<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2000 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-25812
----------------
PSINET INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
NEW YORK 16-1353600
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
44983 KNOLL SQUARE, ASHBURN, VA 20147
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
--------------
(703) 726-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
COMMON STOCK, $.01 PAR VALUE - 157,452,777 SHARES AS OF MAY 1, 2000
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
The Exhibit Index appears on page 33
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PSINET INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 .......................................................3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 ....................................................................4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999.............................................................5
Notes to Condensed Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................29
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................................30
Item 6. Exhibits and Reports on Form 8-K...............................................................30
Signatures..................................................................................................32
Exhibit Index...............................................................................................33
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSINET INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN MILLIONS OF U.S. DOLLARS)
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,425.3 $ 853.6
Restricted cash and short-term investments 158.7 154.1
Short-term investments and marketable securities 439.8 747.6
Accounts receivable, net 112.2 103.6
Prepaid expenses 30.0 20.6
Other current assets 93.4 62.9
-------- --------
Total current assets 2,259.4 1,942.4
Property, plant and equipment, net 1,528.4 1,162.6
Goodwill and other intangibles, net 1,154.8 1,212.0
Other assets and deferred charges 198.9 175.3
-------- --------
Total assets $ 5,141.5 $ 4,492.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 119.9 $ 115.0
Trade accounts payable 143.7 141.5
Accrued payroll and related expenses 33.7 16.1
Other accounts payable and accrued liabilities 95.9 85.3
Accrued interest payable 73.5 94.7
Deferred revenue 31.9 29.5
-------- --------
Total current liabilities 498.6 482.1
Long-term debt 3,159.7 3,185.2
Deferred income taxes 13.8 17.9
Other liabilities 83.8 84.1
-------- --------
Total liabilities 3,755.9 3,769.3
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock
Preferred stock, Series A -- --
Convertible preferred stock, Series C 189.7 375.2
Convertible preferred stock, Series D 749.1 --
Common stock 1.6 1.5
Capital in excess of par value 1,434.0 1,194.8
Accumulated deficit (1,065.8) (861.5)
Treasury stock -- (2.0)
Accumulated other comprehensive income 139.1 125.4
Bandwidth asset to be delivered under IXC agreement (62.1) (110.4)
-------- --------
Total shareholders' equity 1,385.6 723.0
-------- --------
Total liabilities and shareholders' equity $ 5,141.5 $ 4,492.3
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
<PAGE>
PSINET INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2000 1999
------------- -------------
(IN MILLIONS OF U.S. DOLLARS,
EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenue $ 222.9 $ 104.9
Operating costs and expenses:
Data communications and operations 163.6 76.0
Sales and marketing 38.5 18.6
General and administrative 36.3 17.1
Depreciation and amortization 134.5 26.8
Restructuring charge 16.9 -
Costs related to planned distribution
and sale of consumer business 1.1 -
------------- -------------
Total operating costs and expenses 390.9 138.5
------------- -------------
Loss from operations (168.0) (33.6)
Interest expense (79.0) (29.6)
Interest income 24.8 4.7
Other expense, net (0.5) -
Gain (loss) on sale of investments 34.1 (0.2)
------------- -------------
Loss before income taxes (188.6) (58.7)
Income taxes - -
------------- -------------
Net loss (188.6) (58.7)
Return to preferred shareholders (15.6) (0.6)
------------- -------------
Net loss available to common shareholders $ (204.2) $ (59.3)
============= =============
Basic and diluted loss per share $ (1.35) $ (0.56)
============= =============
Shares used in computing basic and
diluted loss per share (in thousands) 150,848 106,716
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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PSINET INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
------------- -----------
(IN MILLIONS OF U.S. DOLLARS)
(UNAUDITED)
<S> <C> <C>
Net cash used in operating activities $ (63.2) $ (77.2)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (362.6) (55.7)
Purchases of short-term investments (278.5) (129.3)
Proceeds from maturity or sale of short-term investments 647.6 153.9
Investments in certain businesses, net of cash acquired (69.6) (35.1)
Restricted cash and short-term investments (4.7) 29.6
Other, net (0.2) (0.3)
----------- -----------
Net cash used in investing activities (68.0) (36.9)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt - 101.3
Repayments of debt (12.4) (3.4)
Principal payments under capital lease obligations (23.2) (12.3)
Proceeds from equity offerings, net 740.2 -
Proceeds from exercise of common stock options 16.8 6.3
Payments of dividends on preferred stock - (0.5)
Other, net (0.3) (0.1)
----------- -----------
Net cash provided by financing activities 721.1 91.3
----------- -----------
Effect of exchange rate changes on cash (18.2) (8.9)
----------- -----------
Net increase (decrease) in cash and cash equivalents 571.7 (31.7)
Cash and cash equivalents, beginning of period 853.6 56.8
----------- -----------
Cash and cash equivalents, end of period $ 1,425.3 $ 25.1
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 106.7 $ 14.6
Income taxes - -
Noncash investing and financing activities:
Capital lease obligations incurred 13.3 60.0
Acceptance of IXC bandwidth 48.3 11.9
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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PSINET INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
These consolidated financial statements as of March 31, 2000 and for the
three month periods ended March 31, 2000 and 1999 and the related footnote
information are unaudited and have been prepared on a basis substantially
consistent with the audited consolidated financial statements of PSINet Inc.
and its subsidiaries (collectively, "PSINet" or the "Company") as of and for
the year ended December 31, 1999 included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission ("SEC"). These
financial statements should be read in conjunction with the audited
consolidated financial statements and the related notes to the consolidated
financial statements of the Company as of and for the year ended December 31,
1999. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) which management considers necessary to present fairly the
consolidated financial position of the Company at March 31, 2000, and its
results of operations and its cash flows for the three month periods ended
March 31, 2000 and 1999. The results of operations for the three month period
ended March 31, 2000 may not be indicative of the results expected for any
succeeding quarter or for the entire year ending December 31, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results may
differ from those estimates.
NOTE 2 - ACCOUNTING POLICIES
LOSS PER SHARE - Basic loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted loss per
share is computed using the weighted average number of shares of common stock,
adjusted for the dilutive effect of common stock equivalent shares of common
stock options and warrants, common stock issuable upon conversion of convertible
preferred stock and contingently issuable shares of common stock. Common stock
equivalent shares are calculated using the treasury stock method. The effect of
common stock equivalents, which totaled 36.5 million and 17.8 million shares at
March 31, 2000 and 1999, respectively, has been excluded from the computation of
diluted loss per share as the effect would be antidilutive. Accordingly, there
is no reconciliation between basic and diluted loss per share for each of the
periods presented.
FOREIGN CURRENCY - Gains and losses on translation of the accounts of the
Company's non-U.S. operations, including intercompany balances invested for
the foreseeable future, are accumulated and reported as a component of
accumulated other comprehensive income in shareholders' equity. At March 31,
2000 and December 31, 1999, the cumulative foreign currency translation
adjustment was $36.8 million and $47.6 million, respectively. Transaction
gains and losses on the Company's non-functional currency denominated assets
and liabilities are recorded in the consolidated statements of operations.
REVENUE RECOGNITION - In December 1999, the SEC released Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101")
which clarifies the SEC's views on revenue recognition. The Company believes
its existing revenue recognition policies and procedures are in compliance
with SAB 101 and, therefore, SAB 101's adoption will have no material impact
on the Company's financial condition, results of operations or cash flows.
NOTE 3 - RESTRUCTURING CHARGE
During the past two years, PSINet has made significant acquisitions of
fiber-based bandwidth and related equipment to enhance its network
infrastructure and lower its per unit operating costs. The Company has also
acquired since January 1, 1998 more than 65 companies throughout its five
geographic operating
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<PAGE>
regions, resulting in overlapping network infrastructure in
several markets. During the first quarter of 2000, PSINet completed and approved
a restructuring plan directed at developing a global brand image, eliminating
certain network redundancies, streamlining operations and product offerings, and
taking advantage of synergies created by its integration process.
The Company expects that its restructuring plan will have a positive effect on
its financial position and future operating results. Expected cost saving
results from the restructuring plan include:
- - reduced annual data communication and operations expense of approximately
$15.1 million; and
- - reduced annual depreciation and amortization expense of
$8.7 million.
As of March 31, 2000, management does not believe there are any unresolved
contingencies or other issues that could result in an adjustment to the
restructuring costs.
Based upon this restructuring plan, the Company has incurred incremental and
non-recurring expenses of $16.9 million for the three months ended March 31,
2000, which consists of the following components:
- - $12.8 million of termination charges for excess bandwidth and facilities;
- - $3.4 million for closures of duplicate POP facilities that were identified
for decommissioning; and
- - $0.7 million for employee reduction in force ("RIF") plans.
The termination charges for excess bandwidth consist mainly of $12.6 million for
penalties incurred to terminate circuits across three of our geographic
operating segments: $9.8 million in our Asia/Pacific segment, $2.3 million in
our U.S./Canada segment, and $0.5 million in our Latin America segment. The
remaining $0.2 million relates to facility lease termination costs.
The POP closure charges result directly from downsizing and eliminating POP
locations in our U.S./Canada segment. POP closure charges of $3.4 million were
incurred in connection with the planned closure of 102 POPs, including $2.2
million in contractor costs to close duplicate and excess facilities, and $0.8
million of circuit termination and facilities lease termination costs and $0.4
million of other related costs. Closure and exit costs include payments required
under lease contracts, less any applicable sublease income after the properties
were abandoned, lease buyout costs and costs to terminate telecommunications
bandwidth directly associated with the POP. As of March 31, 2000, approximately
10% of the 102 POPs had been eliminated.
The RIF charge resulted from the termination of 132 employees. All terminations
and termination benefits were communicated to the affected employees prior to or
on March 31, 2000 and all remaining severance benefits are expected to be paid
before March 31, 2001.
Liabilities for termination of excess bandwidth and POP closure charges are
included in other accounts payable and accrued liabilities while severance and
benefits liabilities are included in accrued payroll and related liabilities.
Through March 31, 2000, approximately $0.6 million had been paid under the
restructuring plan.
Also, in the first quarter of 2000, the Company identified certain assets to be
written-off and certain tangible and intangible assets that required accelerated
depreciation and amortization as a result of the assessment of the remaining
useful lives to reflect the timing of when the assets identified in the
restructuring would actually be taken out of service. The $59.0 million asset
charge, included in depreciation and amortization, for the quarter ended March
31, 2000 consists of the following:
- - $50.9 million write-off of acquired tradenames;
- - $4.4 million write-off and accelerated depreciation of obsolete equipment;
and
- - $3.7 million write-off of certain software assets.
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<PAGE>
The acquired tradename charge resulted from the Company's decision to utilize a
single global brand identity. As a result, the Company decided to discontinue
commercial use of its many acquired companies' tradenames. The Company believes
the switch to the global use of the PSINet tradename will enhance both its
global brand imaging and customer recognition efforts.
The write-off and accelerated depreciation of equipment relates to certain
telecommunications equipment that will be removed from service as a result of
closure of certain POPs and disposal of other network equipment.
The write-off of certain software assets resulted from the decision to no longer
utilize certain business software solutions.
NOTE 4 - PLANNED DISTRIBUTION AND SALE OF CONSUMER BUSINESS
During the three months ended March 31, 2000, the Company incurred $1.1 million
of direct incremental costs related to the Company's planned distribution and
sale of its consumer business. As a result of acquisitions in 1998 and 1999, the
Company has amassed a significant number of consumer customers throughout its
operating regions. The Company's primary strategic focus is providing services
to business and wholesale customers. Accordingly, in February and March 2000,
the Company announced that worldwide retail consumer operations will be
consolidated into a new retail business unit, known as Inter.net Ltd.
Inter.net is expected to initially serve an estimated 550,000 consumer
accounts distributed throughout global markets (mostly outside of the United
States), with over 30 localized consumer portals in more than 20 countries.
The Company is currently assessing its options regarding Inter.net, including
a possible initial public offering or spin-off of the business, to best
maximize PSINet shareholder value.
NOTE 5 - ACQUISITIONS OF CERTAIN BUSINESSES
CONSUMMATED TRANSACTIONS
All of the companies listed below which the Company has acquired are Internet
service providers or data transmission companies, offering a wide range of
Internet-protocol based solutions for businesses and small office/home office
and consumer users. Depending on the particular business activities of the
company acquired, revenue may also be derived from network integration, web
hosting, managed co-location and eCommerce, as well as vertical market
Internet services, including eCommerce, medical and telecommunications
Internet solutions.
During the three months ended March 31, 2000, the Company acquired a 100%
ownership interest in the following businesses for an aggregate of approximately
$31.6 million:
<TABLE>
<CAPTION>
BUSINESS NAME LOCATION ACQUISITION DATE
- ------------- -------- ----------------
<S> <C> <C>
IPhil Philippines January 2000
Telepath US January 2000
GlobalNet Brazil March 2000
InterServer Argentina March 2000
SSD Argentina March 2000
</TABLE>
Subsequent to March 31, 2000, the Company acquired a 100% ownership interest in
the following businesses:
<TABLE>
<CAPTION>
BUSINESS NAME LOCATION ACQUISITION DATE
- ------------- -------- ----------------
<S> <C> <C>
IDCI.Net US April 2000
Pontocom Brazil April 2000
</TABLE>
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<PAGE>
Each of the above acquisitions was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of the
acquired companies have been included in the Company's consolidated financial
statements since the acquisition dates. The purchase price of the acquisitions
has been preliminarily allocated to assets acquired, including intangible
assets, and liabilities assumed, based on their respective fair values at the
acquisition dates. As part of the allocation process, the Company evaluates each
acquisition for acquired in-process research and development technologies. Based
on the Company's preliminary allocations, no in-process research and development
technologies were identified for its 2000 acquisitions to date.
For certain acquisitions, the Company has retained a portion of the purchase
price under holdback provisions of the purchase agreements to secure performance
by the sellers of indemnification or other contractual obligations. These
acquisition holdback liabilities are generally payable up to 24 months after the
date of closing of the related acquisitions. Acquisition holdback liabilities
totaled $79.0 million at March 31, 2000. The Company made $4.7 million in
payments on acquisition holdbacks in 2000.
Total amortization expense of goodwill and other intangibles was $80.1 million
(including $50.9 million relating to the first quarter restructuring charge) and
$7.4 million for the three months ended March 31, 2000 and 1999, respectively.
PENDING TRANSACTION
On March 21, 2000, the Company entered into a definitive agreement to acquire
Metamor Worldwide, Inc. ("Metamor"), a leading provider of information
technology, or IT, solutions. Under the terms of the merger agreement with
Metamor, the aggregate consideration to be paid to Metamor shareholders
consists of approximately 31.2 million shares of the Company's common stock
(at a conversion ratio of 0.9 shares of the Company's common stock for each
share of Metamor's common stock outstanding), which represents an aggregate
value of approximately $1.35 billion, based upon an average price per share
of the Company's common stock of $43.35 for the period from March 20, 2000
through March 24, 2000. The Company will also assume options to acquire
approximately 4.6 million shares of Metamor common stock which, under the
terms of the merger agreement, will be exercisable into approximately 4.1
million shares of the Company's common stock and represent an aggregate fair
value of approximately $142.5 million. Additionally, the Company will
transfer funds for the redemption of Metamor's 2.94% Convertible Subordinated
Notes having a face amount of approximately $227.0 million and will repay
amounts outstanding under Metamor's $80.0 million revolving credit facility
($40.2 million was outstanding as of April 25, 2000) immediately prior to the
merger as a condition to closing. Simultaneously with the merger, the Company
expects to invest $50.0 million in 8 1/2% preferred stock of Xpedior
Incorporated, a majority owned subsidiary of Metamor. The source of the cash
for the repayment of the Metamor outstanding debt and the investment in
Xpedior will be cash on hand. Completion of the transaction is subject to a
number of conditions, including the receipt of shareholder approval from the
Company's shareholders and Metamor's stockholders. There can be no assurance
that the transaction will be completed.
NOTE 6 - SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
At March 31, 2000 and December 31, 1999, short-term investments and
marketable securities, including restricted amounts, consisted of $78.0
million and $342.9 million, respectively, of U.S. government obligations,
$166.6 million and $346.1 million, respectively, of commercial paper, $87.4
million and $42.8 million, respectively, of certificates of deposit and
$139.9 million and $82.7 million, respectively, in equity securities. All
short-term investments are classified as available-for-sale. The unrealized
holding gain was $102.3 million and $77.8 million at March 31, 2000 and
December 31, 1999, respectively. The March 31, 2000 unrealized holding gain
was comprised of $1.2 million in government obligations and $101.1 million in
equity securities. At May 10, 2000, the unrealized holding gain in the equity
securities held at March 31, 2000 was $43.2 million.
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<PAGE>
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C>
Telecommunications bandwidth $ 688.9 $ 500.2
Data communications equipment 676.0 546.3
Leasehold improvements 90.3 114.4
Software 57.6 32.5
Office and other equipment 81.3 57.5
Land and buildings 201.5 124.6
-------- --------
1,795.6 1,375.5
Less accumulated depreciation and amortization (267.2) (212.9)
-------- --------
Property, plant and equipment, net $1,528.4 $1,162.6
======== ========
</TABLE>
Total depreciation and leasehold amortization expense was $54.4 million
(including $8.1 million relating to the first quarter restructuring charge) and
$19.4 million for the three months ended March 31, 2000 and 1999, respectively.
At March 31, 2000 and December 31, 1999, telecommunications bandwidth included
$334.6 million and $223.2 million, respectively, and land and buildings included
$125.9 million and $53.3 million, respectively, of assets classified as
construction in progress for which no depreciation will be recognized until
construction is completed. Anticipated completion dates are through 2001. In the
three months ended March 31, 2000 the Company capitalized interest of $9.5
million. No interest was capitalized in the three months ended March 31, 1999.
NOTE 8 - DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C>
10.0% Senior notes due 2005 $ 600.0 $ 600.0
10.5% Senior notes due 2006 (Euro 150.0) 143.3 150.9
10.5% Senior notes due 2006 600.0 600.0
11.0% Senior notes due 2009 (Euro 150.0) 143.3 150.9
11.0% Senior notes due 2009 1,050.0 1,050.0
11.5% Senior notes due 2008 350.0 350.0
Capital lease obligations at interest rates ranging from 2.7% to 17.3% 354.4 359.7
Notes payable at interest rates ranging from 1.8% to 12.7%. 36.0 36.0
-------- --------
3,277.0 3,297.5
Plus unamortized premium 2.6 2.7
-------- --------
3,279.6 3,300.2
Less current portion (119.9) (115.0)
-------- --------
Long-term portion $ 3,159.7 $ 3,185.2
======== ========
</TABLE>
The senior notes are senior unsecured obligations of the Company ranking
equivalent in right of payment to all existing and future unsecured and
unsubordinated indebtedness of the Company, and senior in right of payment to
all existing and future subordinated indebtedness of the Company. Interest is
payable on the senior notes semi-annually. At March 31, 2000, the Company has
deposited in an escrow account restricted cash and short-term investments of
$38.2 million to fund, when due, the next semi-annual interest payment on the
10% senior notes. The indentures governing the senior notes contain certain
financial and other covenants which, among other things, will restrict the
Company's ability to incur further indebtedness, make certain payments
(including payments of dividends) and investments, and sell assets. The Company
was in compliance with these covenants at March 31, 2000.
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<PAGE>
The Company has various financing arrangements accounted for as capital leases
for the acquisition of equipment and other fixed assets. During the three months
ended March 31, 2000 and 1999, the Company incurred capital lease obligations
under these arrangements of $13.3 million and $60.0 million, respectively. At
March 31, 2000, the aggregate unused portion under these arrangements totaled
$418.7 million after designating $30.8 million of payables for various equipment
purchases which will be financed under existing capital lease facilities. The
capital lease obligations contain provisions which, among other things, require
the maintenance of certain financial ratios and restrict the payment of
dividends. The Company was in compliance with these covenants at March 31, 2000.
NOTE 9 - CAPITAL STOCK
ISSUANCE OF CONVERTIBLE SERIES D PREFERRED STOCK
In February 2000, the Company completed an offering of 16,500,000 shares of
7% Series D cumulative convertible preferred stock ("Series D preferred
stock") for aggregate net proceeds of approximately $740.2 million after
expenses and excluding amounts paid by the purchasers of the Series D
preferred stock into the deposit account described below. The Series D
preferred stock has a liquidation preference of $50 per share.
At closing, the purchasers of the Series D preferred stock deposited
approximately $57.9 million into an account established with a deposit agent
("the Series D deposit account"). The Series D deposit account is not an asset
of the Company. Funds in the Series D deposit account will be paid to the
holders of the Series D preferred stock each quarter in the amount of $0.875 per
share in cash or may be used, at the Company's option, to purchase shares of
common stock at either 93% or 97% of the market price of the common stock on
that date (depending on whether the registration statement covering the shares
is effective) for delivery to holders of Series D preferred stock in lieu of
cash payments. Holders of Series D preferred stock will receive quarterly
payments from the Series D deposit account commencing May 15, 2000 and
continuing until February 15, 2001. The funds placed in the Series D deposit
account by the purchasers of the Series D preferred stock will, together with
the earnings on those funds, be sufficient to make payments, in cash or stock,
from the issue date through February 15, 2001. Until the expiration of the
Series D deposit account, the Company will accrete a return to preferred
shareholders each quarter from the date of issuance at an annual rate of 7% of
the liquidation preference per share. Such amount is recorded as a deduction
from net income to determine net income available to common shareholders. Under
certain circumstances, the Company can elect to terminate the Series D deposit
account prior to February 15, 2001, at which time the remaining funds in the
Series D deposit account would be distributed to the Company and the Series D
preferred stock would begin to accrue dividends.
Each share of Series D preferred stock is convertible at any time after February
15, 2000 at the option of the holders into 0.9352 shares of the Company's common
stock, equal to a conversion price of $53.465 per share, subject to adjustment
upon the occurrence of specified events. The Series D preferred stock is
redeemable, at the Company's option, at a redemption premium of 105.50% of the
liquidation preference (plus accumulated and unpaid dividends, if any) on or
after August 15, 2001 but prior to February 15, 2003, if the trading price of
its common stock equals or exceeds $80.20 per share for a specified trading
period. The Company will also make additional payments to the holders of the
Series D preferred stock if the Company redeems the Series D preferred stock
under the foregoing circumstances. Except in the foregoing circumstances, the
Company may not redeem the Series D preferred stock prior to February 15, 2003.
Beginning on February 15, 2003, the Company may redeem shares of the Series D
preferred stock at an initial redemption premium of 104.00% of the liquidation
preference, declining to 100.00% on February 15, 2007 and thereafter, plus in
each case all accumulated and unpaid dividends to the redemption date. The
Company may effect any redemption, in whole or in part, at its option, in cash,
by delivery of fully paid and nonassessable shares of its common stock or a
combination of cash and common stock (subject to applicable law), by delivering
notice to the holders of the Series D preferred stock.
-11-
<PAGE>
In the event of a change of control of PSINet (as defined in the charter
amendment designating the Series D preferred stock), holders of Series D
preferred stock will, if the market value of the Company's common stock at such
time is less than the conversion price for the Series D preferred stock, have a
one time option to convert all of their outstanding shares of Series D preferred
stock into shares of the Company's common stock at an adjusted conversion price
equal to the greater of (1) the market value of the Company's common stock as of
the date of the change in control and (2) $28.98. In lieu of issuing shares of
common stock issuable upon conversion in the event of a change of control, the
Company may, at its option, make a cash payment equal to the market value of the
common stock otherwise issuable.
EXCHANGE AND CONVERSION OF SERIES C PREFERRED STOCK
In February and March 2000, the Company exchanged 8,155,192 newly issued shares
of its common stock for an aggregate of 4,629,335 shares of its outstanding
Series C preferred stock through individually negotiated transactions with a
limited number of holders of its Series C preferred stock. The implied premium
of approximately $1.7 million incurred in connection with the exchanges, net of
$32.4 million to be received from the deposit account relating to the exchanged
shares, has been recognized as a return to preferred shareholders in the first
quarter of 2000. Subsequent to the exchange, the Company converted the exchanged
Series C preferred stock into 7,422,675 shares of its common stock, which are
held as treasury stock.
NOTE 10 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended March 31, 2000 and 1999
was as follows (in millions of U.S. dollars):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net loss $ (188.6) $ (58.7)
-------- -------
Other comprehensive income:
Unrealized holding gains (losses) 24.5 (0.1)
Foreign currency translation adjustment (10.8) (14.0)
-------- -------
13.7 (14.1)
-------- -------
Comprehensive income (loss) $ (174.9) $ (72.8)
======== =======
</TABLE>
During the three months ended March 31, 2000, significant fluctuations in the
Japanese Yen accounted for the majority of the change in the foreign currency
translation adjustment.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2000, the Company had commitments to certain telecommunications
vendors under operating lease agreements totaling $173.6 million payable in
various years through 2011. Additionally, the Company has various agreements to
lease office space, facilities and equipment and, as of March 31, 2000, the
Company was obligated to make future minimum lease payments of $81.5 million
under such non-cancelable operating leases expiring in various years through
2023.
In connection with the Company's previously announced naming rights and
sponsorship agreements with the Baltimore Ravens of the National Football
League, the Company will make payments over the next 18 years totaling
approximately $79.1 million.
At March 31, 2000, the Company was obligated to make future cash payments that
total $379.9 million for acquisitions of global fiber-based and satellite
telecommunications bandwidth, including IRUs or other rights. The Company also
expects that there will be additional costs, such as connectivity and equipment
charges, in connection with taking full advantage of such acquired bandwidth and
IRUs. Certain of this fiber-based and satellite telecommunications bandwidth may
require the acquisition and installation of equipment necessary to access and
light the bandwidth in order to make it operational.
-12-
<PAGE>
The Company currently believes that its capital expenditures in 2000 will be
greater than those in 1999. For the three months ended March 31, 2000, total
capital expenditures were $423.6 million, of which $362.0 million was in
cash. For the year ending December 31, 2000, the Company expects its capital
expenditures will be approximately $1.2 billion, which the Company expects to
come from a combination of cash on hand and through vendor, lease and other
financing.
The Company is subject to certain other claims and legal proceedings that arise
in the ordinary course of its business activities. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
may be decided unfavorably to the Company. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition or results of
operations or cash flows of the Company.
In February 2000, the Company launched PSINet Ventures, a corporate venture
program. The program involves a combination of cash investments and the
exchange of services for equity in certain businesses. This program will be
funded with approximately $1.0 billion, which includes the value of current
investments and the value of Internet services for future investments as well
as $100 million in cash. At March 31, 2000, the Company had invested cash of
$43.2 million, committed a total of $40.0 million of services and committed
additional investments of $2.7 million of cash under this program.
NOTE 12 - INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
The Company's operations are organized into five geographic operating segments -
U.S./Canada, Latin America, Europe, Asia/Pacific and India/Middle East/Africa
("IMEA"). The Company evaluates the performance of its segments and allocates
resources to them based on revenue and EBITDA, which the Company defines as
losses before interest expense and interest income, taxes, depreciation and
amortization, other non-operating income and expense, charge for acquired
in-process research and development, restructuring charge, and costs related to
the planned distribution and sale of the consumer business.
Operations of the Company's U.S./Canada segment include shared network costs and
corporate functions which the Company does not allocate to its other geographic
segments for management reporting purposes. Capital expenditures include both
assets acquired for cash and financed through capital leases and seller-financed
arrangements.
Financial information for the Company's geographic operating segments is
presented below (in millions of U.S. dollars):
<TABLE>
<CAPTION>
U.S./CANADA LATIN AMERICA EUROPE ASIA/PACIFIC IMEA TOTAL
----------- ------------- ------ ------------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
- ------------------
MARCH 31, 2000
- --------------
Revenue $136.4 $ 14.1 $ 33.4 $ 38.7 $0.3 $ 222.9
EBITDA (11.8) (1.3) (4.7) 2.3 --- (15.5)
Assets 4,186.6 159.4 373.8 418.8 2.9 5,141.5
Capital expenditures 366.7 10.8 27.1 19.0 --- 423.6
THREE MONTHS ENDED
- ------------------
MARCH 31, 1999
- --------------
Revenue $ 59.1 $ --- $ 15.9 $ 29.9 $ --- $104.9
EBITDA (8.0) --- (1.9) 3.1 --- (6.8)
Assets 903.8 --- 194.9 272.5 --- 1,371.2
Capital expenditures 81.4 --- 40.4 5.8 --- 127.6
</TABLE>
EBITDA for all reportable segments differs from consolidated loss before income
taxes reported in the Company's consolidated statements of operations as follows
(in millions of U.S. dollars):
-13-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2000 1999
---- ----
<S> <C> <C>
EBITDA $ (15.5) $ (6.8)
Reconciling items:
Depreciation and amortization (134.5) (26.8)
Restructuring charge (16.9) ---
Costs related to planned distribution
and sale of consumer business (1.1) ---
Interest expense (79.0) (29.6)
Interest income 24.8 4.7
Other expense, net (0.5) ---
Gain (loss) on sale of investments 34.1 (0.2)
---- -----
Loss before income taxes $(188.6) $(58.7)
======== =======
</TABLE>
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH (1) OUR
ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO, AND (2) OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS, NOTES THERETO
AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 INCLUDED IN OUR
ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THE RESULTS SHOWN HEREIN ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS TO BE EXPECTED IN ANY FUTURE PERIODS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS THAT INVOLVE RISKS
AND UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS. FOR A DISCUSSION OF THE RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, YOU SHOULD READ
"RISK FACTORS" INCORPORATED BY REFERENCE HEREIN TO OUR PERIODIC REPORTS AND
OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
We are a leading global provider of Internet and eCommerce solutions to
businesses. As an Internet Super Carrier (ISC), we offer a robust suite of
products globally that enable our customers to utilize the Internet for mission
critical applications carried over a worldwide fiber optic network that is
capable of transmission speeds in excess of three terabits per second.
We offer a suite of value-added products and services that are designed to
enable our customers, through their use of the Internet, to more efficiently
transact and conduct eCommerce with their customers, suppliers, business
partners and remote office locations. We provide Internet connectivity and Web
hosting services to approximately 100,000 corporate customers, which together
with our ISP, carrier, small office/home office (SOHO) and consumer businesses
around the world served over 2.0 million end users. Our services and products
include dedicated, dial-up and DSL Internet access services connections, Web
hosting and collocation services, transaction network services, VPNs, eCommerce
solutions, voice-over-IP, e-mail and managed security services. We also provide
wholesale and private label network connectivity and related services to other
ISPs and telecommunications carriers to further utilize our network capacity. We
serve approximately 90 of the 100 largest metropolitan statistical areas in the
U.S., have a presence in the 20 largest telecommunications markets globally and
operate in 28 countries. We conduct our business through operations organized
into five geographic operating segments - U.S./Canada, Latin America, Europe,
Asia/Pacific and India/Middle East/Africa.
We operate one of the largest global commercial data communications networks.
Our Internet-optimized network extends around the globe and is connected to more
than 900 points of presence (POPs) that enable our customers to connect to the
Internet. Our network reach allows our customers to access their corporate
network and systems resources through local calls in over 150 countries. We
expand the reach of our network by connecting with other large ISPs through
contractual arrangements, called peering agreements, that permit the exchange of
information between our network and the networks of our peering partners. We
offer free peering to ISPs in more than 100 cities in the continental U.S.,
which provides each party with the opportunity to bypass the often congested and
unreliable public exchange points, thereby improving overall network performance
and customer satisfaction.
We have embarked on an initiative to aggressively grow our hosting center
business through the construction of approximately $800 million of hosting
centers. We currently have eight global Internet and eCommerce hosting centers
operating and plan to open 16 more. We also have three network operating centers
that monitor and manage network traffic 24-hours per day, seven-days per week.
-15-
<PAGE>
ACQUISITIONS
We typically enter a new market through the acquisition of an existing company
within that market, and then further expand through a combination of
organic growth supplemented by acquisitions. A key component of our
business strategy is our continued expansion in international markets. On
November 23, 1999, we acquired Transaction Network Services, Inc., which we
refer to as TNI.
PENDING ACQUISITION OF METAMOR WORLDWIDE, INC.
In March 2000, we entered into a definitive agreement to acquire Metamor
Worldwide, Inc. ("Metamor"). Metamor is a leading provider of information
technology (IT) solutions with diverse service offerings. In 1999, Metamor
completed the initial public offering of 20% of its eBusiness solutions
subsidiary, Xpedior Incorporated. On December 16, 1999, Xpedior began trading
on the Nasdaq Stock Market under the symbol "XPDR". Metamor still owns
approximately 80% of the outstanding stock of Xpedior. Completion of the
acquisition is subject to a number of conditions, including receipt of
approval from the shareholders of PSINet and Metamor. We cannot assure you
that the transaction will be completed.
RESTRUCTURING CHARGE
During the past two years, we have made significant acquisitions of fiber-based
bandwidth and related equipment to enhance our network infrastructure and lower
our per unit operating costs. We also acquired more than 65 companies throughout
our five geographic operating regions, resulting in overlapping network
infrastructure in several markets. During the first quarter of 2000, we
completed and approved our restructuring plan directed at developing a global
brand image, eliminating network redundancies, streamlining operations and
product offerings, and taking advantage of synergies created by our integration
process.
We expect our restructuring plan will have a positive effect on our financial
position and future operating results. Expected cost saving results from our
restructuring plan include:
- - reduced annual data communication and operations expense of $15.1 million;
and
- - reduced annual depreciation and amortization expense of $8.7 million.
As of March 31, 2000, we do not believe there are any unresolved contingencies
or other issues that could result in an adjustment to our restructuring costs.
Based upon this restructuring plan, we have incurred incremental and
non-recurring expenses of $16.9 million for the three months ended March 31,
2000, which consists of the following components:
- - $12.8 million of termination charges for excess bandwidth and facilities;
- - $3.4 million for closures of duplicate POP facilities that were identified
for decommissioning; and
- - $0.7 million for employee reduction in force ("RIF") plans.
The termination charges for excess bandwidth and facilities consist mainly of
$12.6 million for penalties incurred to terminate circuits across three of our
geographic operating segments: $9.8 million in our Asia/Pacific segment, $2.3
million in our U.S./Canada segment, and $0.5 million in our Latin America
segment. The remaining $0.2 million relates to facility lease termination costs.
The POP closure charges result directly from downsizing and eliminating POP
locations in our U.S./Canada segment. POP closure charges of $3.4 million were
incurred in connection with the
-16-
<PAGE>
planned closure of 102 POPs, including $2.2 million in contractor costs to
close duplicate and excess facilities, $0.8 million of circuit termination
and facilities lease termination costs and $0.4 million of other related
costs. Closure and exit costs include payments required under lease
contracts, less any applicable sublease income after the properties were
abandoned, lease buyout costs and costs to terminate telecommunications
bandwidth directly associated with the POP. As of March 31, 2000,
approximately 10% of the 102 POPs had been eliminated.
The RIF charge resulted from the termination of 132 employees. All terminations
and termination benefits were communicated to the affected employees prior to or
on March 31, 2000 and all remaining severance benefits are expected to be paid
before March 31, 2001.
Liabilities for termination and POP closure charges are included in other
accounts payable and accrued liabilities while severance and benefits
liabilities are included in accrued payroll and related liabilities. Actual
amounts of termination benefits, POPs and other restructuring related payments
can be found in Note 3 to our consolidated financial statements under
"Restructuring Charge". We believe that cash flows from operations and available
financing sources will be sufficient to implement and complete our intended
restructuring actions.
Also, in the first quarter of 2000, we identified certain assets to be
written-off and certain tangible and intangible assets that required accelerated
depreciation and amortization as a result of the assessment of the remaining
useful lives to reflect the timing of when the assets identified in the
restructuring would actually be taken out of service. Our $59.0 million asset
charge, included in depreciation and amortization, for the quarter ended March
31, 2000 consists of the following:
- - $50.9 million write-off of acquired tradenames;
- - $4.4 million write-off and acelerated depreciation of obsolete equipment;
and
- - $3.7 million write-off of certain software assets.
The acquired tradename charge resulted from our decision to utilize a single
global brand identity. As a result, we decided to discontinue commercial use of
our many acquired companies tradenames. We believe the switch to the global use
of the PSINet tradename will enhance both our global brand imaging and customer
recognition efforts.
The write-off and accelerated depreciation of equipment relates to certain
telecommunications equipment that will be removed from service as a result of
closure of certain POPs and disposal of other network equipment.
The write-off of certain software assets resulted from the decision to no
longer utilize certain business software solutions.
STOCK SPLIT
On February 11, 2000, we effected a two-for-one split of our common stock by
means of a stock dividend to holders of record as of the close of business on
January 28, 2000. The financial statements and all references to common stock
contained in this Form 10-Q give retroactive effect to the stock split.
-17-
<PAGE>
PLANNED DISTRIBUTION AND SALE OF CONSUMER BUSINESS
In the first quarter of 2000, we incurred $1.1 million of direct incremental
costs related to our planned distribution and sale of our consumer business.
As a result of acquisitions in 1998 and 1999, we have amassed a significant
number of consumer customers throughout our operating regions. Our primary
strategic focus is providing services to business and wholesale customers.
Accordingly, in February and March 2000, we announced that worldwide retail
consumer operations will be consolidated into a new retail business unit,
known as Inter.net Ltd. Inter.net Ltd. is expected to initially serve an
estimated 550,000 consumer accounts distributed throughout global markets
(mostly outside of the United States), with over 30 localized consumer
portals in more than 20 countries. We are currently assessing our options
regarding Inter.net Ltd., including a possible initial public offering or
spin-off of the business, to best maximize PSINet shareholder value.
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1999.
Results of Operations
(all charts below are in millions of U.S. dollars)
Revenue.
We generate revenue from providing Internet connectivity, Web hosting, eCommerce
services and related services to business, consumer and other ISP customers.
Revenue from business customers primarily arises from monthly charges for
Internet connectivity, eCommerce and web hosting services. Revenues from ISP
customers relate to services provided under wholesale arrangements which pay us
a monthly charge for each customer served regardless of what each customer pays
their carrier for Internet access services. Consumer revenue is derived directly
from our consumer accounts.
Revenue by Geographic Segment
<TABLE>
<CAPTION>
US/ LATIN ASIA/ INDIA/MIDDLE
CANADA AMERICA EUROPE PACIFIC EAST/AFRICA TOTAL
------ ------- ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31, 2000 $136.4 $14.1 $33.4 $38.7 $0.3 $222.9
Three Months Ended December 31, 1999 105.0 11.5 31.7 37.2 * 185.4
Three Months Ended March 31, 1999 59.1 * 15.9 29.9 * 104.9
Increase from December 31, 1999 31.4 $ 2.6 $ 1.7 $ 1.5 $0.3 $ 37.5
Percentage Increase from December 31, 1999 30% 23% 5% 4% * 20%
Increase from March 31, 1999 $ 77.3 $14.1 $17.5 $ 8.8 $0.3 $118.0
Percentage Increase from March 31, 1999 131% * 110% 29% * 113%
</TABLE>
* Latin America and IMEA were new segments in 1999.
Revenue by Business Unit
<TABLE>
<CAPTION>
ACCESS HOSTING ECOMMERCE CARRIER &
SERVICES SERVICES SERVICES ISP SERVICES TOTAL
-------- -------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 2000 $108.3 $19.7 $44.8 $50.1 $222.9
Three Months Ended December 31, 1999 106.6 14.5 20.5 43.8 185.4
Three Months Ended March 31, 1999 74.3 7.9 ** 22.7 104.9
Increase from December 31, 1999 $ 1.7 $ 5.2 $24.3 $ 6.3 $ 37.5
</TABLE>
-18-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 Percentage Increase 2% 36% 119% 14% 20%
Increase from March 31, 1999 $ 34.0 $11.8 $44.8 $ 27.4 $118.0
Percentage Increase from March 31, 1999 46% 149% ** 121% 113%
</TABLE>
** eCommerce and Hosting Services were new business units during 1999.
Revenue growth from the three months ended December 31, 1999 to the three
months ended March 31, 2000 of 20% consisted of 19% internally generated
(know as organic) growth (i.e., from businesses that were owned at the
beginning of the year) and 1% from acquisitions (i.e., from businesses
acquired during 2000). Revenue growth from the three months ended March 31,
1999 to the three months ended March 31, 2000 of 113% consisted of 81%
organic growth and 32% growth from acquisitions. Our organic revenue growth
is attributable to a number of factors, including the timing of acquisitions
in prior periods, an increase in the number of business customer and ISP
accounts, and an increase in the average annual revenue realized per new
business customer account. While most revenue is recurring in nature, from
time to time we generate non-recurring revenue from consulting and other
arrangements that may or may not continue in the future. To date, such
amounts have not been material to total revenue.
We provided service to over 98,900 corporate accounts at March 31, 2000, an
increase of 9% from the 91,000 corporate accounts served at December 31, 1999
and an increase of 66% from the 59,700 corporate accounts served at March 31,
1999. Of the total corporate account growth in the first quarter, 38% was
attributable to the existing customer base of the companies we acquired,
compared to 25% in the fourth quarter of 1999. Our accounts outside the U.S. at
March 31, 2000 represented 67% of our customer account base compared with 64% at
December 31, 1999 and 60% at March 31, 1999. At March 31, 2000, our Carrier and
ISP provided service to 1.3 million end users. This compares with 0.8 million
and 0.6 million Carrier and ISP customers at December 31, 1999 and March 31,
1999, respectively. Average annual new contract value for business accounts
increased from $6,200 at March 31, 1999 to $7,100 at December 31, 1999 to $7,300
at March 31, 2000, which we believe reflects an increasing demand for
value-added services and higher levels of bandwidth. Our business account
retention rate for the three months ended March 31, 2000 was 75% compared to 79%
and 81% for the three months ended December 31, 1999 and March 31, 1999,
respectively.
The reasons for the growth in access services between the quarters are
consistent with our overall organic and acquisition-related revenue growth as
a whole.
Hosting service revenue growth for the three months ended March 31, 2000 is
primarily organic and related to the increased investments made in the
infrastructure behind this business unit and increases in the number of, and
training of, the sales force during the first quarter of 2000. We expect hosting
service revenue to continue to experience growth in future periods.
eCommerce service revenue growth for the three months ended March 31, 2000
reflects revenue attributable to TNI, which was acquired in November 1999.
Carrier and ISP Services revenue growth among quarters is almost entirely
organic and relates to increases in the number of customers.
Data Communications and Operations.
<TABLE>
<CAPTION>
PERCENTAGE OF
THREE MONTHS ENDED AMOUNT REVENUE
- ------------------ ------ -------
<S> <C> <C>
March 31, 2000 $163.6 73.4%
December 31, 1999 $135.1 72.9%
</TABLE>
-19-
<PAGE>
<TABLE>
<S> <C> <C>
March 31, 1999 $ 76.0 72.5%
</TABLE>
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C>
Increase from December 31, 1999 $28.5 21%
Increase from March 31, 1999 $87.6 115%
</TABLE>
Data communications and operations expenses consist primarily of leased long
distance and local circuit costs as well as personnel and related operating
expenses associated with network operations, customer support and field service.
The increases in expenses over the periods presented related principally to
increases in:
- - our dedicated access customer account base grew to 24,500 at March 31,
2000 from 23,400 at December 31, 1999 and 16,000 at March 31, 1999;
- - dedicated customer circuit costs increased $6.2 million, or 30% from the
three months ended December 31, 1999 to the three months ended March 31,
2000, and $13.0 million, or 93%, from the three months ended March 31, 1999
to the three months ended March 31, 2000;
- - backbone circuit costs increased $16.1 million, or 45% from the three
months ended December 31, 1999 to the three months ended March 31, 2000 and
$31.3 million, or 150%, from the three months ended March 31, 1999 to the
three months ended March 31, 2000;
- - PRI expenses increased $1.4 million, or 6% from the three months ended
December 31, 1999 to the three months ended March 31, 2000 and $12.9
million, or 116%, from the three months ended March 31, 1999 to the three
months ended March 31, 2000;
- - personnel and related operating expenses associated with network
operations, customer support and field service increased $4.0 million, or
12% from the three months ended December 31, 1999 to the three months ended
March 31, 2000 and $21.5 million, or 127%, from the three months ended
March 31, 1999 to the three months ended March 31, 2000; and
- - operations and maintenance charges on our bandwidth were consistent for the
three months ended December 31, 1999 and March 31, 2000 but increased $1.2
million, or 63%, from the three months ended March 31, 1999 to the three
months ended March 31, 2000.
A significant portion of the increase in data communications and operations
expenses relates to a full quarter of TNI activity, which was acquired in
November 1999. Although we expect that data communications and operations
expenses will continue to increase as our customer base grows, we anticipate
that such expenses will decrease over time as a percentage of revenue as we
acquire network bandwidth under IRU or capital lease agreements due to decreases
in unit costs as a result of continued increases in network utilization. Network
bandwidth acquired under IRU or capital lease agreements is recorded as an asset
and amortized over its useful life as a component of depreciation and
amortization. This will, in turn, result in an increase in the operations and
maintenance expense component of data communications costs, increases in costs
for other leased circuits connected to the bandwidth, as well as increases in
depreciation and amortization expense over the useful life of the bandwidth,
typically 10 to 20 years. In addition, we expect to more efficiently utilize our
existing network bandwidth acquired under agreements not considered IRUs or
capital leases. As part of our restructuring, we plan to terminate selected PRI
connections in areas where robust dial-up Internet access growth is not expected
and to terminate IRU agreements on routes, such as selected trans-pacific
sections, where bandwidth is redundant or underutilized.
Sales and Marketing.
<TABLE>
<CAPTION>
PERCENTAGE OF
THREE MONTHS ENDED AMOUNT REVENUE
- ------------------ ------ -------------
<S> <C> <C>
March 31, 2000 $38.5 17.3%
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C> <C>
December 31, 1999 $35.8 19.3%
March 31, 1999 $18.6 17.7%
</TABLE>
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C>
Increase from December 31, 1999 $ 2.7 8%
Increase from March 31, 1999 $19.9 107%
</TABLE>
Sales and marketing expenses consist primarily of personnel costs, advertising
costs, distribution costs and related occupancy costs. The amount increased
between the three months ended March 31, 1999, December 31, 1999 and March 31,
2000 due to costs associated with the expansion of our domestic sales force to
respond to opportunities in the web hosting business, growth of our sales force
internationally in conjunction with our growth and acquisitions and continued
increases in advertising costs designed to increase awareness of the PSINet
brand, including the launch of a branding campaign during 2000 designed to
leverage the PSINet brand worldwide. However, as a percentage of revenue, sales
and marketing expense should decrease over time.
General and Administrative.
<TABLE>
<CAPTION>
PERCENTAGE OF
THREE MONTHS ENDED AMOUNT REVENUE
- ------------------ ------ -------------
<S> <C> <C>
March 31, 2000 $36.3 16.3%
December 31, 1999 $31.4 16.9%
March 31, 1999 $17.1 16.3%
</TABLE>
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C>
Increase from December 31, 1999 $ 4.9 16%
Increase from March 31, 1999 $19.2 112%
</TABLE>
General and administrative expenses consist primarily of salaries and occupancy
costs for executive, financial, legal and administrative personnel and provision
for uncollectible accounts receivable. The increase each quarter has resulted
from general and administrative expenses of companies acquired and from the
growth of our business, in particular, our organic growth and the addition of
management staff and other related operating expenses across our organization.
While general and administrative expenses should continue to increase in amount
as we continue to develop our infrastructure and our organizations to manage a
global business, such costs should decrease as a percentage of revenue due to
achieving greater economies of scale.
Depreciation and Amortization.
<TABLE>
<CAPTION>
PERCENTAGE OF
THREE MONTHS ENDED AMOUNT REVENUE
- ------------------ ------ -------------
<S> <C> <C>
March 31, 2000 $134.5 60.3%
December 31, 1999 $ 63.7 34.4%
March 31, 1999 $ 26.8 25.6%
</TABLE>
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C>
Increase from December 31, 1999 $ 70.8 111%
Increase from March 31, 1999 $107.7 402%
</TABLE>
Depreciation and amortization costs have increased both in amount and as a
percentage of revenue as a result of capital expenditures associated with
network infrastructure enhancements, including telecommunications bandwidth
acquisitions, and depreciation and amortization of tangible and
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<PAGE>
intangible assets related to business acquisitions. In addition, an asset
impairment charge and accelerated depreciation aggregating $59.0 million
arising from our restructuring plan has been included in the three months
ended March 31, 2000.
For the three months ended March 31, 2000, $54.4 million of our depreciation
and amortization expenses related to depreciation of fixed assets, and
approximately $80.1 million related to amortization of intangibles. These
amounts include $8.1 million and $50.9 million, respectively relating to the
write-off and accelerated amortization of certain tangible and intangible
assets as part of our restructuring plan. For the three months ended December
31, 1999, $40.1 million of our depreciation and amortization expenses related
to depreciation of fixed assets and approximately $23.6 million related to
amortization of intangibles. For the three months ended March 31, 1999, $19.4
million related to depreciation of fixed assets and approximately $7.4
million related to amortization of intangibles.
Our depreciation and amortization expenses will increase as a result of our
acquisition of network bandwidth under IRU or capital lease agreements and from
tangible and intangible assets related to business combinations and expansion of
our operations offset by a reduction of ongoing quarterly amortization of
approximately $2.2 million relating to assets written off as a result of our
restructuring plan.
Acquired In-Process Research and Development.
<TABLE>
<CAPTION>
PERCENTAGE OF
THREE MONTHS ENDED AMOUNT REVENUE
- ------------------ ------ ------
<S> <C>
March 31, 2000 $ -- -- %
December 31, 1999 $88.7 47.8%
March 31, 1999 $ -- -- %
</TABLE>
A portion of the value of various acquisitions in the three months ended
December 31, 1999 was attributed to in-process research and development, which
must be expensed immediately. The charge was quantified by means of independent
valuations and reflects technologies acquired prior to technological feasibility
and for which there was no alternative future use. We are in the process of
finalizing valuations for our acquisitions in the year 2000 and the allocation
of the purchase price for such acquisitions is preliminary. We expect that final
allocations for material acquisitions will be completed before the end of 2000,
and we do not expect the charge for in-process research and development, if any,
to be material.
Interest Expense.
<TABLE>
<CAPTION>
PERCENTAGE OF
THREE MONTHS ENDED AMOUNT REVENUE
- ------------------ ------ -------------
<S> <C> <C>
March 31, 2000 $79.0 35.4%
December 31, 1999 $72.2 38.9%
March 31, 1999 $29.6 28.2%
</TABLE>
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C>
Increase from December 31, 1999 $ 6.8 9%
Increase from March 31, 1999 $49.4 167%
</TABLE>
Interest expense has increased due to the issuance of our 11% senior notes in
July 1999 and our 10 1/2% senior notes in December 1999, as well as to increased
borrowings and capital lease obligations incurred to finance our network
expansion and to fund our working capital requirements. Interest expense is
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directly related to our borrowings. Interest expense will increase in absolute
dollar terms in 2000 based on a full year of interest expense on our 1999
borrowings. Future increases in interest expense will depend on our capital
needs and financing decisions.
Interest Income.
<TABLE>
<CAPTION>
PERCENTAGE OF
THREE MONTHS ENDED AMOUNT REVENUE
- ------------------ ------ -------------
<S> <C> <C>
March 31, 2000 $24.8 11.1%
December 31, 1999 $21.9 11.8%
March 31, 1999 $ 4.7 4.5%
</TABLE>
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C>
Increase from December 31, 1999 $ 2.9 13%
Increase from March 31, 1999 $20.1 428%
</TABLE>
Interest income has increased due to interest received on the net proceeds of
our various financing activities during 1999 and 2000, which we invest in
short-term investment grade and government securities until such time as we use
them for other purposes.
Net Loss Available to Common Shareholders and Loss per Share.
<TABLE>
<CAPTION>
PERCENTAGE OF LOSS PER
THREE MONTHS ENDED AMOUNT REVENUE SHARE
- ------------------ ------ ------- -----
<S> <C> <C> <C>
March 31, 2000 $204.2 91.6% $1.35
December 31, 1999 $223.5 120.6% $1.63
March 31, 1999 $ 59.3 56.5% $0.56
</TABLE>
The primary reasons for the change in net loss available to common shareholders
were:
- - an increase of return to preferred shareholders;
- - operating results of acquired companies;
- - the increase in data communications costs, including expenditures for
dial-up circuits (e.g., PRIs);
- - acquisitions of fiber-based and satellite telecommunications bandwidth,
leading to an increase in depreciation, personnel and other operating costs
to manage the bandwidth;
- - a non-recurring restructuring charge of $16.9 million and $59.0 million
of write-offs and accelerated depreciation and amortization of certain
tangible and intangible assets for the three months ended March 31, 2000;
- - an increase in depreciation and amortization related to acquisitions;
- - charges for acquired in-process research and development during the three
months ended December 31, 1999;
- - an increase in net interest expense due to the issuance of our senior
notes; and
- - gain on sale of investments during the three months ended March 31, 2000.
The return to preferred shareholders is subtracted from net loss in determining
the net loss available to common shareholders. Because inclusion of common stock
equivalents is antidilutive, basic and diluted loss per share are the same in
each period presented.
SEGMENT INFORMATION
We offer a broad range of Internet access services and related products to
businesses in the U.S. and throughout the world. As of March 31, 2000, we served
primary markets in 28 countries, with operations organized into five geographic
operating segments - U.S./Canada, Latin America, Europe,
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<PAGE>
Asia/Pacific and India/Middle East/Africa. In measuring performance and
allocating assets, the chief operating decision maker reviews each geographic
operating segment as a whole and not by types of services provided.
We evaluate the performance of our operating segments and allocate resources to
them based on revenue and EBITDA, which we define as losses before interest
expense and interest income, taxes, depreciation and amortization, other
non-operating income and expense, charge for acquired in-process research and
development, restructuring charge, and costs related to the planned distribution
and sale of the consumer business.
Operations of the U.S./Canada segment include shared network costs and corporate
functions that we do not allocate to our other geographic segments for
management reporting purposes.
Revenue by operating segment is provided on the basis of where services are
provided. We had no single customer representing greater than 10% of our
revenues.
Key changes in the metrics we report in our segment footnote are as
follows:
<TABLE>
<CAPTION>
INDIA/
U.S./ LATIN ASIA/ MIDDLE
CANADA AMERICA EUROPE PACIFIC EAST/AFRICA TOTAL
------- --------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue growth - Q499 to Q100 29.9% 22.7% 5.5% 3.9% * 20.2%
Revenue growth - Q199 to Q100 131.0% * 110.3% 29.4% * 112.6%
EBITDA growth - Q499 to Q100 37.3% (3,769.4)% (9,433.1)% 19.2% * 8.2%
EBITDA growth - Q199 to Q100 (47.3)% * (147.6)% (25.2)% * (128.7)%
EBITDA as a % of Revenue - Q100 (8.6)% (9.5)% (14.1)% 6.0% 3.2% (6.9)%
EBITDA as a % of Revenue - Q499 (17.9)% (0.3)% (0.2)% 5.3% * (9.1)%
EBITDA as a % of Revenue - Q199 (13.5)% * (12.0)% 10.4% * (6.5)%
</TABLE>
* Latin America and India/Middle East/Africa were new segments in 1999.
All of our operating segments have experienced changes in revenue and EBITDA
during the quarters due to our organic growth and to increases in the number of
our acquisitions as described elsewhere in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Our loss from operations differs from EBITDA only by depreciation and
amortization, other non-operating income and expense, charge for acquired
in-process research and development, restructuring charge, and costs relating to
the planned distribution and sale of consumer business; therefore, loss from
operations in each segment reflects the same underlying trends as those
impacting EBITDA as a percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
We historically have had losses from operations, which have been funded
primarily through borrowings and capital lease financings from vendors,
financial institutions and other third parties, and through the issuances of
debt and equity securities. In the three months ended March 31, 2000, we
received net proceeds of approximately $740.2 million from equity financing. At
March 31, 2000, we had $2.0 billion of cash, cash equivalents, short-term
investments and marketable securities, including restricted amounts.
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<PAGE>
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
Cash flows used in operating activities were $63.2 million and $77.3 million for
the three months ended March 31, 2000 and March 31, 1999, respectively. Cash
flows from operating activities can vary significantly from period to period
depending upon the timing of operating cash receipts and payments and other
working capital changes, especially accounts receivable, prepaid expenses and
other assets, and accounts payable and accrued liabilities. In both periods our
net losses were the primary component of cash used in operating activities,
offset by significant non-cash depreciation and amortization expenses relating
to our network and intangible assets. Operating cash flows in the three months
ended March 31, 1999 also include the payment of a $48.0 million arbitration
award.
Cash flows used in investing activities were $68.0 million and $36.9 million
for the three months ended March 31, 2000 and March 31, 1999, respectively.
Investments in certain businesses resulted in the use of $69.6 million of
cash for the three months ended March 31, 2000, net of cash acquired.
Investments in our network and facilities during the three months ended March
31, 2000 resulted in total additions to fixed assets of $423.6 million. Of
this amount, $13.3 million was financed under vendor or other financing
arrangements, $48.3 million of non-cash additions related to the OC-48
bandwidth acquired from IXC Internet Services, Inc. (IXC), and $362.0 million
was expended in cash, including payment of $1.8 million for other network
facilities that remained in accounts payable at December 31, 1999. For the
three months ended March 31, 1999, total additions were $127.6 million, of
which $60.0 million was financed under equipment financing agreements, $11.9
million of non-cash additions related to the OC-48 bandwidth acquired from
IXC, and $55.7 million was expended in cash. Purchases of short-term
investments during the three months ended March 31, 2000 were an aggregate of
$278.5 billion, offset by proceeds from the sale and maturity of short-term
investments of $647.6 million. Purchases of short-term investments during the
three months ended March 31, 1999 were an aggregate of $129.3 million offset
by the sale and maturity of short-term investments of $153.9 million.
Investing cash flows for the three months ended March 31, 2000 and March 31,
1999 were increased by $4.7 million and decreased by $29.6 million,
respectively, from changes in restricted cash and short-term investments
related to various financing and acquisition activities.
Cash flows provided by financing activities were $721.1 million and $91.3
million for the three months ended March 31, 2000 and March 31, 1999,
respectively. In the first three months of 2000, we received $740.2 million
of net proceeds from the issuance of Series D Preferred Stock. In the first
three months of 1999, we received $101.3 million from debt issuances. We made
debt repayments aggregating $35.6 million and $15.7 million for the three
months ended March 31, 2000 and March 31, 1999, respectively. During the
three months ended March 31, 2000 and March 31, 1999, respectively, we
received proceeds from the exercise of stock options of $16.8 million and
$6.3 million, respectively.
CAPITAL STRUCTURE
Our capital structure at March 31, 2000 consisted of senior notes, capital lease
obligations, convertible preferred stock and common stock.
Total borrowings at March 31, 2000 were $3.3 billion, which included $119.9
million in current obligations and $3.2 billion in long-term debt.
As of March 31, 2000, $418.7 million was available for purchases of equipment
and other fixed assets under various lease financing arrangements, after
designating $30.8 million of payables for various equipment purchases that we
intend to finance under these agreements.
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<PAGE>
At March 31, 2000, we had outstanding $600.0 million aggregate principal amount
of 10% senior notes due 2005, $350.0 million aggregate principal amount of 11
1/2% senior notes due 2008, $1.05 billion aggregate principal amount and Euro
150 million aggregate principal amount of 11% senior notes due 2009, and $600
million aggregate principal amount and Euro 150 million aggregate principal
amount of 10 1/2% senior notes due 2006. At March 31, 2000 we had on deposit in
an escrow account restricted cash and short-term investments of $38.2 million to
fund, when due, the next semi-annual interest payment on the 10% senior notes.
The indentures governing each of the senior notes contain many covenants with
which we must comply relating to, among other things, the following matters:
- - a limitation on our payment of cash dividends, repurchase of capital stock,
payment of principal on subordinated indebtedness and making of certain
investments, unless after giving effect to each such payment, repurchase or
investment, certain operating cash flow coverage tests are met, excluding
certain permitted payments and investments;
- - a limitation on our and our subsidiaries' incurrence of additional
indebtedness, unless at the time of such incurrence, our ratio of debt to
annualized operating cash flow would be less than or equal to 6.0 to 1.0
prior to April 1, 2001 and less than or equal to 5.5 to 1.0 on or after
April 1, 2001, excluding certain permitted incurrences of debt;
- - a limitation on our and our subsidiaries' incurrence of liens, unless the
senior notes are secured equally and ratably with the obligation or
liability secured by such lien, excluding certain permitted liens;
- - a limitation on the ability of any of our subsidiaries to create or
otherwise cause to exist any encumbrance or restriction on the payment of
dividends or other distributions on its capital stock, payment of
indebtedness owed to us or any of our other subsidiaries, making of
investments in us or any other of our subsidiaries, or transfer of any
properties or assets to us or any of our other subsidiaries, excluding
permitted encumbrances and restrictions;
- - a limitation on certain mergers, consolidations and sales of assets by us
or our subsidiaries;
- - a limitation on certain transactions with our affiliates;
- - a limitation on the ability of any of our subsidiaries to guarantee or
otherwise become liable with respect to any of our indebtedness unless such
subsidiary provides for a guarantee of the senior notes on the same terms
as the guarantee of such indebtedness;
- - a limitation on certain sale and leaseback transactions by us or our
subsidiaries;
- - a limitation on certain issuances and sales of capital stock of our
subsidiaries; and
- - a limitation on our ability to engage in any business not substantially
related to a telecommunications business.
At March 31, 2000, we were in compliance with all such covenants.
In February and March 2000, we exchanged 8,155,192 newly issued shares of our
common stock for an aggregate of 4,629,335 shares of our Series C preferred
stock through individually negotiated transactions with a limited number of
holders of the Series C preferred stock. The implied premium of
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<PAGE>
approximately $1.7 million incurred in connection with the exchanges, net of
cash to be received from the deposit account relating to the exchanged
shares, was recognized as a return to preferred shareholders in the first
quarter of 2000. Subsequent to the exchange, we converted the exchanged
Series C preferred stock into 7,422,675 shares of our common stock, which we
hold as treasury shares.
In February 2000, we completed an offering of 16,500,000 shares of 7% Series D
cumulative convertible preferred stock ("Series D preferred stock") for
aggregate net proceeds of approximately $740.2 million after expenses (excluding
amounts paid by the purchasers of the Series D preferred stock into the deposit
account described below). The Series D preferred stock has a liquidation
preference of $50 per share.
At closing, the purchasers of the Series D preferred stock deposited
approximately $57.9 million into an account established with a deposit agent
("the Series D deposit account"). The Series D deposit account is not an asset
of ours. Funds in the Series D deposit account will be paid to the holders of
the Series D preferred stock each quarter in the amount of $0.875 per share in
cash or may be used, at our option, to purchase shares of common stock at either
93% or 97% of the market price of the common stock on that date (depending on
whether the registration statement covering the shares is effective) for
delivery to holders of Series D preferred stock in lieu of cash payments.
Holders of Series D preferred stock will receive quarterly payments from the
Series D deposit account commencing May 15, 2000 and continuing until February
15, 2001. The funds placed in the Series D deposit account by the purchasers of
the Series D preferred stock will, together with the earnings on those funds, be
sufficient to make payments, in cash or stock, from the issue date through
February 15, 2001.
COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS
In order to maintain our competitive position, enhance our capabilities as an
Internet Super Carrier and continue to meet the increasing demands for service
quality, availability and competitive pricing, we expect to make significant
capital expenditures including for developing hosting centers. At March 31, 2000
we were obligated to make future cash payments that total $379.9 million for
acquisitions of global fiber-based and satellite telecommunications bandwidth,
including IRUs or other rights. We also expect that there will be additional
costs, such as connectivity and equipment charges, in connection with taking
full advantage of such acquired bandwidth and IRUs. Certain of this fiber-based
and satellite telecommunications bandwidth may require the acquisition and
installation of equipment necessary to access and light the bandwidth in order
to make it operational. We currently believe that our capital expenditures in
2000 will be greater than those in 1999. For the year ending December 31, 2000,
we expect our capital expenditures will be approximately $1.2 billion, which we
expect to come from a combination of cash on hand and through vendor and other
lease financing.
In February 2000, we announced the launch of PSINet Ventures, a corporate
venture program. With a combination of cash investments and the exchange of
services for equity, PSINet Ventures will partner with innovative Internet
entrepreneurs through direct minority equity investments, typically during
early-and mid-stage financing. Our investments are typically in businesses
that are accounted for as cost investments. We will focus globally on
application service providers (ASPs), content service providers (CSPs),
eCommerce providers, Internet infrastructure providers, incubators, and other
emerging opportunities that enhance PSINet's financial and competitive
technology and service positions. We expect to structure certain of these
arrangements with new start-up companies to allow them to purchase PSINet
services, including managed web hosting and Virtual Internet Service Provider
(VISP) services, in exchange for equity rather than cash. This program will
be funded with approximately $1.0 billion, which includes the value of
current investments and the value of Internet services for future investments
as well as $100.0 million in cash. At March 31, 2000, we had invested $43.2
million, committed to provide services of $40.0 million and committed
additional investments of $2.7 million under this program.
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<PAGE>
As of March 31, 2000, we had commitments to certain telecommunications vendors
under operating lease agreements totaling $173.6 million payable in various
years through 2011. Additionally, we have various agreements to lease office
space, facilities and equipment and, as of March 31, 2000, we were obligated to
make future minimum lease payments of $81.5 million under those non-cancelable
operating leases expiring in various years through 2023.
For certain acquisitions, we have retained a portion of the purchase price under
holdback provisions of the purchase agreements to secure performance by certain
sellers of indemnification or other contractual obligations of the sellers.
These holdback amounts are generally payable up to 24 months after the date of
closing of the related acquisitions. Acquisition holdback amounts totaled $79.0
million at March 31, 2000, the majority of which is reported in other
liabilities.
In connection with our previously announced naming rights and sponsorship
agreements with the Baltimore Ravens of the National Football League, we will
make payments over the next 18 years totaling approximately $79.1 million.
We presently believe, based on the flexibility we expect to have in the
timing of orders of bandwidth, in outfitting our POPs with appropriate
telecommunications and computer equipment, and in controlling the pace and
scope of our anticipated buildout of our international data communications
network and eCommerce hosting centers, that we will have a reasonable degree
of flexibility to adjust the amount and timing of such capital expenditures
in response to our then existing financing capabilities, market conditions,
competition and other factors. Accordingly, we believe that working capital
generated from the use of acquired bandwidth, together with other working
capital, from capital lease financings, from the proceeds of our recent debt
and equity offerings and from future equity or debt financings, which we
presently expect to be able to obtain when needed, will be sufficient to meet
the currently anticipated working capital and capital expenditure
requirements of our operations. We cannot assure you, however, that we will
have access to sufficient additional capital or financing on satisfactory
terms to enable us to meet our capital expenditure and working capital
requirements. We regularly review our capital commitments and needs and the
availability of financing through institutional sources and the capital
markets. We expect to pursue opportunities to raise additional capital from
time to time as we determine to be advisable based upon our capital needs,
financing capabilities and market conditions.
OTHER POSSIBLE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We anticipate that we will continue to seek to develop relationships with
strategic partners, both domestically and internationally, and to acquire
assets, including, without limitation, additional telecommunications bandwidth,
and businesses and make investments (including venture capital investments)
principally relating to or complementary to our existing businesses. Certain of
these strategic relationships may involve other telecommunications companies
that desire to enter into joint marketing and services arrangements with us
pursuant to which we would provide Internet and Internet-related services to
such companies. Such transactions, if deemed appropriate by us, may also be
effected in conjunction with an equity or debt investment by such companies in
us or vice versa. Such relationships and acquisitions may require additional
financing and may be subject to the consent of our lenders and other third
parties.
DERIVATIVES AND FOREIGN CURRENCY EXPOSURE
We have not entered into any financial instruments to serve as hedges against
certain financial and currency risks or for trading. However, as a result of the
recent increase in our foreign operations and the issuance of our Euro-
denominated senior notes, we may begin to use various financial instruments,
including derivative financial instruments, in the ordinary course of business,
for purposes other than
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<PAGE>
trading. These instruments could include letters of credit, guarantees of debt,
interest rate swap agreements and foreign currency exchange contracts relating
to intercompany payables of foreign subsidiaries. We do not intend to use
derivative financial instruments for speculative purposes. Foreign currency
exchange contracts would be used to mitigate foreign currency exposure and with
the intent of protecting the U.S. dollar value of certain currency positions and
future foreign currency transactions. Interest rate swap agreements would be
used to reduce our exposure to risks associated with interest rate fluctuations.
By their nature, all such instruments would involve risk, including the risk of
nonperformance by counterparties. We would attempt to control our exposure to
counterparty credit risk through monitoring procedures and by entering into
multiple contracts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, we had other financial instruments consisting of cash, fixed
and variable rate debt and short-term investments, which are held for purposes
other than trading. The substantial majority of our debt obligations have fixed
interest rates and are denominated in U.S. dollars, which is our reporting
currency. However, we have issued fixed rate Euro 150.0 million aggregate
principal amount of 11% senior notes and Euro 150.0 million aggregate principal
amount of 10 1/2% senior notes, which are subject to foreign currency exchange
risk. The proceeds from the Euro senior notes are currently invested in Euro
denominated cash and cash equivalents. A 10% change in the exchange rate for the
Euro would impact quarterly interest expense by approximately $0.8 million and
the carrying value of the Euro denominated notes would change by approximately
$28.7 million. Annual maturities of our debt obligations at March 31, 2000,
excluding capital lease obligations, were as follows: $6.7 million in 2000, $8.8
million in 2001, $8.2 million in 2002, $8.1 million in 2003, $1.0 million in
2004 and $2,892.4 million thereafter. At March 31, 2000, the carrying value of
our debt obligations, excluding capital lease obligations, was $2,925.2 million
and the fair value was $2,804.9 million. The weighted-average interest rate of
our debt obligations, excluding capital lease obligations, at March 31, 2000 was
10.7%. Our investments are generally fixed rate short-term investment grade and
government securities denominated in U.S. dollars. At March 31, 2000, all of our
investments in debt securities are due to mature within twelve months and the
carrying value of all of our investments approximates fair value. At March 31,
2000, $158.7 million of our cash and short-term investments were restricted in
accordance with the terms of our financing arrangements and certain acquisition
holdback agreements. We actively monitor the capital and investing markets in
analyzing our capital raising and investing decisions.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, we issued 16,500,000 shares of our 7% Series D cumulative
convertible preferred stock in a placement for net proceeds of $740.2 million
after discounts, commissions and offering expenses and excluding amounts paid
by the purchasers of the Series D preferred stock into a deposit account. The
initial purchasers were Donaldson, Lufkin & Jenrette Securities Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc., Chase Securities Inc. and BancBoston
Robertson Stephens Inc. For a description of the conversion terms of the
Series D Preferred Stock, please refer to Note 9 to our Notes to Condensed
Consolidated Financial Statements included herein. The stock issued in this
transaction is subject to transfer restrictions which were noted on the stock
certificates. The stock was offered only to qualified institutional buyers,
or QIBs, and the transaction was exempt from registration pursuant to Section
4(2) of and Rule 144A under the Securities Act of 1933.
In February and March 2000, we exchanged 8,155,192 shares of our common stock
for an aggregate of 4,629,335 shares of the then outstanding Series C
preferred stock through individually negotiated transactions with a limited
number of holders of Series C preferred stock. After the exchange, we
converted the exchanged Series C preferred stock into 7,422,675 shares of our
common stock, which are being held as treasury shares. Upon the conversion,
the formerly outstanding shares of Series C preferred stock resumed the
status of authorized and unissued shares of our preferred stock, undesignated
as to series, that are available for future issuance as described above.
Approximately $32.4 million will be released to us from the deposit account
because of the conversion. As a result of these transactions, there are only
4,570,665 shares of Series C preferred stock outstanding as of the date of
this document. The transaction was exempt from registration pursuant to
Section 3(a)(9) of the Securities Act. No commission or other renumeration
was paid to any person or entity for soliciting the exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed herewith:
<TABLE>
<S> <C>
Exhibit 10.1 Employment Agreement dated as of March 3, 2000
between PSINet and Robert L. Kamba
Exhibit 27* Financial Data Schedule
Exhibit 99.1 Risk Factors
</TABLE>
* Not deemed filed for purposes of Section 11 of the Securities Act
of 1933, Section 18 of the Securities Exchange Act of 1934 and
Section 323 of the Trust Indenture Act of 1939 or otherwise subject
to the liabilities of such sections and not deemed part of any
registration statement of which such exhibit relates.
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<PAGE>
(b) Reports on Form 8-K
On January 10, 2000, we filed a Current Report on Form 8-K containing
our financial statements for the second and third quarters of 1999.
On January 18, 2000, we filed a Current Report on Form 8-K dated
January 16, 2000 which included as an exhibit a press release issued by
us announcing our two-for-one stock split of our common stock which was
effected in the form of a stock dividend.
On January 26, 2000, we filed a Current Report on Form 8-K which
included as an exhibit a press release issued by us announcing our
intent to conduct a placement of securities in accordance with
Securities and Exchange Commission Rule 144A.
On January 28, 2000, we filed a Current Report on Form 8-K which
included as exhibits two press releases issued by us on January 27,
2000, the first announcing that we had sold 14 million shares of our 7%
Series D cumulative convertible preferred stock in accordance with
Securities and Exchange Commission Rule 144A and the second announcing
that an additional 2.1 million shares were available to be sold
pursuant to an over-allotment option.
On February 9, 2000, we filed a Current Report on Form 8-K dated
January 26, 2000 which included as exhibits the following: our
unaudited pro forma consolidated financial information, our
Management's Discussion and Analysis of Financial Condition and Results
of Operation, our Business section and a Glossary.
On February 11, 2000, we filed a Current Report on Form 8-K dated
February 1, 2000 announcing the completion of our previously announced
offering of $700 million aggregate principal amount of our 7% Series D
cumulative convertible preferred stock in accordance with Securities
and Exchange Commission Rule 144A.
On March 22, 2000, we filed a Current Report on Form 8-K which included
as an exhibit a press release issued by us announcing that we had
entered into a definitive agreement to acquire Metamor Worldwide, Inc.
-31-
<PAGE>
MARCH 31, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSINET INC.
MAY 15, 2000 By: /s/ WILLIAM L. SCHRADER
- ------------ ---------------------------------
Date William L. Schrader
Chairman, Chief Executive Officer
and Director
MAY 15, 2000 By: /s/ JORGE R. FORGUES
- ------------ ---------------------------------
Date Jorge R. Forgues
Vice President and Acting Chief
Financial Officer
(Principal Financial Officer)
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<PAGE>
EXHIBIT INDEX
The following Exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<S> <C> <C>
10.1 Employment Agreement dated as of March 3, Filed herewith
2000 between PSINet and Robert L. Kamba
27 Financial Data Schedule Filed herewith
99.1 Risk Factors Incorporated by reference to the section
entitled "Risk Factors" contained in Amendment
No. 1 to our Registration Statement on Form S-4
filed with the Securities and Exchange
Commission on May 12, 2000,
(Registration No. 333-34802)
</TABLE>
-33-
<PAGE>
EXHIBIT 10.1
March 3, 2000
Mr. Robert L. Kamba
/Address redacted/
Dear Robert:
This letter confirms our offer to you of employment by PSINet Inc. (the
"Company"), and sets forth the terms and conditions which shall govern such
employment as outlined below. This offer is subject to satisfactory completion
of reference checks and ratification by the Company's Board of Directors, but
otherwise shall remain open until COB on Friday, March 10, 2000.
1. EMPLOYMENT:
a) The Company agrees to employ you as Senior Vice President and President,
Global Hosting Operations, reporting to the President and Chief Operating
Officer (COO) of the Company or his designee. This is a corporate officer
position and as an officer of the Company you must stand for election by the
Board of Directors each year. You accept the employment and agree to begin work
on or before Monday, March 20, 2000, and remain in the employ of the Company,
and, except during vacation periods and sickness, to provide during standard
business hours a minimum of forty (40) hours per week of management services to
the Company, as determined by and under the direction of the COO.
b) During your employment you will, except during vacations, periods of illness,
and other absences beyond your reasonable control, devote your best efforts,
skill and attention to the performance of your duties on behalf of the Company.
2. COMPENSATION:
a) BASE SALARY. The Company shall pay you a base salary at the rate of $225,000
per annum. Your base salary shall be subject to additional increases at the
discretion of the Company's Board of Directors. Your base salary shall be
payable in such installments as the Company regularly pays its other salaried
employees, subject to such deductions and withholdings as may be required by law
or by further agreement with you.
b) BONUS COMPENSATION. The Company will pay you a bonus upon the successful
completion of the objectives established for your performance. The performance
criteria will be issued separately by the President and COO, and may be changed,
with mutual fairness, from time to time as situations develop. The target bonus
for the period ending December 31, 2000 (start date through December 31, 2000)
will be a total of up to $112,500. Separate criteria will be established for
your entitlement for the year starting January 1, 2001.
c) INCENTIVE STOCK OPTIONS. Effective upon your start date, PSINet Inc. shall
grant you options, subject to Board approval, to purchase 125,000 shares of
PSINet Inc.'s common stock (the "Options") pursuant to its Executive Stock
Incentive Plan (the "Plan"). Such Options shall be evidenced by an option
agreement in such form as required by the Plan. Among other terms and provisions
prescribed by the Plan, the option agreement shall provide that (a) the exercise
price of the Options shall be the price per share of the Company's common stock
as reported by the NASDAQ Stock Market at the close of business on your start
date, (b) the Options shall not be exercisable after the expiration of ten (10)
years from the date such Options are granted, and (c) the stock shall vest
ratably, monthly, over forty-eight (48) months, provided that for each
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<PAGE>
month's vesting purposes you continue to be employed full time by the Company or
one of its subsidiaries during such month, and provided that the Company's Board
of Directors ratifies, no less often than annually, that you have met the
performance standards and criteria set for you for the preceding period.
3. EMPLOYEE BENEFITS:
a) You shall be provided employee benefits, including (without limitation)
401(k), four (4) weeks' paid vacation, and life, health, accident and disability
insurance under the Company's plans, policies and programs available to
employees in accordance with the provisions of such plans, policies, and
programs.
b) You shall be reimbursed for automobile expenses to a maximum of $800 per the
Company's Car Allowance Policy.
c) You shall be eligible to receive financial planning and tax assistance from
PriceWaterhouseCoopers and the Mason Companies up to a value of $8,000.
4. TERMINATION:
a) Your employment with the Company may be terminated by the Company at any time
for "Cause" as defined in Section 4(c) hereof. Upon such termination, the
Company will provide written notice whether it has elected to use the
non-competition restrictions set forth in Section 5(a) hereof. Your employment
may also be terminated by the Company at any time without Cause provided the
Company shall have given you one hundred eighty (180) days' prior written notice
of such termination. That written notice must state whether the Company has
elected to use the non-Competition restriction (which decision may not be
rescinded). In addition, your employment may be terminated by you at any time
for any reason, provided you shall have given the Company at least thirty (30)
days' prior written notice of such termination. By the 30th day the Company must
notify you in writing whether it has elected to use the non-Competition
restriction. Such decision may not be rescinded. Failure of the Company to so
notify you shall result in the non-Competition restriction not being in place.
b) Subject to your compliance with your obligations under Section 5 hereof, in
the event that your employment terminates or is terminated by you or the Company
for any reason other than for Cause, and the Company has elected to use the
non-Competition restriction, you shall be entitled, for a period of twelve (12)
months after termination of employment, to the following (collectively, the
"Termination Payments"): (i) your then current rate of base salary as provided
in Section 2; (ii) all life insurance and health benefits, disability insurance
and benefits and reimbursement theretofore being provided to you; and (iii)
Company contributions, to the extent permitted by applicable law, to a SEP-IRA,
Keogh or other retirement mechanism selected by you sufficient to provide the
same level of retirement benefits you would have received if you had remained
employed by the Company during such 12-month period. The Company shall make up
the difference in cash payments directly to you to the extent that applicable
law would not permit it to make such contributions.
c) The Company shall have "Cause" for your termination of your employment by
reason of any breach of your agreement not to compete pursuant to Section 5
hereof, your committing an act materially adversely affecting the Company which
constitutes wanton or willful misconduct, your conviction of a felony, or any
material breach by you of this Agreement.
5. AGREEMENT NOT TO COMPETE.
a) In consideration of your employment pursuant to this Agreement and for other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, you covenant to and agree with the Company that, so long as you
are employed by the Company under this Agreement and for a period of twelve (12)
months following the termination of such employment (but only if the Company has
elected to enforce the
-35-
<PAGE>
restriction), you shall not, without the prior written consent of the Company,
either for yourself or for any other person, firm or corporation, manage,
operate, control, participate in the management, operation or control of or be
employed by any other person or entity which is engaged in providing
Internet-related network or communications services competitive with the
Internet-related network or communication services offered to customers by the
Company as of the date of termination or within six (6) months thereafter. The
foregoing shall in no event restrict you from: (i) writing or teaching, whether
on behalf of for-profit, or not-for-profit institution(s); (ii) investing
(without participating in management or operation) in the securities of any
private or publicly traded corporation or entity; or (iii) after termination of
employment, becoming employed by a hardware, software or other vendor to the
Company, provided that such vendor does not offer network or communication
services that are competitive with the Internet-related network or
communications services offered by the Company as of the date of termination of
employment or within six (6) months thereafter.
b) You may request permission from the Company's Board of Director's to engage
in activities which would otherwise be prohibited by Section 5(a). The Company
shall respond to such request within thirty (30) days after receipt. The Company
will notify you in writing if it becomes aware of any breach or threatened
breach of any of the provisions in Section 6(a), and you shall have thirty (30)
days after receipt of such notice in which to cure or prevent the breach, to the
extent that you are able to do so. You and the Company acknowledge that any
breach or threatened breach by you of any of the provisions in Section 5(a)
above cannot be remedied by the recovery of damages, and agree that in the event
of any such breach or threatened breach which is not cured with such 30-day
period, the Company may pursue injunctive relief for any such breach or
threatened breach. If a court of competent jurisdiction determines that you
breached any of such provisions, you shall not be entitled to any Termination
Payments from and after date of the breach. In such event, you shall promptly
repay any Termination Payments previously made plus interest thereon from the
date of such payment(s) at 12% per annum. If, however, the Company has suspended
making such Termination Payments and a court of competent jurisdiction finally
determines that you did not breach such provision or determines such provision
to be unenforceable as applied to your conduct, you shall be entitled to receive
any suspended Termination Payment, plus interest thereon from the date when due
at 12% per annum. The Company may elect (once) to continue paying the
Termination Payments before a final decision has been made by the court.
6. INTELLECTUAL PROPERTY. Ownership of Work Product. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed or
created by you during the course of performing the Company's work (collectively
the "Work Product") shall belong exclusively to the Company and shall, to the
extent possible, be considered a work made for hire for the Company within the
meaning of Title 17 of the United States Code. You automatically assign, and
shall assign at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or interest you may have
in such Work Product, including any copyrights or other intellectual property
rights pertaining thereto. Upon request of the Company, you shall take such
further actions, including execution and delivery of instruments of conveyance,
as may be appropriate to give full and proper effect to such assignment.
7. TRANSFERABILITY.
a) As used in this Agreement, the term "Company" shall include any successor to
all or part of the business or assets of the Company who shall assume and agree
to perform this Agreement.
This Agreement shall inure to the benefit of and be enforceable by you and your
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
b) Except as provided under paragraph (a) of this Section 7, neither this
Agreement nor any of the rights or obligations hereunder shall be assigned or
delegated by any party hereto without the prior written consent of the other
party.
8. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as
-36-
<PAGE>
if such invalid or unenforceable provision were omitted. If a court of competent
jurisdiction determines that any particular provision of this Agreement is
invalid or unenforceable, the court shall restrict the provision so as to be
enforceable. However, if the provisions of Section 5 shall be restricted, a
proportional reduction shall be made in the payments under Section 4.
9. ENTIRE AGREEMENT; WAIVERS. This letter Agreement contains the entire
agreement of the parties concerning the subject matter hereof and supersedes
and cancels all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written. No waiver or modification
of any provision of this Agreement shall be effective unless in writing and
signed by both parties.
10. NOTICES. Any notices, requests, instruction or other document to be
given hereunder shall be in writing and shall be sent certified mail, return
receipt requested, addressed to the party intended to be notified at the
address of such party as set for at the head of this agreement or such other
address as such party may designate in writing to the other.
11. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE SUBJECT TO, GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAW.
12. COUNTERPARTS. This letter Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
shall be one and the same instrument.
Please confirm your agreement with the foregoing by signing and returning one
copy of this letter Agreement to the undersigned, whereupon this letter
agreement shall become a binding agreement between you and the Company.
Sincerely,
PSINet Inc.
By: /s/Harold S. Wills
------------------
HAROLD S. WILLS
PRESIDENT AND CHIEF OPERATING OFFICER
Accepted and Agreed to as of March 3, 2000:
By: /s/Robert L. Kamba
-37-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 1,552
<SECURITIES> 472
<RECEIVABLES> 133
<ALLOWANCES> 21
<INVENTORY> 0
<CURRENT-ASSETS> 2,259
<PP&E> 1,795
<DEPRECIATION> 267
<TOTAL-ASSETS> 5,142
<CURRENT-LIABILITIES> 499
<BONDS> 3,160
0
940
<COMMON> 1,434
<OTHER-SE> (988)
<TOTAL-LIABILITY-AND-EQUITY> 5,142
<SALES> 223
<TOTAL-REVENUES> 223
<CGS> 164
<TOTAL-COSTS> 164
<OTHER-EXPENSES> 227
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> (189)
<INCOME-TAX> 0
<INCOME-CONTINUING> (189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (189)
<EPS-BASIC> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
