<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
PSINET INC.
-----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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</TABLE>
<PAGE>
PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 15, 2000
The Annual Meeting of Shareholders of PSINET INC. (the "Company") will be
held at the Company's offices located at 44983 Knoll Square, Ashburn, Virginia,
on Monday, May 15, 2000, at 9:00 A.M. for the purpose of considering and acting
upon the following matters:
(1) The election of three directors for terms expiring at the Company's 2002
Annual Meeting of Shareholders.
(2) The approval of an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of capital
stock from 530 million shares to 2.06 billion shares, of which 2.0
billion shares will be shares of Common Stock and 60 million shares will
be shares of Preferred Stock.
(3) The approval of amendments to the Company's Executive Stock Incentive
Plan and Strategic Stock Incentive Plan.
(4) The ratification or disapproval of the appointment by the Board of
Directors of PricewaterhouseCoopers LLP as independent accountants for
the year ending December 31, 2000.
(5) The transaction of such other business as may properly come before the
meeting and any adjournments thereof.
Pursuant to the provisions of the By-laws of the Company, the Board of
Directors has fixed the close of business on March 20, 2000 as the record date
for determining the shareholders of the Company entitled to notice of and to
vote at the meeting and any adjournments thereof.
Please note that you may have the choice of voting over the Internet or by
telephone. Follow the instructions on your proxy card or, if your shares are
held in the name of a bank or broker, follow the instructions on the form you
receive from your bank or broker.
ALL SHAREHOLDERS ARE URGED TO CAST THEIR VOTE ON THE INTERNET OR BY PHONE,
OR TO COMPLETE, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY TO THE COMPANY
IN THE ACCOMPANYING POSTAGE PAID ENVELOPE.
By Order Of The Board Of Directors,
Kathleen B. Horne
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND
CORPORATE SECRETARY
April 7, 2000
Herndon, Virginia
<PAGE>
PSINET INC.
510 HUNTMAR PARK DRIVE
HERNDON, VIRGINIA 20170
------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 15, 2000
SOLICITATION
This Proxy Statement is being mailed to shareholders on or about April 7,
2000 in connection with the solicitation of proxies by the Board of Directors of
PSINET INC., a New York corporation ("PSINet" or the "Company"), to be used at
the Annual Meeting of Shareholders of the Company (the "Annual Meeting"), to be
held on May 15, 2000. Accompanying this Proxy Statement is a Notice of Annual
Meeting of Shareholders and a form of proxy. A copy of the 1999 Annual Report to
Shareholders of the Company, which contains financial statements and related
data, also accompanies this Proxy Statement.
All proxies which are properly completed, signed and returned to the
Company, or cast electronically or by telephone in accordance with instructions
provided, in a timely manner will be voted in accordance with the instructions
thereon. Proxies may be revoked by any shareholder through written notice to the
Secretary of the Company prior to the exercise thereof or by voting by telephone
or Internet at a later time, and shareholders who are present at the Annual
Meeting may withdraw their proxies and vote in person if they so desire.
The expense of preparing, assembling, printing and mailing the form of proxy
and the material used in the solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
to solicit proxies personally and by telephone and telegraph. The Company has
requested banks, brokers and other custodians, nominees and fiduciaries to
forward copies of the proxy materials to their principals and to request
authority for the execution of proxies and will reimburse such persons for their
services in doing so. The cost of such additional solicitation incurred
otherwise than by use of the mails is estimated not to exceed $5,000. In
addition, the Company has engaged the firm of MacKenzie Partners, Inc.
("MacKenzie") as its proxy solicitor in connection with the Annual Meeting for
an amount not to exceed $4,000 plus reimbursement of reasonable costs incurred
by MacKenzie.
The Board of Directors has fixed the close of business on March 20, 2000, as
the record date for the determination of shareholders who are entitled to notice
of and to vote at the Annual Meeting and any adjournments thereof. As of the
record date, the Company had outstanding approximately 156,918,900 shares of its
common stock, $.01 par value (the "Common Stock"). All references to shares of
the Company's Common Stock contained in this Proxy Statement give effect to the
Company's two-for-one common stock split effected on February 11, 2000. Holders
of the Company's Common Stock are entitled to one vote per whole share. Holders
of fractional shares are entitled to exercise voting rights in proportion to
their fractional holdings.
A majority of the outstanding shares of the Company's Common Stock entitled
to vote at the Annual Meeting is required to establish a quorum at the Annual
Meeting. A plurality of the votes cast by the holders of the shares of the
Company's Common Stock entitled to vote at the Annual Meeting is required for
the election of directors. The affirmative vote of the holders of a majority of
the shares of the Company's Common Stock entitled to vote at the Annual Meeting
is required for the approval of the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
capital stock. The affirmative vote of the holders of a majority of the shares
of the Company's Common Stock present in person or by proxy at the Annual
Meeting is required for the
<PAGE>
approval of the amendments to the Company's Executive Stock Incentive Plan and
Strategic Stock Incentive Plan. A majority of the votes cast by the holders of
the Company's Common Stock entitled to vote at the Annual Meeting is required
for the ratification of the appointment of independent accountants.
With regard to the election of directors, votes may be cast in favor or
withheld. Votes withheld from any director will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
at the Annual Meeting, but will not affect the outcome of the voting in such
election. With regard to other proposals, abstentions may be specified. The
Company believes that abstentions are shares present and entitled to vote, but
do not constitute votes cast in respect of a particular matter. The Company,
therefore, intends to count abstentions and votes withheld in respect of voting
on the proposal to ratify the appointment of independent accountants for
purposes of determining the presence or absence of a quorum for the transaction
of business at the Annual Meeting but not as votes having been cast in respect
of such proposal. Accordingly, such abstentions and votes withheld will not
affect the outcome of the voting on that proposal. Abstentions in respect of the
proposal to approve the amendments to the Company's Certificate of Incorporation
and to the Company's Executive Stock Incentive Plan and Strategic Stock
Incentive Plan will be counted for purposes of determining both the presence or
absence of a quorum for the transaction of business and the total number of
shares present with respect to such proposal. Accordingly, such abstentions or
votes withheld in respect of this proposal will have the same effect as votes
against this proposal. Broker non-votes (that is, proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owners or other persons entitled to vote shares on a particular
matter as to which the brokers or nominees do not have discretionary power) may
be counted as present or represented for purposes of determining the presence or
absence of a quorum for the transaction of business, but not for purposes of
determining the voting power present with respect to proposals in respect of
which brokers do not have discretion (non-discretionary proposals).
PRINCIPAL SHAREHOLDERS
COMMON STOCK
The following table sets forth the beneficial ownership of the Company's
Common Stock, as of March 3, 2000, by (i) each person who is known by the
Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each director and director nominee of the Company who owns shares of
the Company's Common Stock; (iii) each executive officer named in the Summary
Compensation Table appearing elsewhere herein; and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
- ------------------------ --------------------- --------
<S> <C> <C>
IXC Internet Services, Inc...................... 20,459,578(2) 13.4%
Janus Capital Corporation....................... 17,884,282(3) 11.7
William L. Schrader............................. 11,350,069(4) 7.4
T. Rowe Price Associates, Inc................... 10,001,448(5) 6.6
Harold S. Wills................................. 1,172,100(6) *
David N. Kunkel................................. 903,819(7) *
Ralph J. Swett.................................. 34,750(8) *
William H. Baumer............................... 188,976(9) *
Chi H. Kwan..................................... 86,458(10) *
Ian P. Sharp.................................... 23,750(11) *
Edward D. Postal................................ 40,008(12) *
Executive officers and directors as a group
(18 persons).................................. 14,730,439(13) 9.7
</TABLE>
- ------------------------
* Less than 1%
2
<PAGE>
(1) The persons named in the table have sole voting and dispositive power with
respect to all shares of the Company's Common Stock shown as beneficially
owned by them, subject to the information contained in the notes to the
table and to community property laws, where applicable.
(2) These shares could be deemed to be beneficially owned by the members of the
Board of Directors of Cincinnati Bell Inc. (doing business as Broadwing
Inc.). Cincinnati Bell's address is 201 East Fourth Street, P.O. Box 2301,
Cincinnati, Ohio 45201. These shares include 6,000,000 shares of our Common
Stock, which, according to IXC's Schedule 13D Amendment No. 1 filed on
June 17, 1999, IXC loaned to Merrill Lynch International, which we refer to
as MLI, in June 1999 in respect of a forward-purchase agreement with MLI to
be settled in the second quarter of 2002 or sooner upon the occurrence of
specified additional 3,000,000 shares of our common stock, which, according
to IXC's Schedule 13D Amendment No. 3 filed on July 19, 1999, IXC loaned to
MLI in July 1999 in respect of a forward-purchase agreement with MLI to be
settled in the first quarter of 2002 or sooner upon the occurrence of
specified events, pursuant to which MLI made a payment to IXC of
$59,750,860.68. In the amendments to its Schedule 13D, IXC stated that it
has waived the right to vote any of the loaned shares during the term of
these transactions. MLI has informed IXC and us that MLI will sell the
shares borrowed from IXC in connection with the hedge of its obligations
under the forward-purchase agreements with IXC. We have effected a
registration statement with respect to these 6,000,000 shares pursuant to a
demand by IXC of its registration rights.
(3) In a Schedule 13G dated February 9, 2000, Janus Capital Corporation reported
sole voting and dispositive power over all these shares. Janus Capital
Corporation's address is 101 Filmore Street, Denver, Colorado 80206-4923.
(4) Includes 11,022,714 shares which are pledged with NationsBank in respect of
four lines of credit providing Mr. Schrader with up to $25.0 million on an
aggregate basis, of which approximately $22.8 million (including principal
and interest) was outstanding as of March 3, 2000, at an interest rate equal
to the 30 day LIBOR rate plus 0.9% per annum. Includes 2,000 shares held by
Mr. Schrader and his wife as joint tenants with rights of survivorship. Does
not include approximately 92,200 shares that were transferred in December
1999 to a foundation, of which Mr. Schrader is the trustee, and of which Mr.
Schrader disclaims beneficial ownership. Also includes 300,000 shares held
by a limited liability company of which Mr. Schrader and his wife have
shared voting and dispositive power. Does not include 2,125,224 shares
beneficially owned by Mr. Schrader's wife, nor 223,764 shares held by two
trusts (of which Mr. Schrader's wife is trustee) for the benefit of two
minor children of Mr. Schrader's. Mr. Schrader disclaims beneficial
ownership of the shares beneficially owned by his wife and held in trust for
his minor children. Mr. Schrader's address is c/o PSINet Inc., 510 Huntmar
Park Drive, Herndon, Virginia, 20170. Also includes 14,583 shares issuable
upon the exercise of vested options and options which are deemed to be
presently exercisable. Does not include 85,417 shares issuable upon the
exercise of options which are not deemed to be presently exercisable.
(5) In a Schedule 13G dated February 14, 2000, T. Rowe Price Associates, Inc.
claimed sole voting power over 1,158,632 shares, sole dispositive power over
10,001,448 shares and no shared voting or shared dispositive power over any
shares. T. Rowe Price Associates, Inc.'s address is 100 East Pratt Street,
Baltimore, Maryland 21202.
(6) Includes 1,060,738 shares issuable upon the exercise of vested options which
are deemed to be presently exercisable and 2,122 shares issuable pursuant to
Mr. Willis' participation in the Employee Stock Purchase Plan for the period
from October 1, 1999 through March 31, 2000. Does not include
622,292 shares issuable upon the exercise of options which are not deemed to
be presently exercisable.
(FOOTNOTES CONTINUED ON NEXT PAGE)
3
<PAGE>
(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)
(7) Includes 901,761 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
390,625 shares issuable upon the exercise of options which are not deemed to
be presently exercisable or 55,142 shares beneficially owned by
Mr. Kunkel's wife. Mr. Kunkel disclaims beneficial ownership of the shares
beneficially owned by his wife.
(8) Includes 11,250 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
18,750 shares issuable upon the exercise of options which are not deemed to
be presently exercisable or 6,500 shares beneficially owned by Mr. Swett's
wife.
(9) Includes 100,000 shares issuable upon the exercise of outstanding warrants
and 9,000 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable. Does not include 15,000 shares
issuable upon the exercise of options which are not deemed to be presently
exercisable.
(10) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 163,542 shares issuable upon the exercise of options which are
not deemed presently exercisable.
(11) Consists solely of shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Does not include
approximately 16,250 shares issuable upon the exercise of options which are
not deemed to be presently exercisable.
(12) Includes 5,208 shares issuable upon the exercise of vested options and
options which are deemed to be presently exercisable. Mr. Postal resigned
from the Company on March 1, 2000 and all unvested options were cancelled at
that time.
(13) See notes (4) and (7) through (13) above. Includes also approximately
942,981 shares issuable upon the exercise of vested options and options
which are deemed to be presently exercisable granted to four executive
officers. Also includes approximately 9,773 shares issuable pursuant to
participation in the Employee Stock Purchase Plan by two executive officers.
Does not include approximately 2,304,858 shares issuable upon the exercise
of outstanding options granted to four executive officers which are not
deemed to be presently exercisable.
4
<PAGE>
PROPOSAL 1--ELECTION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors will be
divided into two classes consisting of at least three directors each and as
nearly equal in number as possible, and that directors will be elected for terms
of two years on a staggered basis. The Board of Directors is currently composed
of six directors, three whose terms expire in 2000 and three whose terms expire
in 2001. Unless authority to vote for the election of a director is specifically
withheld by appropriate designation (either electronically or on the face of the
proxy), it is the intention of the persons named in the accompanying form of
proxy to vote such proxy for the election at the Annual Meeting of William H.
Baumer, Ralph J. Swett and Harold S. Wills as directors to serve until the 2002
Annual Meeting of Shareholders and until their respective successors shall have
been elected and qualified.
All nominees presently are members of the Company's Board of Directors. The
proxies cannot be voted for a greater number of persons than three. Management
has no reason to believe that the named nominees will be unable or unwilling to
serve if elected to office. In such case, however, it is intended that the
individuals named in the enclosed proxy will vote for the election of such
substituted nominees as the Company's Board of Directors may recommend.
Certain information as of March 20, 2000 concerning the nominees and
directors continuing in office is set forth in the following table.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, BUSINESS
NAME AGE EXPERIENCE AND DIRECTORSHIPS
- ---- -------- ---------------------------------------------------------
<S> <C> <C>
NOMINEES FOR TERMS EXPIRING IN 2002
William H. Baumer 67 Professor of Philosophy at the University at Buffalo
since 1971. Acting Chairman of the Department of
Economics at the University at Buffalo from June 1992
until June 1995. Treasurer and Vice President of NYSERNet
from January 1986 to December 1990 and from December 1989
to December 1990, respectively. Director of the Company
since 1993.
Ralph J. Swett 65 Retired. Former Vice Chairman of the Board of Directors
of IXC Communications, Inc. ("IXC Communications") now
known as Broadwing Communications Inc., which formerly
was the indirect parent company of IXC Internet Services
Inc. ("IXC"). Chairman of IXC Communications from its
formation in July 1992 through April 1998, and served as
Chief Executive Officer and President of IXC
Communications from July 1992 to October 1997. Prior
thereto, served as Chairman of the Board and Chief
Executive Officer of Communications Transmission, Inc.
("CTI"), a predecessor entity to IXC Communications, from
1986 to 1992. From 1969 to 1986, served in increasingly
senior positions (Vice President, President and Chairman)
of Times Mirror Cable Television, a subsidiary of Times
Mirror and a previous owner of IXC Carrier, Inc., the
direct parent company of IXC ("IXC Carrier"), and as a
Vice President of Times Mirror from 1981 to 1986. Served
as Chairman of IXC Carrier since 1979 and served as its
Chief Executive Officer from 1986 to October 1997 and its
President from 1991 to October 1997. Director of the
Company since February 25, 1998, effective upon the
closing of the Company's transaction with IXC as
described herein under "Certain Relationships and
Transactions--Strategic Alliance with IXC."
(TABLE CONTINUES ON NEXT PAGE)
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
(TABLE CONTINUED FROM PREVIOUS PAGE)
PRINCIPAL OCCUPATION, BUSINESS
NAME AGE EXPERIENCE AND DIRECTORSHIPS
- ---- -------- ---------------------------------------------------------
<S> <C> <C>
Harold S. Wills 58 President and Chief Operating Officer of the Company
since September 1998 and April 1996, respectively.
Executive Vice President of the Company from April 1996
to September 1998. Acting Chief Financial Officer of the
Company from April 1996 to October 1996. Chief Operating
Officer of Hospitality Information Networks, Inc., a
provider of information services for the hospitality
industry, from July 1995 through January 1996. Served in
various capacities including Managing Director,
International Computer Services, Technical Service
Director and Sales Director of Granada Group PLC, a
computer services provider, from September 1991 through
September 1995. Director of the Company since April 1996.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
David N. Kunkel 56 Vice Chairman of the Company since October 1999.
Executive Vice President of the Company since October
1998. Senior Vice President of the Company from September
1996 to October 1998. Vice President of the Company from
July 1995 to September 1996. General Counsel of the
Company from June 1995 to September 1999. Senior Counsel
to Nixon, Hargrave, Devans & Doyle LLP, outside counsel
for the Company, from July 1995 through December 1995.
Partner of Nixon, Hargrave, Devans & Doyle LLP from
January 1979 until July 1995. Outside counsel to NYSERNet
Inc. ("NYSERNet"), a provider of data networking services
in New York State, from 1986 until 1989 and to the
Company from its inception until July 1995. Director of
the Company since 1995.
William L. Schrader 48 Founder of the Company. Chairman of the Board of
Directors and Chief Executive Officer of the Company
since its inception. President of the Company from its
inception to September 1998. President and Chief
Executive Officer of NYSERNet from January 1986 to
December 1989. Co-founder and Executive Director of
Cornell Theory Center, a supercomputer center, from May
1984 until February 1987. Director of the Company since
its inception.
Ian P. Sharp 67 Retired. President and founder of I. P. Sharp Associates,
a software development company, from December 1964
through July 1989. Director of the Company since
September 1996.
</TABLE>
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors met 24 times during the year ended December 31, 1999.
Each of the directors attended 75% or more of the meetings held by the Board of
Directors and each of the directors attended 75% or more of the meetings held by
any committee of the Board of Directors on which such person served during the
last fiscal year, except for Mr. Sharp who attended less than 75% of the Audit
Committee meetings.
The Company's Board of Directors has three standing committees: the Audit
Committee, the Compensation Committee and the Financing Committee. The Board
does not have a standing nominating committee. The Audit Committee met seven
times during the year ended December 31,
6
<PAGE>
1999. The Audit Committee, among other things, recommends the firm to be
appointed as independent accountants to audit the Company's financial
statements, reviews significant accounting and reporting issues and
developments, reviews and discusses the scope and results of each audit with the
independent accountants, reviews with management and the independent accountants
the Company's interim and year-end operating results and considers the adequacy
of the internal accounting controls and audit procedures of the Company. The
Committee may also conduct inquiries into the Company's operations, including,
without limitation, inquiries to ensure compliance with applicable laws,
securities rules and regulations and accounting standards. The current members
of the Audit Committee are Messrs. Baumer, Sharp and Swett.
The Compensation Committee met eight times during the year ended December
31, 1999. The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's
Executive Stock Option Plan, Executive Stock Incentive Plan and Strategic Stock
Incentive Plan. The current members of the Compensation Committee are Messrs.
Baumer, Sharp and Swett.
The Financing Committee did not meet during the year ended December 31,
1999, although certain matters within the purview of such committee, including
debt issuances were approved by the full Board of Directors. The Financing
Committee may authorize and approve financings of debt securities by the
Company, lease financings and equity financings subject to certain limitations.
The current members of the Financing Committee are Messrs. Baumer, Schrader and
Sharp.
COMPENSATION OF DIRECTORS
Directors, other than those who also are employees or consultants of the
Company or are serving on the Board of Directors as representatives of a
shareholder, receive annual fees of $15,000, with Committee Chairmen receiving
an additional amount of $3,000 each per year, and are eligible for awards under
the Company's Directors Stock Incentive Plan (the "Directors' Plan"). The
Directors' Plan provides for initial option grants with respect to 10,000 shares
of Common Stock ("Initial Grants") to be made to each eligible director upon his
or her first election to the Company's Board of Directors and, thereafter, for
annual grants of options to purchase 5,000 shares of Common Stock to be made to
each eligible director who has served on the Company's Board of Directors for at
least 12 months. Options are exercisable for 10 years after the date of grant.
The exercise price for any option under the plan shall be equal to the fair
market value of the Common Stock at the time such option is granted. The plan
provides that Initial Grants thereunder vest over a four-year period in respect
of the exercise of one-sixteenth of the shares subject thereto on the last day
of each calendar quarter following such grant, and that annual option awards
vest over a two-year period in respect of one-half of the shares subject thereto
on each of the first and second anniversaries of the grant date. Each of Messrs.
Sharp and Swett received Initial Grants upon their election to the Company's
Board of Directors in accordance with the Directors' Plan. In addition,
directors who are not also officers of the Company receive fees of $1,000 per
day for Board and Committee meetings, $200 per day for Board and Committee
conference calls and $1,250 per day for services provided as a director at the
Company pursuant to Board or committee request. Committee Chairmen receive an
additional $250 for each Committee meeting attended and $50 for each Committee
conference call attended. Directors also are reimbursed for certain reasonable
expenses incurred in attending Board or Committee meetings.
7
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information as of March 20, 2000
concerning the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- -------- ---------------------------------------------------
<S> <C> <C>
William L. Schrader....................... 48 Chairman of the Board of Directors and Chief
Executive Officer (Founder)
Harold S. Wills........................... 58 President, Chief Operating Officer and Director
David N. Kunkel........................... 56 Vice Chairman, Executive Vice President and
Director
Geoffrey E. Axton......................... 42 Senior Vice President and President, U.S.
Operations and Corporate Development
James F. Cragg............................ 48 Senior Vice President and President, U.S. Sales and
Marketing
Edward A. Davis........................... 54 Senior Vice President and President, PSINetworks
Company
Harry G. Hobbs............................ 46 Senior Vice President and President, PSINet Europe
Kathleen B. Horne......................... 42 Senior Vice President, General Counsel and
Corporate Secretary
Philippe J. Kuperman...................... 56 Senior Vice President and President, PSINet Latin
America
Chi H. Kwan............................... 49 Senior Vice President and President, PSINet
Asia/Pacific
Michael J. Malesardi...................... 39 Senior Vice President and Controller
John B. Muleta............................ 35 Senior Vice President and President, Global
Facilities Development and IMEA (India, Middle East
and Africa)
William A. Opet........................... 43 Senior Vice President and President, Transaction
Network Services Division
Lawrence Winkler.......................... 33 Senior Vice President and Treasurer
</TABLE>
WILLIAM L. SCHRADER is the founder of the Company and has served as Chairman
of the Board of Directors and Chief Executive Officer of the Company since its
inception and as President of the Company from its inception to September 1998.
Prior to forming the Company, Mr. Schrader served as President and Chief
Executive Officer of NYSERNet from January 1986 to December 1989. Mr. Schrader
also was a co-founder, and, from May 1984 until February 1987, served as
Executive Director of the Cornell Theory Center, a National Science Foundation
supercomputer center.
HAROLD S. WILLS has served as President of the Company since September 1998
and as a director and Chief Operating Officer of the Company since April 1996,
and had served as Executive Vice President of the Company from April 1996 to
September 1998. Mr. Wills also served as Acting Chief Financial Officer of the
Company from April 1996 to October 1996. Mr. Wills served as Chief Operating
Officer of Hospitality Information Networks, Inc., a provider of information
services for the hospitality industry, from July 1995 through January 1996. Mr.
Wills also held various positions including, Managing Director, International
Computer Services, Technical Service Director and Sales
8
<PAGE>
Director of Granada Group PLC, a computer services provider, from September 1991
through September 1995.
DAVID N. KUNKEL has served as Vice Chairman of the Company since October
1999, as Executive Vice President of the Company since October 1998, had served
as Senior Vice President of the Company from September 1996 to October 1998, had
served as Vice President of the Company from July 1995 to September 1996, and
had served as General Counsel of the Company from June 1995 to September 1999.
Mr. Kunkel has served as a director of the Company since September 1995 and had
served as Secretary of the Company from September 1995 to October 1998. Mr.
Kunkel also served as Vice President of International Operations of the Company
from April 1996 to September 1996 and as Senior Counsel to Nixon, Hargrave,
Devans & Doyle LLP (now known as Nixon Peabody LLP), outside counsel to the
Company, from July 1995 through December 1995. Prior to July 1995, Mr. Kunkel
was a partner with the law firm of Nixon, Hargrave, Devans & Doyle LLP for 16
years and served as outside counsel to NYSERNet from 1986 until 1989 and to the
Company from its inception until July 1995.
GEOFFREY E. AXTON has served as Senior Vice President and President, U.S.
Operations and Corporate Development of the Company since October 1999 and had
served as Senior Vice President, Business and Corporate Development of the
Company from November 1998 to October 1999. Prior to joining the Company, Mr.
Axton was a founder executive and Vice President of Strategy and Commercial
Development for Concert Communications from May 1995 to October 1998. Prior
thereto, Mr. Axton held a variety of positions at British Telecom where he was
employed for 18 years.
JAMES F. CRAGG has served as Senior Vice President and President, U.S. Sales
and Marketing of the Company since, October 1999 and had served as Vice
President, Central Region President Sales and Marketing of the Company from July
1999 to October 1999. Prior to joining the Company, Mr. Cragg served as
President and Chief Operating Officer of Advanced Communications from January
1998 to June 1999. Prior thereto, Mr. Cragg served as Vice President,
Mid-America Region of Brooks Fiber from November 1996 to December 1997 and prior
to that he was Senior Vice President of Business Markets with Snyder
Communications from May 1995 to October 1996.
EDWARD A. "TED" DAVIS has served as Senior Vice President and President,
PSINetworks Company of the Company since October 1998. Prior to joining the
Company, Mr. Davis served as Vice President of Customer Technical Support for
Lucent Technologies (formerly the network services division of AT&T), from
January 1995 to April 1998. Prior thereto, Mr. Davis served in various technical
and management positions with AT&T since beginning his career there in June
1968.
HARRY G. HOBBS has served as Senior Vice President and President, PSINet
Europe of the Company since September 1998 and had served as Vice President,
Customer Administration of the Company from September 1997 to September 1998.
Prior to joining the Company, Mr. Hobbs served as Vice President, Customer Care
for American Personal Communications, LP, a provider of wireless communications
services and an affiliate of Sprint Spectrum, from February 1995 to August 1997.
Prior thereto, Mr. Hobbs served in various positions in the Customer Service,
Operations and Large Account Support groups at MCI, including Vice President,
Global Customer Service from September 1993 to February 1995, Director,
Operations from March 1992 to February 1995 and Director, Large Account Group
from November 1990 to March 1992.
KATHLEEN B. HORNE has served as Senior Vice President and General Counsel of
the Company since October 1999, had served as Vice President and Deputy General
Counsel of the Company from November 1998 to September 1999 and had served as
Assistant General Counsel of the Company from April 1996 to November 1998. Since
January 2000, Ms. Horne has served as Corporate Secretary of the Company. Prior
to joining the Company, Ms. Horne was with the law firm of Nixon, Hargrave,
Devans & Doyle LLP (now known as Nixon Peabody LLP) for five years.
9
<PAGE>
PHILIPPE KUPERMAN has served as Senior Vice President and President, PSINet
Latin America of the Company since May 1999. Prior thereto, Mr. Kuperman served
as Vice President Americas and Asia for the Language Technology Division of
Lernout & Hauspie Speech Products N.V., a developer of translation software,
from October 1998 to February 1999. Prior thereto, Mr. Kuperman was employed by
Globalink Inc., which was acquired by Lernout & Hauspie, as Executive Vice
President of Worldwide Sales and Marketing from July 1996 to January 1997 and as
Senior Vice President of International Operations form January 1997 to September
1998. Prior thereto, Mr. Kuperman served in various positions at Software AG, a
developer of database, networking and application software, from 1989 to May
1996, most recently as Senior Vice President, Indirect Sales Worldwide.
CHI H. KWAN has served as Senior Vice President and President, PSINet
Asia/Pacific of the Company since October 1998. Prior to joining the Company,
Mr. Kwan served as Vice Chairman and Representative Director of Montblanc Japan
K.K., a maker of luxury branded products, from May 1997 to September 1998. Prior
thereto, Mr. Kwan served in several executive management positions with Pitney
Bowes Corporation and its affiliates, including Vice Chairman and Director and
Vice President Market Development, Asia Pacific, from October 1995 to April
1997, and President and Representative Director of Dodwell Pitney Bowes
Corporation from April 1992 to September 1995. From 1975 to April 1992, Mr. Kwan
held various senior management positions with Nicolet Japan, K.K. (a
manufacturer and seller of spectroscopy products), Finnegan-Mat Instruments Inc.
(a developer of analytical instruments) and H.B. Fuller Japan Inc. (a worldwide
manufacturer and marketer of specialty chemicals).
MICHAEL J. MALESARDI has served as Senior Vice President of the Company
since February 2000 and as Controller of the Company since July 1997 and had
served as Vice President of the Company from July 1997 to February 2000. Prior
to joining the Company, Mr. Malesardi served as Director of Financial
Administration of Watson Wyatt from April 1995 to May 1997 and as Controller of
Watson Wyatt from February 1992 to April 1995. From September 1982 to February
1992, Mr. Malesardi held various positions at Price Waterhouse LLP (now known as
PricewaterhouseCoopers LLP), the latest as Senior Audit Manager.
JOHN B. MULETA has served as Senior Vice President and President, Global
Facilities Development and IMEA (India, Middle East, Africa) of the Company
since October 1999 and had served as Vice President of Capacity Planning and
Service Delivery of the Company from February 1998 to September 1999 and as Vice
President, Office of the General Counsel of the Company from February 1998 to
August 1998. Prior to joining the Company, Mr. Muleta was with the Federal
Communications Commission as the Deputy Bureau Chief, Common Carrier Bureau from
September 1997 to February 1998, as Chief, Enforcement Division from July 1995
to August 1997 and as Attorney-Advisor, Office of Plans and Policy from December
1994 to July 1995. Prior thereto, Mr. Muleta was with Coopers & Lybrand
Consulting, LLC and GTE Corporation.
WILLIAM A. OPET has served as Senior Vice President and President,
Transaction Network Services Division of the Company since November 1999 and as
President, PSINet Corporate Network Services of the Company from July 1998 to
November 1999. Prior to joining the Company, Mr. Opet held various positions at
Geotek Company, including President and Chief Executive Officer of Geotek Data
Company, Senior Vice President of Business Development, Senior Vice President of
Marketing and Sales, and Vice President of Marketing during his tenure from
April 1994 to January 1998. Prior thereto, Mr. Opet was Vice President of
Marketing of LIN Broadcasting from 1990 to 1994.
LAWRENCE WINKLER has served as Senior Vice President of the Company since
February 2000, as Treasurer of the Company since September 1998 and had served
as Vice President of the Company from September 1998 to February 2000 and as
Director of Capital Markets of the Company from November 1997 to September 1998.
Prior to joining the Company, Mr. Winkler was Director of Investor Relations for
The Mills Corporation from November 1996 to November 1997 where he was
10
<PAGE>
responsible for investor relations and capital markets. From February 1995 to
November 1996, Mr. Winkler served as Manager of Financial Analysis and Investor
Relations for the Black and Decker Corporation. Prior thereto, Mr. Winkler
served in various senior financial management and consulting roles for CRI Inc.
and Arthur Andersen & Co./Andersen Consulting.
Each of the Company's executive officers serves at the pleasure of the Board
of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules promulgated thereunder require the
Company's officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC") and
to furnish to the Company copies of all such filings. The Company has
determined, based solely upon a review of those reports and amendments thereto
furnished to the Company during and with respect to the year ended December 31,
1999 and written representations from certain reporting persons, that Edward
Postal and E.A. Davis were inadvertently late in filing Forms 4 each due to
technical errors, the former which was due on June 10, 1999 and was filed on
June 12, 1999 and the latter which was due on January 10, 1999 and was filed on
January 11, 1999. In addition, Ralph Swett was late in filing three Forms 4
which were due on November 10, 1999, December 10, 1999 and January 10, 2000, in
respect of transactions which occurred in October 1999, November 1999 and
December 1999, respectively. A Form 5 reporting these three transactions was
filed late, on March 17, 2000.
11
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth in summary form the
compensation paid by the Company to its chief executive officer and to each of
its four most highly compensated executive officers other than the chief
executive officer as of December 31, 1999 for services rendered to the Company
in all capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1)($) BONUS (1)($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
- --------------------------- -------- ------------- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader........ 1999 $487,500 $262,500 $3,300(2) 100,000(3) $1,150(4)
Chairman and 1998 314,519 200,000 5,905(2) -- 1,195(4)
Chief Executive Officer 1997 248,519 150,000 7,457(2) -- 3,135(4)
Harold S. Wills............ 1999 $468,750 $212,500 $5,155(5) 330,000(6) $3,250(7)
President and 1998 360,500 150,000 9,354(5) 450,000(6) 3,250(7)
Chief Operating Officer 1997 252,654 100,000 9,929(5) 500,000(6) 3,125(7)
Chi H. Kwan (8)............ 1999 $371,716 $161,403 $ -- 50,000(10)
Senior Vice President and 1998 97,820 40,350 29,346(9) 200,000(10)
President, PSINet Asia/
Pacific
David N. Kunkel............ 1999 $350,000 $150,000 $5,835(11) 190,000(12) $3,250(7)
Vice Chairman and 1998 334,192 150,000 4,288(11) 400,000(12) 3,250(7)
Executive Vice President 1997 299,327 100,000 6,550(11) 200,000(12) 3,125(7)
Edward D. Postal........... 1999 $286,250 $120,000 $5,792(13) 250,000(14) $3,250(7)
Executive Vice President 1998 252,288 115,000 5,590(13) 400,000(14) 3,250(7)
and Chief Financial 1997 204,077 75,000 6,880(13) 150,000(14) 3,125(7)
Officer
</TABLE>
- ------------------------
(1) Amounts reported in respect of a particular fiscal year reflect amounts
earned for services rendered in that fiscal year regardless of when paid.
(2) Consists of (i) $1,034 and $5,107 paid to Mr. Schrader with respect to
installation of a security system at Mr. Schrader's home in 1998 and 1997,
respectively, (ii) a car allowance of $3,300, $3,290 and $2,350 in 1999,
1998 and 1997, respectively, and (iii) a $1,581 taxable trip provided by the
Company to Mr. Schrader in 1998.
(3) Consists of 100,000 options issued under the Company's Executive Stock
Incentive Plan in 1999.
(4) Consists of: (i) matching contributions made to Mr. Schrader's account under
the Company's 401(k) Plan in the amounts of $1,150, $1,195 and 1,000 in
1999, 1998 and 1997, respectively, and (ii) insurance premiums in the amount
of $2,135 paid by the Company in 1997 with respect to the proportionate
beneficial interest of Mr. Schrader's spouse in an insurance policy on Mr.
Schrader's life.
(FOOTNOTES CONTINUE ON NEXT PAGE)
12
<PAGE>
(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)
(5) Consists of (i) $473 and $6,051 paid to Mr. Wills for installation of a
security system at his home in 1998 and 1997, respectively, (ii) car
allowances of $2,396, $3,173 and $3,878 paid to Mr. Wills in 1999, 1998 and
1997 respectively and (iii) taxable trips provided by the Company to Mr.
Wills in the amount of $2,759 in 1999 and $5,708 in 1998.
(6) Consists of (i) 260,000 and 250,000 options issued under the Company's
Strategic Stock Incentive Plan in 1999 and 1998, respectively, (ii) 70,000,
200,000 and 100,000 options issued under the Company's Executive Stock
Incentive Plan in 1999, 1998 and 1997, respectively, and (iii) 400,000
options issued under the Company's Executive Stock Option Plan in 1997.
(7) Consists of matching contributions made to the named officer's account under
the Company's 401(k) Plan in the years indicated.
(8) Mr. Kwan joined the Company in September 1998. Accordingly, no information
is provided for periods prior thereto with respect to Mr. Kwan. Compensation
listed is based on an exchange rate of (Yen) .0097820 = U.S.$1 at December
31, 1999.
(9) Represents a signing bonus paid to Mr. Kwan at the end of his first month.
(10) Consists of (i) 50,000 options issued under the Company's Strategic Stock
Incentive Plan in 1999 and (ii) 200,000 options issued under the Company's
Executive Stock Incentive Plan in 1998.
(11) Consists of (i) car allowances of $5,835, $4,288 and $3,544 paid to Mr.
Kunkel in 1999, 1998 and 1997, respectively and (ii) payments made to Mr.
Kunkel in connection with his relocation as follows: $830 for certain
closing costs on the sale of his primary residence paid to Mr. Kunkel in
1997 and $2,176 for certain carrying costs for his residence pending such
sale paid to Mr. Kunkel in 1997.
(12) Consists of (i) 190,000 and 200,000 options issued under the Company's
Strategic Stock Incentive Plan in 1999 and 1998, respectively, (ii) 200,000
options issued under the Company's Executive Stock Incentive Plan in 1998
and (iii) 200,000 options issued pursuant to the Company's Executive Stock
Option Plan in 1997.
(13) Represents a car allowance to Mr. Postal.
(14) Consists of (i) 50,000 and 200,000 options issued under the Company's
Strategic Stock Incentive Plan in 1999 and 1998, respectively, (ii) 200,000,
200,000 and 72,100 options issued under the Company's Executive Stock
Incentive Plan in 1999, 1998 and 1997, respectively, and (iii) 77,900
options issued under the Company's Executive Stock Option Plan in 1997.
13
<PAGE>
OPTION GRANTS. The following table sets forth certain information, as of
December 31, 1999, concerning individual grants of stock options made during the
fiscal year ended December 31, 1999 to each of the persons named in the Summary
Compensation Table above.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED EXERCISE APPRECIATION
UNDERLYING TO EMPLOYEES OR BASE FOR OPTION TERM
OPTIONS IN PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE 5% ($) 10% ($)
- ---- ---------- ---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader............. 100,000(2) 0.85% $17.3750 10/01/09 $1,092,704 $2,769,128
Harold S. Wills................. 4,678(3) 0.04% $21.3750 04/01/09 $ 62,885 $ 159,362
55,322(3) 0.47% $21.3750 04/01/09 $ 743,673 $1,884,613
200,000(3) 1.70% $24.3125 05/19/09 $3,058,000 $7,749,573
70,000(2) 0.60% $17.3750 10/01/09 $ 764,893 $1,938,389
Chi H. Kwan..................... 50,000(3) 0.43% $24.3125 05/19/09 $ 764,500 $1,937,393
David N. Kunkel................. 3,334(3) 0.03% $21.3750 04/01/09 $ 44,818 $ 113,577
36,666(3) 0.31% $21.3750 04/01/09 $ 492,887 $1,249,073
1,180(3) 0.01% $24.3125 05/19/09 $ 18,042 $ 45,722
148,820(3) 1.27% $24.3125 05/19/09 $2,275,458 $5,766,457
Edward D. Postal................ 45,834(3) 0.39% $21.3750 04/01/09 $ 616,129 $1,561,392
4,166(3) 0.04% $21.3750 04/01/09 $ 56,002 $ 141,920
450(2) 0.01% $24.3125 05/19/09 $ 6,881 $ 17,437
149,550(2) 1.27% $24.3125 05/19/09 $2,286,620 $5,794,743
50,000(2) 0.43% $17.3750 10/01/09 $ 546,352 $1,384,564
</TABLE>
- ------------------------
(1) Based upon total grants of options in respect of 11,770,071 shares of Common
Stock made during 1999.
(2) Granted under the Company's Executive Stock Incentive Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to continued
employment by the Company on each of such dates.
(3) Granted under the Company's Strategic Stock Incentive Plan. Vest monthly
over 48 months from the anniversary of the grant, subject to the continued
employment by the Company on each of such dates. Under each of the Company's
Executive Stock Incentive Plan, Executive Stock Option Plan, Directors Stock
Incentive Plan and Strategic Stock Incentive Plan, upon the acquisition of
beneficial ownership of 30% or more of the Company's outstanding Common
Stock by any person other than a wholly-owned subsidiary of the Company or
the occurrence of certain other change in control events specified in such
plans, including certain mergers, consolidations and transfers of all or
substantially all of the Company's assets, all options and stock
appreciation rights will become fully exercisable and all restricted stock
awards will become immediately vested.
14
<PAGE>
AGGREGATE YEAR-END OPTION VALUES. The following table provides information
concerning the number of unexercised options held by each of the individuals
named in the Summary Compensation Table as of December 31, 1999. Also reported
are the values for "in the money" options, which represent the positive spread
between the exercise price and the fair market value of the Company's Common
Stock as of December 31, 1999.
AGGREGATED OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1999(#) AT DECEMBER 31, 1999 ($)(1)
ACQUIRED VALUE --------------------------- ----------------------------
NAME ON EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Schrader....... 854,000 $13,935,030 4,166 95,834 $ 56,241 $ 1,293,759
Harold S. Wills........... 96,968 $ 2,678,741 909,698 773,334 $23,423,846 $15,380,060
Chi H. Kwan............... -- -- 65,625 184,375 $ 1,540,811 $ 3,906,054
David N. Kunkel........... -- -- 835,094 457,292 $21,522,735 $ 8,991,613
Edward D. Postal.......... -- -- 449,905 550,095 $11,254,141 $10,635,161
</TABLE>
- ------------------------
(1) Based upon a closing price of $30.875 on December 31, 1999, as reported on
The Nasdaq Stock Market.
EMPLOYMENT AGREEMENTS. The Company has employment agreements with each of
Messrs. Schrader, Wills, Kwan and Kunkel. The Company also has employment
agreements with its executive officers pursuant to which they serve in their
respective capacities.
Mr. Schrader's employment agreement provides for a four-year term ending
October 2003 and a current annual base salary of $750,000 with a minimum annual
increase of 5%. The agreement also provides for a performance bonus of $450,000
per annum or such greater amount as may be determined by the Compensation
Committee, subject to achievement of certain performance objectives established
by the Compensation Committee.
Mr. Wills's employment agreement provides for a four-year term ending
October 2003 and a current annual base salary of $600,000, with a minimum annual
increase of 5%. The agreement also provides for a performance bonus of $400,000
per annum, or such greater amount as may be determined by the Compensation
Committee, subject to achievement of certain performance objectives established
by the Compensation Committee.
Mr. Kwan's employment agreement provides for a three-year term ending August
2001, and a current annual base salary of (Yen)40,000,000 per annum, and also
provides for a signing bonus of (Yen)3,000,000, a performance bonus of
(Yen)8,250,000 for the period ended March 1999 and an annual performance bonus
of (Yen)16,500,000, subject to achievement of certain performance objectives
established by the Company's Chief Operating Officer.
Mr. Kunkel's employment agreement provides for a four-year term ending
October 2002 and a current annual base salary of $350,000, and also provides for
a performance bonus of at least $150,000, subject to achievement of certain
performance objectives established by the Company's Chairman.
These employment agreements also provide for standard employee benefits,
including, without limitation, participation in the Company's 401(k) plan and
bonus plan as well as life, health, accident and disability insurance. These
agreements also provide for a 24-month non-competition period. If the Company
elects to enforce such non-competition restrictions, these officers are
entitled, for a period of 24 months after termination of their employment, to
receive their then current base salary and all benefits being provided to them
at the time of termination. Each of these employment agreements provides that
options awarded pursuant thereto are subject to immediate vesting upon the
occurrence of certain change in control events.
15
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee currently is composed of Messrs. Baumer, Sharp
and Swett. The Compensation Committee is responsible, subject to the approval of
the Board of Directors, for establishing the Company's compensation program.
COMPENSATION PHILOSOPHY AND POLICY
The Company's compensation program generally is designed to motivate and
reward the Company's executive officers and other personnel responsible for
attaining financial, operational and strategic objectives that will contribute
to the overall goal of enhancing shareholder value. In administering the plan,
the Compensation Committee assesses the performance of individuals and the
Company relative to those objectives. The Company's compensation program
generally provides incentives to achieve annual and longer term objectives. The
principal elements of the compensation plan include base salary, cash bonus
awards and stock awards in the form of grants of stock options and restricted
Common Stock. These elements generally are blended in order to provide
compensation packages which provide competitive pay, reward the achievement of
financial, operational and strategic objectives and align the interests of the
Company's executive officers and other high level personnel with those of the
Company's shareholders.
BASE SALARY. During 1999, the Company had employment agreements with each
of Messrs. Schrader, Wills, Kwan, Kunkel and Postal, as well as with most of the
other individuals who served as officers during such period. Mr. Schrader's
compensation was determined based upon his leadership of the Company in setting
and pursuing its financial, operational and strategic objectives.
The Company considers the experience of the individual, the scope and
complexity of the position and the size and growth rate of the Company and the
compensation paid by the Company's competitors in setting base salaries for
officers and employees. Due to the increasingly competitive nature of the
Company's industry segment, compensation amounts paid by the Company's
competitors are expected to continue to grow in importance to the Company as it
assesses its compensation structure in the future in order to ensure its ability
to continue to attract and retain highly qualified executives.
BONUSES. All full-time employees of the Company, including executive
officers to the extent they are not already entitled to receive a bonus pursuant
to the terms of their respective employment agreements, are eligible to receive
bonuses from the Company subject to satisfaction of specified performance
criteria. For 1999, Messrs. Schrader, Wills, Kwan, Kunkel and Postal received
bonuses pursuant to the terms of their respective employment agreements. See
"Executive Compensation--Employment Agreements." In determining the level of
bonus paid to Mr. Schrader in 1999, the Compensation Committee, in addition to
consideration of Mr. Schrader's individual performance, took particular note of
the Company's overall increased revenues and successful debt and equity
offerings during 1999 and the acquisition by the Company of Transaction Network
Services, Inc., as well as the Company's continued expansion through the
successful completion of the acquisition of 60 Internet Service Providers in the
U.S., Canada, Latin America, Asia/Pacific, Europe and the India/Middle East/
Africa region during the 24 months ended December 31, 1999.
STOCK AWARDS. To promote the Company's long-term objectives, stock awards
are made to directors, officers and employees who are in a position to make a
significant contribution to the Company's long-term success. The stock awards
are made to officers and employees pursuant to the Company's Executive Stock
Incentive Plan, in the form of incentive stock options and non-qualified stock
options, pursuant to the Company's Executive Stock Incentive Plan, in the form
of incentive stock options, non-qualified stock options, stock appreciation
rights and restricted stock awards, and to directors pursuant to the Company's
Directors Stock Incentive Plan, in the form of non-qualified stock
16
<PAGE>
options. The Company also makes awards in the form of incentive stock options,
non-qualified stock options, stock appreciation rights and restricted stock
grants to key personnel in connection with acquisitions, mergers, strategic
alliances and other business combinations pursuant to its Strategic Stock
Incentive Plan.
Stock options represent rights to purchase shares of the Company's Common
Stock in varying amounts pursuant to a vesting schedule (generally forty-eight
months) determined by the Compensation Committee at a price per share specified
on the date of grant of the option (which may not be less than the fair market
value on the date of the grant). Stock options expire at the conclusion of a
fixed term (generally 10 years).
Stock appreciation rights may be granted in tandem with options and, upon
exercise, entitle the holder to receive cash, Common Stock or a combination
thereof (at the discretion of the Compensation Committee) having a value equal
to the excess of fair market value per share of the Common Stock on the exercise
date multiplied by the number of shares with respect to which the right is
exercised over the option exercise price for such number of shares.
Restricted stock awards consist of a specified number of shares of the
Company's Common Stock with an appropriate restrictive legend affixed thereto.
Shares of restricted stock may not be sold or otherwise transferred until
ownership vests in the recipient, at the time and in the manner specified by the
Compensation Committee at the time of the award.
Since the stock options, stock appreciation rights and restricted stock
awards vest and may grow in value over time, these components of the Company's
compensation plan are designed to reward performance over a sustained period and
to enhance shareholder value through the achievement of corporate objectives.
The Company intends that these awards will strengthen the focus of its
directors, officers and employees on managing the Company from the perspective
of a person with an equity stake in the Company.
In selecting recipients and the size of grants, the Compensation Committee
considers various factors such as the potential of the recipient, the salary of
the recipient, and competitive factors affecting the Company's ability to
attract and retain employees, prior grants, a comparison of awards made to
officers in comparable positions at similar companies and Company performance.
During 1999, Mr. Schrader was awarded options to purchase 100,000 shares of
the Company's Common Stock under the Company's Executive Stock Incentive Plan.
In addition, Mr. Wills was awarded options to purchase 70,000 shares under such
plan. Also, during 1999, Mr. Wills, Kunkel, Postal and Kwan were awarded options
to purchase 260,000, 190,000, 50,000 and 50,000 shares, respectively, under the
Company's Strategic Stock Incentive Plan. Awards made to other executive
officers during 1999 consisted of options to purchase an aggregate of 690,000
shares under the Company's Executive Stock Incentive Plan and 470,000 shares
under the Company's Strategic Stock Incentive Plan. Option awards under the
Company's Executive Stock Incentive Plan were made during 1999 with respect to
an aggregate of 6,455,280 shares of Common Stock. Options to purchase 5,247,224
shares of Common Stock were awarded under the Company's Strategic Stock
Incentive Plan during 1999. Options awarded under the Executive Stock Incentive
Plan vest ratably over forty-eight months. Awards made to directors during 1999
consisted of options with respect to 30,000 shares of Common Stock under the
Company's Directors Stock Incentive Plan.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code"), imposes
limitations upon the federal income tax deductibility of compensation paid to
the Company's chief executive officer and to each of the other four most highly
compensated executive officers of the Company. Under these limitations, the
Company may deduct such compensation only to the extent that during any fiscal
year the compensation paid to any such officer does not exceed $1,000,000 or
meets certain specified conditions
17
<PAGE>
(such as certain performance-based compensation that has been approved by the
Company's shareholders). The Compensation Committee does not believe that rigid
efforts to avoid this non-deductibility provision are always consistent with
sound executive compensation practices intended to improve shareholder value.
Moreover, the Company currently is generating net operating losses for income
tax purposes and is therefore not in a position to utilize all of its income tax
deductions. The Compensation Committee recognizes that some compensation paid to
an executive of the Company for 1999 may be non-deductible under Section 162(m)
as a result of exercises of non-qualified stock options granted to that
individual in 1993. The Compensation Committee anticipates, that compensation of
certain key executives paid for 2000 and future years will include some amounts
that are not deductible under Section 162(m).
COMPENSATION COMMITTEE
William H. Baumer, Chairman
Ian P. Sharp
Ralph J. Swett
18
<PAGE>
PROPOSAL 2 -- APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION INCREASING THE NUMBER OF AUTHORIZED SHARES OF
CAPITAL STOCK
The Board of Directors has voted unanimously to approve an amendment to the
Company's Certificate of Incorporation and to recommend such amendment to the
shareholders. The proposed amendment, if authorized, would increase the
aggregate number of authorized shares of capital stock. The text of the proposed
amendment is attached to this Proxy Statement as Exhibit A. If authorized by the
shareholders, the proposed amendment to the Company's Certificate of
Incorporation will become effective upon the filing of a Certificate of
Amendment with the Secretary of State of New York, which will occur as soon as
practicable after authorization.
The proposed amendment to Paragraph FOURTH of the Company's Certificate of
Incorporation, if approved by the Shareholders, will increase the number of
authorized shares of the Company's capital stock from 530 million to 2.06
billion shares, the number of authorized shares of the Company's Common Stock
from 500 million to 2.0 billion shares and the number of authorized shares of
the Company's Preferred Stock from 30 million shares to 60 million shares.
The Certificate of Incorporation of the Company currently authorizes the
issuance of 530 million shares, of which 500 million shares are authorized to be
issued as Common Stock and 30 million shares are authorized to be issued as
Preferred Stock. As of March 3, 2000, there were approximately 149,520,373
shares of Common Stock outstanding and 1,767,396 shares of Common Stock in the
Company's treasury. In addition, 23,754,200 shares are reserved for issuance
upon conversion of the Company's Series C Preferred Stock, 20,000,000 shares are
reserved for issuance upon payment of dividends on the Company's Series C
Preferred Stock, 10,000,000 shares are reserved for issuance and sale pursuant
to the Deposit Agreement in connection with the Company's Series C Preferred
Stock, 13,092,800 shares are reserved for issuance upon conversion of the
Company's Series D Preferred Stock, 10,000,000 shares are reserved for issuance
upon payment of dividends on the Company's Series D Preferred Stock, 2,000,000
shares are reserved for issuance and sale pursuant to the Deposit Agreement in
connection with the Company's Series D Preferred Stock, approximately 28,533,308
shares of Common Stock were reserved for issuance in connection with outstanding
stock options, 100,000 shares were reserved for issuance in connection with
outstanding warrants to purchase Common Stock and a total of 14,435,715
additional shares were reserved for issuance under the Company's stock plans. As
a result, the Company has available for issuance 226,796,208 shares of Common
Stock. If the proposed amendments to the Executive Stock Incentive Plan and
Strategic Stock Incentive Plan are approved (see Proposal 3), the Company will
be required to reserve an additional 25,000,000 for issuance under those Plans.
Assuming all of the Plan proposals are approved and based upon the number of
shares authorized for issuance as of March 3, 2000, the Company would have
available for issuance 201,796,208 additional shares of Common Stock.
The Company anticipates that it will continue to seek to acquire assets and
businesses of companies providing services complementary to its existing
business in furtherance of its strategy to maintain a leadership position as an
Internet Super Carrier. In connection with these acquisitions, the Company may
issue Common Stock or Preferred Stock that is convertible into Common Stock. The
Board of Directors believes that it is advantageous for the Company to be able
to act promptly with respect to investment and acquisition opportunities as well
as other transactions and that the proposed increase in the number of authorized
shares of capital stock is desirable in order to have the additional authorized
shares of capital stock available, as needed, for possible future financing and
acquisition transactions, stock dividends or splits, employee stock plans and
for other general corporate purposes determined by the Board of Directors to be
in the best interests of the Company. Having such additional authorized shares
available for issuance in the future would give the Company greater flexibility
and allow shares of Common Stock, convertible Preferred Stock or other
securities exercisable, exchangeable or convertible into Common Stock to be
issued without the expense and
19
<PAGE>
delay of a shareholders' meeting, except as may be required by applicable law or
regulations. The holders of Common Stock do not have any preemptive rights to
subscribe for or purchase any additional shares of Common Stock that may be
issued. The issuance of additional shares might reduce the shareholders'
proportional interest in the Company.
The increase in authorized shares is not being proposed to provide
additional authorized shares of Common Stock that could be issued in an attempt
to make more difficult a change in control or takeover of the Company, and the
Company has no present intention of issuing additional shares of Common Stock
for that purpose. Nevertheless, the additional authorized shares of Common Stock
could be issued to make any attempt to change control of the Company more
difficult if the Board were to determine that such an attempt was not in the
best interests of the Company.
Approval of the proposed amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
capital stock requires the affirmative vote by holders of a majority of the
outstanding shares of Common Stock. Unless marked to the contrary, proxies
received will be voted for approval of this proposed amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION INCREASING
THE NUMBER OF AUTHORIZED SHARES OF ITS CAPITAL STOCK.
PROPOSAL 3 -- APPROVAL OF AMENDMENTS TO THE EXECUTIVE STOCK INCENTIVE PLAN AND
THE STRATEGIC STOCK INCENTIVE PLAN
EXECUTIVE STOCK INCENTIVE PLAN
The Board of Directors has unanimously adopted and recommends that the
shareholders approve an amendment to the Company's Executive Stock Incentive
Plan to increase the number of shares of the Company's Common Stock available
for issuance thereunder from a maximum of 31,600,000 shares (subject to
adjustment in the event of any stock dividend, stock split, recapitalization or
similar event) to a maximum of 43,600,000 shares (subject to adjustment in the
event of any stock dividend, stock split, recapitalization or similar event).
The effective date of the proposed amendment will be the date on which such
amendment is approved by the shareholders.
REQUIRED VOTE
Approval of the adoption of the amendment to the Executive Stock Incentive
Plan requires the affirmative vote of the holders of a majority of shares of the
Company's Common Stock present in person or by proxy and entitled to vote at the
Annual Meeting. Abstentions and broker non-votes will be counted as present for
purposes of determining whether a quorum is present, and broker non-votes will
not be treated as entitled to vote on this matter at the Annual Meeting.
PLAN ACTIVITY
As of March 17, 2000, options to purchase an aggregate of 19,572,762 shares
of the Company's Common Stock were outstanding under the Executive Stock
Incentive Plan and, without taking into account the proposed amendments to the
plan, 6,180,818 shares remained available for future grants under the plan.
The table under the caption "Option Grants in 1999" provides information
with respect to the grant of options under the Executive Stock Incentive Plan
during fiscal year 1999 to the executive officers of the Company appearing in
the Summary Compensation Table. The following table sets forth
20
<PAGE>
additional information with respect to options granted under the Executive Stock
Incentive Plan during fiscal year 1999 to certain groups:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OPTIONS
IDENTITY OF GROUP EXERCISE PRICE GRANTED(#)
- ----------------- ---------------- ----------
<S> <C> <C>
All executive officers as a group (14 persons).............. $22.61 860,000
Non-executive directors as a group (3 persons).............. $ -- --
Non-executive officer employees as a group (approximately
933 persons).............................................. $23.42 5,595,286
</TABLE>
GENERAL
The purpose of the Executive Stock Incentive Plan is to enable the Company
to attract and retain employees and consultants and provide them with an
incentive to maintain and enhance the Company's long-term performance record. In
the view of the Board of Directors, the plan as well as predecessor plans have
been successful in achieving these objectives. In light of the Company's recent
expansion and strategy for continued growth, the Board of Directors believes
that the proposed amendments to the plan are necessary to ensure that an
adequate number of shares are available for awards so that the plan can continue
to make a significant contribution to the morale and motivation of the Company's
and its subsidiaries' employees and consultants in the future.
The Company's Executive Stock Incentive Plan was adopted by the Company's
Board of Directors on March 1, 1995 and approved by the shareholders of the
Company on April 8, 1995. The plan has been amended three times to increase the
number of shares of the Company's Common Stock eligible for issuance thereunder
in November 1995 and in May and September 1999. The plan presently provides that
up to 31,600,000 shares of the Company's Common Stock (subject to adjustment in
the event of any stock dividend, stock split, recapitalization or similar event)
will be available for awards under the plan. As noted above, the proposed
amendment would increase the maximum number of shares available for awards under
the plan to 43,600,000 (subject to adjustment in the event of any stock
dividend, stock split, recapitalization or similar event). Awards under the plan
will be made to persons who have the capability of making a substantial
contribution to the success of the Company and may be in the form of incentive
stock options, non-qualified stock options, stock appreciation rights or
restricted stock awards. Employees may be awarded any type of award under the
plan. Consultants may be awarded any type of award except incentive stock
options.
STRATEGIC STOCK INCENTIVE PLAN
The Board of Directors has unanimously adopted and recommends that the
shareholders approve an amendment to the Company's Strategic Stock Incentive
Plan to increase the number of shares of the Company's Common Stock available
for issuance thereunder from a maximum of 16,000,000 shares (subject to
adjustment in the event of any stock dividend, stock split, recapitalization or
similar event) to a maximum of 29,000,000 shares (subject to adjustment in the
event of any stock dividend, stock split, recapitalization or similar event).
The effective date of the proposed amendment will be the date on which such
amendment is approved by the shareholders.
REQUIRED VOTE
Approval of the adoption of the amendment to the Strategic Stock Incentive
Plan requires the affirmative vote of the holders of a majority of shares of the
Company's Common Stock present in person or by proxy and entitled to vote at the
Annual Meeting. Abstentions and broker non-votes will be counted as present for
purposes of determining whether a quorum is present, and broker non-votes will
not be treated as entitled to vote on this matter at the Annual Meeting.
21
<PAGE>
PLAN ACTIVITY
As of March 17, 2000, options to purchase an aggregate of 6,637,443 shares
of the Company's Common Stock were outstanding under the Strategic Stock
Incentive Plan and, without taking into account the proposed amendments to the
plan 8,190,727 shares remained available for future grants under the plan.
The table under the caption "Option Grants in 1999" provides information
with respect to the grant of options under the Strategic Stock Incentive Plan
during fiscal year 1999 to the executive officers of the Company appearing in
the Summary Compensation Table. The following table sets forth additional
information with respect to options granted under the Strategic Stock Incentive
Plan during fiscal year 1999 to certain groups:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE OPTIONS
IDENTITY OF GROUP PRICE ($/SH) GRANTED (#)
- ----------------- ------------------------- -----------
<S> <C> <C>
All executive officers as a group (14 persons)............. $23.22 1,020,000
Non-executive directors as a group (3 persons)............. $ -- --
Non-executive officer employees as a group
(approximately 1,229 persons)............................ $22.55 4,227,224
</TABLE>
GENERAL
The purpose of the Strategic Stock Incentive Plan is to enable the Company
and its subsidiaries in connection with acquisitions, mergers, strategic
alliances, joint ventures and other business combination transactions, to
attract and retain employees and consultants and provide them with an incentive
to maintain and enhance the Company's and its subsidiaries' long-term
performance record by creating a long-term mutuality of interests among the
employees and consultants and the shareholders of the Company. The plan provides
for the issuance to persons who have the capability of making a substantial
contribution to the success of the Company or any one or more of its
subsidiaries of incentive stock options, non-qualified stock options, stock
appreciation rights and restricted stock grants in connection with acquisitions,
mergers, strategic alliances and other business combinations and transactions
effected by the Company and/or one or more of its subsidiaries. In light of the
Company's recent expansion, especially through mergers and acquisitions, and
strategy for continued growth, the Board of Directors believes that the proposed
amendments to the plan are necessary to ensure that an adequate number of shares
are available for awards so that the plan can continue to make a significant
contribution to the morale and motivation of the Company's and its subsidiaries'
employees and consultants in the future.
The Company's Strategic Stock Incentive Plan was adopted by the Company's
Board of Directors on June 5, 1995 and approved by the shareholders of the
Company on November 11, 1995. The plan has been amended to increase the number
of shares of the Company's Common Stock eligible for issuance thereunder in May
and September 1999. Currently, awards under the plan may be made in respect of
up to 16,000,000 shares of the Company's Common Stock (subject to adjustment in
the event of any stock dividend, stock split, recapitalization or similar
event). As noted above, the proposed amendment would increase the maximum number
of shares available for awards under the plan to 29,000,000 (subject to
adjustment in the event of any stock dividend, stock split, recapitalization or
similar event). The total number of shares with respect to which restricted
stock awards may be granted to any one participant shall not exceed 20,000 per
calendar year (subject to substitution or adjustment in the event to any stock
dividend, stock split, recapitalization or similar event). Employees may be
awarded any type of award offered under the plan. Consultants may be awarded any
type of award except incentive stock options. No awards may be made under the
plan after the tenth anniversary thereof.
22
<PAGE>
SUMMARY OF PLAN FEATURES
The following is a summary of certain features common to both the Executive
Stock Incentive Plan and the Strategic Stock Incentive Plan (together, the
"Plans"). The summary is qualified in its entirety by reference to the Plans,
copies of each of which are together annexed hereto as Exhibit B.
ADMINISTRATION. The Plans are administered by the Compensation Committee of
the Board of Directors, none of the members of which, during the one-year period
prior to commencement of service thereon or during such service, has been or
will be granted any awards pursuant to either of the Plans, subject to certain
permitted exceptions.
The Compensation Committee has the power to determine the persons to whom,
and the time or times at which, awards shall be granted, the type of award to be
granted and the number of shares to be subject to each award, to interpret the
Plans and to prescribe rules, regulations and procedures in connection with the
operation of the Plans. All questions of interpretation and application of the
Plans, or as to awards granted under the Plans, are subject to the determination
of the Compensation Committee, which will be conclusive and binding.
AWARDS. Awards granted under the Plans are evidenced by agreements between
the individual employee or consultant and the Company. Incentive stock options
within the meaning of Section 422 of the Internal Revenue Code as well as
options which do not meet the requirements of that section may be granted alone
or in tandem with stock appreciation rights. All options will expire not more
than 10 years after the date of grant except for incentive stock options granted
to holders of more than 10% of the voting power of the Company, which will
expire not more than five years after the date of grant. The exercise price for
any option issued under the Plans shall be equal to the fair market value of the
Company's Common Stock at the time such option is granted provided that, in the
case of incentive stock options granted to holders of more than 10% of the
voting power of the Company, the exercise price shall equal at least 110% of
fair market value. Payment of an option's exercise price may be made in cash, by
check or, in certain circumstances, by delivery of shares of Common Stock
assigned to the Company, or by a combination of the foregoing. The Company may
loan employees amounts in respect of the exercise of options under the Plans
provided that such loans are evidenced by interest bearing promissory notes and
secured by a pledge of the Company's Common Stock having an aggregate purchase
price on the date of exercise at least equal to the principal amount of the
note. Options are not transferable other than by will or by the laws of descent
and distribution, pursuant to a qualified domestic relations order or, to the
extent permitted under the option agreement or under interpretation of the
Compensation Committee under Rule 16b-3 of the Exchange Act, by gift to family
members or other permitted transferees. Options may be exercised only by the
optionee, his or her guardian, his or her legal representative or his or her
permitted transferee.
Stock appreciation rights may be granted in tandem with options granted
under the Plans. Upon exercise of a stock appreciation right, the grantee will
receive from the Company cash, Common Stock or a combination thereof (at the
discretion of the Compensation Committee) having a value equal to the excess of
the fair market value per share of the Company's Common Stock on the exercise
date multiplied by the number of shares with respect to which the right is being
exercised over the option exercise price for such number of shares.
Restricted stock also may be granted under the Plans provided that any one
participant may not receive awards in respect to more than 20,000 shares per
year. The Compensation Committee will determine the restrictions that apply to
each such grant. During the restricted period, the grantee may not sell or
otherwise transfer the restricted stock, but will have the right to vote the
restricted stock and to receive dividends, if any.
Upon the acquisition of beneficial ownership of 30% or more of the Company's
Common Stock by any person other than a wholly-owned subsidiary of the Company
or the occurrence of certain other
23
<PAGE>
change of control events specified in the Plans, including certain mergers and
consolidations and transfers of all or substantially all of the Company's
assets, all options and stock appreciation rights shall become fully exercisable
and all restricted stock awards shall become immediately vested.
AMENDMENTS. The Plans may be amended by the Compensation Committee or the
shareholders, provided that the Compensation Committee may not, without
shareholder approval, materially increase the benefits accruing to participants
under the Plans, materially increase the maximum number of shares as to which
awards may be granted under the Plans, increase the number of restricted stock
grants per year per participant or change the basis of making performance-based
awards for participants whose compensation is subject to Section 162(m) of the
Internal Revenue Code, change the minimum exercise price of options or stock
appreciation rights, change the class of eligible persons, extend the period for
which awards may be granted or exercised or withdraw the authority to administer
one or both of the Plans from the Compensation Committee.
CERTAIN INCOME TAX CONSEQUENCES. A participant who is awarded a stock option
will not realize any income, nor will the Company be entitled to any deduction,
at the time of grant. If a participant who is not an "insider" subject to
Section 16(b) of the Exchange Act exercises a non-qualified option, he or she
will realize ordinary income equal to the difference between the option price
and the fair market value of the shares on the date of exercise and the holding
period for capital gain and loss purposes will begin on the date of exercise. In
the case of a participant who is a Section 16(b) insider, upon exercise of an
option, he or she will realize ordinary income on the first day on which a sale
of shares at a profit would not expose the participant to Section 16(b)
liability (the "date of taxation"). The amount of income recognized will be
equal to the excess of the fair market value of the shares on the date of
taxation over the option price and the holding period for capital gains and
losses will begin on the date of taxation. An insider may elect to be taxed
according to the rules applicable to non-insiders by filing an election with the
Internal Revenue Service under Section 83(b) of the Internal Revenue Code within
30 days from the date of exercise.
If the exercise price of a non-qualified option is paid by surrendering
stock of the Company, the participant will recognize no gain or loss on the
shares that he or she surrenders to pay the option price (the "surrendered
shares"). The number of shares that the participant receives upon exercise of
the option in excess of the surrendered shares are considered "additional
shares." The participant will recognize ordinary income upon exercise equal to
the fair market value of the additional shares on the date of exercise, less any
cash paid towards the exercise price. The basis of the additional shares will be
equal to their fair market value on the date of exercise, and their holding
period will begin on that date. The shares that the participant receives upon
exercise equal to the surrendered shares will have a basis and holding period
equal to that of the surrendered shares.
If a participant exercises an incentive stock option, he or she will not
recognize any income at that time (although the difference between the option
price and the fair market value of shares may be subject to the alternative
minimum tax) and the Company will not be entitled to any tax deduction. If the
option price of an incentive stock option is paid by surrendering stock of the
Company, the Internal Revenue Service treats such an exchange as if there were
two transactions. The first transaction is treated as a non-taxable exchange of
the previously acquired shares for an equal number of new shares, both having
the same market value. The basis of the new shares will be the same as that of
the shares surrendered and the holding period will include the holding period of
the shares surrendered. The second transaction concerns the additional shares
that a participant will receive pursuant to the exercise. This exchange also
results in no gain or loss being recognized at the time of the exchange. The
basis of these additional shares, however will equal zero (i.e., the participant
is treated as having paid nothing for these shares). The holding period for the
additional shares begins on the date of the exchange.
24
<PAGE>
The Company will be entitled to a deduction for federal tax purposes at the
same time and in the same amount as the participant is considered to have
realized ordinary income with respect to any option. When a participant disposes
of Common Stock acquired through the exercise of a non-qualified option, any
amount received in excess of the fair market value of the shares on the date of
exercise will be subject to taxation as long-term or short-term capital gains,
depending on the holding period of the shares. If the amount received is less
than such fair market value of the shares, the difference will be treated as a
capital loss for tax purposes. When a participant ultimately sells Common Stock
acquired through exercise of an incentive stock option, he or she will recognize
long-term capital gain or loss on the difference between the amount received
upon disposition and the option price of the shares on the date of exercise
provided that the requisite holding periods are satisfied.
Under current federal tax laws, no income will be recognized by a
participant at the time a stock appreciation right is granted to the
participant. Ordinary income will be recognized by the participant upon exercise
of a stock appreciation right equal to the amount of cash received plus the fair
market value, on the date of exercise, of any shares issued. The Company will be
entitled to a deduction equal to the amount the participant recognizes as
ordinary income and at the time the participant recognizes income.
The basis of a share acquired pursuant to the exercise of a stock
appreciation right will be the amount included in income due to receipt of the
share. When the participant disposes of shares acquired pursuant to the exercise
of a stock appreciation right, any amount realized in excess of the basis of the
shares will be treated as long-term or short-term capital gain, depending on the
holding period of the shares. If the amount realized is less than the basis of
the shares, the loss will be treated as long-term or short-term capital loss,
depending on the holding period of the shares.
Unless the participant otherwise elects, receipt of a grant of restricted
shares of Common Stock will not result in the recognition of income by the
participant. At the time of vesting of ownership of any such shares, the
participant will recognize ordinary income equal to the fair market value of
such shares. At that time, the Company will be entitled to a deduction. The
deduction will be equal to the amount which is taxable to the participant as
ordinary income.
The participant may elect to recognize ordinary income at the time of grant.
Any such election must be made within 30 days of grant pursuant to regulations
issued under Section 83(b) of the Internal Revenue Code. The amount of such
income will be equal to the fair market value of the shares of stock without
regard to the restrictions. In such a case, the Company would be entitled to a
deduction equal to the amount which is taxable to the participant as ordinary
income.
The basis of a share acquired under a restricted stock grant will be the
amount included in ordinary income due to receipt of the share. When the
participant disposes of shares acquired under a restricted stock grant, any
amount realized in excess of the basis of the shares will be treated as long-
term or short-term capital gain, depending on the holding period of the shares
(measured from the time the participant recognized ordinary income from the
receipt of such shares). If the amount realized is less than the basis of the
shares, the loss will be treated as long-term or short-term loss, depending on
the holding period of the shares.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE
ADOPTION BY THE BOARD OF DIRECTORS OF THE AMENDMENTS TO EACH OF THE EXECUTIVE
STOCK INCENTIVE PLAN AND THE STRATEGIC STOCK INCENTIVE PLAN.
25
<PAGE>
STOCK PRICE PERFORMANCE
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock, based upon the market price of the
Company's Common Stock as reported by The Nasdaq Stock Market, with the
cumulative total return of companies in the Nasdaq Composite Index and the
Nasdaq Telecommunications Index for the period from May 2, 1995 through
December 31, 1999. Prior to May 2, 1995, the Company's Common Stock was not
publicly traded.
[GRAPH APPEARS HERE]
26
<PAGE>
<TABLE>
<CAPTION>
5/2/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PSINet Inc. 100.00 99.61 140.98 150.00 63.52 75.41 71.31 71.31
NASDAQ
Composite Index 100.00 110.97 124.04 125.10 131.64 142.38 147.45 154.70
NASDAQ
Telecom Index 100.00 111.11 125.21 127.12 133.69 137.91 129.82 129.99
</TABLE>
<TABLE>
<CAPTION>
3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PSINet Inc. 48.36 49.18 52.87 33.61 72.95 85.25 91.40 136.89
NASDAQ
Composite Index 146.89 173.81 203.21 190.30 222.72 228.83 206.49 268.33
NASDAQ
Telecom Index 120.52 151.04 174.93 189.75 241.52 255.42 225.59 314.15
</TABLE>
<TABLE>
<CAPTION>
3/31/99 6/30/99 9/30/99 12/31/99
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PSINet Inc. 279.10 286.89 235.86 404.92
NASDAQ
Composite Index 300.74 329.07 337.05 496.58
NASDAQ
Telecom Index 395.08 418.89 382.47 555.87
</TABLE>
27
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1999, the members of the Compensation
Committee of the Company's Board of Directors consisted of Messrs. Baumer,
Schrader and Swett. Mr. Schrader is the Chairman of the Company's Board of
Directors and Chief Executive Officer of the Company. None of such persons other
than Mr. Schrader is an executive officer or employee of the Company.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
STRATEGIC ALLIANCE WITH IXC
IRU AND STOCK PURCHASE AGREEMENT. In February 1998, the Company acquired
from IXC Internet Services, Inc. ("IXC") 20-year noncancellable indefeasible
rights of use ("IRUs") in up to 10,000 equivalent route miles of fiber-based
OC-48 network bandwidth (the "PSINet IRUs") in selected portions across the IXC
fiber optic telecommunications system within the United States. The PSINet IRUs
were acquired in exchange for the issuance to IXC of 20,459,578 shares of Common
Stock representing approximately 20% of the issued and outstanding Common Stock
of the Company after giving effect to such issuance and having an aggregate
market value of $78,641,502 based on the closing market price per share of the
Common Stock as reported by The Nasdaq Stock Market on such date of $3.84375
(the "IXC Shares") and a contingent payment obligation pursuant to an IRU and
Stock Purchase Agreement, dated as of July 22, 1997, between the Company and
IXC, as amended (the "IRU Purchase Agreement"). The contingent payment
obligation terminated in January 1999 without the payment of any amounts or the
issuance of any additional shares of Common Stock to IXC.
IXC has been granted certain demand and "piggyback" registration rights with
respect to the IXC Shares pursuant to a registration rights agreement between
IXC and the Company. In January 2000, the Company caused the registration of
6,000,000 of the IXC Shares pursuant to a demand by IXC under the registration
rights agreement. Pursuant to the IRU Purchase Agreement, Ralph J. Swett, the
former chairman of IXC Communications, was elected, effective as of the closing
of the transaction, to the Company's Board of Directors. The IRU Purchase
Agreement provides that the Company's Chairman will recommend that Mr. Swett
continue to be re-elected to the Company's Board for so long as IXC continues to
own at least 95% of the IXC Shares. IXC has entered into transactions that may
cause or have caused this provision to no longer be effective. In the event IXC
proposes to sell or otherwise dispose of any of the IXC Shares, other than
pursuant to a pledge to an unaffiliated third party lender, the Company has a
right of first offer to acquire the shares proposed to be sold at the closing
market price per share of the Common Stock as reported by The Nasdaq Stock
Market or the principal securities exchange on which the Common Stock is then
listed on the date notice of such proposed sale is given to the Company. Other
than as set forth above and except for transfer restrictions existing from time
to time under applicable federal and state securities laws, the IXC Shares are
not subject to any transfer restrictions or to any voting restrictions or other
agreements.
PSINET IRUS. As of January 1, 2000, approximately 16,248 route miles of
OC-12 (equivalent to approximately 4,062 route miles of OC-48) bandwidth have
been delivered to PSINet. The Company expects to take delivery of the remaining
bandwidth from IXC through the term of the contract. IXC has granted the Company
a security interest in, among other collateral, a portion of the IRUs underlying
the PSINet IRUs granted to IXC by IXC Carrier and in a portion of certain other
IRUs in IXC's fiber optic telecommunications system to secure the performance of
IXC's obligations under the IRU Purchase Agreement to deliver the PSINet IRUs.
IXC is obligated to provide customary operation and maintenance services with
respect to the bandwidth delivered to the Company at specified prices and terms,
the total cost of which to the Company on an annual basis is expected to be
approximately $1.2 million per each 1,000 equivalent route miles of OC-48
bandwidth accepted under the IRU Purchase Agreement. IXC also will furnish
multiplexing, reconfiguration and collocation services with respect to such
bandwidth as requested by the Company at agreed upon fees.
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CERTAIN RESTRICTIONS ON USE AND TRANSFER OF BANDWIDTH. The Company may use
the bandwidth acquired from IXC for any purpose in connection with the provision
of Internet services and at a rate of DS-3 (45 Mbps) or less for non-Internet
telecommunications transport, but is restricted from using such bandwidth to
deliver any private line or long distance switched telephone services (based on
non-Internet telephone switching technologies) to any third party. In addition,
the Company may not effect any sale, swap, lease or other transfer of such
bandwidth to any unaffiliated third party except (i) in connection with the
offering of Internet connectivity services or (ii) in connection with a bona
fide financing arrangement. Any transferee of bandwidth acquired from IXC, other
than in connection with a bankruptcy of the Company, will be subject to the
terms and conditions of the IRU Purchase Agreement, including, without
limitation, the foregoing restrictions.
JOINT MARKETING AND SERVICES AGREEMENT. In connection with this
transaction, the Company and IXC also entered into a Joint Marketing and
Services Agreement (the "Marketing Agreement") pursuant to which each party is
entitled to market the products and services of the other under its own brand.
Pursuant to the Marketing Agreement, the Company has agreed to provide IXC with
managed connectivity services, value-added services and opportunity consulting
services for specified fees which, in light of the strategic importance to the
Company of the PSINet IRUs and the Company's other arrangements with IXC
described herein, the Company has agreed will be, or will be equal to, the
lowest offered by the Company.
IRU AGREEMENT. In September 1999, the Company acquired IRUs in an
additional four fibers in approximately 55,124 fiber miles pursuant to an IRU
Agreement with IXC Communications Services, Inc., a predecessor to Broadwing
Communications Services Inc. ("Broadwing"). Under the terms of the Agreement,
the Company will pay an aggregate of $165,372,000. The initial term of the grant
is for a period of 20 years with a 5 year renewal option by the Company. In
addition, the Company may acquire up to an additional 12 fibers from Broadwing.
If Broadwing delivers the additional bandwidth, which would be in 2001, the
Company would be committed to make cash payments at that time of between $120
million and $180 million.
FIBER CAPACITY PROVISION AND MAINTENANCE AGREEMENT WITH MARCA-TEL
GENERAL. On March 6, 2000, PSINet Mexico, S.A. de C.V. ("PSINet Mexico")
entered into a Long Term Fiber Capacity Provision and Maintenance Agreement (the
"Capacity Agreement") with Marca-Tel, S.A. de C.V. ("Marca-Tel"). Broadwing (an
affiliate of IXC), owns 65% of a limited liability company that has a 45%
interest in Marca-Tel. Pursuant to the Capacity Agreement, PSINet Mexico paid
Marca-Tel $40.0 million for the exclusive right to the capacity of 4 to 18
fibers along Marca-Tel's fiber optic route, which comprises approximately 40% of
the available fiber along the route consisting of 36,960 strand kilometers of
fiber. The initial term of the grant is for a period of twenty years with a five
year renewal option by the Company.
GUARANTY. In connection with the Capacity Agreement, the parties have
entered into a Guaranty Agreement dated as of March 6, 2000 whereby Broadwing
has guaranteed to each of the Company and PSINet Mexico the payment, performance
and discharge of the obligations of Marca-Tel with respect to the collocation,
optical amplifer sites and regen sites work to be provided pursuant to the terms
of the Capacity Agreement up to a maximum of $1.5 million.
In addition, the parties have entered into a Guaranty and Agreement dated as
of March 6, 2000 (the "Guaranty and Agreement") relating to a pending proceeding
involving Marca-Tel and certain other holders of concessions for rendering
communications services in Mexico. The proceeding challenges an administrative
resolution issued in May 1997 by the Mexican Commission Federal de
Telecomunicaciones (the "Administrative Determination") which sets forth certain
amounts which Telmex is entitled to charge Marca-Tel and other carriers as
compensation for interconnection projects undertaken by Telmex. Pursuant to the
terms of the Guaranty and Agreement, Broadwing has
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guaranteed to each of PSINet Mexico and the Company the payment of any amounts
payable by Marca-Tel, up to a maximum of $20 million, in satisfaction of or in
connection with any final decision with respect to such proceeding if Marca-Tel
fails to pay any such amount and, as a result of such failure any action is
taken which may or does adversely affect Marca-Tel's ability to fully perform
its obligations under the Capacity Agreement, or if the decision causes a loss
by Marca-Tel of any concession or license required to render public
telecommunication services or to operate its network in Mexico or causes the
interruption of any service on Marca-Tel's network.
OPTION. Under the terms of the Guaranty and Agreement, Broadwing has also
agreed to use its best efforts to obtain all necessary governmental and third
party authorizations in order to offer the Company an option to pay up to $8.0
million of any amounts payable by Broadwing under the Guaranty and Agreement in
return for the transfer and assignment to the Company or its affiliates, of 50%
of Broadwing's ownership interest in Marca-Tel.
OTHER TRANSACTIONS. In addition to the transactions described above, the
Company and IXC Communications or its affiliates are parties to transactions in
the ordinary course of business which the Company believes are on terms no more
favorable than could be obtained on an arms' length basis with independent third
parties.
PROPOSAL 4 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors, on the recommendation of the Audit Committee of the
Board, has appointed the firm of PricewaterhouseCoopers LLP, independent
accountants, to audit and report on the financial statements of the Company for
the year ending December 31, 2000. PricewaterhouseCoopers LLP, or its
predecessor entity, Price Waterhouse LLP, has been employed by the Company as
its independent accountants since 1990.
It is expected that a representative of PricewaterhouseCoopers LLP will be
present at the Annual Meeting to answer questions of shareholders and will have
the opportunity, if desired, to make a statement.
REQUIRED VOTE
The ratification of the appointment of PricewaterhouseCoopers LLP requires a
majority of the votes cast by holders of the Company's Common Stock entitled to
vote at the Annual Meeting. Abstentions and broker non-votes will be counted as
present for purposes of determining whether a quorum is present, and broker
non-votes will not be treated as entitled to vote on this matter at the Annual
Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF
THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP.
SHAREHOLDER PROPOSALS
The Company's Certificate of Incorporation and By-laws require any
shareholder who wishes to bring any proposal before a meeting of shareholders or
to nominate a person to serve as a director to give written notice thereof and
certain related information to the Company at least 60 days prior to the date
one year from the date of the immediately preceding annual meeting, if such
proposal or nomination is to be submitted at an annual meeting, and within ten
days of the giving of notice to the shareholders, if such proposal or nomination
is to be submitted at a special meeting. The written notice must set forth with
particularity (i) the name and business address of the shareholder submitting
such proposal and all persons acting in concert with such shareholder; (ii) the
name and address of the persons identified in clause (i), as they appear on the
Company's books (if they so appear); (iii) the class and number of shares of the
Company's stock beneficially owned by the persons identified in
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clause (i); (iv) a description of the proposal containing all material
information relating thereto, including, without limitation, the reasons for
submitting such proposal; and (v) such other information as the Board of
Directors reasonably determines is necessary or appropriate to enable the Board
of Directors and shareholders of the Company to consider such proposal.
Management does not know of any matters which are likely to be brought
before the Annual Meeting other than those referred to in this Proxy Statement.
However, in the event that any other matters properly come before the Annual
Meeting, the persons named in the enclosed proxy will vote in accordance with
their judgment on such matters.
The presiding officer at the Annual Meeting may determine that any
shareholder proposal was not permissible under or was not made in accordance
with the foregoing procedures or is otherwise not in accordance with law and, if
he so determines, he may refuse to allow the shareholder proposal or nomination
to be considered at the Annual Meeting.
Under the rules of the SEC, shareholder proposals intended to be presented
at the next annual meeting (to be held in 2001) must be received by the Company
on or before December 8, 2000 in order to be included in the proxy statement and
proxy for that meeting. Proposals should be directed to the Corporate Secretary,
PSINet Inc., 510 Huntmar Park Drive, Herndon, Virginia 20170.
A copy of the Company's Annual Report to Shareholders, which includes
financial statements and related data, accompanies this Proxy Statement.
According to SEC rules, the information presented in this Proxy Statement
under the captions "Compensation Committee Report on Executive Compensation" and
"Stock Price Performance" shall not be deemed to be "soliciting material" or to
be filed with the SEC under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and nothing contained in any previous filings made by the
Company under such Acts shall be interpreted as incorporating by reference the
information presented under the specified captions.
By Order Of The Board Of Directors,
Kathleen B. Horne
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND CORPORATE SECRETARY
Dated: April 7, 2000
Herndon, Virginia
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EXHIBIT A
PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION OF PSINET INC.
The first four sentences of Article FOURTH of the Certificate of
Incorporation would be amended to read in their entirety as follows:
The Corporation is authorized to issue two classes of shares to be
designated, respectively, Common Stock ("Common Stock") and Preferred Stock
("Preferred Stock"). The total number of shares of capital stock that the
Corporation is authorized to issue is Two Billion Sixty Million
(2,060,000,000). The total number of shares of Common Stock that the
Corporation shall have authority to issue is Two Billion (2,000,000,000).
The total number of shares of Preferred Stock that the Corporation shall
have the authority to issue is Sixty Million (60,000,000).
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EXHIBIT B
PSINET INC.
EXECUTIVE STOCK INCENTIVE PLAN
(AS AMENDED ON MAY 15, 2000)
1. BACKGROUND AND PURPOSE
PSINet Inc. (the "Company") hereby establishes the PSINet Inc. Executive
Stock Incentive Plan (the "Plan"). The purpose of this Plan is to enable the
Company to attract and retain employees and consultants and provide them with an
incentive to maintain and enhance the Company's long-term performance record. It
is intended that this purpose will best be achieved by granting eligible
employees incentive stock options ("ISO's"), non-qualified stock options
("NQSO's"), stock appreciation rights ("SAR's") and restricted stock grants,
individually or in combination, under this Plan pursuant to the rules set forth
in Sections 83, 162(m), 421 and 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. ADMINISTRATION
The Plan shall be administered by a Committee of the Company's Board of
Directors (the "Committee"). This Committee shall consist of at least three
members of the Company's Board of Directors each of whom shall, unless the Board
determines otherwise, be "outside directors" as this term is defined in Code
Section 162(m) and regulations thereunder and none of whom during the one-year
period prior to commencement of service on the Committee, or during such
service, has been granted or awarded any equity security or derivative security
of the Company pursuant to the Plan or, except as permitted by Rule 16b-3
(c)(2)(i), or any successor provision, promulgated pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), any other plan of the
Company or any of its affiliates. Subject to the provisions of the Plan, the
Committee shall possess the authority, in its discretion, (a) to determine the
employees of the Company to whom, and the time or times at which, ISO's and/or
NQSO's (ISO's and NQSO's are collectively referred to as "options"), SARs and
restricted stock grants (all four types of grants are collectively referred to
as "awards") shall be granted; (b) to determine at the time of grant whether an
award will be an ISO, a NQSO, a restricted stock grant or a combination of these
awards and the number of shares to be subject to each award; (c) if options are
granted to a participant, whether SARs related to such options shall be granted
to such participant; (d) to prescribe the form of the award agreements and any
appropriate terms and conditions applicable to the awards and to make any
amendments to such agreements or awards; (e) to interpret the Plan; (f) to make
and amend rules and regulations relating to the Plan; and (g) to make all other
determinations necessary or advisable for the administration of the Plan. The
Committee's determinations shall be conclusive and binding. No member of the
Committee shall be liable for any action taken or decision made in good faith
relating to the Plan or any award granted hereunder.
3. ELIGIBLE EMPLOYEES
Awards may be granted under the Plan only to employees and consultants of
the Company and its subsidiaries (which shall include all corporations of which
at least fifty percent of the voting stock is owned by the Company directly or
through one or more corporations at least fifty percent of the voting stock of
which is so owned) who have the capability of making a substantial contribution
to the success of the Company. Employees may be awarded any type of award
offered under the Plan. Consultants may be awarded any type of award except
ISOs.
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4. SHARES AVAILABLE
The total number of shares of the Company's Common Stock (par value of $0.01
per share) available in the aggregate for awards under this Plan is 43,600,000.
Shares to be granted may be authorized and unissued shares or may be treasury
shares.
The total number of shares with respect to which restricted stock awards may
be granted to any one participant shall not exceed 20,000 per calendar year
(subject to substitution or adjustment as provided in Section 11).
If an award expires, terminates or is cancelled without being exercised or
becoming vested, new awards may thereafter be granted under the Plan covering
such shares unless Rule 16b-3 provides otherwise. No award may be granted more
than 10 years after the effective date of the Plan.
5. TERMS AND CONDITIONS OF ISO'S
Each ISO granted under the Plan shall be evidenced by an ISO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform with this Plan and contain the following terms and
conditions:
(a) EXERCISE PRICE. The exercise price under each option shall equal
the fair market value of the Common Stock at the time such option is
granted. If an option is granted to an officer or employee who at the time
of grant owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company (a "10-percent
Shareholder"), the purchase price shall be at least 110 percent of the fair
market value of the stock subject to the option.
(b) DURATION OF OPTION. Each option by its terms shall not be
exercisable after the expiration of ten years from the date such option is
granted. In the case of an option granted to a 10-percent Shareholder, the
option by its terms shall not be exercisable after the expiration of five
years from the date such option is granted.
(c) OPTIONS NONTRANSFERABLE. Each option by its terms shall not be
transferable by the participant otherwise than (i) by will or the laws of
descent and distribution, (ii) pursuant to a qualified domestic relations
order, or (iii) to the extent permitted under the option agreement or
interpretation of the Committee and under Rule 16b-3 promulgated under the
Exchange Act, by gift to family members or entities beneficially owned by
family members or other permitted transferees under Rule 16b-3 promulgated
under the Exchange Act, and shall be exercisable, during the participant's
lifetime, only by the participant, the participant's guardian or the
participant's legal representative, the participant's transferee under a
qualified domestic relations order or other permitted transferee under this
section. To the extent required for the option grant and/or exercise to be
exempt under Rule 16b-3, options (or the shares of Common Stock underlying
the options) must be held by the participant for at least six months
following the date of grant.
(d) EXERCISE TERMS. Each option granted under the Plan shall become
exercisable on a schedule to be determined by the Committee at the time of
grant, which schedule may vary from one grant to another. Options may be
partially exercised from time to time during the period extending from the
time they first become exercisable until the tenth anniversary (fifth
anniversary for a 10-percent Shareholder) of the date of grant.
No outstanding option may be exercised by any person if the employee to
whom the option is granted is, or at any time after the date of grant has
been, in competition with the Company. The Committee has the sole discretion
to determine whether an employee's actions constitute competition with the
Company or an affiliated company. The Committee may impose such other
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terms and conditions on the exercise of options as it deems appropriate to
serve the purposes for which this Plan has been established.
(e) MAXIMUM VALUE OF ISO SHARES. No ISO shall be granted to an
employee under this Plan or any other ISO plan of the Company or its
subsidiaries to purchase shares as to which the aggregate fair market value
(determined as of the date of grant) of the Common Stock which first become
exercisable by the employee in any calendar year exceeds $100,000.
(f) PAYMENT OF EXERCISE PRICE. An option shall be exercised upon
written notice to the Company accompanied by payment in full for the shares
being acquired. The payment shall be made in cash, by check or, if the
option agreement so permits, by delivery of shares of Common Stock of the
Company beneficially owned by the participant, duly assigned to the Company
with the assignment guaranteed by a bank, trust company or member firm of
the New York Stock Exchange, or by a combination of the foregoing. Any such
shares so delivered shall be deemed to have a value per share equal to the
fair market value of the shares on such date. For this purpose, fair market
value shall equal the closing price of the Company's Common Stock on the
Nasdaq National Market System on the date the option is exercised, or, if
there was no trading in such stock on the date of such exercise, the closing
price on the last preceding day on which there was such trading.
Subject to the approval of the Board of Directors upon recommendation by
the Committee, in respect of the exercise of options, the Company may loan
to the employee a sum equal to an amount which is not in excess of 100% of
the purchase price of the shares so purchased upon exercise, such loan to be
evidenced by the execution and delivery of a promissory note. Interest shall
be paid on the unpaid balance of the promissory note at such times and at
such rate as shall be determined by the Board of Directors. Such promissory
note shall be secured by the pledge to the Company of shares having an
aggregate purchase price on the date of exercise equal to or greater than
the principal amount of such note. An optionee shall have, as to such
pledged shares, all rights of ownership, including the right to vote such
shares and to receive dividends paid on such shares, subject to the security
interest of the Company. Such shares shall not be released by the Company
from the pledge unless the proportionate amount of the note secured thereby
has been repaid to the Company. All notes executed hereunder shall be
payable at such times and in such amounts and shall contain such other terms
as shall be specified by the Board of Directors, provided, however, that
such terms shall conform to requirements contained in any applicable
regulations which are issued by any governmental authority.
6. TERMS AND CONDITIONS FOR NQSO'S
Each NQSO granted under the Plan shall be evidenced by a NQSO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform to this Plan and contain the same terms and conditions
as the ISO option agreement except that the 10-percent Shareholder restrictions
in Sections 5(a) and 5(b) and the maximum value of share rules of Section 5(e)
shall not apply to NQSO grants. To the extent an option initially designated as
an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and
shall otherwise remain in full force and effect.
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
To the extent permitted under Rule 16b-3 promulgated under the Exchange Act,
the Committee may, in its discretion, award stock appreciation rights to any
eligible employee of the Company who is subject to Section 16(b) of the Exchange
Act in conjunction with incentive stock options or nonqualified stock options
then being granted to him, or to be attached to one or more such options
theretofore granted and at the time held unexercised by such employee which
shall entitle the
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employee to receive payment from the Company in accordance with the following
provisions and such other terms and conditions as the Committee shall determine
from time to time:
(a) An SAR granted hereunder may be made part of an option at the time
of grant of the option or at any time thereafter up to six months prior to
the expiration of the option.
(b) Such SAR will entitle the holder to elect to receive, in lieu of
exercising the option to which it relates, an amount (in cash or in Common
Stock, or a combination thereof, all in the sole discretion of the
Committee) equal to 100% of the excess of:
(1) the fair market value per share of the Company's Common Stock on
the date of exercise of such right, multiplied by the number of
shares with respect to which the right is being exercised, over
(2) the aggregate option exercise price for such number of shares.
(c) Such SAR will be exercisable only to the extent that it has a
positive value and the option to which it relates is exercisable, except
that no SAR shall be exercisable during the first six (6) months after the
date of its grant.
(d) Upon exercise of an SAR, the option (or portion thereof) with
respect to which such right is exercised shall be surrendered and shall not
thereafter be exercisable.
(e) The exercise of an SAR will reduce the number of shares purchasable
pursuant to the related option and available under the Plan to the extent of
the number of shares with respect to which the right is exercised.
8. TERMS AND CONDITIONS OF RESTRICTED STOCK GRANTS
The Committee may, evidenced by such written agreement as the Committee
shall from time to time prescribe, grant to an eligible employee a specified
number of shares of the Company's Common Stock which shall vest only after the
attainment of the relevant restrictions described below ("restricted stock").
Such restricted stock shall have an appropriate restrictive legend affixed
thereto. A restricted stock grant shall be neither an option nor a sale, but
shall be subject to the following conditions and restrictions:
(a) Restricted stock may not be sold or otherwise transferred by the
participant until ownership vests, provided however, to the extent required
for the restricted stock grant to be exempt under Rule 16b-3, the restricted
stock must be held by the participant for at least six months following the
date of vesting.
(b) Ownership shall vest only following satisfaction of one or more of
the following criteria as the Committee may prescribe:
(1) the passage of three years, or such longer period of time as the
Committee in its discretion may provide, from the date of grant.
(2) the attainment of performance-based goals established by the
Committee as of the date of grant. If the participant's
compensation is subject to the $1 million cap of Code Section
162(m), the Committee may establish such performance goals based
on one or more of the following targets:
- total shareholder return
- earnings per share growth
- cash flow growth
- return on equity and/or
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If the participant's compensation is not subject to the $1 million
cap of Code Section 162(m), the Committee may establish the
performance goal on the basis of the preceding four targets or any
other target it may from time to time deem appropriate in its
discretion.
(3) any other conditions the Committee may prescribe, including a
non-compete requirement.
(c) Unless the Committee shall determine otherwise with respect to
participants whose compensation is not governed by Code Section 162(m), the
Committee shall grant and administer all performance-based awards under
(b)(2) above with the intent of meeting the criteria of Code Section 162(m)
for performance-based compensation. To this end, the outcome of all targeted
goals shall be substantially uncertain on the date of grant; the goals shall
be established no later than 90 days following the commencement of service
to which the goals relate; the minimum period for attaining each performance
goal shall be one year; and the Committee shall certify at the conclusion of
the performance period whether the performance-based goals have been
attained. Such certification may be made by noting the attainment of the
goals in the minutes of the Committee's meetings.
(d) Except as otherwise determined by the Committee, all rights and
title to restricted stock granted to a participant under the Plan shall
terminate and be forfeited to the Company upon failure to fulfill all
conditions and restrictions applicable to such restricted stock.
(e) Except for the restrictions set forth in this Plan and those
specified by the Committee in any restricted stock agreement, a holder of
restricted stock shall possess all the rights of a holder of the Company's
Common Stock (including voting and dividend rights); provided, however, that
prior to vesting the certificates representing such shares of restricted
stock (and the amount of any dividends issued with respect thereto) shall be
held by the Company for the benefit of the participant and the participant
shall deliver to the Company a stock power executed in blank covering such
shares. As the shares vest, certificates representing such shares shall be
released to the participant.
(f) All other provisions of the Plan not inconsistent with this section
shall apply to restricted stock or the holder thereof, as appropriate,
unless otherwise determined by the Committee.
9. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any certificate upon the grant,
vesting or exercise of any award or option until it has been furnished with such
opinion, representation or other document as it may reasonably deem necessary to
ensure compliance with any law or regulation of the Securities and Exchange
Commission or any other governmental authority having jurisdiction under this
Plan. Certificates delivered upon such grant, vesting or exercise may bear a
legend restricting transfer absent such compliance. Each award shall be subject
to the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to such award upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such awards or the issue or purchase of shares thereunder, such awards may not
vest or be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee in the exercise of its reasonable
judgment.
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10. IMPACT OF TERMINATION OF EMPLOYMENT
(a) OPTIONS
If the employment of a participant terminates by reason of death or
disability (as determined by the Committee), any option may be exercised by the
participant or, in the event of the participant's death, by the participant's
personal representative any time prior to the earlier of the expiration date of
the option or the expiration of one year after the date of termination, but only
if, and to the extent that, the participant was entitled to exercise the option
at the date of such termination. Upon termination of the participant's
employment for any reason other than death or disability, any vested option that
was exercisable immediately preceding termination may be exercised at any time
prior to the earlier of the expiration date of the option or the expiration of
three months after the date of such termination. In the event of retirement, the
three month period specified in the preceding sentence shall be extended to one
year in the case of NQSOs. Notwithstanding the foregoing, an option may not be
exercised after termination of employment if the Committee reasonably determines
that the termination of employment of such participant resulted from willful
acts or failure to act by the participant detrimental to the Company or any of
its subsidiaries.
(b) RESTRICTED STOCK GRANTS
(i) PASSAGE OF TIME VESTING. If a participant has been awarded
restricted stock whose vesting is conditioned solely on the passage of
time, any termination of employment for any reason, shall result in the
forfeiture of all restricted stock awards that were not vested prior to
the termination of employment except as otherwise provided by the
Committee.
(ii) PERFORMANCE-BASED VESTING. If a participant has been awarded
restricted stock whose vesting is based solely on the attainment of
performance-based goals or partly on the attainment of performance-based
goals and partly on the passage of time, any termination of employment
except death, disability or retirement shall result in the forfeiture of
all restricted stock awards that were not vested prior to the termination
of employment. A participant who terminates employment on account of
death, disability or retirement may, if the performance-based criteria
are eventually attained, be awarded (or, in the event of death, the
participant's designated beneficiary or personal representative if there
is no designated beneficiary shall be awarded) up to a pro rata portion
of the restricted shares based on the participant's length of service as
of his or her termination of employment over the length of the award
period ending on the date the performance-based criteria are satisfied
(or the passage of time would have been satisfied, if later, for an award
based in part on performance goals and in part on the passage of time).
The Committee shall have the discretion whether to grant a full pro rata
portion of the restricted shares, a lesser portion or no shares at all
under this subsection (b)(ii).
(c) SARS
If a participant terminates employment while holding an unexercised SAR, the
participant, or his designated beneficiary (or legal representative if there is
no designated beneficiary) in the event of his death, may exercise the SAR to
the same extent as the option to which it is related may be exercised following
termination of employment.
(d) MISCELLANEOUS TERMINATION PROVISIONS
Unless otherwise determined by the Committee, an authorized leave of absence
shall not constitute a termination of employment for purposes of this Plan.
For purposes of this section, retirement means that a participant terminates
employment at or after the date on which the participant reaches any normal
retirement age specified in any policy adopted by the Board or, in the absence
of such policy, age 65.
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If the employment of a participant terminates for any reason other than
disability, retirement or death, any unpaid balance on any promissory note used
in the purchase of stock shall become due and payable upon not less than three
months' notice from the Company, which notice may be given at any time after
such termination; provided, however, that such unpaid balance on such promissory
note shall become due and payable five years from the date of such termination,
unless the note has an earlier due date. In the case of termination due to
death, any unpaid balance remaining on such note on the date of death shall
become due and payable one year from such date.
11. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by reason of
any stock dividend, stock split, recapitalization, reorganization, merger,
consolidation, split-up, combination, or exchange of shares, or of any similar
change affecting the Common Stock, the number and kind of shares authorized
under Section 4, the number and kind of shares which thereafter are subject to
an award under the Plan and the number and kind of unexercised options and
unvested shares set forth in awards under outstanding agreements and the price
per share shall be adjusted automatically consistent with such change to prevent
substantial dilution or enlargement of the rights granted to, or available for,
participants in the Plan.
12. WITHHOLDING TAXES
All cash payable to a participant under the terms of this Plan shall be
subject to such federal, state and local income and employment tax withholdings
as payments of this type are normally subject. Whenever the Company proposes or
is required to issue or transfer shares of Common Stock under the Plan, or
whenever restricted stock vests, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy any federal,
state and/or local income and employment withholding tax requirements prior to
the delivery of any certificate or certificates for such shares or to take any
other appropriate action to satisfy such withholding requirements.
Notwithstanding the foregoing, subject to such rules as the Committee may
promulgate and compliance with any requirements under Rule 16b-3, the recipient
may satisfy such obligation in whole or in part by electing to have the Company
withhold shares of Common Stock from the shares to which the recipient is
otherwise entitled.
13. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall not confer upon any
participant any right with respect to continuance as an employee of the Company
or any subsidiary, nor shall they interfere in any way with the right of the
Company or any subsidiary to terminate the participant's position as an employee
at any time.
14. RIGHTS AS A SHAREHOLDER
The recipient of any option under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for the
underlying shares of Common Stock are issued to the recipient. The recipient of
a restricted stock grant shall have all rights of a shareholder except as
otherwise limited by the terms of this Plan.
15. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the Committee or by the
shareholders of the Company, except that the Committee may not, without approval
of a majority of the shareholders present in person or by proxy, materially
increase the benefits accruing to participants under the Plan, materially
increase the maximum number of shares as to which awards may be granted under
the Plan,
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<PAGE>
increase the number of restricted stock grants per year per participant or
change the basis for making performance-based awards for participants whose
compensation is subject to Code Section 162(m), change the minimum exercise
price of options or SARs, change the class of eligible persons, extend the
period for which awards may be granted or exercised, or withdraw the authority
to administer the Plan from the Committee or a committee of the Committee
consisting solely of outside directors unless the Board determines that inside
directors may serve on the Committee. Notwithstanding the foregoing, to the
extent permitted by law, the Committee may amend the Plan without the approval
of shareholders, to the extent it deems necessary to cause the Plan to comply
with Securities and Exchange Commission Rule 16b-3 or any successor rule, as it
may be amended from time to time or as otherwise permitted under Rule 16b-3
promulgated under the Exchange Act and the Code. Except as required by law, no
amendment, modification, or termination of the Plan may, without the written
consent of a participant to whom any award shall theretofore have been granted,
adversely affect the rights of such participant under such award.
16. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a
change in control of the Company (as defined in subsection (c) below), all
of a participant's restricted stock awards shall become immediately vested
to the same extent as if all restrictions had been satisfied and all options
and SARs shall become immediately vested and exercisable, unless directed
otherwise by a resolution of the Committee adopted prior to and specifically
relating to the occurrence of such change in control.
(b) In the event of a change in control each participant holding an
exercisable option (i) shall have the right at any time thereafter during
the term of such option to exercise the option in full notwithstanding any
limitation or restriction in any option agreement or in the Plan, and (ii)
if no related SAR has been granted with respect to an option, may, subject
to Committee approval and after written notice to the Company within 60 days
after the change in control, or, if the participant is an officer subject to
Section 16 of the Exchange Act and to the extent required to exempt the
transaction under Rule 16b-3, during the period beginning on the third
business day and ending on the twelfth business day following the first
release for publication by the Company after such change of control of a
quarterly or annual summary statement of earnings, which release occurs at
least six months following grant of the option, whichever period is longer,
receive, in exchange for the surrender of the option or any portion thereof
to the extent the option is then exercisable in accordance with clause (i),
an amount of cash equal to the difference between the fair market value (as
determined by the Committee) on the date of surrender of the Common Stock
covered by the option or portion thereof which is so surrendered and the
option price of such Common Stock under the option.
(c) For purposes of this section, "change in control" means:
(1) there shall be consummated
i. any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to
which any shares of the Company's common stock are to be
converted into cash, securities or other property, provided that
the consolidation or merger is not with a corporation which was
a wholly-owned subsidiary of the Company immediately before the
consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially
all, of the assets of the Company (other than to one or more
directly or indirectly wholly-owned subsidiaries of the
Company); or
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(2) the shareholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
(3) any person (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) shall become the beneficial owner (within the meaning
of Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or
more of the Company's then outstanding common stock, provided that such
person shall not be a wholly-owned subsidiary of the Company immediately
before it becomes such 30% beneficial owner; or
(4) individuals who constitute the Company's Board of Directors on
the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at
least three quarters of the directors comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of the
Company in which such person is named as a nominee for director, without
objection to such nomination) shall be, for purposes of this clause (d),
considered as though such person were a member of the Incumbent Board.
17. EFFECTIVE DATE
The effective date of the Plan is March 1, 1995 provided that within 12
months of this date the Plan is approved by the affirmative vote of the owners
of a majority of the Company's outstanding shares of Common Stock.
18. DEFINITIONS
Any terms or provisions used herein which are defined in Sections 83,
162(m), 421, or 422 of the Internal Revenue Code as amended, or the regulations
thereunder or corresponding provisions of subsequent laws and regulations in
effect at the time awards are made hereunder, shall have the meanings as therein
defined.
19. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal Revenue
Code that relate to awards, this Plan and any award agreement adopted pursuant
to it shall be construed under the laws of the State of New York.
Amended as of May 15, 2000
<TABLE>
<S> <C> <C>
PSINET INC.
By: /s/ WILLIAM L. SCHRADER
-----------------------------------------
William L. Schrader
Chairman and CEO
</TABLE>
Date of Shareholder Approval: May 15, 2000
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PSINET INC.
STRATEGIC STOCK INCENTIVE PLAN
(AS AMENDED ON MAY 17, 2000)
1. BACKGROUND AND PURPOSE
PSINet Inc. (the "Company") hereby establishes the PSINet Inc. Strategic
Stock Incentive Plan (the "Plan"). The purpose of this Plan is to enable the
Company and its subsidiaries, in connection with acquisitions, mergers,
strategic alliances, joint ventures and other business combinations and
transactions, to attract and retain employees and consultants and provide them
with an incentive to maintain and enhance the Company's and its subsidiaries'
long-term performance record. It is intended that this purpose will best be
achieved by granting eligible employees and, subject to the terms of this Plan,
consultants incentive stock options ("ISOs"), non-qualified stock options
("NQSOs"), stock appreciation rights ("SARs") and restricted stock grants,
individually or in combination, under this Plan pursuant to the rules set forth
in Sections 83, 162(m), 421 and 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). It is intended that ISOs, SARs, NQSOs and restricted stock
grants will be awarded under this Plan in connection with acquisitions, mergers,
strategic alliances and other business combinations and transactions effected or
to be effected by the Company and/or one or more of its subsidiaries.
2. ADMINISTRATION
The Plan shall be administered by a Committee of the Company's Board of
Directors (the "Committee"). This Committee shall consist of at least three
members of the Company's Board of Directors each of whom shall, unless the Board
determines otherwise, be "outside directors" as this term is defined in Code
Section 162(m) and regulations thereunder and none of whom during the one-year
period prior to commencement of service on the Committee, or during such
service, has been granted or awarded any equity security or derivative security
of the Company pursuant to the Plan or, except as permitted by Rule 16b-3
(c)(2)(i), or any successor provision, promulgated pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), any other plan of the
Company or any of its affiliates. Subject to the provisions of the Plan, the
Committee shall possess the authority, in its discretion, (a) to determine the
employees or consultants of the Company or a subsidiary to whom, and the time or
times at which, ISOs and/or NQSOs (ISOs and NQSOs are collectively referred to
as "options"), SARs and restricted stock grants (all four types of grants are
collectively referred to as "awards") shall be granted; (b) to determine at the
time of grant whether an award will be an ISO, a NQSO, a restricted stock grant
or a combination of these awards and the number of shares to be subject to each
award; (c) if options are granted to a participant, whether SARs related to such
options shall be granted to such participant; (d) to prescribe the form of the
award agreements and any appropriate terms and conditions applicable to the
awards and to make any amendments to such agreements or awards; (e) to interpret
the Plan; (f) to make and amend rules and regulations relating to the Plan; and
(g) to make all other determinations necessary or advisable for the
administration of the Plan. The Committee's determinations shall be conclusive
and binding. No member of the Committee shall be liable for any action taken or
decision made in good faith relating to the Plan or any award granted hereunder.
3. ELIGIBLE EMPLOYEES
Awards may be granted under the Plan only to employees and consultants of
the Company and its subsidiaries (which shall include all corporations of which
at least fifty percent of the voting stock is owned by the Company directly or
through one or more corporations at least fifty percent of the voting stock of
which is so owned) who have the capability of making a substantial contribution
to the success
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of the Company or any or more of its subsidiaries. Employees may be awarded any
type of award offered under the Plan. Consultants may be awarded any type of
award except ISOs.
4. SHARES AVAILABLE
The total number of shares of the Company's Common Stock (par value of $0.01
per share) available in the aggregate for awards under this Plan shall not
exceed Twenty-Nine Million (29,000,000) shares. Shares to be granted may be
authorized and unissued shares or may be treasury shares.
The total number of shares with respect to which restricted stock awards may
be granted to any one participant shall not exceed 10,000 per calendar year
(subject to substitution or adjustment as provided in Section 11).
If an award expires, terminates or is cancelled without being exercised or
becoming vested, new awards may thereafter be granted under the Plan covering
such shares unless Rule 16b-3 provides otherwise. No award may be granted more
than 10 years after the effective date of the Plan.
5. TERMS AND CONDITIONS OF ISOS
Each ISO granted under the Plan shall be evidenced by an ISO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform with this Plan and contain the following terms and
conditions:
(a) EXERCISE PRICE. The exercise price under each option shall equal
the fair market value of the Common Stock at the time such option is
granted. If an option is granted to an officer or employee who at the time
of grant owns stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company (a "10-percent
Shareholder"), the purchase price shall be at least 110 percent (110%) of
the fair market value of the stock subject to the option.
(b) DURATION OF OPTION. Each option by its terms shall not be
exercisable after the expiration of ten years from the date such option is
granted. In the case of an option granted to a 10-percent Shareholder, the
option by its terms shall not be exercisable after the expiration of five
years from the date such option is granted.
(c) OPTIONS NONTRANSFERABLE. Each option by its terms shall not be
transferable by the participant otherwise than (i) by will or the laws of
descent and distribution, (ii) pursuant to a qualified domestic relations
order, or (iii) to the extent permitted under the option agreement or
interpretation of the Committee and under Rule 16b-3 promulgated under the
Exchange Act, by gift to family members or entities beneficially owned by
family members or other permitted transferees under Rule 16b-3 promulgated
under the Exchange Act, and shall be exercisable, during the participant's
lifetime, only by the participant, the participant's guardian or the
participant's legal representative, the participant's transferee under a
qualified domestic relations order or other permitted transferee under this
section. To the extent required for the option grant and/or exercise to be
exempt under Rule 16b-3, options (or the shares of Common Stock underlying
the options) must be held by the participant for at least six months
following the date of grant.
(d) EXERCISE TERMS. Each option granted under the Plan shall become
exercisable on a schedule to be determined by the Committee at the time of
grant, which schedule may vary from one grant to another. Options may be
partially exercised from time to time during the period extending from the
time they first become exercisable until the tenth anniversary (fifth
anniversary for a 10-percent Shareholder) of the date of grant.
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<PAGE>
No outstanding option may be exercised by any person if the employee to
whom the option is granted is, or at any time after the date of grant has
been, in competition with the Company. The Committee has the sole discretion
to determine whether an employee's actions constitute competition with the
Company or an affiliated company. The Committee may impose such other terms
and conditions on the exercise of options as it deems appropriate to serve
the purposes for which this Plan has been established.
(e) MAXIMUM VALUE OF ISO SHARES. No ISO shall be granted to an
employee under this Plan or any other ISO plan of the Company or its
subsidiaries to purchase shares as to which the aggregate fair market value
(determined as of the date of grant) of the Common Stock which first become
exercisable by the employee in any calendar year exceeds $100,000.
(f) PAYMENT OF EXERCISE PRICE. An option shall be exercised upon
written notice to the Company accompanied by payment in full for the shares
being acquired. The payment shall be made in cash, by check or, if the
option agreement so permits, by delivery of shares of Common Stock of the
Company beneficially owned by the participant, duly assigned to the Company
with the assignment guaranteed by a bank, trust company or member firm of
the New York Stock Exchange, or by a combination of the foregoing. Any such
shares so delivered shall be deemed to have a value per share equal to the
fair market value of the shares on such date. For this purpose, fair market
value shall equal the closing price of the Company's Common Stock on the
Nasdaq National Market System on the date the option is exercised, or, if
there was no trading in such stock on the date of such exercise, the closing
price on the last preceding day on which there was such trading.
Subject to the approval of the Board of Directors upon recommendation by
the Committee, in respect of the exercise of options, the Company may loan
to the employee a sum equal to an amount which is not in excess of 100% of
the purchase price of the shares so purchased upon exercise, such loan to be
evidenced by the execution and delivery of a promissory note. Interest shall
be paid on the unpaid balance of the promissory note at such times and at
such rate as shall be determined by the Board of Directors. Such promissory
note shall be secured by the pledge to the Company of shares having an
aggregate purchase price on the date of exercise equal to or greater than
the principal amount of such note. An optionee shall have, as to such
pledged shares, all rights of ownership, including the right to vote such
shares and to receive dividends paid on such shares, subject to the security
interest of the Company. Such shares shall not be released by the Company
from the pledge unless the proportionate amount of the note secured thereby
has been repaid to the Company. All notes executed hereunder shall be
payable at such times and in such amounts and shall contain such other terms
as shall be specified by the Board of Directors, provided, however, that
such terms shall conform to requirements contained in any applicable
regulations which are issued by any governmental authority.
6. TERMS AND CONDITIONS FOR NQSOS
Each NQSO granted under the Plan shall be evidenced by a NQSO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform to this Plan and contain the same terms and conditions
as the ISO option agreement except that the 10-percent Shareholder restrictions
in Sections 5(a) and 5(b) and the maximum value of share rules of Section 5(e)
shall not apply to NQSO grants. To the extent an option initially designated as
an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and
shall otherwise remain in full force and effect.
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<PAGE>
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
To the extent permitted under Rule 16b-3 promulgated under the Exchange Act,
the Committee may, in its discretion, award stock appreciation rights to any
eligible employee of the Company who is subject to Section 16(b) of the Exchange
Act in conjunction with incentive stock options or nonqualified stock options
then being granted to him, or to be attached to one or more such options
theretofore granted and at the time held unexercised by such employee which
shall entitle the employee to receive payment from the Company in accordance
with the following provisions and such other terms and conditions as the
Committee shall determine from time to time:
(a) An SAR granted hereunder may be made part of an option at the time
of grant of the option or at any time thereafter up to six months prior to
the expiration of the option.
(b) Such SAR will entitle the holder to elect to receive, in lieu of
exercising the option to which it relates, an amount (in cash or in Common
Stock, or a combination thereof, all in the sole discretion of the
Committee) equal to 100% of the excess of:
(1) the fair market value per share of the Company's Common Stock on
the date of exercise of such right, multiplied by the number of
shares with respect to which the right is being exercised, over
(2) the aggregate option exercise price for such number of shares.
(c) Such SAR will be exercisable only to the extent that it has a
positive value and the option to which it relates is exercisable, except
that no SAR shall be exercisable during the first six (6) months after the
date of its grant.
(d) Upon exercise of an SAR, the option (or portion thereof) with
respect to which such right is exercised shall be surrendered and shall not
thereafter be exercisable.
(e) The exercise of an SAR will reduce the number of shares purchasable
pursuant to the related option and available under the Plan to the extent of
the number of shares with respect to which the right is exercised.
8. TERMS AND CONDITIONS OF RESTRICTED STOCK GRANTS
The Committee may, evidenced by such written agreement as the Committee
shall from time to time prescribe, grant to an eligible employee a specified
number of shares of the Company's Common Stock which shall vest only after the
attainment of the relevant restrictions described below ("restricted stock").
Such restricted stock shall have an appropriate restrictive legend affixed
thereto. A restricted stock grant shall be neither an option nor a sale, but
shall be subject to the following conditions and restrictions:
(a) Restricted stock may not be sold or otherwise transferred by the
participant until ownership vests, provided however, to the extent required
for the restricted stock grant to be exempt under Rule 16b-3, the restricted
stock must be held by the participant for at least six months following the
date of vesting.
(b) Ownership shall vest only following satisfaction of one or more of
the following criteria as the Committee may prescribe:
(1) the passage of three years, or such longer period of time as the
Committee in its discretion may provide, from the date of grant.
(2) the attainment of performance-based goals established by the
Committee as of the date of grant. If the participant's
compensation is subject to the $1 million cap of
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<PAGE>
Code Section 162(m), the Committee may establish such
performance goals based on one or more of the following targets:
- total shareholder return
- earnings per share growth
- cash flow growth
- return on equity and/or
If the participant's compensation is not subject to the $1 million
cap of Code Section 162(m), the Committee may establish the
performance goal on the basis of the preceding four targets or any
other target it may from time to time deem appropriate in its
discretion.
(3) any other conditions the Committee may prescribe, including a
non-compete requirement.
(c) Unless the Committee shall determine otherwise with respect to
participants whose compensation is not governed by Code Section 162(m), the
Committee shall grant and administer all performance-based awards under
(b)(2) above with the intent of meeting the criteria of Code Section 162(m)
for performance-based compensation. To this end, the outcome of all targeted
goals shall be substantially uncertain on the date of grant; the goals shall
be established no later than 90 days following the commencement of service
to which the goals relate; the minimum period for attaining each performance
goal shall be one year; and the Committee shall certify at the conclusion of
the performance period whether the performance-based goals have been
attained. Such certification may be made by noting the attainment of the
goals in the minutes of the Committee's meetings.
(d) Except as otherwise determined by the Committee, all rights and
title to restricted stock granted to a participant under the Plan shall
terminate and be forfeited to the Company upon failure to fulfill all
conditions and restrictions applicable to such restricted stock.
(e) Except for the restrictions set forth in this Plan and those
specified by the Committee in any restricted stock agreement, a holder of
restricted stock shall possess all the rights of a holder of the Company's
Common Stock (including voting and dividend rights); provided, however, that
prior to vesting the certificates representing such shares of restricted
stock (and the amount of any dividends issued with respect thereto) shall be
held by the Company for the benefit of the participant and the participant
shall deliver to the Company a stock power executed in blank covering such
shares. As the shares vest, certificates representing such shares shall be
released to the participant.
(f) All other provisions of the Plan not inconsistent with this section
shall apply to restricted stock or the holder thereof, as appropriate,
unless otherwise determined by the Committee.
9. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any certificate upon the grant,
vesting or exercise of any award or option until it has been furnished with such
opinion, representation or other document as it may reasonably deem necessary to
ensure compliance with any law or regulation of the Securities and Exchange
Commission or any other governmental authority having jurisdiction under this
Plan. Certificates delivered upon such grant, vesting or exercise may bear a
legend restricting transfer absent such compliance. Each award shall be subject
to the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to such award upon any securities exchange or under any state or federal
law, or the consent or approval
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<PAGE>
of any governmental regulatory body, is necessary or desirable as a condition
of, or in connection with, the granting of such awards or the issue or purchase
of shares thereunder, such awards may not vest or be exercised in whole or in
part unless such listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable to the
Committee in the exercise of its reasonable judgment.
10. IMPACT OF TERMINATION OF EMPLOYMENT
(a) OPTIONS
If the employment of an participant terminates by reason of death or
disability (as determined by the Committee), any option may be exercised by the
participant or, in the event of the participant's death, by the participant's
personal representative any time prior to the earlier of the expiration date of
the option or the expiration of one year after the date of termination, but only
if, and to the extent that, the participant was entitled to exercise the option
at the date of such termination. Upon termination of the participant's
employment for any reason other than death or disability, any vested option that
was exercisable immediately preceding termination may be exercised at any time
prior to the earlier of the expiration date of the option or the expiration of
three months after the date of such termination. In the event of retirement, the
three month period specified in the preceding sentence shall be extended to one
year in the case of NQSOs. Notwithstanding the foregoing, an option may not be
exercised after termination of employment if the Committee reasonably determines
that the termination of employment of such participant resulted from willful
acts or failure to act by the participant detrimental to the Company or any of
its subsidiaries.
(b) RESTRICTED STOCK GRANTS
(i) PASSAGE OF TIME VESTING. If a participant has been awarded
restricted stock whose vesting is conditioned solely on the passage of
time, any termination of employment for any reason, shall result in the
forfeiture of all restricted stock awards that were not vested prior to
the termination of employment except as otherwise provided by the
Committee.
(ii) PERFORMANCE-BASED VESTING. If a participant has been awarded
restricted stock whose vesting is based solely on the attainment of
performance-based goals or partly on the attainment of performance-based
goals and partly on the passage of time, any termination of employment
except death, disability or retirement shall result in the forfeiture of
all restricted stock awards that were not vested prior to the termination
of employment. A participant who terminates employment on account of
death, disability or retirement may, if the performance-based criteria
are eventually attained, be awarded (or, in the event of death, the
participant's designated beneficiary or personal representative if there
is no designated beneficiary shall be awarded) up to a pro rata portion
of the restricted shares based on the participant's length of service as
of his or her termination of employment over the length of the award
period ending on the date the performance-based criteria are satisfied
(or the passage of time would have been satisfied, if later, for an award
based in part on performance goals and in part on the passage of time).
The Committee shall have the discretion whether to grant a full pro rata
portion of the restricted shares, a lesser portion or no shares at all
under this subsection (b)(ii).
(c) SARS
If a participant terminates employment while holding an unexercised SAR, the
participant, or his designated beneficiary (or legal representative if there is
no designated beneficiary) in the event of his death, may exercise the SAR to
the same extent as the option to which it is related may be exercised following
termination of employment.
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(d) MISCELLANEOUS TERMINATION PROVISIONS
Unless otherwise determined by the Committee, an authorized leave of absence
shall not constitute a termination of employment for purposes of this Plan.
For purposes of this section, retirement means that a participant terminates
employment at or after the date on which the participant reaches any normal
retirement age specified in any policy adopted by the Board or, in the absence
of such policy, age 65.
If the employment of a participant terminates for any reason other than
disability, retirement or death, any unpaid balance on any promissory note used
in the purchase of stock shall become due and payable upon not less than three
months' notice from the Company, which notice may be given at any time after
such termination; provided, however, that such unpaid balance on such promissory
note shall become due and payable five years from the date of such termination,
unless the note has an earlier due date. In the case of termination due to
death, any unpaid balance remaining on such note on the date of death shall
become due and payable one year from such date.
11. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by reason of
any stock dividend, stock split, recapitalization, reorganization, merger,
consolidation, split-up, combination, or exchange of shares, or of any similar
change affecting the Common Stock, the number and kind of shares authorized
under Section 4, the number and kind of shares which thereafter are subject to
an award under the Plan and the number and kind of unexercised options and
unvested shares set forth in awards under outstanding agreements and the price
per share shall be adjusted automatically consistent with such change to prevent
substantial dilution or enlargement of the rights granted to, or available for,
participants in the Plan.
12. WITHHOLDING TAXES
All cash payable to a participant under the terms of this Plan shall be
subject to such federal, state and local income and employment tax withholdings
as payments of this type are normally subject. Whenever the Company proposes or
is required to issue or transfer shares of Common Stock under the Plan, or
whenever restricted stock vests, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to satisfy any federal,
state and/or local income and employment withholding tax requirements prior to
the delivery of any certificate or certificates for such shares or to take any
other appropriate action to satisfy such withholding requirements.
Notwithstanding the foregoing, subject to such rules as the Committee may
promulgate and compliance with any requirements under Rule 16b-3, the recipient
may satisfy such obligation in whole or in part by electing to have the Company
withhold shares of Common Stock from the shares to which the recipient is
otherwise entitled.
13. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall not confer upon any
participant any right with respect to continuance as an employee of the Company
or any subsidiary, nor shall they interfere in any way with the right of the
Company or any subsidiary to terminate the participant's position as an employee
at any time.
14. RIGHTS AS A SHAREHOLDER
The recipient of any option under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for the
underlying shares of Common Stock are issued to the recipient. The recipient of
a restricted stock grant shall have all rights of a shareholder except as
otherwise limited by the terms of this Plan.
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15. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the Committee or by the
shareholders of the Company, except that the Committee may not, without approval
of a majority of the shareholders present in person or by proxy, materially
increase the benefits accruing to participants under the Plan, materially
increase the maximum number of shares as to which awards may be granted under
the Plan, increase the number of restricted stock grants per year per
participant or change the basis for making performance-based awards for
participants whose compensation is subject to Code Section 162(m), change the
minimum exercise price of options or SARs, change the class of eligible persons,
extend the period for which awards may be granted or exercised, or withdraw the
authority to administer the Plan from the Committee or a committee of the
Committee consisting solely of outside directors unless the Board determines
that inside directors may serve on the Committee. Notwithstanding the foregoing,
to the extent permitted by law, the Committee may amend the Plan without the
approval of shareholders, to the extent it deems necessary to cause the Plan to
comply with Securities and Exchange Commission Rule 16b-3 or any successor rule,
as it may be amended from time to time or as otherwise permitted under Rule
16b-3 promulgated under the Exchange Act and the Code. Except as required by law
or as provided in Section 17 hereof, no amendment, modification, or termination
of the Plan may, without the written consent of a participant to whom any award
shall theretofore have been granted, adversely affect the rights of such
participant under such award.
16. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a
change in control of the Company (as defined in subsection (c) below), all
of a participant's restricted stock awards shall become immediately vested
to the same extent as if all restrictions had been satisfied and all options
and SARs shall become immediately vested and exercisable, unless directed
otherwise by a resolution of the Committee adopted prior to and specifically
relating to the occurrence of such change in control.
(b) In the event of a change in control each participant holding an
exercisable option (i) shall have the right at any time thereafter during
the term of such option to exercise the option in full notwithstanding any
limitation or restriction in any option agreement or in the Plan, and (ii)
if no related SAR has been granted with respect to an option, may, subject
to Committee approval and after written notice to the Company within 60 days
after the change in control, or, if the participant is an officer subject to
Section 16 of the Exchange Act and to the extent required to exempt the
transaction under Rule 16b-3, during the period beginning on the third
business day and ending on the twelfth business day following the first
release for publication by the Company after such change of control of a
quarterly or annual summary statement of earnings, which release occurs at
least six months following grant of the option, whichever period is longer,
receive, in exchange for the surrender of the option or any portion thereof
to the extent the option is then exercisable in accordance with clause (i),
an amount of cash equal to the difference between the fair market value (as
determined by the Committee) on the date of surrender of the Common Stock
covered by the option or portion thereof which is so surrendered and the
option price of such Common Stock under the option.
(c) For purposes of this section, "change in control" means:
(1) there shall be consummated
i. any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to
which any shares of the Company's common stock are to be
converted into cash, securities or other property, provided that
the consolidation or merger is not with a corporation which was
a
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wholly-owned subsidiary of the Company immediately before the
consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially
all, of the assets of the Company (other than to one or more
directly or indirectly wholly-owned subsidiaries of the
Company); or
(2) the shareholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
(3) any person (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) shall become the beneficial owner (within the meaning
of Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or
more of the Company's then outstanding common stock, provided that such
person shall not be a wholly-owned subsidiary of the Company immediately
before it becomes such 30% beneficial owner; or
(4) individuals who constitute the Company's Board of Directors on
the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at
least three quarters of the directors comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of the
Company in which such person is named as a nominee for director, without
objection to such nomination) shall be, for purposes of this clause (d),
considered as though such person were a member of the Incumbent Board.
17. EFFECTIVE DATE
The effective date of the Plan is June 5, 1995 provided that within 12
months of this date the Plan is approved by the affirmative vote of the owners
of a majority of the Company's outstanding shares of Common Stock. In the event
that such approval is not given within such 12-month period, all ISOs granted
under this Plan shall be deemed to be NQSOs and this Plan and all awards made
hereunder shall otherwise continue to be in full force and effect.
18. DEFINITIONS
Any terms or provisions used herein which are defined in Sections 83,
162(m), 421, or 422 of the Internal Revenue Code as amended, or the regulations
thereunder or corresponding provisions of subsequent laws and regulations in
effect at the time awards are made hereunder, shall have the meanings as therein
defined.
19. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal Revenue
Code that relate to awards, this Plan and any award agreement adopted pursuant
to it shall be construed under the laws of the State of New York.
Amended as of May 15, 2000
PSINET INC.
By: /s/ William L. Schrader
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Chairman and CEO
Date of Shareholder Approval: May 15, 2000
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