 135,324 144,700 135,324 -- - -- -
Peoples Benefit Life Insurance
Company (Teamsters Separate
Account).......................... 188,000 175,818 188,000 175,818 -- - -- -
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
Shares Shares That Shares Owned
Beneficially May Be Sold After Offering
Owned(1) Pursuant to This
Prospectus
----------------------- ---------------------- ----------------------
Series D Common Series D Common Series D Common
Preferred Stock(2) Preferred Stock Preferred Stock(3)
Stock Stock Stock
---------- ------------- ---------- ---------- ------ -------
No. of No. of No. of No. of No. of % No. of %
Selling Shareholders Shares Shares Shares Shares Shares --- Shares ---
----------------------------------- ---------- ------------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PGEP III LLC....................... 19,000 17,769 19,000 17,769 -- - -- -
PHX-Janus Equity/Income
Series............................. 1,220 1,141 1,220 1,141 -- - -- -
Physician's Life................... 4,665 4,363 4,665 4,363 -- - -- -
Pilgrim Convertible Fund........... 76,622 71,657 76,622 71,567 -- - -- -
Pine Grove Equitized Partners V LLC 27,600 25,812 27,600 25,812 -- - -- -
Pitney Bowes Retirement
Fund............................... 130,922 122,439 130,922 122,439 -- - -- -
Q Opportunity Fund, LTD............ 697,100 651,928 697,100 651,928 -- - -- -
Ramius Capital Group Holdings, Ltd. 5,000 4,676 5,000 4,676 -- - -- -
Retail Clerks Pension
Trust #2........................... 48,200 45,077 48,200 45,077 -- - -- _
Robertson Stephens Inc............. 35,000 32,732 35,000 32,732 __ _ __ _
Salomon Smith Barney Inc........... 200,000 187,040 200,000 187,040 -- - -- -
San Diego City Retirement.......... 13,573 12,694 13,573 12,694 -- - -- -
San Diego County Convertible....... 32,209 30,122 32,209 30,122 -- - -- -
SG Cowen Securities
Corporation........................ 50,000 46,760 50,000 46,760 -- - -- -
Southport Partners International,
Ltd............................... 50,000 46,760 50,000 46,760 -- - -- -
St. Albans Partners Ltd............ 122,000 114,095 112,000 114,095 -- - -- -
State Employees' Retirement Fund
of the State of
Delaware........................... 83,300 77,903 83,300 77,903 -- - -- -
State of Connecticut Combined
Investment Funds.................. 194,800 182,177 194,800 182,177 -- - -- -
State of Oregon Equity............. 145,000 135,604 145,000 135,604 -- - -- -
STI Capital Management............. 44,700 41,804 44,700 41,804 -- - -- -
SunAmerica Series Trust, on behalf
of its Federated Utility Portfolio 16,800 15,712 16,800 15,712 -- - -- -
Susquehanna Capital Group.......... 109,700 102,592 109,700 102,592 -- - -- -
The Income Fund of America, Inc.... 650,000 607,880 650,000 607,880 -- - -- -
The Northwestern Mutual Life
Insurance Company for its Group
Annuity Separate Account (High
Yield Bond Portfolio)............. 38,000 35,538 38,000 35,538 -- - -- -
Vanguard Convertible Securities
Fund, Inc......................... 183,700 171,797 183,000 171,797 -- - -- -
Variable Insurance Products Fund:
High Income Portfolio............. 100,000 93,520 100,00 93,520 -- - -- -
Wake Forest University............. 11,136 10,415 11,136 10,415 -- - -- -
Writers Guild - Industry Health
Fund.............................. 3,563 3,333 3,563 3,333 -- - -- -
Yield Strategies Fund I, LP........ 20,000 18,704 20,000 18,704 -- - -- -
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
Shares Shares That Shares Owned
Beneficially May Be Sold After Offering
Owned(1) Pursuant to This
Prospectus
----------------------- ---------------------- ----------------------
Series D Common Series D Common Series D Common
Preferred Stock(2) Preferred Stock Preferred Stock(3)
Stock Stock Stock
---------- ------------- ---------- ---------- ------ -------
No. of No. of No. of No. of No. of % No. of %
Selling Shareholders Shares Shares Shares Shares Shares --- Shares ---
----------------------------------- ---------- ------------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yield Strategies Fund II, LP....... 90,000 84,168 90,000 84,168 -- - -- -
Zeneca Holdings Trust.............. 18,450 17,255 18,450 17,255 -- - -- -
Zurich HFR Master Hedge Fund Index
Ltd............................... 8,000 7,482 8,000 7,482 -- - -- -
---------- ---------- ---------- ---------- ------ -------
Total......................... 16,324,769 15,523,300 16,324,769 15,266,963 0 256,337
</TABLE>
___________________
(1) Includes any shares as to which the individual has sole or shared voting
power or investment power and also any shares which the individual has the
right to acquire within 60 days of the date of this prospectus. Unless
otherwise indicated in the footnotes, each person has sole voting and
investment power with respect to the shares shown as beneficially owned.
(2) Includes shares of common stock issuable upon conversion of our Series D
preferred stock. The Series D preferred stock is convertible into common
stock at the conversion rate of .9352 shares of common stock for each share
of Series D preferred stock. Does not include common stock that we may
issue to the selling shareholders as dividends on our Series D preferred
stock or in exchange for funds held in the deposit account. See "Summary -
Description of Series D Preferred Stock."
(3) Based upon an aggregate of 190,064,576 shares of PSINet common stock
outstanding as of June 30, 2000 and assuming the sale of all shares of
Series D preferred stock offered hereby.
S-5
<PAGE>
Rule No. 424(b)(3)
Registration No. 333-35910
[LOGO]
16,500,000 shares of 7% Series D Cumulative Convertible Preferred Stock
15,430,800 shares of Common Stock issuable on conversion
5,000,000 shares of Common Stock issuable as dividends
750,000 shares of Common Stock issuable in exchange
for funds held in a deposit account
_____________________________________
The selling shareholders are selling up to 16,500,000 shares of our Series
D preferred stock and up to 15,430,800 shares of our common stock issuable upon
conversion of the Series D preferred stock. In addition, we may issue to the
selling shareholders up to 5,000,000 shares of common stock as dividends on the
Series D preferred stock and up to 750,000 shares of common stock in lieu of
cash payments otherwise required under the deposit account arrangement described
in the next paragraph.
When we first issued the Series D preferred stock in January 2000, the
selling shareholders deposited sufficient cash into the deposit account to allow
for quarterly cash payments to them of $0.875 per share of Series D preferred
stock beginning May 15, 2000 and ending February 15, 2001. At our option, cash
in the deposit account may be used to purchase shares of our common stock, which
would be delivered to the selling shareholders in lieu of the required cash
payments. The deposit account arrangements are described further in this
prospectus.
The Series D preferred stock has a liquidation preference of $50 per share.
A 7% cumulative annual dividend is payable quarterly on the Series D preferred
stock beginning May 15, 2001 or upon the earlier termination of the deposit
account. The dividend is payable in cash or, at our option, in shares of our
common stock or a combination of cash and shares, as further described in this
prospectus.
The Series D preferred stock is convertible at any time into our common
stock at the conversion price and on the conditions specified in this
prospectus. We may redeem the Series D preferred stock beginning August 15, 2001
at the redemption prices and on the conditions specified in this prospectus.
Our common stock trades on the Nasdaq National Stock Market under the
symbol "PSIX." On August 2, 2000, the last reported sales price for our common
stock was $16.00 per share. The Series D preferred stock does not trade on
Nasdaq or any exchange.
This investment involves material risks. See "Risk Factors" beginning on
page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
__________________________________
The date of this prospectus is August 3, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 8
Selling Shareholders..................................................... 9
Plan of Distribution..................................................... 13
Description of Series D Preferred Stock.................................. 13
Description of Indebtedness.............................................. 25
Material Federal Income Tax Consequences................................. 25
Legal Matters............................................................ 37
Experts.................................................................. 37
Where You Can Find More Information...................................... 37
Documents Incorporated By Reference...................................... 37
</TABLE>
_______________
This prospectus contains "forward-looking statements" for purposes of
Section 27A of Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These forward-looking statements may involve risks and
uncertainties that may cause our actual results to be materially different from
future results or performance expressed or implied by such statements. These
statements may be identified by the use of words such as "expect," "anticipate,"
"intend," "believe" and "plan." Factors that could contribute to such
differences are discussed under "Risk Factors."
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. We are not making an offer of these securities in any jurisdiction
where the offer or sale is not permitted. Information incorporated by reference
in this prospectus from our prior SEC filings and the prior SEC filings of
Metamor Worldwide, Inc. is accurate only as of the date of filing of the
incorporated documents. Our and Metamor's business, financial condition,
results of operations and prospects may have changed since those dates.
_______________
-i-
<PAGE>
SUMMARY
This summary contains more detailed information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, especially the
risks of investing discussed under "Risk Factors" on page 10 of this
prospectus.
PSINet Inc.
General
We are a leading global provider of Internet and eCommerce solutions to
businesses. As an Internet Super Carrier, or ISC, we offer a robust suite of
products globally that enable our customers to utilize the Internet for mission
critical applications carried over a worldwide fiber optic network that is
capable of transmission speeds in excess of three terabits per second. We define
the elements of an ISC to include:
. Worldwide fiber network and related optronic equipment -- We operate one of
the largest global data communications networks. It is Internet optimized
and built with PSINet's fiber, satellite and wireless facilities which
circumnavigate the globe, and is designed 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.
. Multiple Internet and eCommerce hosting centers -- We currently have open
nine global Internet and eCommerce hosting centers located in Amsterdam,
Atlanta, Herndon (Virginia/DC), La Chaux-de-Fonds (Switzerland), London,
Los Angeles, New York City, Toronto and Tokyo. These data centers contain a
total of approximately 338,000 square feet. In addition, we plan to open
the following 15 global Internet and eCommerce hosting centers: seven in
our U.S./Canada segment (Austin, Boston, Dallas, Loudoun (Virginia/DC),
Miami, San Francisco and Toronto); three in our Europe segment (Berlin,
Geneva and Paris); three in our Asia/Pacific segment (Hong Kong, Seoul and
Sydney) and two in our Latin America segment (Buenos Aires and Mexico
City). These data centers are expected to range from 60,000 to 360,000
square feet each. Once all of these hosting facilities are completed, we
will have more than two million square feet of state-of-the-art
infrastructure in key financial and business centers around the world.
. Full suite of products -- We offer a full suite of Internet access and
eCommerce products for corporate customers in 28 countries that not only
allow them to access the Internet but also to host their mission critical
business applications. We have a private label business unit, serving
leading Internet Service Providers, or ISPs, and telephone companies with
Internet services supporting nearly one million consumers. In addition,
through our Virtual ISP, or VISP, programs, we provide a full private label
solution to organizations who wish to offer Internet services to their
customers, employees or members.
. Extensive global distribution -- We have over 1,000 sales personnel and
2,500 Value Added Resellers, or VAR, systems integrators and Web design
professionals throughout the world.
. Global brand name recognition -- Our brand name is increasingly recognized
throughout the world for Internet and eCommerce services and applications
that meet the needs of business customers, supported by local language
sales, provisioning and service.
We offer a suite of value-added products and services that allow our
customers, through their use of the Internet, to more efficiently transact and
conduct eCommerce with their customers, suppliers, business partners and remote
office locations. We provide Internet connectivity and Web hosting services to
approximately 100,000 corporate accounts, which together with our ISP, carrier,
small office/home
-1-
<PAGE>
office (SOHO) and consumer businesses around the world serve over 2.0 million
end users. Our services and products include dedicated, dial-up and digital
subscriber line, or DSL, Internet access services connections, Web hosting and
collocation services, transaction network services, virtual private networks, or
VPNs, eCommerce solutions, voice-over-Internet protocol, or 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 serve approximately 90 of the 100
largest metropolitan statistical areas in the U.S., have a presence in the 20
largest telecommunications markets globally and operate in 28 countries. We
conduct our business through operations organized into five geographic operating
segments - U.S./Canada, Latin America, Europe, Asia/Pacific and India/Middle
East/Africa.
We operate one of the largest global commercial data communications
networks. Our Internet-optimized network extends around the globe and is
connected to more than 900 points of presence, or POPs, 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 expand the reach of our network by connecting with other large
ISPs through contractual arrangements, called peering agreements, that permit
the exchange of information between our network and the networks of our peering
partners. We offer free peering to ISPs in more than 100 cities in the
continental U.S., which provides each party with the opportunity to bypass the
often congested and unreliable public exchange points, thereby improving overall
network performance and customer satisfaction. We currently have nine global
Internet and eCommerce hosting centers operating and plan to open 15 more
centers. We also have three network operating centers that monitor and manage
network traffic 24-hours per day, seven-days per week.
Our mission is to build the premier global 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.
We have embarked on an initiative to aggressively grow our hosting center
business through the construction of more than $1.0 billion of new facilities.
As a result of acquisitions in 1998 and 1999, we have amassed a significant
number of consumer customers throughout our operating regions. Our primary
strategic focus is on providing services to business and wholesale customers.
Accordingly, in February and March 2000 we announced that we have begun
consolidating our worldwide retail consumer operations into a new retail
business unit known as Inter.net. Inter.net will be run by an experienced
management team and will consist of nearly 500 staff specialists in consumer
sales, marketing and customer support, as well as the existing billing and
customer support systems. Inter.net will initially serve approximately 550,000
consumer accounts distributed throughout global markets (mostly outside of the
United States), with over 30 localized consumer portals in more than 20
countries. We are currently assessing our options regarding Inter.net,
including a possible IPO or spin-off of the business, to best maximize our
shareholder value. In the first quarter of 2000, we incurred $1.1 million of
incremental costs related to the consolidation and planned distribution or sale
of our consumer business.
In February 2000, we announced the launch of PSINet Ventures, a new
corporate venture program. With a combination of cash investments and the
exchange of services for equity, PSINet Ventures will partner with innovative
Internet entrepreneurs through direct minority equity investments, typically
during early and mid-stage financing. PSINet Ventures will focus globally on
application service providers, or ASPs, content service providers, or CSPs,
eCommerce providers, Internet infrastructure providers, incubators, and other
emerging opportunities that enhance PSINet's financial and competitive
technology and service positions. The services for equity structure permits the
start-up company to
-2-
<PAGE>
purchase any PSINet service, including managed web hosting and VISP services, in
exchange for equity rather than cash.
During the past two years we have made significant acquisitions of fiber-
based bandwidth and related equipment to enhance our network infrastructure and
lower our per unit operating costs. In addition, we have acquired more than 65
companies throughout our five geographic operating regions, with many in the
same countries where the result is an overlapping network infrastructure.
During the first quarter of 2000, we completed and approved a plan to eliminate
redundancies, streamline operations, and take advantage of synergies created by
our mergers and acquisitions process. As a result of these actions, during the
quarter ended March 31, 2000 we recorded a restructuring charge of $16.9 million
and $59.0 million of write-off of assets and accelerated depreciation and
amortization of certain tangible and intangible assets.
Our principal executive offices are located at 44983 Knoll Square, Ashburn,
Virginia 20147. Our telephone number is (703) 726-4100.
________________
-3-
<PAGE>
Recent Developments
Acquisition of Metamor Worldwide, Inc.
On June 15, 2000, we acquired Metamor Worldwide, Inc., a leading provider
of information technology, or IT, solutions and changed its name to PSINet
Consulting Solutions, Inc. The aggregate consideration to be paid to former
Metamor stockholders consists of approximately 31,739,108 shares of our common
stock based on an aggregate of 35,265,759 shares of common stock of Metamor
outstanding as of the effective time of the merger and a conversion ratio of 0.9
shares of our common stock for each share of Metamor's common stock outstanding.
We also assumed options to acquire approximately 4,325,016 shares of Metamor
common stock which are exercisable into approximately 3,892,514 shares of our
common stock. In addition, we entered into a supplement to the indenture
governing Metamor's 2.94% Convertible Subordinated Notes due 2004 having a face
amount at maturity of approximately $227.0 million providing, among other
things, that the notes are now convertible into PSINet common stock instead of
Metamor common stock. The new conversion ratio for the Metamor notes is
21.36573 shares of PSINet common stock per $1,000 principal amount at maturity,
subject to further adjustment as provided in the indenture. Simultaneously
with the merger, we invested $50.0 million through a convertible note which will
convert into shares of convertible preferred stock of Xpedior, a majority owned
subsidiary of Metamor. The source of the cash for the investment in Xpedior was
cash on hand.
Exchange and Conversion of Series C Preferred Stock
In February and March 2000, we exchanged 8,155,192 newly issued shares of
our common stock for an aggregate of 4,629,335 shares of our outstanding Series
C preferred stock through individually negotiated transactions with a limited
number of holders of our Series C preferred stock. The implied premium of
approximately $1.7 million incurred in connection with the exchanges, net of
cash received from the deposit account relating to the exchanged shares, was
recognized as a return to preferred shareholders in the first quarter of 2000.
Subsequent to the exchange, we converted the exchanged Series C preferred stock
into 7,422,675 shares of our common stock, which is held as treasury stock.
Common Stock Split
All information in this document gives effect to a two-for-one stock split
of our common stock, effected in the form of a stock dividend on February 11,
2000, to holders of record as of the close of business on January 28, 2000.
-4-
<PAGE>
Terms of the Series D Preferred Stock
<TABLE>
<S> <C>
Series D Preferred Stock 16,500,000 shares of our 7% Series D cumulative convertible preferred
Outstanding stock.
Liquidation Preference $50 per share.
Deposit Account............. At closing, purchasers of the Series D preferred stock deposited
approximately $57.9 million into an account, called the "deposit
account," established with a deposit agent from which quarterly cash
payments of $0.875 per share will be made commencing May 15, 2000 or
which may be used to purchase shares of common stock from us for purchase
by holders in lieu of the cash payments. The funds placed in the deposit
account by the purchasers of the Series D preferred stock will, together
with the earnings on those funds, be sufficient to make payments, in cash
or stock, to the holders of the Series D preferred stock from the date of
issuance through February 15, 2001.
Dividends................... Cumulative annual dividends of 7% payable quarterly in arrears on
February 15, May 15, August 15 and November 15 of each year, commencing
May 15, 2001 (or earlier if the deposit account is terminated before that
date), when, as and if declared by our board of directors. Dividends
will not start to accrue until the deposit account expires, which is
expected to occur on February 15, 2001 (although dividends may accrue
earlier if the deposit account is terminated before that date). As a
result, we do not expect to make dividend payments until May 15, 2001
unless the deposit account is terminated before that date. Dividends
may, at our option, be paid in cash, by delivery of shares of our common
stock or a combination of cash and shares. Our ability to pay cash dividends
is limited by the terms of our outstanding senior notes and our 6 3/4%
Series C cumulative convertible preferred stock. Our ability to pay
dividends may also be restricted by applicable law.
Conversion.................. Each share of Series D preferred stock may be converted at any time after
February 15, 2000 at the option of the holder into that number of shares
of our common stock as is equal to the liquidation preference of that
share of Series D preferred stock divided by an initial conversion price
of $53.465, subject to adjustment upon the occurrence of specified
events. As a result, each share of Series D preferred stock will
initially be convertible into 0.9352 shares of common stock.
Optional Redemption......... Except in the circumstances described in the next paragraph, we may not
redeem the Series D preferred stock prior to February 15, 2003.
Beginning on February 15, 2003, we may redeem shares of Series D
preferred stock initially at a redemption premium of 104.00% of the
liquidation preference and thereafter at prices declining to 100.00%,
plus in each case all accumulated and unpaid dividends, whether or not
declared. We may effect any redemption, in whole or in part, by
delivering cash, shares of our common stock or a combination of cash and shares.
Our ability to redeem shares is limited by the terms of our outstanding
senior notes, our Series C preferred stock and applicable law.
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
Special Redemption.......... We may redeem the Series D preferred stock at a redemption premium of
105.50% of the liquidation preference (plus accumulated and unpaid
dividends, whether or not declared) on or after August 15, 2001 but prior
to February 15, 2003, if the trading price of our common stock equals or
exceeds $80.20 per share for a specified trading period. We will also
make additional payments to the holders if we exercise the redemption
rights under the foregoing circumstances before February 15, 2003.
Change of Control........... In the event of a change of control of our company, each holder of the
Series D preferred stock will, in the event that the market price per
share (as defined) of our common stock at such time is less than the
conversion price of the Series D preferred stock, have a one-time option
to convert such holder's shares of Series D preferred stock into shares
of our common stock at a conversion price equal to the greater of (1) the
market price per share ending on the date on which a change of control
event occurs and (2) $28.98. In lieu of issuing shares of our 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 price of the shares of
our common stock otherwise issuable.
Voting Rights............... Holders of Series D preferred stock have no voting rights with respect to
general corporate matters except as provided by law or, in limited
circumstances, as provided in the certificate of amendment to our
certificate of incorporation relating to the Series D preferred stock.
Ranking..................... The Series D preferred stock ranks senior to our common stock, ratably
with our outstanding Series C preferred stock (of which we have 4,570,665
shares outstanding) and senior to or ratably with other existing and
future series of our preferred stock. We may issue additional series of
preferred stock that rank ratably with our Series D preferred stock
(including additional shares of Series D preferred stock) without a vote
of the holders of Series D preferred stock.
Tax Consequences............ The federal income tax consequences of acquiring and holding the Series D
preferred stock and the shares of our common stock issuable upon
conversion of such Series D preferred stock or in redemption of the Series
D preferred stock or as a dividend on the Series D preferred stock, and the
treatment of payments received from the deposit account, are described in
this prospectus under "Certain Federal Income Tax Consequences."
Prospective investors are urged to consult their own tax advisors regarding
the tax consequences of acquiring, holding or disposing of the Series D
preferred stock or the shares of our common stock issuable upon
conversion of the Series D preferred stock or in redemption of the Series D
preferred stock or as a dividend on the Series D preferred stock, and the
treatment of payments received from the deposit account, in light of their
own personal investment circumstances, including consequences resulting from
the possibility that distributions on the Series D preferred stock may exceed
our current and accumulated earnings and profits, in which case they would not be
treated as dividends for tax purposes. See "Certain Federal Income Tax Consequences."
</TABLE>
-6-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(In millions of U.S. dollars, except per share, share and operating data)
The following table sets forth for the periods indicated our summary
consolidated financial and operating data. The consolidated balance sheet data,
consolidated statement of operations data and consolidated cash flow data as of
and for the years ended December 31, 1995, 1996, 1997, 1998, and 1999 and as of
March 31, 1999 and 2000, and for the three months ended March 31, 1999 and 2000
have been derived from our consolidated financial statements. The results of
operations for the three months ended March 31, 2000 may not be indicative of
the results for the year ending December 31, 2000. In 1998, 1999, and to date
in 2000, we have acquired a significant number of businesses, including Metamor,
and Transaction Network Services, Inc., or TNI, acquired a significant amount of
global fiber optic bandwidth, issued a significant amount of debt and equity
and, in 1998, incurred a non-recurring arbitration charge. In 1996, we sold our
individual subscriber accounts and certain related assets and in 1997 we sold
our software subsidiary. These transactions affect the comparability of our
financial position, results of operations and cash flows for those years. The
following summary consolidated financial and operating data should be read in
conjunction with our more detailed consolidated financial statements and related
notes incorporated by reference into this document.
EBITDA is used in the Internet services industry as one measure of a
company's operating performance and historical ability to service debt. EBITDA
is not determined in accordance with generally accepted accounting principles,
is not indicative of cash used by operating activities and should not be
considered in isolation or as an alternative to, or more meaningful than,
measures of performance determined in accordance with generally accepted
accounting principles. We define EBITDA as earnings (losses) from continuing
operations before interest expense and interest income, taxes, depreciation and
amortization, other non-operating income and expense, and charges for intangible
asset write-down and acquired in-process research and development, restructuring
charge and costs related to the planned distribution and sale of the consumer
business. Our definition of EBITDA may not be comparable to similarly titled
measures used by other companies.
For the purposes of computing the ratio of earnings to combined fixed
charges and preferred stock dividends, earnings consist of losses before income
taxes, equity in loss of affiliate, amortization of capitalized interest and
fixed charges. Fixed charges consist of interest on all indebtedness, including
amounts capitalized, amortization of debt financing costs and that portion of
rental expense which we believe to be representative of interest (deemed to be
one-third of rental expense).
-7-
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
--------- -------- -------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
U.S................................................... $ 36.2 $ 77.6 $ 104.0 $ 156.0 $ 270.6 $ 50.6 $ 123.0
International......................................... 2.5 6.8 17.9 103.6 284.1 54.3 99.9
------- ------- ------- -------- --------- -------- --------
38.7 84.4 121.9 259.6 554.7 104.9 222.9
Other income, net..................................... -- 5.4 -- -- -- -- --
------- ------- ------- -------- --------- -------- --------
38.7 89.8 121.9 259.6 554.7 104.9 222.9
Operating costs and expenses:
Data communications and operations.................... 32.1 70.1 94.4 199.4 396.4 76.0 163.6
Sales and marketing................................... 23.9 27.1 25.8 57.0 103.8 18.6 38.5
General and administrative............................ 10.6 20.7 23.0 45.3 78.7 17.1 36.3
Depreciation and amortization......................... 14.8 28.0 28.3 63.4 166.5 26.8 134.5
Charge for acquired in-process research and
development......................................... -- -- -- 70.8 88.7 -- --
Restructuring charge.................................. -- -- -- -- -- -- 16.9
Costs related to planned distribution and sale
of consumer business................................ -- -- -- -- -- -- 1.1
Intangible asset write-down........................... 9.9 -- -- -- -- -- --
------- ------- ------- -------- --------- -------- --------
Total operating costs and expenses.................. 91.3 145.9 171.5 435.9 834.1 138.5 390.9
------- ------- ------- -------- --------- -------- --------
Loss from operations.................................. (52.6) (56.1) (49.6) (176.3) (279.4) (33.6) (168.0)
Interest expense...................................... (2.0) (5.0) (5.4) (63.9) (193.1) (29.6) (79.0)
Non-recurring arbitration charge...................... -- -- -- (49.0) -- -- --
Loss before income taxes.............................. (53.2) (55.3) (46.1) (262.7) (419.0) (58.7) (188.6)
Net loss.............................................. (53.2) (55.1) (45.6) (261.8) (416.2) (58.7) (188.6)
Return to preferred shareholders...................... -- -- (0.4) (3.1) (17.7) (0.6) (15.6)
Net loss available to common shareholders............. $ (53.2) $ (55.1) $ (46.0) $ (264.9) $ (433.9) $ (59.3) $ (204.2)
======= ======= ======= ======== ========= ======== ========
Basic and diluted loss per share...................... $ (1.01) $ (0.70) $ (0.57) $ (2.66) $ (3.49) $ (0.56) $ (1.35)
======= ======= ======= ======== ========= ======== ========
Shares used in computing basic
and diluted loss per share (in thousands)........... 52,970 78,756 80,612 99,612 124,386 106,716 150,848
======= ======= ======= ======== ========= ======== ========
Other Financial Data:
EBITDA (as defined):
U.S................................................... $ (26.9) $ (20.5) $ (13.1) $ (26.2) $ (39.4) $ (8.3) $ (12.1)
International......................................... (1.0) (7.5) (8.1) (15.9) 15.2 1.5 $ (3.4)
------- ------- ------- -------- --------- -------- --------
$ (27.9) $ (28.0) $ (21.2) $ (42.1) $ (24.2) $ (6.8) $ (15.5)
======= ======= ======= ======== ========= ======== ========
Capital expenditures.................................. $ 45.2 $ 38.4 $ 50.1 $ 303.6 $ 832.8 $ 127.6 $ 423.6
Ratio of earnings to combined fixed charges
and preferred stock dividends
(deficiency of earnings to cover
combined fixed charges and
preferred stock dividends).......................... $ (53.0) $ (54.4) $ (46.5) $ (266.6) $ (442.9) $ (59.3) $ (213.7)
Consolidated Cash Flow Data:
Cash flows used in operating activities............... $ (30.1) $ (32.5) $ (15.6) $ (87.6) $ (157.8) $ (77.2) $ (63.2)
Cash flows used in investing activities............... (22.0) (7.9) (15.6) (783.9) (1,558.6) (36.9) (68.0)
Cash flows provided by (used in) financing
activities.......................................... 151.4 (10.5) 12.6 874.2 2,520.3 91.3 721.1
Operating Data:
Number of POPs........................................ 241 350 350 500 900 525 900
Number of business customer accounts.................. 8,200 17,800 26,400 54,700 91,000 59,700 98,900
Number of consumer customer accounts.................. 75,000 0 5,300 225,000 562,000 221,000 563,000
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
--------- -------- -------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalent, short-term investments
and marketable securities........................... $ 102.7 $ 56.4 $ 33.3 $ 322.5 $ 1,601.2 $ 266.0 $1,865.1
Restricted cash and short-term investments............ -- 0.9 20.7 162.5 154.1 132.9 158.7
Total assets.......................................... 201.8 177.1 186.2 1,284.2 4,492.3 1,371.2 5,141.5
Current portion of debt............................... 16.6 26.9 39.6 60.0 115.0 166.2 119.9
Long-term debt, less current portion.................. 24.1 26.9 33.8 1,064.6 3,185.2 1,118.8 3,159.7
Shareholders' equity (deficit)........................ 143.2 89.8 73.4 (120.2) 723.0 (175.3) 1,385.6
</TABLE>
-8-
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
(In millions of U.S. dollars, except per share and share amounts)
The following Summary Unaudited Pro Forma Condensed Combined Financial
Information gives pro forma effect to our acquisition of Metamor as well as to
other transactions, as more fully discussed under "Unaudited Pro Forma Condensed
Combined Financial Information" incorporated into this document by reference
from our Form 8-K dated June 15, 2000 as if they had occurred on January 1, 1999
for the statement of operations data and on March 31, 2000 for the balance sheet
data.
If we had actually completed the Metamor acquisition in prior periods,
Metamor might have performed differently. You should not rely on the pro forma
financial information as an indication of the results we would have achieved if
the Metamor acquisition had taken place earlier or of the future results that
the companies will achieve after completion of the Metamor acquisition. For
further information concerning the following summary pro forma financial
information, including the adjustments made in preparing it, please refer to
"Unaudited Pro Forma Condensed Combined Financial Information" incorporated into
this document by reference from our Form 8-K dated June 15, 2000.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
------------------ -------------------
<S> <C> <C>
Combined Statement of Operations Data:
Internet access revenue.................................................. $ 758.8 $ 222.9
Services revenue......................................................... 577.0 158.4
-------- --------
Total revenue...................................................... 1,335.8 381.3
Operating costs and expenses:
Data communications and operations....................................... 523.4 163.6
Cost of services revenue................................................. 341.0 96.9
Selling, general and administrative...................................... 403.2 140.4
Depreciation and amortization............................................ 338.1 157.9
Charge for acquired in-process research and development.................. 88.7 --
Restructuring charge..................................................... -- 16.9
Costs related to the planned distribution and sale of consumer business.. -- 1.1
-------- --------
Total operating costs and expenses................................. 1,694.4 576.8
-------- --------
Loss from operations...................................................... (358.6) (195.5)
Interest expense.......................................................... (217.6) (82.6)
Interest income........................................................... 56.5 25.4
Other income, net......................................................... 1.1 40.2
-------- --------
Loss from continuing operations before income taxes....................... (518.6) (212.5)
Income tax benefit (expense).............................................. -- 2.3
-------- --------
Loss from continuing operations........................................... (518.6) (210.2)
Return to preferred shareholders.......................................... (64.4) (18.8)
-------- --------
Loss from continuing operations available to common shareholders.......... $ (583.0) $ (229.0)
======== ========
Basic and diluted loss per share from continuing operations............... $ (3.55) $ (1.22)
======== ========
Shares used in computing basic and diluted loss per share from continuing
operations (in thousands)............................................... 164,280 187,662
======== =======
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
March 31, 2000
------------------
<S> <C>
Combined Balance Sheet Data:
Cash, cash equivalents, short-term investments and marketable securities.................... $1,896.6
Restricted cash and short-term investments.................................................. 158.7
Total assets................................................................................ 7,047.6
Current portion of debt..................................................................... 119.9
Long-term debt, less current portion........................................................ 3,378.6
Shareholders' equity........................................................................ 2,895.8
</TABLE>
-9-
<PAGE>
RISK FACTORS
This offering involves material risks. Please carefully read the following
risk factors in addition to the other information set forth in this document
before investing.
Risks Related to PSINet
There are a number of risks related to PSINet that are continuously
disclosed in our SEC filings which are incorporated in this document by
reference. Please read them carefully.
Risks Related to the Offering
The Series D preferred stock ranks equally in priority with our Series C
preferred stock as to liquidation preference and dividends
The Series D preferred stock has been issued on parity with the Series C
preferred stock. This means that the holders of our Series C and Series D
preferred stock rank equally in priority as to the payment of dividends and, in
the event of our dissolution, liquidation or winding up, as to any distribution
of our assets after we have satisfied our creditors. As of March 31, 2000, we
had 4,570,665 shares of our Series C preferred stock outstanding, with an
aggregate liquidation preference of $228.5 million.
Even if a market in the Series D preferred stock develops, it may be
volatile
The market for securities similar to the Series D preferred stock has been
volatile, which volatility may be exacerbated by the general volatility for
Internet stocks. We cannot assure you that, if a market develops, it will not be
subject to similar volatility.
The price of our Series D preferred stock could be affected by the market price
and trading volume of our common stock, which may be highly volatile
Because the Series D preferred stock is convertible into our common stock,
the stock price of our Series D preferred stock may be affected by the trading
price of our common stock. The market price and trading volume of our common
stock has been and may continue to be highly volatile. Factors such as
variations in our revenue, earnings and cash flow and announcements of new
service offerings, technological innovations, strategic alliances and/or
acquisitions involving our competitors or price reductions by us, our
competitors or providers of alternative services could cause the market price of
our common stock to fluctuate substantially. In addition, the stock markets
recently have experienced significant price and volume fluctuations that
particularly have affected technology-based companies and resulted in changes in
the market prices of the stocks of many companies that have not been directly
related to the operating performance of those companies. Such broad market
fluctuations have adversely affected and may continue to adversely affect the
market price of our common stock. In addition, some of our shareholders who have
registration rights may also require us to register their shares of common stock
for resale. Sales of a large number of shares of our common stock all at once
could adversely affect the price of our common stock and, as a result, impact
the price of our Series D preferred stock.
We do not anticipate that we will pay cash dividends on our common stock
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. In addition, our debt securities and credit facility contain limitations
on our ability to declare and pay cash dividends.
-10-
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the sale by any selling
shareholder of any shares of the Series D preferred stock or of any shares of
common stock issuable upon conversion of the Series D preferred stock. We will
not receive proceeds from our offering of shares of common stock to the selling
shareholders, other than any cash from the deposit account that is used to
purchase our shares of common stock to be delivered to the selling shareholders
in lieu of the cash payments otherwise required to be made to the selling
shareholders under the deposit account. See "Description of Series D Preferred
Stock - Deposit Account" for additional information about the deposit account
arrangements. If we do receive cash from the deposit account, we will use those
proceeds for general corporate purposes.
-11-
<PAGE>
SELLING SHAREHOLDERS
In February 2000 we issued an aggregate of 16,500,000 shares of our Series
D preferred stock in an offering made pursuant to Rule 144A under the Securities
Act of 1993. The Series D preferred stock is convertible into shares of our
common stock.
None of the selling shareholders has held any position or office or had a
material relationship with PSINet or any of its affiliates within the past three
years, except for Donaldson, Lufkin & Jenrette Securities Corporation, which,
from time to time, has served as our investment banker and an underwriter and
initial purchaser of our securities and Merrill Lynch, Pierce Fenner and Smith
Inc. which, from time to time, has served as an underwriter and initial
purchaser of our securities.
The following table sets forth information as of August 2, 2000, which has
been provided to us by the selling shareholders, regarding beneficial ownership
of our Series D preferred stock and common stock by each selling shareholder.
<TABLE>
<CAPTION>
Shares That
Shares May Be Sold
Beneficially Pursuant to This Shares Owned
Owned(1) Prospectus After Offering
--------------------------- ---------------------- ---------------------------
Series D Series D Series D
Preferred Common Preferred Common Preferred Common
Stock Stock(2) Stock Stock Stock Stock(3)
--------------------------- ---------------------- --------------------------
No. of No. of No. of No. of No. of No. of
Selling Shareholders Shares Shares Shares Shares Shares % Shares %
-------------------- ------ ------ ------ ------ ------ ---- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AIG Soundshore Holdings Ltd.............. 103,000 253,332 103,000 96,326 -- -- 157,006 --
AIG SoundShore Strategic Holding Fund
Ltd...................................... 21,400 58,225 21,400 20,014 -- -- 38,212 --
Allstate Insurance Company............... 42,000 39,279 42,000 39,279 -- -- -- --
Alscott Investments, LLC................. 56,006 52,377 56,006 52,377 -- -- -- --
Argent Classic Convertible
Arbitrage Fund (Bermuda) L.P............. 50,000 46,760 50,000 46,760 -- -- -- --
BankAmerica Pension Plan................. 75,000 70,140 75,000 70,140 -- -- -- --
BNP Artbitrage SNC....................... 27,500 53,218 27,500 25,718 -- -- 27,500 --
BNY Hamilton Equity Income Fund.......... 120,000 112,224 120,000 112,224 -- -- -- --
California Public Employees' Retirement
System................................... 165,000 154,308 165,000 154,308 -- -- -- --
Chrysler Corporation Master Retirement
Trust.................................... 163,800 153,186 163,800 153,186 -- -- -- --
Circlet (IMA) Limited.................... 66,700 62,378 66,700 62,378 -- -- -- --
Delaware PERS............................ 45,000 42,084 45,000 42,084 -- -- -- --
Delta Airlines Inc. Retirement Plan...... 178,480 166,915 178,480 166,915 -- -- -- --
Deeprock & Co............................ 75,000 70,140 75,000 70,140 -- -- -- --
Deutsche Bank Securities Inc............. 1,353,000 1,265,326 1,353,000 1,265,326 -- -- -- --
Donaldson, Lufkin & Jenrette Securities
Corp..................................... 690,519 645,774 690,519 645,774 -- -- -- --
ECT Investments, Inc..................... 150,000 140,280 150,000 140,280 -- -- -- --
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Shares That
Shares May Be Sold
Beneficially Pursuant to This Shares Owned
Owned(1) Prospectus After Offering
--------------------------- ---------------------- ---------------------------
Series D Series D Series D
Preferred Common Preferred Common Preferred Common
Stock Stock(2) Stock Stock Stock Stock(3)
--------------------------- ---------------------- ---------------------------
No. of No. of No. of No. of No. of No. of
Selling Shareholders Shares Shares Shares Shares Shares % Shares %
-------------------- ------ ------ ------ ------ ------ --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Family Service Life Insurance Co......... 12,000 11,223 12,000 11,223 -- -- -- --
Federated Insurance Series,
on behalf of its Federated
Utility Fund II.......................... 26,000 24,316 26,000 24,316 -- -- -- --
Federated Utility Fund, Inc.............. 197,200 184,422 197,200 184,422 -- -- -- --
Fundamental Investors, Inc............... 325,000 303,940 325,000 303,940 -- -- -- --
General Motors Welfare Benefit
Trust (L-T Veba)......................... 77,500 72,478 77,500 72,478 -- -- -- --
General Motors Welfare Benefit
Trust (S-T Veba)......................... 50,000 46,760 50,000 46,760 -- -- -- --
GLG Partners............................. 700,000 654,640 700,000 654,640 -- -- -- --
Golden Rule Financial Company............ 54,092 50,587 54,092 50,587 -- -- -- --
Goldman Sachs and Company................ 542 507 542 507 -- -- -- --
Granville Capital Corp................... 128,000 119,706 128,000 119,706 -- -- -- --
Guardian Life Insurance Co............... 180,000 168,336 180,000 168,336 -- -- -- --
Guardian Pension Trust................... 8,000 7,482 8,000 7,482 -- -- -- --
ICI American Holdings Trust.............. 23,050 21,557 23,050 21,557 -- -- -- --
Income Fund of America, Inc.............. 450,000 420,840 450,000 420,840 -- -- -- --
JMG Capital Partners, LP................. 509,850 476,812 509,850 476,812 -- -- -- --
JMG Triton Offshore Fund Ltd............. 956,850 894,846 956,850 894,847 -- -- -- --
KBC Financial Products USA Inc........... 200,000 187,040 200,000 187,040 -- -- -- --
L.A. Fire and Police Pension Fund........ 429,000 401,201 429,000 401,201 -- -- -- --
LLT, Ltd................................. 12,000 11,225 12,000 11,223 -- -- -- --
Lyxor Master Fund........................ 73,300 68,550 73,300 68,550 -- -- -- --
Mason Street Funds, Inc. for the
Asset Allocation Fund and High
Yield Bond fund.......................... 7,000 6,547 7,000 6,547 -- -- -- --
MassMutual Corporate Investors........... 15,000 14,028 15,000 14,028 -- -- -- --
MassMutual Corporate Value
Partners Limited......................... 40,000 37,408 40,000 37,408 -- -- -- --
MassMutual High Yield Partners II
LLC. .................................... 65,000 60,788 65,000 60,788 -- -- -- --
MassMutual Life Insurance Company........ 65,000 60,788 65,000 60,788 -- -- -- --
Merrill Lynch, Pierce Fenner and
Smith Inc................................ 75,000 103,759 75,000 70,140 -- -- 33,619 --
Motion Picture Industry Health
Plan - Active Member Fund................ 19,100 17,863 19,100 17,863 -- -- -- --
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Shares That
Shares May Be Sold
Beneficially Pursuant to This Shares Owned
Owned(1) Prospectus After Offering
--------------------------- ---------------------- ---------------------------
Series D Series D Series D
Preferred Common Preferred Common Preferred Common
Stock Stock(2) Stock Stock Stock Stock(3)
--------------------------- ---------------------- ---------------------------
No. of No. of No. of No. of No. of No. of
Selling Shareholders Shares Shares Shares Shares Shares % Shares %
-------------------- ------ ------ ------ ------ ------ --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Motion Picture Industry Health
Plan - Retiree Member Fund............... 9,600 8,978 9,600 8,978 -- -- -- --
Northwestern Mutual Series Fund, Inc.
for the High Yield Bond Portfolio........ 20,000 18,704 20,000 18,704 -- -- -- --
OCM Convertible Trust.................... 88,500 82,766 88,500 82,766 -- -- -- --
PGEP III LLC............................. 19,000 17,769 19,000 17,769 -- -- -- --
Palladin Securities LLC.................. 17,000 15,899 17,000 15,899 -- -- -- --
Partner Reinsurance Company Ltd.......... 32,200 30,114 32,200 30,114 -- -- -- --
Peoples Benefit Life Insurance
Company ................................. 144,700 135,324 144,700 135,324 -- -- -- --
Peoples Benefit Life Insurance
Company (Teamsters Separate Account)..... 188,000 175,818 188,000 175,818 -- -- -- --
Pine Grove Equitized Partners V LLC...... 27,600 25,812 27,600 25,812 -- -- -- --
Pitney Bowes Retirement Fund............. 130,922 122,439 130,922 122,439 -- -- -- --
Q Opportunity Fund, LTD.................. 697,100 651,928 697,100 651,928 -- -- -- --
Ramius Capital Group Holdings, Ltd....... 5,000 4,676 5,000 4,676 -- -- -- --
Retail Clerks Pension Trust #2........... 48,200 45,077 48,200 45,077 -- -- -- --
Robertson Stephens Inc................... 35,000 32,732 35,000 32,732 -- -- -- --
SG Cowen Securities Corporation.......... 50,000 46,760 50,000 46,760 -- -- -- --
Southport Partners International, Ltd.... 50,000 46,760 50,000 46,760 -- -- -- --
St. Albans Partners Ltd.................. 122,000 114,095 112,000 114,095 -- -- -- --
State Employees' Retirement Fund
of the State of Delaware................. 83,300 77,903 83,300 77,903 -- -- -- --
State of Connecticut Combined
Investment Funds ........................ 194,800 182,177 194,800 182,177 -- -- -- --
State of Oregon Equity................... 145,000 135,604 145,000 135,604 -- -- -- --
STI Capital Management................... 44,700 41,804 44,700 41,804 -- -- -- --
SunAmerica Series Trust, on
behalf of its Federated Utility
Portfolio ............................... 16,800 15,712 16,800 15,712 -- -- -- --
Susquehanna Capital Group................ 109,700 102,592 109,700 102,592 -- -- -- --
The Northwestern Mutual Life
Insurance Company for its Group
Annuity Separate Account (High
Yield Bond Portfolio).................... 38,000 35,538 38,000 35,538 -- -- -- --
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Shares That
Shares May Be Sold
Beneficially Pursuant to This Shares Owned
Owned(1) Prospectus After Offering
--------------------------- ---------------------- ---------------------------
Series D Series D Series D
Preferred Common Preferred Common Preferred Common
Stock Stock(2) Stock Stock Stock Stock(3)
------------ ------------- ----------- --------- ------------- -------------
No. of No. of No. of No. of No. of No. of
Selling Shareholders Shares Shares Shares Shares Shares % Shares %
-------------------- ------ ------ ------ ------ ------ --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vanguard Convertible Securities Fund,
Inc...................................... 183,700 171,797 183,700 171,797 -- -- -- --
Variable Insurance Products Fund:
High Income Portfolio.................... 100,000 93,520 100,000 93,520 -- -- -- --
Yield Strategies Fund II, LP............. 90,000 84,168 90,000 84,168 -- -- -- --
Zurich HFR Master Hedge Fund
Index Ltd................................ 8,000 7,482 8,000 7,482 -- -- -- --
Zeneca Holdings Trust.................... 18,450 17,255 18,450 17,255 -- -- -- --
------------ ------------ ------------ ------------ ------ --------
Total............................. 10,798,161 10,354,798 10,798,161 10,098,461 0 256,337 --
</TABLE>
___________________
(1) Includes any shares as to which the individual has sole or shared voting
power or investment power and also any shares which the individual has the
right to acquire within 60 days of the date of this prospectus. Unless
otherwise indicated in the footnotes, each person has sole voting and
investment power with respect to the shares shown as beneficially owned.
(2) Includes shares of common stock issuable upon conversion of our Series D
preferred stock. The Series D preferred stock is convertible into common
stock at the conversion rate of .9352 shares of common stock for each share
of Series D preferred stock. Does not include common stock that we may
issue to the selling shareholders as dividends on our Series D preferred
stock or in exchange for funds held in the deposit account. See "Summary -
Description of Series D Preferred Stock."
(3) Based upon an aggregate of 190,064,576 shares of PSINet common stock
outstanding as of June 30, 2000 and assuming the sale of all shares of
Series D preferred stock offered hereby.
-15-
<PAGE>
PLAN OF DISTRIBUTION
This prospectus may be used by us for the issuance of common stock directly
to the selling shareholders as payment of dividends on the Series D preferred
stock and/or in exchange for funds held in the deposit account. See "Summary -
Description of Series D Preferred Stock." This prospectus may also be used by
the selling shareholders for the resale of shares of Series D preferred stock
and for the resale of shares of common stock issued by us, if any, to the
selling shareholders upon conversion of the Series D preferred stock. The
securities being offered by the selling shareholders may be sold from time to
time to purchasers directly by the selling shareholders, their pledgees, donees,
transferees and successors-in-interest, including parties who borrow shares to
settle short sales. Alternatively, the selling shareholders, their pledgees,
donees, transferees and successors-in-interest, may from time to time offer the
securities through underwriters, broker/dealers or agents who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the selling shareholders and/or the purchasers of securities for whom they
may act as agent (which discounts, concessions or commissions as to particular
underwriters, brokers, dealers or agents may be in excess of those customary in
the types of transactions involved). The selling shareholders, and any
underwriters, broker/dealers or agents that participate in the distribution of
the securities may be deemed to be underwriters, and any profit on the sale of
the securities by them and any profit on the resale of such securities purchased
by them may be deemed to be underwriting discounts, commissions or concessions
under the Securities Act of 1933. Any such securities may, without limitation,
be so offered or sold in the open 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 or fixed prices, in each case as determined by the
selling shareholder or by agreement between the selling shareholder and
underwriters, brokers, dealers or agents, or purchasers. To the extent
required, the number of securities 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.
The selling shareholders may also sell the securities being registered hereby in
accordance with Rule 144 of the Securities Act rather than pursuant to this
prospectus, provided they meet the criteria and conform to the requirements of
such Rule.
The sale of the securities by the selling shareholders may be effected in
transactions (which may involve crosses, block transactions and borrowings,
returns and reborrowings of the securities, pursuant to stock loan agreements to
settle short sales of the securities):
. on any national securities exchange or quotation service on which the
securities 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;
. through the writing of put or call options (whether such options are
listed on an options exchange or otherwise) relating to the securities
or to the short sales of the securities;
. through the distribution of the securities by any selling shareholder
to its partners, members or shareholders; or
. through a combination of any of the above.
The selling shareholders may enter into hedging transactions with broker-
dealers or other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of our
common stock in the course of hedging the positions they assume with selling
shareholders. The selling shareholders may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealer or other financial institution of securities
offered hereby, which securities such broker-dealer or other financial
-16-
<PAGE>
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction). Such securities 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 the selling shareholders or by other persons acquiring
securities, including parties who borrow the securities to settle short sales.
Under the securities laws of certain states, the securities may be sold in
such states only through registered or licensed brokers or dealers. In
addition, in certain states the securities may not be sold unless they have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
All registration expenses incurred in connection with the registration of
the securities to which this prospectus relates will be borne by us.
Registration expenses include all fees and expenses incident to the registration
of the securities to which this prospectus relates, including fees and expenses
of our counsel and the selling shareholders (limited, in the case of counsel to
the selling shareholders, to the reasonable fees and disbursements of not more
than one counsel) 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 Securities Exchange Act of
1934, the selling shareholders 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 securities by the selling shareholders. All of the foregoing may
affect the marketability of the securities offered hereby.
Any sales by the selling shareholders are subject to compliance by the
selling shareholders with restrictions in the registration rights agreement
between PSINet and the selling shareholders, principally related to blackout
periods and the like.
We have agreed to indemnify the selling shareholders against certain
liabilities, including liabilities under the Securities Act, with respect to the
sale of securities covered by this document.
-17-
<PAGE>
DESCRIPTION OF SERIES D PREFERRED STOCK
General
Under our certificate of incorporation, our board of directors is
authorized, without further shareholder action, to issue up to 30,000,000 shares
of our preferred stock, par value $.01 per share, in one or more series, and to
fix the rights, preferences, privileges, and restrictions of such series, and
such other qualifications, limitations or restrictions as are permitted by New
York law. With respect to dividends and upon liquidation, dissolution or
winding up, the Series D preferred stock will rank senior to our common stock,
ratably with our 6 3/4% Series C cumulative convertible preferred stock, and
senior to or ratably with any future offerings of preferred stock. As of the
date of this prospectus, we have 16,500,000 shares of Series D preferred stock
outstanding.
Our outstanding Series D preferred stock is fully paid and nonassessable,
subject to Section 630 of the New York Business Corporation Law. The transfer
agent, registrar, redemption, conversion and dividend disbursing agent for our
Series D preferred stock is First Chicago Trust Company, a division of
EquiServe. The transfer agent will send notices to shareholders of any special
meetings at which holders of Series D preferred stock have the right to vote.
Holders of our Series D preferred stock will have no preemptive rights with
respect to any shares of our capital stock or any of our other securities
convertible into or carrying rights or options to purchase any such shares.
Funds have been deposited into a deposit account sufficient to pay a
quarterly cash payment from that deposit account in an amount equal to $0.875
per share of Series D preferred stock, subject to the rights described below
which allow us to pay dividends in shares of our common stock in lieu of cash.
The quarterly cash payment from the deposit account is called the quarterly
return amount, and payments of those amounts commenced May 15, 2000 and will
continue, subject to specified exceptions described below, until February 15,
2001. After such date, dividends will begin to accrue on the Series D preferred
stock, although, as we discuss below, they may begin to accrue at an earlier
time if the deposit account is terminated under the circumstances described
below. Wilmington Trust Company holds the deposit account and acts as the
deposit agent for the Series D preferred stock.
We describe below in more detail the terms of the Series D preferred stock
and the deposit account and the circumstances under which holders of shares of
Series D preferred stock may be expected to receive payments from the deposit
account.
The following summary of the Series D preferred stock and the deposit
account, while complete in material respects, is nonetheless a summary. It is
qualified in its entirety by reference to the provisions of our certificate of
incorporation and the amendment to our certificate of incorporation with respect
to our Series D preferred stock and the deposit agreement.
Deposit Account
The funds that the purchasers of the Series D preferred stock deposit in
the deposit account will be invested in U.S. Government obligations or U.S.
Government guaranteed obligations which together with the earnings on those
funds will be sufficient to pay the aggregate quarterly return amounts through
February 15, 2001, which date we call the deposit expiration date.
The quarterly return amount will be based on an annual rate of 7% of the
liquidation preference. The quarterly return amount payable on the Series D
preferred stock for each full quarterly period will be computed by dividing the
annual return amount (which is an amount equal to the annual rate on our
-18-
<PAGE>
Series D preferred stock multiplied by the liquidation preference) by four. The
quarterly return amount payable on the Series D preferred stock for any period
other than a full quarterly period will be computed on the basis of a 360-day
year consisting of twelve 30-day months.
Unless, on or prior to the notice date described below, we have delivered
to the deposit agent a direction notice instructing the deposit agent to
purchase shares of common stock from us, the deposit agent will deliver to each
holder of Series D preferred stock the quarterly return amount on February 15,
May 15, August 15 and November 15 of each year, each such date being called a
deposit payment date. These payments commenced on May 15, 2000 and will
continue until the deposit expiration date (or earlier if the deposit account is
terminated in the manner described below). The "notice date" will be a date
occurring on or prior to the tenth day prior to the applicable deposit payment
date or deposit expiration date, as the case may be. If we have delivered a
direction notice to the deposit agent on or prior to any notice date, the
deposit agent will, as instructed by us in the direction notice, purchase from
us, for delivery to each holder of Series D preferred stock in lieu of all or a
portion of the quarterly return amount (which has not been previously paid in
cash or shares of our common stock) on the next deposit payment date, that
number of whole shares of common stock determined by dividing such quarterly
return amount by (a) if on the date of such payment a registration statement
covering the shares of common stock so issued is effective, 97% of the market
value of the common stock on the record date and (b) if on the date of such
payment a registration statement covering the shares of common stock so issued
is not effective or use of such registration statement is otherwise not
permissible for any reason within our control, 93% of the market value of the
common stock on the record date. Market value will be calculated, as of any
date, based on the average of the daily closing price for the five consecutive
trading days ending on such date. The closing price for each day will be the
last sales price or, in case no such reported sales take place on such day, the
average of the last reported bid and asked price, in either case on the
principal national securities exchange on which our shares of common stock are
admitted to trading or listed, or if not listed or admitted to trading on such
exchange, the representative closing bid price as reported by the Nasdaq
National Market or if not available, the fair market price as determined in good
faith by our board of directors.
Under the terms of the deposit agreement, we have agreed that, upon written
request of the deposit agent, we will deliver, for and on behalf of the deposit
agent, the shares of common stock acquired by the deposit agent directly to
holders of our Series D preferred stock. The deposit agreement also provides
that the obligation to purchase shares of common stock from us is secured by the
funds in the deposit account.
In the event of any conversion of the Series D preferred stock into shares
of our common stock prior to the deposit expiration date, in those circumstances
we will be paid any funds remaining in the deposit account allocable to those
shares of Series D preferred stock so converted (and as a result, holders of
Series D preferred stock will not receive any partial payment from the deposit
account if they convert their shares prior to receipt of a full quarterly return
amount).
Notwithstanding the foregoing we may, upon notice to the holders of Series
D preferred stock, elect early termination of the deposit account if:
. we obtain any required amendments to the covenants under our various
debt obligations that would permit us to pay cash dividends on our
Series D preferred stock prior to the deposit expiration date; and
. at the time we receive such amendments or at any time thereafter (so
long as the amendments remain effective) the trading price, on any
date, for the Series D preferred stock equals or exceeds the
liquidation preference.
-19-
<PAGE>
If we elect early termination of the deposit account, the Series D
preferred stock will begin to accrue dividends from the last deposit payment
date.
On the deposit expiration date, after distributing all quarterly return
amounts, the deposit account agreement requires the deposit agent to pay to us
any cash remaining in the deposit account on such date and terminate the deposit
account.
Upon the final resolution (including the final resolution of all appeals or
rights to appeal in any court) of any voluntary or involuntary dissolution,
liquidation or winding up of our company, the deposit agent will be required to
return, upon our written direction, to the holders of the Series D preferred
stock any funds at the time remaining in the deposit account. While we consider
the funds placed in the deposit account to be the property of the purchasers of
the Series D preferred stock and not our property, we cannot be certain that, in
a bankruptcy proceeding, our creditors or a trustee in bankruptcy could not
claim that those funds constituted property of our bankrupt estate. If that
were to occur, access to the funds in the deposit account by the purchasers of
the Series D preferred stock could be delayed or, if the claims were successful,
even put in doubt.
Dividends
On and after the deposit expiration date, or upon earlier termination of
the deposit account, holders of the Series D preferred stock will be entitled to
receive cumulative dividends at an annual rate of 7% of the liquidation
preference, payable quarterly out of assets legally available on February 15,
May 15, August 15 and November 15 of each year when, as and if declared by our
board of directors. Dividends on the Series D preferred stock will accrue from
February 15, 2001 (or earlier if the deposit account is terminated), and, as a
result, we will not make any dividend payments on the Series D preferred stock
until May 15, 2001 (or earlier if the deposit account is terminated). Dividends,
to the extent declared by our board of directors, may, at our option, be paid in
cash, by delivery of fully paid and nonassessable shares of common stock, or a
combination of cash and shares (subject to applicable law). Dividends will be
payable to holders of record as they appear on our stock register on such record
dates, not more than sixty days nor less than ten days preceding the applicable
dividend payment date, as fixed by our board of directors. Dividends payable on
the Series D preferred stock for each full dividend period will be computed by
dividing the annual dividend rate by four. Dividends payable on the Series D
preferred stock for any period less than a full dividend period will be computed
on the basis of a 360-day year consisting of twelve 30-day months. The Series D
preferred stock will not be entitled to any dividend, whether payable in cash,
property, or securities, in excess of the full cumulative dividends. No
interest, or sum of money in lieu of interest, will be payable in respect of any
accumulated and unpaid dividends.
If we elect to pay dividends in shares of our common stock, the number of
shares of our common stock that we distribute will be calculated by dividing the
dividend payment by (a) if on the date of such payment a registration statement
covering the shares of common stock so issued is effective, 97% of the market
value of the common stock on the record date and (b) if on the date of such
payment a registration statement covering the shares of common stock so issued
is not effective or use of such registration statement is otherwise not
permissible for any reasons within our control, 93% of the market value of the
common stock on the record date.
No dividends or distributions, other than a dividend or distribution in our
stock ranking junior to the Series D preferred stock as to dividends and upon
liquidation, dissolution or winding up, may be declared, made or paid or set
apart for payment upon any of our stock ranking junior to or ratably with the
Series D preferred stock as to dividends, nor may any of our stock ranking
junior to or ratably with the Series D preferred stock as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys paid to or made available for a sinking fund for the
-20-
<PAGE>
redemption of any shares of any such stock), by us (except, in general and in
both cases, by conversion into or exchange for shares of stock of ours ranking
junior to or ratably with the Series D preferred stock as to dividends and upon
liquidation and in the case that moneys for such dividends, distributions,
redemptions, purchases, or other acquisitions are derived from the proceeds of
the offering of such securities or a concurrent offering of related securities)
unless full cumulative dividends have been or contemporaneously are paid or
declared and a sum sufficient for the payment of those dividends is set apart
for such payment on the Series D preferred stock for all dividend payment
periods terminating on or prior to the date of such declaration, payment,
redemption, purchase or acquisition.
Notwithstanding the foregoing, if full dividends have not been declared and
paid or set apart on the Series D preferred stock and any other preferred stock
ranking ratably with the Series D preferred stock as to dividends, dividends may
be declared and paid on the Series D preferred stock and such other ratable
preferred stock, so long as the dividends are declared and paid pro rata so that
the amounts of dividends declared per share on the Series D preferred stock and
such other ratable preferred stock will in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of the Series D
preferred stock and such other preferred stock bear to each other; provided,
that if such dividends are paid in cash on the other ratable preferred stock,
dividends will also be paid in cash on the Series D preferred stock.
The holders of shares of Series D preferred stock at the close of business
on a dividend payment record date will be entitled to receive the dividend
payment on those shares on the corresponding dividend payment date
notwithstanding the subsequent conversion of those shares or our default in
payment of the dividend due on that dividend payment date. Holders of shares
called for redemption on a redemption date between the record date and the
dividend payment date will be entitled to receive their dividend payment on such
redemption date. Except as provided in the immediately preceding sentences or
as otherwise described under "Special Redemption" below, we will make no payment
or allowance for unpaid dividends, whether or not in arrears, on converted
shares or for dividends on the shares of our common stock issued upon
conversion.
Our ability to declare and pay dividends and make other distributions with
respect to our capital stock, including the Series D preferred stock, is limited
by provisions contained in various financing agreements, which currently
prohibit us from making cash dividend payments and in the provisions of our
certificate of incorporation relating to our Series C preferred stock. Our
ability to declare and pay dividends may also be limited by applicable New York
law.
Liquidation Preference
The shares of Series D preferred stock will be issued with a liquidation
preference equal to $50 per share. See also "Federal Income Tax Consequences."
If upon any voluntary or involuntary dissolution, liquidation or winding up of
our company, the amounts payable with respect to the liquidation preference of
the Series D preferred stock and any other shares of our stock ranking as to any
such distribution ratably with the Series D preferred stock (which includes our
Series C preferred stock) are not paid in full, the holders of the Series D
preferred stock and of such other shares will share pro rata in proportion to
the full distributable amounts to which they are entitled. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of the Series D preferred stock will have no right or claim to any of
our remaining assets. Neither the sale of all or substantially all of our
property or business, other than in connection with the dissolution, liquidation
or winding up of the business, nor our merger or consolidation into or with any
other corporation, will be deemed to be a dissolution, liquidation or winding
up, voluntary or involuntary, of our company.
-21-
<PAGE>
Optional Redemption
The Series D preferred stock is not subject to any sinking fund or other
similar provisions.
Except for a special redemption discussed below, we may not redeem the
Series D preferred stock prior to February 15, 2003. Beginning on that date, we
may redeem shares of Series D preferred stock, during the twelve-month periods
commencing on February 15 of the years indicated below, at the following
redemption premiums (expressed as a percentage of the liquidation preference per
share), plus in each case all accumulated and unpaid dividends (whether or not
declared) to the redemption date:
Redemption
Premium
Year Per Share
---- -----------
2003.......................................... 104.000%
2004.......................................... 103.000%
2005.......................................... 102.000%
2006.......................................... 101.000%
2007 and thereafter........................... 100.000%
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 of cash and shares (subject to applicable law), by delivering notice
to the holders of the Series D preferred stock not less than 20 nor more than 60
days prior to the scheduled redemption date.
In the event that fewer than all the outstanding shares of Series D
preferred stock are to be redeemed, the shares to be redeemed will be determined
pro rata or by lot. If we elect to make redemption payments in shares of our
common stock, the number of shares of our common stock that we distribute will
be calculated by dividing the redemption payment by 97% of the market value of
our common stock calculated as described in the last sentence of this paragraph.
In order for us to exercise the option by paying the redemption price in our
common stock, a shelf registration statement must be effective between and
including the redemption notice date and the redemption date. The market value
of the common stock will be calculated based on the average of the daily closing
price for the five consecutive trading days ending two trading days prior to the
redemption date.
From and after the applicable redemption date, unless we default in the
payment of the redemption price, dividends on the shares of Series D preferred
stock to be redeemed on such redemption date shall cease to accumulate, such
shares shall no longer be deemed to be outstanding, and all rights of the holder
of those shares as shareholders (except the right to receive the redemption
price) will cease.
If any dividends on the Series D preferred stock are in arrears, no shares
of Series D preferred stock will be redeemed.
Our ability to redeem any shares of Series D preferred stock is, and may
continue to be, limited by the terms of our other financing arrangements, our
Series C preferred stock and applicable law. In fact, we would currently be
prohibited by the terms of our outstanding senior notes from redeeming the
Series D preferred stock for cash.
-22-
<PAGE>
Special Redemption
We may redeem the Series D preferred stock at a redemption premium of
105.50% of the liquidation preference, plus accumulated and unpaid dividends, if
any, whether or not declared, to the provisional redemption date on or after
August 15, 2001 but prior to February 15, 2003 ("provisional redemption"), if
the trading price of our common stock equals or exceeds $80.20 per share for 20
trading days within any 30 consecutive trading days ending one day prior to the
day on which we send out a provisional redemption notice. If we undertake a
provisional redemption, holders of Series D preferred stock that we call for
redemption, will, in addition to the payments required by the preceding
sentence, also receive an "additional payment" in an amount equal to the present
value of the aggregate value of the dividends that would thereafter have been
payable on the Series D preferred stock (whether or not declared) from the
provisional redemption date to February 15, 2003 called the "additional period."
The present value will be calculated using the bond equivalent yield on U.S.
Treasury notes or bills having a term nearest in length to that of the
additional period on the day immediately preceding the date on which a notice of
provisional redemption is mailed. We will be obligated to make the additional
payment on all Series D preferred stock that we have called for provisional
redemption, whether or not those shares of Series D preferred stock are
converted into shares of common stock prior to the provisional redemption date.
Voting Rights
Except as set forth below and as required by law, holders of Series D
preferred stock will have no voting rights. Under New York law, holders of
Series D preferred stock will be entitled to vote as a class upon a proposed
amendment to our charter, whether or not the holders are entitled to vote by the
terms of our charter, if the amendment would:
. exclude or limit their right to vote on any matter, except as such
right may be limited by voting rights given to new shares then being
authorized of any existing or new class or series,
. increase or reduce the par value of the shares of the Series D
preferred stock, change any shares into a different number of shares
of the same class or into the same or a different number of shares of
any class or series, or change, fix or abolish the designation of the
Series D preferred stock or any of the relative rights, preferences
and limitations of the shares of the Series D preferred stock,
provided that the shares may be converted into shares of any other
class or into shares of any other series of the same class, or alter
the terms or conditions upon which their shares are convertible or
change the shares issuable upon conversion of the shares of the Series
D preferred stock if that action would adversely affect the holders of
the Series D preferred stock, or
. subordinate their rights by authorizing shares having preferences that
would be in any respect superior to their rights.
If the dividends payable on the Series D preferred stock are in arrears for
six quarterly periods, the holders of Series D preferred stock voting separately
as a class with the shares of any other preferred stock or preference securities
having similar voting rights, including our Series C preferred stock, will be
entitled at the next regular or special meeting of our shareholders to elect two
directors to our board of directors. Such voting rights will continue only
until such time as the dividend arrearage on the Series D preferred stock has
been paid in full.
The affirmative vote or consent of the holders of at least 66 2/3% of the
outstanding Series D preferred stock will be required to permit us to issue any
class or series of stock, or security convertible into stock or evidencing a
right to purchase any shares of any class or series of stock ranking senior to
the Series D preferred stock as to dividends, liquidation rights or voting
rights, and for amendments to our
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charter that would affect adversely the rights of holders of the Series D
preferred stock. Notwithstanding the above, any issuance of shares of preferred
stock which rank ratably with the Series D preferred stock (including the
issuance of additional shares of our Series D preferred stock) will not, by
itself, be deemed to adversely affect the rights of the holders of the Series D
preferred stock. In all such cases, each share of Series D preferred stock shall
be entitled to one vote.
Conversion Rights
The Series D preferred stock will be convertible at any time after February
15, 2000 at the holder's option into the number of whole shares of our common
stock as is equal to the liquidation preference divided by a conversion price of
$53.465, subject to adjustment as described below. We refer to the present
conversion price and the conversion price as further adjusted as the conversion
price. A share of Series D preferred stock called for redemption will be
convertible into shares of our common stock up to and including, but not after,
the close of business on the second business day prior to the date fixed for
redemption unless we default in the payment of the amount payable upon
redemption.
In our discretion, no fractional shares of our common stock or securities
representing fractional shares of our common stock will be issued upon
conversion. Any fractional interest in a share of our common stock resulting
from conversion will be paid in cash based on the last reported sales price of
our common stock on any national exchange or any level of Nasdaq, or any
national securities exchange or authorized quotation system on which our common
stock is then listed, at the close of business on the trading day next preceding
the date of conversion or such later time as we are legally and contractually
able to purchase such fractional shares.
The conversion price for the Series D preferred stock is subject, upon the
occurrence of specified events after the issuance of the Series D preferred
stock, to adjustment in accordance with formulas set forth in our charter,
including:
. any redemption payment or payment of a dividend or other distribution
payable in shares of our common stock to all holders of any class of
our capital stock, other than the issuance of shares of our common
stock in connection with the payment in redemption for, of dividends
on or the conversion of the Series D preferred stock or any other
preferred stock that ranks ratably with the Series D preferred stock
or the issuance of any shares of our common stock pursuant to the
deposit agreement or a deposit agreement created for the benefit of
holders of any other preferred stock that ranks ratably with the
Series D preferred stock or to all holders of the Series D preferred
stock or any other preferred stock that ranks ratably with the Series
D preferred stock based upon the number of shares of our common stock
into which the Series D preferred stock or any other preferred stock
that ranks ratably with the Series D preferred stock is then
convertible;
. any issuance to all holders of shares of our common stock of rights,
options or warrants entitling them to subscribe for or purchase shares
of our common stock or securities convertible into or exchangeable for
shares of our common stock at less than market value as of the date of
conversion or exchange; provided, however, that no adjustment will be
made with respect to such a distribution if the holder of shares of
the Series D preferred stock would be entitled to receive such rights,
options or warrants upon conversion at any time of shares of the
Series D preferred stock into our common stock and provided, further,
that if such rights, options or warrants are only exercisable upon the
occurrence of triggering events, then the conversion price for the
Series D preferred stock will not be adjusted until such triggering
events occur;
. any subdivision, combination or reclassification of our common stock;
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. any distribution consisting exclusively of cash (excluding any cash
distributed upon a merger or consolidation to which the last bullet
point of this paragraph applies) to all holders of shares of our
common stock in an aggregate amount that, combined together with (1)
all other such cash distributions made within the then preceding 12
months in respect of which no adjustment has been made and (2) any
cash and the fair market value of other consideration paid or payable
in respect of any tender offer by us or any of our subsidiaries for
shares of our common stock concluded within the then preceding 12
months in respect of which no adjustment has been made, exceeds 15% of
our market capitalization (defined as the product of the then current
market price of our common stock times the number of shares of our
common stock then outstanding on the record date of such
distribution);
. the completion of a tender or exchange offer that we or any of our
subsidiaries make for shares of our common stock that involves an
aggregate consideration that, together with (1) any cash and other
consideration payable in a tender or exchange offer by us or any of
our subsidiaries for shares of any of our common stock expiring within
the then preceding 12 months in respect of which no adjustment has
been made and (2) the aggregate amount of any such cash distributions
referred to in the fourth bullet point of this paragraph to all
holders of shares of our common stock within the then preceding 12
months in respect of which no adjustments have been made, exceeds 15%
of our market capitalization just prior to the expiration of such
tender offer; or
. a distribution to all holders of our common stock consisting of
evidences of indebtedness, shares of capital stock other than our
common stock or assets, including securities, but excluding those
dividends, rights, options, warrants and distributions referred to
above (other than in connection with a merger effected solely to
reflect a change in our jurisdiction of incorporation).
No adjustment of the conversion price will be required to be made until the
cumulative adjustments, whether or not made, amount to 1.0% or more of the
conversion price as last adjusted. No conversion price adjustment will be made
as a result of the issuance of our common stock on conversion of the Series D
preferred stock. Each event requiring adjustment to the conversion price will
require only a single adjustment even though more than one of the adjustment
clauses may be applicable to such event. We reserve the right to make such
reductions in the conversion price in addition to those required in the
foregoing provisions as we consider to be advisable in order that any event
treated for federal income tax purposes as a dividend of stock or stock rights
will not be taxable to the recipients. In the event we elect to make such a
reduction in the conversion price, we will comply with the requirements of Rule
14e-1 under the Securities Exchange Act of 1934, and any other securities laws
and regulations thereunder if and to the extent that such laws and regulations
are applicable in connection with the reduction of the conversion price.
In the event that, after the issuance of the Series D preferred stock, we
distribute rights or warrants (other than those referred to in the second bullet
point of the second preceding paragraph) to all holders of our common stock, so
long as any such rights or warrants have not expired or been redeemed by us, the
holder of any shares of Series D preferred stock surrendered for conversion will
be entitled to receive upon such conversion, in addition to the shares of our
common stock then issuable upon such conversion, which we call the conversion
shares, a number of rights or warrants to be determined as follows: (1) if such
conversion occurs on or prior to the date for the distribution to the holders of
rights or warrants of separate certificates evidencing such rights or warrants,
called the distribution date, the same number of rights or warrants to which a
holder of a number of shares of our common stock equal to the number of
conversion shares is entitled at the time of such conversion in accordance with
the terms and provisions applicable to the rights or warrants, and (2) if such
conversion occurs after such distribution date, the same number of rights or
warrants to which a holder of the number of shares of our common stock into
which such Series D preferred stock was convertible immediately prior to such
distribution date
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would have been entitled on such distribution date in accordance with the terms
and provisions of and applicable to the rights or warrants. In the event the
holders of Series D preferred stock are not entitled to receive such rights or
warrants, the conversion price will be subject to adjustment upon any
declaration or distribution of such rights or warrants.
In case of any reclassification, consolidation or merger of our company
with or into another person or any merger of another person with or into our
company, with specific exceptions, or in case of any sale, transfer or
conveyance of all or substantially all of the assets of our company, computed on
a consolidated basis, each share of Series D preferred stock then outstanding
will, without the consent of any holder of Series D preferred stock, become
convertible only into the kind and amount of securities, cash and other property
receivable upon such reclassification, consolidation, merger, sale, transfer or
conveyance by a holder of the number of shares of our common stock into which
such share of Series D preferred stock was convertible immediately prior to the
effectiveness of that event, after giving effect to any event that has resulted
in a conversion event.
In the case of any distribution by us to our shareholders of substantially
all of our assets, each holder of Series D preferred stock will participate pro
rata in such distribution based on the number of shares of our common stock into
which such holders' shares of Series D preferred stock would have been
convertible immediately prior to such distribution.
Change of Control
Notwithstanding the foregoing, upon a change of control of our company,
holders of Series D preferred stock will, if the market value of our common
stock at such time is less than the conversion price, have a one time option,
upon not less than 30 days of notice nor more than 60 days of notice, to convert
all of their outstanding shares of Series D 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 of control and (2)
$28.98. In lieu of issuing the shares of our 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 such common stock otherwise issuable.
Our charter defines change of control for purposes of the Series D
preferred stock as any of the following events:
. any "person" or "group," as such terms are used in Sections 13(d) and
14(d) of the Exchange Act of 1934, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act of
1934, except that a person will be deemed to have beneficial ownership
of all shares that such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time)
directly or indirectly, of more than 50% of our total outstanding
voting stock;
. during any period of two consecutive years, individuals who at the
beginning of such period constituted our board of directors, together
with any new directors whose election to our board of directors or
whose nomination for election by our shareholders was approved by a
vote of a majority of the directors then still in office who were
either at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to
constitute a majority of our board of directors then in office;
. our company consolidates with or merges with or into any person or
conveys, transfers or leases all or substantially all, computed on a
consolidated basis, of our assets to any person, or any corporation
consolidates with or merges into or with our company in any such event
pursuant to a transaction in which our outstanding voting stock is
changed into or exchanged for cash, securities or other property,
other than any such transaction where our outstanding
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voting stock is not changed or exchanged at all, except to the extent
necessary to reflect a change in the jurisdiction of incorporation of
our company or where no person or group owns, immediately after such
transaction, directly or indirectly, more than 50% of the total
outstanding voting stock of the surviving corporation; or
. our company is liquidated or dissolved or adopts a plan of liquidation
or dissolution.
The good faith determination of our board of directors, based upon the
advice of outside counsel, of the beneficial ownership of securities of our
company within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act will
be conclusive, absent contrary controlling judicial precedent or contrary
written interpretation published by the SEC.
The phrase "all or substantially all" of the assets of our company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer is of "all or substantially all" of our assets.
Registration Rights
Pursuant to a registration rights agreement, we have agreed to use our
reasonable best efforts to keep this registration statement continuously
effective under the Securities Act of 1933 generally until, the earlier of (i)
sale by the selling shareholders of the shares of Series D preferred stock and
of the shares of common stock issuable upon conversion of the Series D preferred
stock pursuant to the shelf registration or (ii) February 1, 2002. Use of this
prospectus by the selling shareholders may be suspended under customary
conditions, for example, during blackout periods preceding an underwritten
offering of PSINet securities.
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DESCRIPTION OF INDEBTEDNESS
The following are summaries of our existing indebtedness. While complete
in material respects, these descriptions are nonetheless summaries. These
descriptions are qualified in their entirety by reference to the provisions of
the various agreements and indentures related to them.
10% Senior Notes
We have outstanding $600.0 million aggregate principal amount of 10% senior
notes due 2005. The 10% senior notes are senior unsecured obligations ranking
equivalent in right of payment to all of our existing and future unsecured and
unsubordinated indebtedness and senior in right of payment to all of our
existing and future 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 105.0%, 102.5% and 100.0% 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 its 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, including the following matters:
. limitation on our payment of cash dividend, 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;
. 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;
. 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 line, excluding certain permitted liens;
. limitation on the ability of our subsidiaries to create or otherwise
cause to exist any encumbrance or restriction on the payment of
dividends or other distributions on our capital stock, payment of
indebtedness owed to us or any other subsidiary, making of investments
in us or any other subsidiary, or transfer of any properties or assets
to us or any other subsidiary, excluding certain permitted encumbrances
and restrictions;
. limitation on certain mergers, consolidations and sales of assets by us
or our subsidiaries;
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. limitation on certain transactions with our affiliates;
. limitation on the ability of 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;
. limitation on certain sale and leaseback transactions by us or our
subsidiaries;
. limitation on certain issuances and sales of capital stock of our
subsidiaries; and
. limitation on our ability or the ability of 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, certain judgments or orders for payment of money in excess of $10
million, and certain events of bankruptcy, insolvency and reorganization.
Our ability to declare a subsidiary as an unrestricted subsidiary would be
dependent upon a number of factors including, but not limited to, the
availability of amounts specified in our indentures which may be used for such
designation.
10 1/2% Senior Notes
We have outstanding approximately $600.0 million and Euro 150.0 million
aggregate principal amount of 10 1/2% senior notes due 2006. 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.
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 10
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 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 other senior notes
and are described above under "-- 10% Senior Notes."
11% Senior Notes
We have outstanding approximately $1.05 billion and Euro 150 million
aggregate principal amount of our 11% senior notes due 2009. 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, as amended, between us and Wilmington Trust company, as Trustee.
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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, any time on or after August 1 of 2004, 2005, 2006 and 2007
at 105.500%, 103.667%, 101.833% and 100.000% 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 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%
senior 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 the sufficient funds or the financial resources necessary to satisfy our
obligations to repurchase the 11% senior notes upon a change of control.
The 11% senior notes indenture contains certain financial covenants with
which we must comply, which are substantially identical to those contained in
the indenture governing our 10% senior notes described above under "-- 10%
Senior Notes."
The events of default under the 11% senior notes indenture are
substantially identical to those contained in the indenture governing our 10%
senior notes described above under "-- 10% Senior Notes."
11 1/2% Senior Notes
We have outstanding $350.0 million aggregate principal amount of our 11
1/2% senior notes due 2008. The 11 1/2% senior notes are our senior unsecured
obligations ranking equivalent in right of payment to all our existing and
future unsecured and unsubordinated indebtedness and senior in right of payment
to all our existing and future subordinated indebtedness. The 11 1/2% senior
notes were issued under an indenture dated as of November 3, 1998, as amended,
between us and Wilmington Trust Company, as Trustee.
The 11 1/2% senior notes will mature on November 1, 2008. Interest on the
11 1/2% senior notes is payable semi-annually on May 1 and November 1 of each
year, commencing May 1, 1999. The 11 1/2% senior notes are redeemable at our
option, in whole or in part, any time on or after November 1, of 2003, 2004,
2005 and 2006 at 105.750%, 103.833%, 101.917% and 100.000% 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 thereof, plus
accrued and unpaid interest to the date of redemption, with the net cash
proceeds of certain public equity offerings or the sale of stock to one or more
strategic investors, provided that at least 65% of the original aggregate
principal amount of the 11 1/2% senior notes remains outstanding immediately
after such redemption. Upon the occurrence of a change of control (as defined
in the 11 1/2% senior notes indenture), we will be required to make an offer to
purchase all of the 11 1/2% senior notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase. We may not have sufficient funds or the financial resources
necessary to satisfy our obligations to repurchase the 11 1/2% senior notes upon
a change of control.
The 11 1/2% senior notes indenture contains certain financial covenants
with which we must comply, which are substantially identical to those contained
in the indenture governing our 10% senior notes described above under "-- 10%
Senior Notes."
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The events of default under the 11 1/2% senior notes indenture are
substantially identical to those contained in the indenture governing our 10%
senior notes described above under "-- 10% Senior Notes."
2.94% Notes
Our subsidiary, PSINet Consulting Solutions, Inc., or PSINet Consulting,
formerly known as Metamor Worldwide, Inc., has outstanding $227.0 million
aggregate principal amount at maturity of 2.94% convertible subordinated notes
due 2004. The 2.94% Notes were issued under an indenture dated as of August 15,
1997 between Metamor and The Bank of New York, as Trustee. In connection with
our merger with Metamor, we entered into a supplement to the indenture governing
the 2.94% Notes which provides that the 2.94% Notes are now convertible into
PSINet common stock. Metamor remains solely liable with respect to the payment
of and interest on the 2.94% Notes. Each 2.94% Note is convertible, at the
option of the holder, at any time after 90 days following the latest date of
original issuance thereof through maturity, unless previously redeemed or
otherwise purchased by PSINet Consulting, into shares of our common stock at the
conversion rate of 21.36573 shares per $1,000 principal amount at maturity of
the 2.94% Notes. The conversion rate will not be adjusted for accreted original
issue discount or accrued interest, but will be subject to adjustment upon the
occurrence of certain events affecting our common stock. Upon conversion, the
holder will not receive any cash payment representing accreted original issue
discount or accrued interest; such accreted original issue discount and accrued
interest will be deemed paid by issuance of our common stock received on
conversion.
The 2.94% Notes will mature on August 15, 2004. Interest on the 2.94%
Notes is payable semiannually in arrears in cash on February 15 and August 15 of
each year, commencing February 15, 1998. The 2.94% Notes are not redeemable by
PSINet Consulting prior to August 18, 2000. Thereafter, the 2.94% Notes will be
redeemable, in whole or in part, at any time on at least 30 days notice at the
option of PSINet Consulting at fixed redemption prices plus accrued and unpaid
interest. Although the 2.94% Notes cannot be redeemed prior to August 18, 2000,
the indenture governing the 2.94% Notes can be satisfied and discharged (except
for certain ministerial provisions) if the 2.94% Notes are redeemable within one
year, PSINet Consulting takes actions necessary to cause the 2.94% Notes to be
redeemed and deposits the redemption price with the Trustee, and PSINet
Consulting takes certain other actions. Upon the occurrence of any fundamental
change in PSINet Consulting (as defined in the 2.94% Notes Indenture) occurring
prior to the maturity of the 2.94% Notes, each holder shall have the right, at
such holder's option, to require PSINet Consulting to purchase all or any part
(provided that the principal amount at maturity is $1,000 or an integral
multiple thereof) of such holder's 2.94% Notes at declining redemption prices,
subject to adjustment in certain events, together with accrued and unpaid
interest thereon to the date of purchase. Neither the acquisition of Metamor by
us nor any future acquisition of us, all or substantially all of the
consideration for which consists of common stock listed on a United States
national securities exchange or the Nasdaq National Stock Market, did or will
constitute a fundamental change.
The events of default under the 2.94% Notes indenture include various
events of default customary for such type of agreement, including, the failure
to pay principal and interest when due on the 2.94% Notes or to pay the
redemption price or fundamental change repurchase price when due, default in the
observance or performance of other covenants in the indenture, and certain
events of bankruptcy, insolvency and reorganization.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary by Nixon Peabody LLP, special tax counsel to
PSINet, of the material United States federal income tax consequences of owning,
holding and disposing of Series D preferred stock and any shares of common stock
received as dividends thereon or in connection with an ownership interest in the
deposit account. This summary is based upon the Internal Revenue Code of 1986,
as amended, existing and proposed treasury regulations, published rulings and
court decisions in effect on the date hereof, all of which are subject to
retroactive change at any time. Our counsel has relied upon our representations
with respect to factual matters for purposes of this summary. This summary is
not binding on the Internal Revenue Service or on the courts. No ruling will be
requested from the Internal Revenue Service on any issues described below. We
cannot assure you that the Internal Revenue Service will not take a different
position concerning the matters discussed below.
This summary applies only to persons who hold the Series D preferred stock
as "capital assets" within the meaning of Section 1221 of the Code. It does not
address tax consequences to taxpayers who are subject to special rules (such as
financial institutions, dealers in securities, tax-exempt organizations,
insurance companies, persons that hold the Series D preferred stock as part of a
straddle or conversion transaction, holders subject to the alternative minimum
tax and, except as discussed below under "Consequences to Non-U.S. Holders of
Series D Preferred Stock," persons who are not "U.S. Holders"). A "U.S. Holder"
means a beneficial owner of Series D preferred stock who purchased it pursuant
to this offering and that for U.S. federal income tax purposes is (1) a citizen
or resident of the United States; (2) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof; (3) an estate the income of which is subject to U.S.
federal income taxation regardless of its source; or (4) a trust if (A) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (B) one or more U.S. fiduciaries have the
authority to control all substantial decisions of the trust.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH PURCHASER
OF SERIES D PREFERRED STOCK IS STRONGLY URGED TO CONSULT WITH SUCH PURCHASER'S
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH PURCHASER'S PERSONAL TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE SERIES D PREFERRED STOCK.
Consequences to Holders of Series D Preferred Stock
Inclusion in Income. Pursuant to the terms of the deposit agreement, each
holder of Series D preferred stock will be treated as owning a pro rata portion
of the cash deposited in the deposit account and we will not treat such cash as
received in exchange for the Series D preferred stock. Accordingly, the
liquidation preference with respect to each share of Series D preferred stock
will exceed the amount we receive upon the issuance of the Series D preferred
stock. Additionally, dividends will not begin to accrue on the Series D
preferred stock until February 15, 2001 (or earlier if the deposit account is
terminated). The precise treatment of Series D preferred stock with these terms
is not entirely clear. However, we intend to treat the Series D preferred stock
as if it were purchased at a discount from its liquidation preference and
provided for accretion in its liquidation preference equal to $0.875 per share
(in respect of each full quarter) on each quarterly deposit payment date, so
long as the Series D preferred stock remains outstanding.
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Under Section 305(c) of the Code, the accretion in the liquidation
preference of the Series D preferred stock on each deposit payment date should
be treated as a dividend taxable as ordinary income to the Series D preferred
stock holders to the extent of our current and accumulated earnings and profits
as determined under U.S. federal income tax principles. The amount of the
distribution on each share of Series D preferred stock will equal the fair
market value of the accretion in the liquidation preference with respect to the
Series D preferred stock. To the extent that the value of the accretion in
liquidation preference on the Series D preferred stock exceeds current and
accumulated earnings and profits, such accretion will be treated as a nontaxable
return of capital and will be applied against and reduce the adjusted tax basis
of such Series D preferred stock in the hands of each holder (but not below
zero). However, such reduction will be exactly offset by an increase in basis
resulting from the holder's receipt of the additional liquidation preference.
If the value of any accretion in liquidation preference exceeds the adjusted tax
basis of the Series D preferred stock in the hands of the holder, such excess
will be treated as capital gain and will be long-term if such holder's holding
period for the Series D preferred stock exceeds one year.
On or after August 15, 2001 but prior to February 15, 2003, we may redeem
shares of the Series D preferred stock at a redemption premium of 105.50% if the
trading price of our common stock equals or exceeds $80.20 per share for a
specified trading period. In the event we have elected an early termination of
the deposit account, a holder of Series D preferred stock whose stock is so
redeemed will also be entitled to the additional payment we described under
"Description of Series D Preferred Stock -- Special Redemption." We do not
intend to treat premium in excess of the liquidation preference (including any
additional payment) as resulting in constructive distribution treatment under
Section 305(c) of the Code. Under treasury regulations issued pursuant to
Section 305(c) of the Code, the constructive distribution provisions could apply
if the issuer has a redemption right, but only if, based on all the facts and
circumstances as of the issue date, redemption pursuant to the right is more
likely than not to occur. A safe harbor treats a redemption right as not more
likely to occur if, among other requirements, exercise of the redemption right
would not reduce the Series D preferred shareholder's yield. In the event of
redemption of Series D preferred stock by reason of the trading price of our
common stock equaling or exceeding $80.20 per share for the specified trading
period, the premium paid (including any additional payment) would not reduce the
Series D preferred shareholder's yield.
On and after the deposit expiration date, a holder of Series D preferred
stock will be entitled to receive dividends at an annual rate of 7% of the
liquidation preference in cash or, at our option, our common stock or a
combination thereof. In the event we exercise our right to pay dividends in our
common stock (after the expiration of the deposit agreement) the number of
shares of such common stock to be distributed shall be determined by dividing
the amount of cash that would be paid by 97% (or, in some circumstances, 93%) of
the market value of the common stock. A holder of Series D preferred stock must
include in income as ordinary income the amount of any such cash distributions
and the fair market value of any common stock distributions to the extent that
we have current or accumulated earnings and profits. If we have no current or
accumulated earnings and profits, distributions are first treated as a return of
capital to the extent of the Series D preferred stock holder's basis, and
thereafter as capital gain.
We presently do not have any current or accumulated earnings and profits as
determined under United States federal income tax principles. As a result,
until such time as we have earnings and profits, an increase in the liquidation
preference on a distribution will reduce the adjusted tax basis (but not below
zero) in the hands of each holder of the shares of Series D preferred stock.
The basis reduction should be offset for each share of Series D preferred stock
by a corresponding increase in tax basis for a holder resulting from the
increase in liquidation preference. Further, until we have current or
accumulated earnings and profits, any accretion in the liquidation preference or
other distributions with respect to the Series D preferred stock will not be
treated as dividends for United States federal income tax purposes and, thus,
will not qualify for any dividends received deduction as described below.
Holders will
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recognize gain to the extent that any distribution exceeds current or
accumulated earnings and profits and their basis in their Series D preferred
stock.
Dividends to Corporate Shareholders. In general, a distribution that is
treated as a dividend for federal income tax purposes and that is made to a
corporate shareholder with respect to the Series D preferred stock will qualify
for the 70% dividends-received deduction under Section 243 of the Code. Holders
should note, however, that we cannot assure you that we will have current or
accumulated earnings and profits in the future. Accordingly, we cannot assure
you that the dividends-received deduction will apply to distributions on the
Series D preferred stock.
In addition, there are many exceptions and restrictions relating to the
availability of the dividends-received deduction such as restrictions relating
to (1) the holding period of stock the dividends on which are sought to be
deducted, (2) debt-financed portfolio stock, (3) dividends treated as
"extraordinary dividends" for purposes of Section 1059 of the Code, and (4)
taxpayers that pay alternative minimum tax. Corporate shareholders should
consult their own tax advisors regarding the extent, if any, to which exceptions
and restrictions may apply to their particular factual situation.
Common Stock-Holding Period. A shareholder's holding period for shares of
common stock received in lieu of cash dividends (after the expiration of the
deposit agreement) or in connection with our right to transfer shares of common
stock under the deposit agreement will commence on the day following the date of
transfer and will not include such shareholders' holding period for the shares
of Series D preferred stock with respect to which the shares of common stock
were distributed. However, a shareholder's holding period for common stock
received on conversion of the Series D preferred stock will include the
shareholder's holding period for the Series D preferred stock.
Sale or Redemption. Upon a sale or other disposition (other than a
redemption or a conversion of Series D preferred stock into common stock) of
Series D preferred stock, a holder will generally recognize capital gain or loss
equal to the difference between the amount of cash and the fair market value of
property received by the holder in such sale or other disposition and such
holder's adjusted tax basis in such shares. Such gain or loss will be long-term
gain or loss if the holder's holding period for such Series D preferred stock or
common stock is more than 12 months. In the case of individuals, long-term
capital gains with respect to property held for more than 12 months are taxed at
a maximum 20% federal tax rate. Net capital gain of corporations is taxed the
same as ordinary income, with a maximum federal tax rate of 35%.
Any gain or loss recognized by a holder upon redemption of the Series D
preferred stock will be treated as gain or loss from the sale or exchange of
Series D preferred stock or common stock, if, taking into account stock that is
actually or constructively owned as determined under Section 318 of the Code:
(1) such holder's interest in our Series D preferred stock is completely
terminated as a result of the redemption, (2) such holder's percentage ownership
in our voting stock immediately after the redemption is less than 80% of such
percentage ownership immediately before such redemption, or (3) the redemption
is "not essentially equivalent to a dividend" (within the meaning of Section 302
of the Code). Sales and acquisitions of our stock occurring contemporaneously
with a redemption of Series D preferred stock, which are made pursuant to an
integrated plan on the part of the holder, may be considered for purposes of
determining whether the preceding tests are met. If a redemption of the Series
D preferred stock is treated as a distribution that is taxable as a dividend,
the holder will be taxed on the payment received in the same manner as described
above, and the holder's adjusted tax basis in the redeemed Series D preferred
stock or common stock will be transferred to any remaining shares held by such
holder.
In the event we have elected an early termination of the deposit account
and a holder of the Series D preferred stock whose stock is redeemed receives
the additional payment, such additional
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payment should be treated as additional cash proceeds received in the redemption
of such Series D preferred stock.
Conversion or Exchange of Series D Preferred Stock. A holder of Series D
preferred stock will generally not recognize gain or loss by reason of receiving
our common stock in exchange for Series D preferred stock upon the redemption or
conversion of the Series D preferred stock, except that gain or loss will be
recognized with respect to any cash received in lieu of fractional shares and
the fair market value of any shares of our common stock attributable to dividend
arrearages will be treated as a constructive distribution as described above.
The adjusted tax basis of the common stock (including fractional share
interests) so acquired will be equal to the tax basis of the shares of Series D
preferred stock exchanged therefor and the holding period of the common stock
received upon conversion will include the holding period of the shares of Series
D preferred stock exchanged. The tax basis of any common stock treated as a
constructive distribution taxable as a dividend will be equal to its fair market
value on the date of the exchange.
Adjustment of Conversion Price. If at any time we make a distribution of
property to holders of our common stock that would be taxable to such
shareholders as a dividend for federal income tax purposes and, in accordance
with the antidilution provisions, the conversion price of the Series D preferred
stock is decreased, the amount of such decrease may be deemed to be the payment
of a taxable dividend to holders of Series D preferred stock. For example, a
decrease in the conversion price in the event of distributions of our
indebtedness or our assets will generally result in deemed dividend treatment to
holders of the Series D preferred stock, but generally a decrease in the event
of stock dividends or the distribution of rights to subscribe for our common
stock will not result in a taxable stock dividend.
Deposit Account. Pursuant to the terms of the deposit agreement, each
holder of Series D preferred stock will be treated as owning a pro rata portion
of the cash deposited in the deposit account. Although there is no authority
directly applicable to the treatment of the deposit account, we believe that the
intended treatment is appropriate, because (1) such cash is intended to not be
subject to the claims of our creditors, and (2) we will not be entitled to
receive the cash in the deposit account except under limited circumstances.
Each holder of Series D preferred stock should not treat its portion of the
cash deposited in the deposit account as part of the cost of the Series D
preferred stock for purposes of determining the holder's adjusted tax basis in
such stock.
Cash distributions of $0.875 per share of Series D preferred stock (in
respect of each full quarter) on each quarterly deposit payment date for each
quarterly period should be treated as withdrawals by the holders of the Series D
preferred stock of amounts deposited in the deposit account. In the event
Series D preferred stock is redeemed and amounts in the deposit account are
distributed to holders of the Series D preferred stock such distributions should
be treated as withdrawals by such holders of amounts deposited in the deposit
account to the extent such distribution is of amounts originally deposited in
the deposit account. Income earned on the cash deposited in the deposit
account, if any, will be included in income by each holder of shares of Series D
preferred stock pro rata in proportion to the number of shares of Series D
preferred stock held by such holder. Each holder will include such amounts in
income in the same manner as though the holder directly owned a pro rata share
of the cash in the deposit account.
Distributions of common stock by the deposit agent to the holders of the
Series D preferred stock following our election to transfer common stock to the
deposit agent should be treated as a purchase by each holder of Series D
preferred stock of such common stock for an amount equal to the Series D
preferred shareholder's share of the cash deposited in the deposit account
allocated to such purchase. To the extent that the fair market value of the
common stock exceeds the amount paid for such common stock, the excess will be
treated as a distribution on the Series D preferred stock.
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In the event that we exercise our right to have the deposit account paid to
us, the holders of the Series D preferred stock will be treated as having made
an additional payment to us with respect to their Series D preferred stock, and
accordingly, will receive an increase in the tax basis of their Series D
preferred stock. In the event of the conversion of the Series D preferred stock
into shares of our common stock prior to the deposit expiration date, we will be
paid any remaining funds in the deposit account allocated to such stock. In
such cases, holders of the common stock received in the conversion will be
treated as having made additional payments to us with respect to our stock, and
the tax basis of their common stock will reflect such increase.
Backup Withholding. Under the backup withholding provisions of the Code
and applicable treasury regulations, a holder of Series D preferred stock or
common stock may be subject to backup withholding at the rate of 31% with
respect to dividends paid on, or the proceeds of a sale, exchange or redemption
of, Series D preferred stock or common stock unless such holder (a) is a
corporation or comes within other exempt categories and when required
demonstrates this fact or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. The
amount of any backup withholding from a payment to a holder will be allowed as a
credit against the holder's federal income tax liability and may entitle such
holder to a refund, provided that the required information is furnished to the
Internal Revenue Service.
Consequence of Original Issue Discount. In connection with the initial
sale of the Series D preferred stock, $49.1 million was placed in a deposit
account. As a result, and in light of the fact that dividends will not accrue
on the Series D preferred stock until February 15, 2001, the shares of Series D
preferred stock will be considered as having been issued for federal tax
purposes at a substantial discount from their liquidation preference amount.
Consequently, purchasers of the Series D preferred stock generally will be
required to include amounts in gross income for federal income tax purposes in
advance of receipt of the cash payments to which the income is attributable.
If a bankruptcy petition is filed by or against us under the United States
Bankruptcy Code after the issuance of the Series D preferred stock, it is
possible that the claim of a holder of Series D preferred stock with respect to
the liquidation preference thereof may be limited to an amount equal to the sum
of (1) the liquidation preference for the preferred stock less the discount at
which such shares of Series D preferred stock are deemed to have been issued;
and (2) that portion of the original discount that is not deemed to constitute
"unmatured interest" or accretion within the meaning of the United States
Bankruptcy Code. Any original issue discount that was not amortized as of any
such bankruptcy filing could constitute "unmatured interest."
Consequences to Non-U.S. Holders of Series D Preferred Stock
The following is a general discussion of United States federal income and
estate tax consequences of the ownership and disposition of the Series D
preferred stock or common stock by a person who is a not a U.S. Holder (a "Non-
U.S. Holder").
Dividends. Generally, dividends paid to a Non-U.S. Holder are subject to
United States withholding tax either at a rate of 30% of the gross amount of the
dividend or such lower rate as may be specified by an applicable tax treaty.
Although there is no authority on point with respect to the application of the
withholding tax to stock similar to the Series D preferred stock which provides
for an accreting liquidation preference, we intend to treat the accretion of the
liquidation preference to Non-U.S. Holders in a manner analogous to original
issue discount notes. Accordingly, although the accretion in the liquidation
preference of the Series D preferred stock on each deposit payment date will be
subject to United States tax at a rate of 30% of the fair market value of the
accretion in the liquidation preference, or
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such lower rate as may be specified by an applicable tax treaty, such tax will
be collected by withholding only when amounts are actually paid by us (or our
agent) to such Non-U.S. Holder.
On and after the deposit expiration date, dividends paid in cash or common
stock will be subject to withholding at the rate of 30% (or lower treaty rate).
To the extent we elect to make dividend payments in common stock, we intend to
withhold a number of shares of our common stock with a fair market value equal
to the withholding tax. Cash dividends paid to a Non-U.S. Holder with respect
to our common stock also will be subject to withholding at 30% or lower treaty
rate.
Dividends that are effectively connected with the conduct of a trade or
business by the Non-U.S. Holder within the United States and, where a tax treaty
applies, are attributable to a United States permanent establishment of the Non-
U.S. Holder, are not subject to the withholding tax (provided the Non-U.S.
Holder files appropriate documentation, including, under current law, Form 4224,
with us or our agent), but instead are subject to United States federal income
tax on a net income basis at applicable graduated individual or corporate rates.
Any such effectively connected dividends received by a Non-U.S. Holder that is a
corporation may, under some circumstances, be subject to an additional "branch
profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
In order to claim the benefit of an applicable tax treaty, we (or our
agent) may require a Non-U.S. Holder of common stock or Series D preferred stock
to provide us or our agent an exemption or reduced treaty rate certificate or
letter in accordance with the terms of the treaty. In addition, backup
withholding, as discussed below, may apply in some circumstances if applicable
certification and other requirements are not met.
A Non-U.S. Holder of Series D preferred stock or our common stock eligible
for a reduced rate of United States withholding tax pursuant to an income tax
treaty may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the Internal Revenue Service.
Non-U.S. Holders should be aware that distributions in excess of current
and accumulated earnings and profits have generally been treated as dividends
for purposes of the foregoing discussion. However, recently promulgated
treasury regulations allow corporations, in some circumstances, to treat
payments with respect to stock as distributions other than dividends subject to
withholding to the extent of insufficient earnings and profits. Holders should
consult their own tax advisors regarding such regulations.
Sale or Exchange. A Non-U.S. Holder will not be subject to United States
income tax on any gain realized upon the sale or exchange of the Series D
preferred stock or common stock if such holder has no connection with the United
States other than holding the Series D preferred stock or common stock and in
particular (1) such gain is not effectively connected with a trade or business
in the United States of the Non-U.S. Holder, (2) in the case of a Non-U.S.
Holder who is an individual that has a "tax home" (as defined in Section
911(d)(3) of the Code) in the United States, such Non-U.S. Holder is not present
in the United States for 183 days or more in the taxable year of such
disposition, and (3) we are not nor have been a "U.S. real property holding
corporation" for United States federal income tax purposes at any time within
the shorter of the five-year period preceding such disposition or the period the
Non-U.S. Holder held the common stock.
We have not determined whether we are or have been within the prescribed
period a "U.S. real property holding corporation" for federal income tax
purposes. In general, we will be treated as a U.S. real property holding
corporation if the fair market value of our U.S. real property interests equals
or exceeds 50% of the total fair market value of our U.S. and non-U.S. real
property interests and our other assets used or held in a trade or business. If
we are, have been or become a U.S. real property holding corporation, so long as
our common stock continues to be regularly traded on an established securities
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market within the meaning of Section 897(c)(3), only a Non-U.S. Holder who holds
or held, at any time during the shorter of the five-year period preceding the
date of disposition or the holder's holding period, more than 5% of our common
stock will be subject to U.S. federal income tax on the disposition of our
common stock.
A Non-U.S. Holder engaged in a trade or business in the United States whose
income from the Series D preferred stock or common stock (including gain from
the sale or exchange thereof) is effectively connected with the conduct of such
trade or business will generally be subject to regular United States federal
income tax on such income in the same manner as if it were a U.S. person. Any
such effectively connected dividends received by a Non-U.S. Holder that is a
corporation may, under some circumstances, be subject to an additional "branch
profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Deposit Account. Because we will treat cash distributions from the deposit
account as non-taxable withdrawals, a Non-U.S. Holder generally will not be
subject to United States tax on such distributions. Distributions from the
deposit account attributable to interest earned on amounts held in the deposit
account and invested in United States government obligations also should be
exempt from United States withholding tax as portfolio interest provided that
the Non-U.S. Holder provides a properly completed Internal Revenue Service Form
W-8.
Federal Estate Tax. An individual Non-U.S. Holder who is treated as the
owner of the Series D preferred stock or common stock at the time of such
individual's death or has made certain lifetime transfers of an interest in the
Series D preferred stock or common stock will be required to include the value
of such Series D preferred stock or common stock in such individual's gross
estate for United States federal estate tax purposes and may be subject to
United States federal estate tax, unless an applicable tax treaty provides
otherwise.
Backup Withholding and Information Reporting. Under some circumstances,
the Internal Revenue Service requires "information reporting" and "backup
withholding" at a rate of 31% with respect to payments of dividends and
interest. Non-U.S. Holders generally would be exempt from Internal Revenue
Service reporting requirements and United States backup withholding with respect
to dividends payable on the Series D preferred stock. A Non-U.S. Holder of
Series D preferred stock that fails to certify its Non-U.S. Holder status in
accordance with the requirements of the proposed regulations would under some
circumstances be subject to United States backup withholding at a rate of 31% on
payments of dividends and interest. The application for exemption is available
by providing a properly completed Internal Revenue Service Form W-9.
The payment of the proceeds on the disposition of the Series D preferred
stock by a Non-U.S. Holder to or through the United States office of a broker or
through a non-United States branch of a United States broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the disposition by a Non-U.S. Holder of Series D preferred stock to or through a
non-United States office of a non-United States broker will not be subject to
backup withholding or information reporting unless the non-United States broker
has specified United States relationships.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded (or credited against the holder's United States
federal income tax liability, if any) provided that the required information is
furnished to the Internal Revenue Service.
New Regulations. Recent treasury regulations provide for new information
reporting and withholding rules with respect to Non-U.S. Holders. In general,
these regulations are effective after
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December 31, 2000 (subject to transition rules). Non-U.S. Holders should consult
their own tax attorneys regarding the effect of such regulations.
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LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
Nixon Peabody LLP, New York, New York. Some of the 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
document by reference to PSINet Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting.
The consolidated financial statements of Metamor Worldwide, Inc. appearing
in Metamor Worldwide, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1999, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given on the authority of such firm as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the SEC on a regular basis that
contain financial information and results of operations. You may read and copy
materials that we have filed with the SEC at the SEC's public reference room at
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 SEC at its Judiciary Plaza location, listed
above, or by telephone at 1-800-SEC-0330, or electronically through the SEC's
Web Site at http://www.sec.gov.
Our common stock and our Series C preferred stock are listed on the Nasdaq
National Market under the symbols "PSIX" and "PSIXP," respectively. Our SEC
filings can also be read and obtained at the following address:
The Nasdaq Stock Market
Reports Section
1735 K Street, N.W.
Washington, D.C. 20006
We furnish our shareholders with annual reports containing our audited
financial statements and with proxy material for our annual meetings complying
with the proxy requirements of the Securities Exchange Act of 1934.
We have filed a registration statement on Form S-3, as amended, with the
SEC with respect to the securities being registered of which this prospectus is
a part. This document does not contain all of the information contained in the
registration statement, certain portions of which have been omitted as permitted
by SEC rules. While complete in material respects, descriptions of documents in
this prospectus are nonetheless summaries. Please refer to the full text of
documents filed as exhibits for complete descriptions.
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DOCUMENTS INCORPORATED BY REFERENCE
PSINet
We are incorporating by reference in this prospectus the following
documents which we have filed with the SEC:
(1) Annual report on Form 10-K for the year ended December 31, 1999 (SEC
File No. 0-25812). This report contains:
. audited consolidated balance sheets for PSINet and its subsidiaries
as of December 31, 1999 and 1998; and
. audited consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended December
31, 1999, 1998 and 1997; and
(2) Quarterly report on Form 10-Q for the quarter ended March 31, 2000
(SEC File No. 0-25812).
(3) Current reports on Form 8-K (SEC File No. 0-25812) dated:
. January 10, 2000
. January 16, 2000
. January 24, 2000
. January 26, 2000
. January 27, 2000
. February 1, 2000
. March 22, 2000
. June 5, 2000
. June 13, 2000
. June 15, 2000
. June 15, 2000
(4) The Joint Proxy Statement/Prospectus contained in Amendment No. 1 to
the Registration Statement on Form S-4 (registration no. 333-34802) filed with
the SEC on May 12, 2000.
(5) Registration statement on Form 8-A dated April 7, 1995, as amended
(SEC File No. 0-25812).
(6) Registration statement on Form 8-A dated June 4, 1996, as amended (SEC
File No. 0-25812).
Metamor
We are incorporating by reference in this prospectus the risk factors and
the following financial statements that have been filed by Metamor with the SEC
(SEC File No. 0-26970) in its annual report on Form 10-K for the year ended
December 31, 1999:
. audited consolidated balance sheets for Metamor and its
subsidiaries as of December 31, 1999 and 1998;
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. audited consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended
December 31, 1999; and
. notes to those consolidated financial statements.
Subsequent Filings
We also incorporate by reference additional documents that we may file with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934 after the date of this prospectus until all the securities offered by
this prospectus are sold. These include periodic reports, such as annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports of Form
8-K, as well as proxy statements.
This prospectus incorporates by reference documents that are not presented
or delivered to you with it. We will send you copies of these documents,
exclusive of exhibits, at no cost to you. Please direct your requests to the
Office of the Secretary, PSINet Inc., 44983 Knoll Square, Ashburn, Virginia
20147 ((703) 726-4100).
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