- The Washington Times - Wednesday, April 4, 2001

Internet company PSINet Inc. likely will file for bankruptcy to restructure its $3.6 billion debt, but the company one of the region's oldest technology businesses isn't expected to emerge from the reorganization.

William Schrader and Martin Schoffstall founded Performance Systems International in 1989, the first business to market Internet access to companies.

Now the Ashburn, Va., company is likely to become the next casualty of the technology sector.

"This is a story of mismanagement more than anything. They had all the tools in place to be wildly successful, and they just whiffed on the execution," said Peter DiCaprio, an analyst and principal at investment banker Thomas Weisel Partners.

PSINet said yesterday it told the Securities and Exchange Commission on Monday it would miss the deadline for filing its annual financial report because of "rapidly changing circumstances." The company doesn't expect to have enough money to meet expenses, and consultants are helping the company determine the value of its assets so it can complete its financial statements.

The company has $254 million on hand.

The Nasdaq Stock Market halted trading of PSINet's stock early yesterday morning and requested more information from the company about its financial status.

PSINet executives yesterday weren't available for comment.

Company spokesman Eric McErlain didn't indicate when PSINet would file for bankruptcy.

Its stock price has fallen more than 99 percent in the past year. The stock fell to 19 cents a share before trading was halted yesterday, down from $30.50 a share April 3, 2000.

PSINet, which employed 4,150 persons at the beginning of last year, built its business by offering Internet connectivity to corporate clients in 25 countries through 100,000 miles of fiber-optic cable.

It also markets Web-hosting services and owns 16 data centers worldwide.

Analysts attribute PSINet's stock performance to the company's debt, which it incurred partly through an aggressive acquisition plan, and to the slumping revenue of the companies it bought.

PSINet purchased 14 companies during the first nine months of 2000, according to documents filed with the SEC.

It spent $1.9 billion in June to buy Internet software and consulting company Metamor Worldwide Inc. But PSINet's revenue from consulting fell 17 percent in the third quarter compared with the second quarter, the company wrote in its quarterly report for the period ending Sept. 30, 2000.

When PSINet bought Metamor, it acquired an 80 percent stake in Xpedior, which designs software for electronic commerce. Xpedior lost $28.5 million in the third quarter last year, and in November PSINet decided to divest itself of the company. But it accrued $663.8 million for the loss as a result of its sale of Xpedior.

PSINet also spent $720 million last year to buy Transaction Network Services, which operates data networks used in point-of-sale credit card transactions. Less than four weeks ago, PSINet announced it sold the company for $300 million.

"It's representative of the excesses of the capital markets. When they were providing companies with money, they spent that money adding businesses," said F. Drake Johnstone, first vice president at Richmond investment banker Davenport and Co.

PSINet lost most of its value beginning in September when it warned third-quarter revenue would fail to meet estimates. The company reported a loss of $1.38 billion for the quarter.

Now technology analysts expect PSINet to begin searching for buyers.

"They still would be cash-flow negative for a couple of years even if they could wipe out the debt, so it is not my expectation that they will emerge successfully from bankruptcy and I expect them to sell off the assets," said David Takata, senior vice president of research at New York investment bank Gerard Klauer Mattison.

PSINet's Internet-access business and Web-hosting business are its two most valuable assets, analysts said.

But potential buyers are expected to wait until PSINet is in bankruptcy court before making an offer, Mr. Johnstone said.

"Most large-cap telecommunications companies have made it clear they will be bottom fishers. They will wait until the company gets into bankruptcy before making an offer," he said.

PSINet said yesterday its services would continue uninterrupted.

"This situation is about our capital structure, not about our service. The operation is still running," Mr. McErlain said.

PSINet said yesterday it will not sell the naming rights it has to the stadium where the National Football League champion Baltimore Ravens play.

The company still owes the Maryland Stadium Authority $78.1 million over 18 years to have its name on the stadium. PSInet signed a 20-year, $105.5 million contract for the rights.

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