<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 1999
REGISTRATION NO. 333-69277
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
FLASHNET COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 4813 75-2614852
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
FLASHNET COMMUNICATIONS, INC.
1812 NORTH FOREST PARK BOULEVARD
FORT WORTH, TEXAS 76102
(817) 332-8883
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
------------------------------
MICHAEL SCOTT LESLIE
PRESIDENT AND CHIEF OPERATING OFFICER
FLASHNET COMMUNICATIONS, INC.
1812 NORTH FOREST PARK BOULEVARD
FORT WORTH, TEXAS 76102
(817) 332-8883
FACSIMILE: (817) 870-0296
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
S. MICHAEL DUNN, P.C. DEAN A. TETIRICK, ESQ. ALAN K. AUSTIN, ESQ.
BROBECK, PHLEGER & HARRISON LLP CANTEY & HANGER, L.L.P. BRIAN C. ERB, ESQ.
301 CONGRESS AVENUE, SUITE 1200 801 CHERRY STREET, SUITE 2100 WILSON SONSINI GOODRICH & ROSATI, P.C.
AUSTIN, TEXAS 78701 FORT WORTH, TEXAS 76102 650 PAGE MILL ROAD
(512) 477-5495 (817) 877-2883 PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE AGGREGATE OFFERING AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value per
share.............................. 3,664,286 $15.00 $54,964,290 $15,281(2)
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(2) Of this amount, $13,428 was previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 15, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[LOGO]
3,200,000 SHARES
COMMON STOCK
FlashNet Communications, Inc. is offering 3,200,000 shares of its common
stock. This is FlashNet's initial public offering. The shares being sold in the
offering have been approved for quotation on the Nasdaq National Market under
the symbol "FLAS." We anticipate that the initial public offering price will be
between $14.00 and $15.00 per share. Of the 3,200,000 shares being sold in this
offering, we have reserved up to 200,000 shares to offer directly to SBC
Communications Inc. and 150,000 shares to offer directly to persons having
relationships with us. All such sales shall be made on the same terms and
conditions available to the public, however, there will be no underwriting
discount or commission on the shares sold to SBC Communications Inc.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------- ----------------
<S> <C> <C>
Public Offering Price........................................................ $ $
Underwriting Discounts and Commissions....................................... $ $
Price of Shares Sold to SBC Communications Inc............................... $ $
Total Proceeds to FlashNet................................................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FlashNet has granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS
J.C. BRADFORD&CO.
2
<PAGE>
EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1999.
3
<PAGE>
Inside front cover fold out:
Graphic depicts a large rectangle with a background collage of a number of
people's faces. Superimposed on the background is a FlashNet name and logo
placed at the top, center of the box. Beneath the name and logo is a map of the
United States depicting the location of FlashNet's points of presence,
third-party points of presence and the network that connects these points of
presence. A large FlashNet logo is superimposed over the map of the United
States.
- --------------------------------------------------------------------------------
Inside front facing cover:
Graphic depicts a large rectangle. "1995" and "1999" are printed on the top
left and bottom right hand corners, respectively. A large arrow runs on a 45
degree angle from the lower left hand corner to the upper right hand corner.
Above the base of the arrow, in the lower left hand corner, are the words "Low
Value Added Consumer Services." Above the point of the arrow, in the upper right
hand corner are the words "High Value Added Business Services." Along the shaft
of the arrow are six equally spaced FlashNet logos. There is a caption connected
to each logo. Beginning from the base of the arrow the captions are "Dial-Up
Consumer Access," "Dedicated/Broadband Business Access," "Web Hosting Services,"
"Co-location Services," "E-Commerce Services," and "Managed IP Services." The
FlashNet name and logo appear in the top left quadrant.
4
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary......................................................................................... 4
Summary Consolidated Financial Data........................................................................ 5
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 17
Dividend Policy............................................................................................ 17
Capitalization............................................................................................. 18
Dilution................................................................................................... 19
Selected Consolidated Financial and Operating Data......................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 34
Management................................................................................................. 51
Certain Transactions....................................................................................... 58
Principal Shareholders..................................................................................... 60
Description of Capital Stock............................................................................... 62
Shares Eligible for Future Sale............................................................................ 65
Underwriting............................................................................................... 67
Legal Matters.............................................................................................. 69
Experts.................................................................................................... 69
Available Information...................................................................................... 69
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>
------------------------
"FlashNet" and the FlashNet logo are service marks for which service mark
applications are pending. Additional service mark applications are pending for
the registration of other service marks used by us in our business. This
prospectus also contains the trademarks and service marks of other companies
which are the property of their respective owners.
Our principal executive offices are located at 1812 North Forest Park
Boulevard, Fort Worth, Texas 76102 and our telephone number is (817) 332-8883.
Our Web site address is www.flash.net. The information on our Web site is not
incorporated by reference into this prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND
OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS
REFLECTS AN INCREASE IN OUR AUTHORIZED CAPITAL STOCK AND A 3.4-FOR-1 SPLIT OF
OUR ISSUED AND OUTSTANDING COMMON STOCK WHICH OCCURRED ON MARCH 11, 1999. THE
INFORMATION ALSO ASSUMES: (A) THAT ALL OUTSTANDING SHARES OF OUR SERIES A
CONVERTIBLE PREFERRED STOCK WILL BE CONVERTED INTO 4,637,889 SHARES OF OUR
COMMON STOCK UPON THE COMPLETION OF THIS OFFERING; (B) NO EXERCISE OR CONVERSION
OF STOCK OPTIONS, WARRANTS OR CONVERTIBLE NOTES AFTER DECEMBER 31, 1998; AND (C)
THAT THE UNDERWRITERS DO NOT ELECT TO EXERCISE THEIR OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."
FLASHNET
FlashNet is a nationwide provider of consumer Internet access and business
services. Our Internet access services are provided through a national network
with 621 "points of presence" in 450 cities, covering approximately 70% of the
U.S. population. Points of presence are local telephone numbers through which
our subscribers can access the Internet. Our business services consist of high
speed Internet access services and other services that enable customers to
outsource their Internet and electronic commerce activities. We have entered
into strategic network arrangements with PSINet and Level 3 Communications. To
date, we have approximately 180,000 customers, including approximately 3,000
business customers.
The market for Internet access is highly competitive and fragmented with
over 4,800 Internet service providers, primarily in local markets and averaging
less than 5,000 customers each. Few Internet service providers have emerged to
capitalize on economies of scale in network operations and marketing to provide
nationwide services. The markets for Internet access and business services are
growing rapidly. Forrester Research projects that Internet service providers'
access revenues in the United States will grow from approximately $6 billion in
1997 to $38 billion in 2002. In addition, International Data Corporation
projects that the market for Web hosting and security business services is the
fastest growing segment of the Internet services market, with revenues expected
to reach approximately $7 billion in 2000.
Our objective is to take advantage of the growth in both of these markets
and to become the leading nationwide provider of Internet access and business
services. We offer a full range of services that we believe provide customers
with the following benefits:
- FAST AND RELIABLE QUALITY SERVICE. Our network consists of
state-of-the-art equipment that we either own or lease from third-party
network providers.
- COST-EFFECTIVE ACCESS. We offer high-quality Internet connectivity and
enhanced business services at price points that are generally lower than
those charged by other Internet service providers with national coverage.
- ENHANCED BUSINESS SERVICES. We offer high speed Internet access services
and other services that enable businesses to outsource their Internet and
electronic commerce activities.
- NATIONWIDE NETWORK COVERAGE. Our access services cover 450 cities and
approximately 70% of the population of the United States.
- SUPERIOR CUSTOMER SUPPORT. Our customer care and technical personnel are
available by telephone and on-line 24 hours-a-day, seven days-a-week.
- BRAND NAME RECOGNITION. We have invested significantly in our brand name
to enhance our customers' comfort and familiarity with us as their
Internet service provider.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by FlashNet.......................... 3,200,000 shares
Common stock to be outstanding after the offering......... 13,415,207 shares(1)
Use of proceeds........................................... For expansion of our sales and marketing
operations, expansion of our network
infrastructure, development of our business
services offerings, repayment of $11.5
million of indebtedness, potential
acquisitions and working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.................... FLAS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25,
1995
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1995 1996 1997 1998
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................................................ $ 34 $ 3,654 $ 17,537 $ 26,892
Total expenses........................................................ 141 9,564 28,511 34,700
-------------- ------------- ------------- ------------
Loss from operations.................................................. (107) (5,910) (10,974) (7,809)
Net loss attributable to common shareholders.......................... (107) (6,054) (11,688) (13,006)
Basic and diluted net loss per share(2)............................... (0.10) (1.15) (2.15) (2.36)
Supplemental basic and diluted net loss per share(2).................. (1.66)
Shares used in computing net loss per share(2)........................ 3,527,075 5,266,389 5,448,786 5,504,726
Shares used in computing supplemental basic and diluted loss per
share(2)............................................................ 7,821,100
<CAPTION>
DECEMBER 31, 1998
---------------------------
PRO FORMA,
ACTUAL AS ADJUSTED
------------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 1,038 $ 38,188
Total assets.......................................................... 9,733 46,883
Working capital....................................................... (22,757) 19,277
Total debt............................................................ 6,896 2,062
Total shareholders' equity (deficit).................................. (23,707) 26,188
</TABLE>
- --------------------------
(1) This number includes 4,637,889 shares of common stock to be issued to
holders of our Series A convertible preferred stock when the Series A
convertible preferred stock automatically converts to common stock at the
closing of this offering. This number does not include:
- 54,730 shares of common stock issuable to holders of our convertible notes
upon the conversion of such notes;
- 1,675,027 shares of common stock issuable to our warrant holders when they
exercise their warrants for $0.003 per share;
- 744,192 shares of common stock issuable to our stock option holders upon
the exercise of outstanding stock options at a weighted average exercise
price of $5.89 per share; and
- 333,333 shares (assuming an initial public offering price of $15.00 per
share) issuable to Goldman, Sachs & Co. upon exercise of an option to
purchase shares of common stock at the initial public offering price,
which option expires 180 days after the date of this offering.
(2) See Note 1 of Notes to Consolidated Financial Statements for the
determination of post stock split shares used in computing basic and diluted
net loss per share and supplemental basic and diluted net loss per share.
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES WE FACE. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY AND ADVERSELY
AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
WE HAVE A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES
We incurred net losses of approximately $107,000 for the period from
September 25, 1995 (Inception) through December 31, 1995, $6.1 million for the
year ended December 31, 1996, $11.7 million for the year ended December 31, 1997
and $10.3 million for the year ended December 31, 1998. As of December 31, 1998,
we had an accumulated deficit of approximately $30.9 million representing, in
large part, the sum of our historical net losses. We have not achieved
profitability in any quarterly or annual period, and we expect to continue to
incur net losses for the foreseeable future. Although our revenues have grown in
recent quarters, we cannot be certain that we will be able to sustain these
growth rates or that we will obtain sufficient revenues to achieve
profitability. If we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
Our liabilities, including our obligation to redeem preferred stock,
exceeded our assets by $23.7 million at December 31, 1998. We expect to continue
to expend substantial financial and other resources on:
- Sales, marketing and administration;
- Developing new service offerings;
- Improving our management information systems; and
- Expanding our network systems and infrastructure.
We expect that all of our costs and expenses will continue to increase in
future periods, which could negatively affect our operating results.
WE ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY
We were incorporated on September 25, 1995 and began offering Internet
access to the public in November 1995. When making your investment decision, you
should consider the risks and difficulties we may encounter in the new and
rapidly evolving Internet market, especially given our limited operating
history. These risks include our ability to:
- Expand our subscriber base and increase subscriber revenues;
- Compete favorably in a highly competitive market;
- Access sufficient capital to support our growth;
- Recruit and retain qualified employees;
- Introduce new products and services; and
- Upgrade our network systems and infrastructure.
6
<PAGE>
We cannot be certain that we will successfully address any of these risks.
In addition, our business is subject to general economic conditions, which may
not be favorable for our business in the future.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
As a result of our limited operating history, we cannot forecast our
operating expenses based on our historical results. Accordingly, we establish
our expense levels in advance based in part on our projections of our future
revenues. Our revenues currently depend heavily on our ability to attract and
retain subscribers who purchase Internet access on an annual basis. Our future
revenues will likely include more business services revenues, which will depend
upon our ability to attract and retain business customers. If our actual
revenues are less than our projected revenues, we may be unable to reduce
expenses proportionately, and our operating results, cash flows and liquidity
would likely be adversely affected.
WE MAY ENCOUNTER PRICING PRESSURE DUE TO INTENSE COMPETITION IN OUR BUSINESS
We face intense competition in conducting our business, and we expect such
competition to continue to increase. Our competitors include various other
Internet access providers with much larger subscriber bases than ours.
Furthermore, a number of our competitors offer a broader variety of business
services and may have done so for longer periods of time. Every local market we
have entered or intend to enter is served by multiple Internet access providers.
Our current and prospective competitors include many large companies, some of
which are better known than us and may have greater financial, technical and
marketing resources than we do.
As a result of increased competition in our industry, we expect to encounter
significant pricing pressure. We cannot be certain that we will be able to
offset the effects of any required price reductions through an increase in the
number of our subscribers, higher revenues from our business services, cost
reductions or otherwise, or that we will have the resources to continue to
compete successfully. You should read "Business--Competition" for a more
complete discussion on the competitive factors and competitors in our industry.
OUR PLANNED AGGRESSIVE GROWTH WILL STRAIN OUR RESOURCES
We have expanded our operations rapidly since inception and intend to
continue to expand our operations aggressively to pursue existing and potential
market opportunities. This rapid growth has placed, and is expected to continue
to place, a significant strain on our managerial, operational and financial
resources. In particular, our planned network expansion will require the
acquisition and installation of necessary equipment and the implementation of
marketing efforts in new locations, as well as the employment of qualified
technical, marketing and customer support personnel in these locations.
In order to manage our growth, we must improve our operational systems,
procedures and controls on a timely basis. For instance, we currently are in the
process of replacing our customer management and billing system with new
software which is expected to be fully operational in the first quarter of 1999.
If this new software is not fully operational on a timely basis or fails to
perform as expected by us, or if the demands placed on our network resources by
our growing subscriber base outpace our growth and operating plans, the quality
and reliability of our service may decline and our relationships with our
customers may be harmed as a result.
7
<PAGE>
We expect that our revenues and operating results may fluctuate
significantly from quarter to quarter. A number of factors are likely to cause
these fluctuations, including:
- The rate of new subscriber acquisitions;
- Subscriber retention;
- Changes in our pricing policies or those of our competitors;
- Capital expenditures and other costs relating to the expansion of our
operations;
- The timing of new product and service announcements by us or our
competitors;
- Market acceptance of new and enhanced versions of our products and
services;
- Personnel changes;
- The introduction of alternative technologies;
- The effect of potential acquisitions; and
- Increased competition in our markets.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS
Our ability to grow depends significantly on our ability to expand our
operations by opening new points of presence, which requires significant capital
equipment expenditures and advance expenditures and commitments for leased
telecommunications facilities and advertising. We anticipate that our cash
requirements for 1999 will include disbursements for some or all of the
following purposes:
- Expansion of our sales and marketing operations;
- Expansion of our network infrastructure;
- Development of our business services offerings;
- Repayment of $11.5 million of indebtedness;
- Potential acquisitions; and
- Working capital and general corporate purposes.
If the proceeds from this offering, after these and other expenditures, are not
sufficient to meet our cash requirements, we will need to seek additional
capital from public or private equity or debt sources to fund our growth and
operating plans and respond to other contingencies, which may include:
- Increases in our growth rate;
- Shortfalls in anticipated revenues or increases in expenses;
- Unanticipated opportunities, such as major strategic alliances or
acquisitions of complementary businesses;
- The development of new products and services; or
- The expansion of our customer care operations, including the recruitment
of additional customer care and support personnel.
We cannot be certain that we will be able to raise additional capital in the
future on terms acceptable to us or at all. If alternative sources of financing
are insufficient or unavailable, we will be required to modify our growth and
operating plans in accordance with the extent of available financing and will be
required to attempt to attain profitability in our existing geographic markets.
8
<PAGE>
IF OUR THIRD-PARTY SUPPLIERS AND TELECOMMUNICATIONS CARRIERS DISCONTINUE DOING
BUSINESS WITH US, WE MAY BE UNABLE TO FIND ADEQUATE REPLACEMENTS
We depend on third-party suppliers of hardware components and
telecommunications carriers to provide equipment and networking services. We
currently acquire certain hardware components used in our network system from
one or two sources, including servers manufactured by Sun Microsystems, modems
manufactured by Ascend Communications and 3Com and high performance routers,
which are devices that receive and transmit data between different networks,
manufactured by Cisco Systems. We currently rely on a few local telephone
companies and others, such as PSINet and Level 3 Communications, to lease to us
data communications capacity via local telecommunications lines and leased long-
distance lines. Our suppliers and telecommunications carriers also sell or lease
products and services to our competitors and may be, or in the future may
become, our competitors. Expansion of our network infrastructure and other
competitors' needs will continue to place a significant demand on our suppliers
and telecommunications carriers. We cannot be certain that our suppliers and
telecommunications carriers will continue to sell or lease their products and
services to us at commercially reasonable prices or at all. Difficulties in
developing alternative sources of supply, if required, could adversely affect
our business, future financial condition or operating results. Moreover, failure
of our telecommunications providers to provide the data communications capacity
required by us for any reason could cause interruptions in our ability to
provide access services to our customers, which may materially and adversely
affect our business, financial condition and operating results.
WE MUST CONTINUE TO EXPAND OUR NETWORK INFRASTRUCTURE TO MEET ADDITIONAL DEMAND
OR CHANGING SUBSCRIBER REQUIREMENTS
Our network infrastructure is composed of a complex system of routers,
switches, transmission lines and other hardware used to provide our subscribers
with Internet access and other services. The future success of our business will
depend on the capacity, reliability and security of this network infrastructure.
We will have to expand and adapt our network infrastructure as the number of
subscribers and the amount and type of information they wish to transmit over
the Internet increases. Such expansion and adaptation of our network
infrastructure will require substantial financial, operational and management
resources. We cannot be certain that we will be able to expand or adapt our
network infrastructure to meet additional demand or changing subscriber
requirements on a timely basis and at a commercially reasonable cost, or at all.
NETWORK CAPACITY CONSTRAINTS MAY IMPEDE OUR SERVICE TO SUBSCRIBERS
Capacity constraints within our network and those of our suppliers have
occurred in the past and will likely occur in the future. Such constraints may
prevent subscribers from gaining access to a particular point of presence or may
inhibit a subscriber from connecting to system-wide services such as e-mail and
newsgroup services. From time to time we have experienced delayed delivery of
networking components or systems from our third-party suppliers, which has
delayed our delivery of service to customers or caused all incoming modem lines
to become full during peak times, resulting in busy signals for subscribers who
are trying to connect to us. Similar problems can occur if we are unable to
expand the capacity of our information servers for e-mail, newsgroups and the
Web fast enough to keep up with the demand from our expanding subscriber base.
Further, if we fail to provide our customers with the requisite network capacity
to enable them to readily access the Internet, our subscribers will experience a
general slow-down in their Internet access which may harm our relationships with
them. If we fail to expand or enhance our network infrastructure on a timely
basis or adapt it to an expanding subscriber base, changing subscriber
requirements or evolving industry standards, our business, financial condition
and operating results could be materially and adversely affected.
9
<PAGE>
DISRUPTIONS OF OUR SERVICES DUE TO SYSTEM FAILURE COULD RESULT IN SUBSCRIBER
CANCELLATIONS
A significant portion of our computer equipment, including critical
equipment dedicated to our Internet access services, is presently located at a
single facility in Fort Worth, Texas. The occurrence of a natural disaster, the
failure of one of our systems or the occurrence of other unanticipated problems
at our headquarters or at one of our primary points of presence could cause
interruptions in our services. Extensive or multiple interruptions in providing
customers with Internet access are a primary reason for customer decisions to
cancel the use of access services. Accordingly, any disruption of our services
due to system failure could have materially adverse repercussions to our
business, financial condition and operating results.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE
Our market is susceptible to rapid changes due to technology innovation,
evolving industry standards, changes in subscriber needs and frequent new
service and product introductions. New services and products based on new
technologies or new industry standards expose us to risks of equipment
obsolescence. We will need to use leading technologies effectively, continue to
develop our technical expertise and enhance our existing services on a timely
basis to compete successfully in this industry. We cannot be certain that we
will be successful in using new technologies effectively, developing new
services or enhancing existing services on a timely basis or that any new
technologies or enhancements used by us or offered to our customers will achieve
market acceptance.
Our ability to compete successfully also depends on the continued
compatibility and interoperability of our services with products and systems
sold by various third parties. Although we intend to support emerging standards
in the market for Internet access and enhanced business services, we cannot be
certain that industry standards will be established or, if they become
established, that we will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market.
We are also at risk due to fundamental changes in the way that Internet
access may be delivered in the future. Currently, Internet services are accessed
primarily by computers connected by telephone lines. Recently, several companies
have developed cable modems, some of which are currently offered for sale. These
cable modems have the ability to transmit data at substantially faster speeds
than the modems currently used by our subscribers and us. As the Internet
becomes accessible by broad segments of the U.S. population through these cable
modems and other consumer electronic devices, or as subscriber requirements
change the means by which Internet access is provided, we will have to develop
new technologies or modify our existing technology to accommodate these
developments and remain competitive. Our pursuit of these technological advances
may require substantial time and expense, and we cannot be certain that we will
succeed in adapting our Internet access services business to alternative access
devices and conduits.
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, WE MAY NOT BE ABLE TO CONTINUE OUR
BUSINESS PLAN
Widespread use of the Internet is a relatively recent phenomenon. Our future
success substantially depends on continued growth in the use of the Internet and
the continued development of the Internet as a viable commercial medium. We
cannot be certain that Internet usage will continue to grow as it has in the
past or that extensive Internet content will continue to be developed and
continue to be accessible for free or at nominal cost to Internet users. If the
use of the Internet does not continue to grow or evolves in a way that we cannot
address, our business, financial condition and operating results could be
materially and adversely affected.
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WE FACE THE UNCERTAINTY OF SUBSCRIBER RETENTION
Our sales, marketing and other costs of acquiring new subscribers are
substantial relative to the monthly fees derived from such subscribers.
Accordingly, we believe that our long-term success depends largely on our
ability to retain our existing subscribers, while continuing to attract new
subscribers. We continue to invest significant resources in our network
infrastructure and customer and technical support capabilities to provide high
levels of customer service. We cannot be certain that these investments will
maintain or improve subscriber retention. We believe that intense competition
from our competitors, some of which offer many free hours of service or other
enticements for new subscribers, has caused, and may continue to cause, some of
our subscribers to switch to our competitors' services. In addition, some new
subscribers use the Internet only as a novelty and do not become consistent
users of Internet services and, therefore, may be more likely to discontinue
their service. These factors adversely affect our subscriber retention rates.
Any decline in subscriber retention rates could have a material adverse effect
on our business, financial condition and operating results.
OUR GROWTH PLANS DEPEND ON THE ACCEPTANCE OF OUR BUSINESS SERVICES
Our operating and growth plans are based in part on our strategy to increase
sales of our business services to corporate customers. This strategy will depend
significantly on the successful development, introduction, expansion and market
acceptance of our business services offerings. We cannot be certain that
additional corporate customers will purchase our business services offerings or
that we will successfully meet customer needs or expectations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED SALES PERSONNEL FOR OUR
CORPORATE SALES PROGRAM, WE MAY NOT BE ABLE TO OBTAIN CUSTOMERS
As part of our corporate sales program, we are beginning to deploy a
geographically dispersed sales force that will be primarily responsible for
attracting and retaining commercial customers for our business services. Our
future success in the business services arena depends on our ability to market
successfully to corporate clients in an environment that is increasingly
competitive. We may not succeed in attracting and retaining qualified sales
managers or other sales people, which is necessary for this type of marketing
approach.
IF WE ARE UNABLE TO RECRUIT INDEPENDENT SALES REPRESENTATIVES, WE MAY NOT BE
ABLE TO CONTINUE OUR NETWORK MARKETING PROGRAM TO RECRUIT SUBSCRIBERS
We employ a network marketing program that entails the use of independent
representatives to sell our access services and to recruit other independent
representatives to sell these services. Independent representatives are paid
commissions by us for their sales of access service plans, as well as for sales
made by those they recruit into the program. This network marketing program
complements our more traditional direct response marketing and corporate sales
activities. We believe that FlashNet is one of only a few Internet service
providers that utilizes network marketing. The success of our network marketing
program will depend on our ability to attract, retain and motivate a large base
of independent representatives, who, in turn, are expected to recruit both
subscribers for our services as well as other independent sales representatives.
For the year ended December 31, 1998, approximately 25% of our new subscribers
were obtained through our network marketing program. We believe that significant
turnover among independent representatives is typical of network marketing
programs. Therefore, in order to maintain or increase the overall number of our
independent representatives,
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<PAGE>
existing representatives must continually recruit new independent
representatives. Our ability to attract and retain independent representatives
could be negatively affected by:
- Adverse publicity relating to our services or operations, including our
network marketing program;
- Our program structure, which may include modifications in commission rates
and training fees;
- The quality and range of our service offerings;
- The level of support services we provide to our independent
representatives;
- The availability of competing network marketing opportunities; and
- Adverse trends regarding Internet usage.
GOVERNMENT REGULATIONS MAY REQUIRE US TO CHANGE OUR NETWORK MARKETING PROGRAM OF
INDEPENDENT SALES REPRESENTATIVES
Because our independent representatives are classified as independent
contractors, we may encounter difficulty enforcing the policies and rules that
we have established to govern their conduct. Violations of these policies and
rules can reflect negatively on us. In addition, our network marketing program
is affected by extensive government regulation, such as federal and state
regulation of the offer and sale of business franchises, business opportunities
and securities. Various governmental agencies monitor direct selling activities,
and we may be required to supply information regarding our marketing program to
certain of these agencies. We also may fail to comply with existing statutes or
regulations as a result of misconduct by our independent representatives, the
ambiguous nature of some of the regulations and the considerable interpretive
and enforcement discretion given to regulators. Any assertion or determination
that our company or our independent representatives are not in compliance with
existing statutes or regulations could have a material adverse effect on our
business and operations.
STATE AND FEDERAL GOVERNMENT REGULATION COULD REQUIRE US TO CHANGE OUR BUSINESS
We provide Internet access and business services, in part, using
telecommunications services provided by carriers that are subject to the
jurisdiction of state and federal regulators. Due to the increasing popularity
and use of the Internet, state and federal regulators may adopt additional laws
and regulations relating to content, user privacy, pricing and copyright
infringement. We cannot predict the impact, if any, that future regulation or
regulatory changes may have on our business. You should read
"Business--Government Regulation" for a more detailed discussion of the
government regulation to which we may be subject.
OUR COMPETITIVE LOCAL EXCHANGE CARRIER SUBSIDIARY IS SUBJECT TO GOVERNMENT
REGULATION
We have received authorization from the State of Texas for a wholly-owned
subsidiary of ours to operate as a competitive local exchange carrier in Texas,
and we may, in the future, seek competitive local exchange carrier status in
other states as well. To the extent we conduct business as a competitive local
exchange carrier, the telecommunications services that we provide through our
competitive local exchange carrier subsidiary will be subject to federal, state
and local regulation, which may include tariff and price listing requirements
and state certification proceedings. We could incur substantial legal and
administrative expenses if a third party were to challenge our filed tariffs or
our subsidiary's competitive local exchange carrier status. In addition, under
some state statutes, changes in the ownership of our outstanding voting
securities also may trigger additional state public utility commission
12
<PAGE>
approval. You should read "Business--Government Regulation--Regulations
Pertinent to Our Competitive Local Exchange Carrier Subsidiary" for a more
detailed discussion of the regulations to which our competitive local exchange
carrier subsidiary will be subject.
WE FACE A POTENTIAL CASH SHORTFALL IF OUR GROWTH RATE SLOWS
The majority of our sales are to customers who prepay for one year of
service. We apply all of the proceeds from these prepayments to acquire more
equipment, purchase advertising, meet current obligations and fund operating
deficits. We do not set aside proceeds as capital reserves to reimburse
subscribers who may decide to discontinue their service before their prepaid
term expires. As a result, our financial condition, including our operating
results, cash flow and liquidity, is dependent upon an increasing number of new
customers in the current year and beyond. In 1997 and 1998, we had to raise
capital through third-party sources due in part to a decline in our rate of new
subscriber growth. Any continued or future decline in the rate of growth of new
subscribers, or any unanticipated increase in the rate of subscriber
reimbursements, could force us to raise additional capital to support our
operations by selling equity securities or incurring additional debt.
WE DEPEND ON THE PROTECTION OF OUR PROPRIETARY RIGHTS
We rely on a combination of copyright, trademark and trade secret laws to
protect our proprietary rights. We cannot be certain that the steps we have
taken will be adequate to prevent the misappropriation of our technology or that
third parties, including competitors, will not independently develop
technologies that are substantially equivalent or superior to our proprietary
technology.
We have obtained from various software manufacturers either licenses or
permissions to use the software that we bundle in our client-side software
product for subscribers and for the software used internally in our Internet
services. Although we believe that these products do not infringe the
proprietary rights of any third parties, third parties could assert infringement
claims against us in the future. The defense of any such claims would require us
to incur substantial costs and would divert management's attention and resources
to defend against any claims relating to proprietary rights, which could
materially and adversely affect our financial condition and operations. Parties
making such claims could secure a judgment awarding them substantial damages, as
well as injunctive or equitable relief that could effectively block our ability
to sell our services. Any such outcome could have a material adverse effect on
our business, financial condition and operating results. If a claim relating to
proprietary technology or information is asserted against us, we may seek
licenses to use such intellectual property. We cannot be certain, however, that
licenses could be obtained by us on acceptable terms, if at all.
WE COULD FACE LOSSES AND POTENTIAL LIABILITY IF INTRUSIONS, VIRUSES OR SIMILAR
DISRUPTIONS TO OUR NETWORK OR COMPUTER SYSTEMS IMPEDE OUR SERVICE OR JEOPARDIZE
OUR CONFIDENTIAL INFORMATION OR THAT OF OUR SUBSCRIBERS
Although we have implemented, and will continue to implement, security
measures, our network and computer systems are vulnerable to intrusions,
computer viruses or similar disruptive problems caused by, or transmitted
through, our subscribers or other Internet users. Computer viruses or similar
disruptions could lead to interruptions, delays or cessation in service to our
subscribers. Inappropriate use of the Internet by third parties could also
potentially jeopardize the security of confidential information stored in our
computer systems or those of our subscribers, which may cause losses to either
us or our subscribers. The potential that this can occur may deter certain
persons from subscribing to our services. Alleviating problems caused by
computer viruses or other breaches of security likely would cause interruptions,
delays or cessation in service to our subscribers, which could have a material
adverse effect on our business and operations. In addition, we expect that our
subscribers will increasingly use the Internet for commercial transactions. Any
network malfunction or security breach could cause these transactions to be
delayed, not completed, or completed with compromised security. It is
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<PAGE>
possible that subscribers or others could assert claims of liability against us
as a result of any such failure. Furthermore, until more comprehensive security
technologies are developed, the security and privacy concerns of existing and
potential subscribers may inhibit the growth of the Internet service industry in
general, and our subscriber base and revenues, in particular.
ACQUISITIONS OF ACCESS SUBSCRIBERS MAY RESULT IN SUBSCRIBER CANCELLATIONS DUE TO
BILLING PROBLEMS AND UNFAMILIARITY WITH OUR SERVICE; ACQUISITIONS OF COMPANIES
MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND DISTRACTION OF OUR MANAGEMENT DUE
TO DIFFICULTIES IN ASSIMILATING PERSONNEL AND OPERATIONS
As part of our growth strategy, we may acquire businesses, products,
technologies and other assets, including subscriber accounts, or enter into
joint venture arrangements, that complement our consumer access and business
services offerings. In an acquisition of access subscribers, we may experience
subscription cancellations in the short-term period following the acquisition
due to the lack of the acquired subscribers' familiarity with us as their
Internet service provider and billing issues that may arise due to poor record
keeping and billing administration by the selling company. If we acquire a
company, we could encounter difficulties in assimilating the personnel and
operations of the acquired company. This may disrupt our ongoing business and
distract management, as well as result in unanticipated costs and difficulty in
maintaining our standards, controls and procedures. We cannot be certain that we
would succeed in overcoming these risks or any other problems encountered in
connection with any acquisitions we may make. In addition, we may be required to
incur debt or issue equity securities to pay for any future acquisitions or to
fund any losses or unanticipated costs of the combined companies.
WE FACE POTENTIAL LIABILITY FOR MATERIAL TRANSMITTED THROUGH OUR NETWORK OR
RETRIEVED THROUGH OUR SERVICES
The law relating to the liability of Internet access and business services
providers for information carried on or disseminated through their networks is
unsettled. In addition, the Federal Telecommunications Act of 1996 imposes fines
on any entity that knowingly permits any telecommunications facility under such
entity's control to be used to make obscene or indecent material available to
minors via an interactive computer service. We cannot predict whether any claim
under such federal statute, similar state statutes or common law will be
asserted against us, or if asserted, whether it will be successful. As the law
in this area develops, we may be required to expend substantial resources or
discontinue certain services to reduce our exposure to the potential imposition
of liability for information carried on and disseminated through our network.
Any costs that we incur as a result of contesting any such asserted claims or
the consequent imposition of liability could materially and adversely affect our
business, financial condition and operating results.
In addition, because materials may be downloaded by users of our services
and subsequently distributed to others, persons may potentially make claims
against us for defamation, negligence, copyright or trademark infringement,
personal injury or other causes of action based on the nature, content,
publication and distribution of such materials. We also could be exposed to
liability with respect to the offering of third-party content that may be
accessible through our services, including links to Web sites maintained by our
subscribers or other third parties, or posted directly to our Web site, and
subsequently retrieved by a third party through our services. It is also
possible that if any third-party content provided through our services contains
errors, third parties who access such material could make claims against us for
losses incurred in reliance on such information. We also offer e-mail services,
which expose us to other potential risks, such as liabilities or claims
resulting from unsolicited e-mail, lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service. Such
claims, with or without merit, likely would divert management's time and
attention and result in significant costs to investigate and defend.
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<PAGE>
WE ARE SUBJECT TO RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. Confusion of dates may bring about system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar business activities. As a result, many companies' software and
computer systems need to be upgraded or replaced in order to comply with such
"Year 2000" requirements. We have established procedures for evaluating and
managing the risks and costs associated with this problem and currently expect
that our computer systems will be Year 2000 compliant by mid-1999. However, many
of our customers maintain their Internet operations on commercially available
operating systems, which may be impacted by Year 2000 complications. In
addition, we rely on third-party vendors for certain telecommunications and
information systems equipment and software included within our services that may
not be Year 2000 compliant. We are in the early stages of conducting an audit of
our third-party suppliers as to the Year 2000 compliance of their systems. The
failure of our internal computer systems or of third-party equipment or software
to operate without Year 2000 complications could require us to incur significant
unanticipated expenses to remedy any problems and could expose us to claims for
losses incurred by our users due to such Year 2000 complications. The defense of
any such claims, with or without merit, could require us to incur substantial
costs and would divert management's time and attention, which could have a
material adverse effect on our business, financial condition and operating
results. In addition, we are subject to external forces that might generally
affect industry and commerce, such as utility company Year 2000 compliance
failures and related service interruptions.
OUR STOCK MAY BE DIFFICULT TO RESELL
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. You may not be able to resell your shares at or above the
initial public offering price due to a number of factors, including:
- Actual or anticipated fluctuations in our operating results;
- Changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- Announcements of technological innovations by our existing or future
competitors;
- Departures of key personnel; or
- The operating and stock price performance of other comparable companies.
YOU MAY NOT BE ABLE TO RESELL SHARES OF OUR STOCK AT OR FOR MORE THAN THE PRICE
YOU PAID
The stock market in general, and the stock prices of Internet companies in
particular, have recently experienced extreme volatility that often has been
unrelated to the operating performance of any specific public companies. If
continued, these broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.
IF OUR SHAREHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR STOCK IN THE PUBLIC MARKET,
THE MARKET PRICE OF OUR STOCK COULD FALL
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and place that we deem
15
<PAGE>
appropriate. You should read "Shares Eligible For Future Sale" for a more
detailed discussion of when and how many additional shares of our stock may be
sold after this offering.
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY THE PERCEPTION THAT CERTAIN
SHAREHOLDERS COULD REQUIRE US TO SELL THEIR SHARES OF OUR STOCK AFTER THIS
OFFERING BY EXERCISING THEIR REGISTRATION RIGHTS
We have entered into registration rights agreements with certain of our
shareholders, noteholders and holders of warrants and options entitling them to
include their shares of common stock in any registration of securities by us
under the Securities Act of 1933, as amended. Additionally, certain of these
holders are also entitled to require us to file a registration statement under
the Securities Act at our expense with respect to their shares of common stock.
Sales of a substantial number of shares of our common stock into the public
market after this offering, or the perception that such sales could occur, could
materially and adversely affect our stock price or could impair our ability to
obtain capital through an offering of equity securities.
OUR PRINCIPAL SHAREHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS WILL RETAIN
SUBSTANTIAL INFLUENCE FOLLOWING THIS OFFERING
Our executive officers, directors and existing 5% and greater shareholders
will beneficially own or control, collectively, 6,966,433 shares of our common
stock, representing approximately 52% of the voting power after this offering.
These shareholders will beneficially own or control, collectively, approximately
50% of the voting power if the underwriters exercise their option to purchase
additional shares of common stock in this offering. After this offering, such
persons, if they were to act together, will be in a position to elect and remove
directors and control the outcome of most matters submitted to shareholders for
a vote. Additionally, such persons would be able to influence significantly a
proposed amendment to our charter, a merger proposal, a proposed sale of assets
or other major corporate transaction or a non-negotiated takeover attempt. Such
concentration of ownership may discourage a potential acquiror from making an
offer to buy our company, which, in turn, could adversely affect the market
price of our common stock.
RECENT CHANGES IN MANAGEMENT RESPONSIBILITIES MAY DISRUPT OUR OPERATIONS
Our Chairman and Chief Executive Officer, A. Lee Thurburn, recently had
heart bypass surgery. As a result, he has decreased his level of management
reponsibility with us as he continues to recover. While Mr. Thurburn intends to
eventually return to a full-time schedule, we currently do not expect that he
will resume his participation in our operations to the same extent as was the
case prior to his surgery.
OUR CHARTER AND BYLAWS AND TEXAS LAW CONTAIN ANTI-TAKEOVER PROVISIONS
Provisions of our Restated Articles of Incorporation, our Bylaws and Texas
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our shareholders. You should read "Description of
Capital Stock" for more information on the anti-takeover effects of provisions
of our Restated Articles of Incorporation and Bylaws and of Texas law.
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USE OF PROCEEDS
The net proceeds we will receive from the sale of the 3,200,000 shares of
common stock offered by us are estimated to be $43,650,000, or $49,927,500 if
the underwriters' over-allotment option is exercised in full, after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by us and assuming a public offering price of $15.00 per share.
In this offering, we are offering to sell up to $3.0 million worth of our
common stock to SBC Communications Inc. We have assumed in this prospectus that
we will sell 200,000 shares of our common stock to SBC based upon an assumed
initial public offering price of $15 per share, with net proceeds to us of $3.0
million. The maximum number of shares we sell to SBC will be equal to $3.0
million divided by the initial public offering price. This maximum number of
shares may be either higher or lower than 200,000 shares depending upon the
actual initial public offering price.
The principal purposes of this offering are to increase our equity capital,
to create a public market for our common stock, to facilitate future access by
us to public equity markets and to provide increased visibility of FlashNet in a
marketplace where many of our competitors are publicly-held companies. We
currently intend to use the net proceeds of this offering as follows:
- Approximately $12.0 million for the expansion of our sales and marketing
operations;
- Repayment of $6.5 million in principal amount of a Secured Promissory Note
issued to Ascend Communications, Inc.;
- Approximately $5.0 million to expand our network infrastructure;
- Repayment of $5.0 million in principal amount of a Term Note issued to
Goldman Sachs Credit Partners L.P.;
- Approximately $2.0 million to develop further our business services
offerings; and
- The balance for working capital, general corporate purposes and potential
acquisitions.
The Ascend promissory note matures upon consummation of this offering and
bears interest at 6.0% per annum. At December 31, 1998, the amount outstanding
under the Ascend promissory note was $6.5 million. The Term Note issued to
Goldman Sachs Credit Partners L.P. matures on January 15, 2000 and bears
interest at 13% per annum until July 15, 1999, at which time, if the Term Note
is not fully repaid, the interest rate will increase, retroactively, to 15.5%.
Other than $6.5 million for repayment of the Ascend promissory note and $5.0
million for repayment of the Term Note issued to Goldman Sachs Credit Partners
L.P., we have not allocated specific dollar amounts for the above mentioned uses
of proceeds. Potential acquisitions may include acquisitions of businesses,
subscriber accounts, products and technologies, or participation in joint
venture arrangements, that are complementary to our business and service
offerings. Although we have not identified any specific businesses, subscriber
accounts, products, technologies or joint ventures that we may acquire or enter
into, nor are there any current agreements or negotiations with respect to any
such transactions, we evaluate such opportunities from time to time. Pending
such uses, the net proceeds will be invested in government securities and other
short-term, investment-grade, interest-bearing instruments.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock and do
not intend to pay any cash dividends on the common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to fund the
development and growth of our business. Future dividends, if any, will be
determined by our Board of Directors.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
(a) on an actual basis and (b) on a pro forma, as adjusted basis to reflect the
conversion of all of the 1,364,085 outstanding shares of Series A convertible
preferred stock into 4,637,889 shares of common stock upon the consummation of
this offering and to give effect to the sale of the common stock offered hereby
at an assumed initial public offering price of $15.00 per share, after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses that are payable by us and the application of the estimated net
proceeds therefrom to repay the Ascend promissory note and the Goldman Sachs
Credit Partners L.P. Term Note as described under "Use of Proceeds." The common
stock shown in the table as issued and outstanding excludes:
- 68,442 shares of common stock issuable upon conversion of convertible
notes;
- 1,709,877 shares of common stock issuable upon the exercise of warrants at
an exercise price of $0.003 per share; and
- 617,984 shares of common stock issuable upon the exercise of stock options
outstanding as of December 31, 1998 at a weighted average exercise price
of $5.58 per share.
As of the date of this prospectus, stock options exercisable for 744,192
shares of common stock are outstanding at a weighted average exercise price
of $5.89 per share. See "Management--1997 Stock Incentive Plan" and "Certain
Transactions." In addition, Goldman, Sachs & Co. has the right to elect to
purchase up to $5.0 million worth of our common stock at the initial public
offering price, which right expires 180 days after the consummation of this
offering.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
PRO FORMA,
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Short-term debt (convertible notes payable, note payable and current
portion of capital lease obligations).................................. $ 6,844 $ 2,010
---------- -----------
---------- -----------
Capital lease obligations, net of current portion........................ $ 52 $ 52
Redeemable Series A Convertible Preferred Stock, par value $1.00 per
share, 1,375,000 shares authorized, 1,364,085 issued and outstanding
actual; none issued or outstanding pro forma, as adjusted.............. 7,911 --
Shareholders' equity (deficit):
Preferred Stock, $1.00 par value, 5,000,000 shares authorized, none
issued or outstanding actual and pro forma, as adjusted................ -- --
Common Stock, no par value, 50,000,000 shares authorized, 5,528,870
shares issued and outstanding actual and 13,366,757 shares issued and
outstanding pro forma, as adjusted..................................... 3,443 55,004
Warrants to purchase common stock........................................ 3,705 3,705
Accumulated deficit...................................................... (30,855) (32,521)
---------- -----------
Total shareholders' equity (deficit)................................... (23,707) 26,188
---------- -----------
Total capitalization................................................. $ (15,744) $ 26,240
---------- -----------
---------- -----------
</TABLE>
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DILUTION
The pro forma deficit in net tangible book value of FlashNet at December 31,
1998 was approximately $15.8 million, or $1.55 per share of common stock. Pro
forma deficit in net tangible book value per share represents the amount of our
total tangible assets reduced by the amount of our total liabilities, divided by
the number of shares of common stock outstanding after giving effect to the
conversion of all shares of Series A convertible preferred stock. After giving
effect to our sale of 3,200,000 shares of common stock in this offering (at an
assumed initial public offering price of $15.00 per share) and after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses payable by us and the application of the net proceeds therefrom, our
pro forma net tangible book value as adjusted at December 31, 1998 would have
been approximately $26.2 million, or $1.96 per share. This represents an
immediate increase in pro forma net tangible book value of $3.51 per share to
our existing shareholders and an immediate dilution of $13.04 per share to new
investors purchasing shares of common stock in this offering. The following
tables:
- Include 4,637,889 shares of common stock that will be issued upon the
conversion of 1,364,085 outstanding shares of Series A convertible
preferred stock on the consummation of this offering; and
- Assume no exercise of any warrants or stock options or conversion of
convertible notes that were outstanding as of or after December 31, 1998.
As of December 31, 1998, there were outstanding:
- Notes convertible into 68,442 shares of common stock;
- Warrants exercisable for 1,709,877 shares of common stock at an exercise
price of $0.003 per share; and
- Stock options exercisable for 617,984 shares of common stock at a weighted
average exercise price of $5.58 per share.
As of the date of this prospectus, stock options exercisable for 744,192 shares
of common stock are outstanding at a weighted average exercise price of $5.89
per share. To the extent that convertible notes are converted, or any
outstanding warrants or options are exercised, new investors may experience
further dilution. See "Management--1997 Stock Incentive Plan" and Note 6 of
Notes to Consolidated Financial Statements.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................................... $ 15.00
Pro forma deficit in net tangible book value per share at December 31, 1998............ $ (1.55)
Increase per share attributable to new investors....................................... 3.51
---------
Pro forma net tangible book value per share after this offering.......................... 1.96
---------
Dilution per share to new investors...................................................... $ 13.04
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1998, the number of shares of common stock purchased, the total consideration
paid to us and the average price per share paid to us by existing shareholders
and by investors purchasing shares of common stock offered hereby, before
deducting estimated underwriting discounts and commissions and estimated
offering expenses of this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................................ 10,166,757 76.1% $ 8,622,998 15.2% $ 0.85
New investors(1)..................................... 3,200,000 23.9 48,000,000 84.8 15.00
------------ ----- ----------- -----
Total............................................ 13,366,757 100.0% $56,622,998 100.0%
------------ ----- ----------- -----
------------ ----- ----------- -----
</TABLE>
- ------------------------------
(1) If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by new investors will increase to 3,650,000
shares, or 26.4% of the total shares of common stock outstanding after this
offering.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and the Notes
thereto and the other financial information included elsewhere in this
prospectus. The statement of operations data the years ended December 31, 1996,
1997 and 1998, and the balance sheet data at December 31, 1997 and 1998 are
derived from the Consolidated Financial Statements included elsewhere in this
prospectus which have been audited by Deloitte & Touche LLP, independent
auditors, as set forth in their report therein. The statement of operations for
the period ended December 31, 1995 and the balance sheet data at December 31,
1995 are derived from audited financial statements not included herein.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER
25, 1995
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------
1995 1996 1997 1998
------------ --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Consumer access services.............................. $ 19 $ 2,286 $ 11,942 $ 21,979
Business services..................................... -- 53 571 1,597
Set-up fees and other................................. 15 1,315 5,024 3,316
------------ --------- --------- ---------
Total revenues...................................... 34 3,654 17,537 26,892
Operating costs and expenses:
Cost of recurring revenues............................ 28 2,348 8,214 11,796
Cost of other revenues................................ 4 473 799 349
Sales and marketing................................... 32 4,329 10,300 8,202
General and administrative............................ 74 1,039 3,453 5,268
Operations and customer support....................... -- 830 3,683 6,016
Depreciation and amortization......................... 3 545 2,061 3,069
------------ --------- --------- ---------
Total expenses...................................... 141 9,564 28,511 34,700
------------ --------- --------- ---------
Loss from operations.................................. (107) (5,910) (10,974) (7,809)
Interest expense (net)................................ -- (144) (714) (2,456)
------------ --------- --------- ---------
Net loss.............................................. (107) (6,054) (11,688) (10,265)
Deemed dividends on redeemable preferred stock........ -- -- -- (2,741)
------------ --------- --------- ---------
Net loss attributable to common shareholders.......... $ (107) $ (6,054) $ (11,688) $ (13,006)
------------ --------- --------- ---------
------------ --------- --------- ---------
Basic and diluted net loss per share(1)............... $ (0.03) $ (1.15) $ (2.15) $ (2.36)
------------ --------- --------- ---------
------------ --------- --------- ---------
Supplemental basic and diluted net loss per
share(1)............................................ $ (1.66)
Shares used in computing basic and diluted loss per
share(1)............................................ 3,527,075 5,266,389 5,448,785 5,504,726
Shares used in computing supplemental basic and
diluted loss per share(1)........................... 7,821,100
</TABLE>
- --------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for the
determination of post stock split shares used in computing basic and diluted
net loss per share and supplemental basic and diluted net loss per share.
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998
--------------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 25 $ 137 $ 1,570 $ 1,038
Total assets........................................ 175 5,887 11,000 9,733
Working capital..................................... (41) (7,113) (16,835) (22,757)
Total debt.......................................... -- 4,672 6,766 6,896
Redeemable preferred stock.......................... -- -- -- 7,911
Total shareholders' equity (deficit)................ 51 (5,275) (13,436) (23,707)
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25,
1995
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------
1995 1996 1997 1998
--------------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
EBITDA(1)..................................... $(104) $(5,365) $(8,913) $(4,740)
Cash flow provided (used) by:
Operating activities........................ $ (38 ) $ 412 $ 1,342 $(5,229)
Investing activities........................ $ (82 ) $(1,038) $(4,461) $(1,445)
Financing activities........................ $ 145 $ 739 $ 4,551 $ 6,142
Subscribers(2)................................ 200 47,361 152,022 172,472
Independent sales representatives in our
network marketing program(2)................ -- -- 1,885 5,424
</TABLE>
- --------------------------
(1) EBITDA consists of net loss before provisions for interest expense, income
taxes, depreciation, amortization and the deemed dividend on the preferred
stock. EBITDA is not intended to represent cash flows from operations in
accordance with generally accepted accounting principles and should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity. We believe that
EBITDA is a standard measure commonly reported and widely used by analysts,
investors and other interested parties in the Internet service provider
industry to compare the operating performance of companies within this
industry. We have elected to include EBITDA in our financial presentation to
provide investors with an additional measurement of our operating
performance, especially in view of our continuing levels of net losses.
(2) Determined as of the end of the period.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA," AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
FlashNet is a nationwide provider of consumer Internet access services and
business services. Founded in September 1995, we initially served as an Internet
access provider for consumers located primarily in the Dallas/Fort Worth area.
To provide Internet access throughout the southwestern United States and
selected central and northeastern states, we expanded our operations during 1996
and 1997 through the installation of 182 FlashNet-owned points of presence where
subscribers can access our services through a local telephone call. These points
of presence are supported by a network operations center in Fort Worth, Texas
and 28 additional remote facilities where FlashNet-owned equipment has been
deployed within third-party networking or data centers. In the first quarter of
1998, we signed a national network access agreement with PSINet that provided us
with access to PSINet's points of presence. This agreement, combined with our
agreement with Level 3 Communications, has transformed our company into a
national Internet service provider with 621 total points of presence across 450
cities throughout the United States. Since our inception, we have accumulated a
subscriber base of approximately 180,000 users, including approximately 3,000
customers for our business services.
In addition to our access services as a national Internet service provider,
we offer a broad range of business services that enable businesses to outsource
their Internet and electronic commerce activities. We expect that business
services revenues will increase in future periods, particularly in view of our
strategy to increase the size of our corporate sales department and expand our
offerings of business services. We believe that attracting additional business
customers will result in a more stable, higher quality customer base. We further
believe that our business services enable us to acquire new corporate customers
more effectively and provide many cross-selling opportunities.
REVENUES.
Our revenues generally are composed of:
- Consumer access services revenues;
- Business services revenues; and
- Set-up fees and other revenues.
Consumer access services revenues consist of annual prepaid and, to a lesser
extent, monthly subscriptions for consumer dial-up access to the Internet. We
offer prepaid and monthly subscribers a full money-back guarantee upon
cancellation of their service if made within 30 days of initiating service.
Amounts received upon the sale or renewal of prepaid annual and monthly
subscriptions are recorded as deferred revenue through the 30-day money-back
cancellation period and then amortized over the remaining period in which
service is provided. Subscribers may cancel their subscriptions at any time
following the initial 30-day period, in which case we charge the subscriber
according to our monthly service rates for services provided through the end of
the month in which the cancellation occurs plus an additional set-up fee, and
refund any remaining prepaid amounts after such charges. Cash received from
subscribers is applied to working capital when received, and no cash reserves
are maintained for potential refund obligations. See "Risk Factors--We Face a
Potential Cash Shortfall if Our Growth Rate Slows."
22
<PAGE>
Business services consisting of dedicated access services also are offered
on a prepaid annual and monthly subscription basis. The revenue recognition
policies and customer guarantee practices described above for consumer access
services also apply to dedicated access business services. Revenues from the
sale of other business services typically involve set-up fees, which are
included in set-up fees and other revenues in our statement of operations, and a
service contract that provides for monthly billing. These business services
revenues are recognized as services are provided.
We derive set-up fees and other revenues through a variety of sources,
including set-up fees for subscribers to our consumer access services and
business services, consulting services, sign-up and renewal fees for independent
representatives in our network marketing program and advertising revenues.
Set-up fees are charged to new customers of monthly consumer access services and
to business services customers, other than prepaid annual dedicated access
customers. These one-time set-up fees are non-refundable and are deferred and
amortized over a one-year period. Consulting services have been provided from
time to time on a limited basis by FlashNet on both a fixed fee and a time-and-
materials basis and are recognized as the services are performed. Non-refundable
fees are paid by representatives in our network marketing program at the
commencement of participation in the program and for renewal of participation on
each anniversary of the representative's commencement date. Such fees are
deferred and amortized over a one-year period following the month of initial
sign-up or renewal, as the case may be. Advertising revenues are recognized as
advertising services are provided.
SUBSCRIBER RETENTION.
During 1998, the monthly rate at which we experienced customer cancellations
and nonrenewals of subscriptions for access services, which is referred to in
our industry as the churn rate, averaged 3.7%. We calculate our churn rate by
dividing (a) the number of customer cancellations and non-renewals during the
period (excluding cancellations made by new subscribers during the first 30 days
of service) by (b) the average of the numbers of subscribers at the beginning of
the period and at the end of the period. If cancellations made by new
subscribers during the first 30 days of service were included, our churn rate
for 1998 would have averaged 4.6%. We intend to continue to devote substantial
resources to maintain customer service on a 24 hours-a-day, seven days-a-week
basis, and to upgrade and expand our network's structure and system components
to ensure high levels of customer satisfaction.
SIGNIFICANT COSTS AND EXPENSES.
We intend to increase our sales and marketing expenditures significantly in
the foreseeable future to attract customers during the ongoing growth phase in
Internet use by broad segments of the U.S. population. Accordingly, we
anticipate significant increases in 1999 in sales and marketing expenses as
compared to 1998. Sales and marketing expenses in 1996, 1997 and 1998 were $4.3
million, $10.3 million and $8.2 million, respectively. A key component of our
strategy is to increase our customer base, both for our consumer access services
and business services, by expanding our sales and marketing efforts within three
primary channels:
- Direct response marketing through media campaigns and mass marketing;
- Our "FlashNet Opportunity" network marketing program; and
- Direct corporate sales through a geographically dispersed sales force.
All three strategies are designed to build brand name recognition and generate
high levels of new customers while minimizing our customer acquisition costs and
churn rate. See "Business--Sales and Marketing."
In our efforts to continue delivering to customers fast and reliable, high
quality Internet access services and reduce network costs on a per-subscriber
basis, we continually monitor and evaluate network performance and utilization.
Through this process, we proactively effect modifications to our network design,
thereby enhancing our ability to address new markets and improving the
efficiency and
23
<PAGE>
performance of our networking resources. Furthermore, in the course of our
geographic expansion and the establishment of new points of presence, we
determine whether it is more cost effective to build our own facilities or to
lease ports from third-party providers, such as those available to us under our
contractual arrangements with PSINet and Level 3 Communications. We believe that
the combination of our own network infrastructure with those of our third-party
providers enables us to manage effectively our networking costs to achieve lower
service costs per subscriber while ensuring the delivery of high quality
services on a nationwide basis.
We have incurred annual and quarterly losses from our operations since our
inception, and we expect to incur operating losses on both a quarterly and
annual basis for the foreseeable future. At December 31, 1998, we had an
accumulated deficit of $30.9 million. Moreover, although our revenues have
increased in recent periods, there can be no assurance that our revenues will
grow in future periods, that they will grow at past rates, that we will achieve
profitability on a quarterly or annual basis in the future or that, if
profitability is achieved, it will be sustained. See "Risk Factors--We Have a
History of Losses and Expect Continued Losses," "--We are a New Company with a
Limited Operating History" and "--Our Quarterly Financial Results are Subject to
Significant Fluctuations."
RESULTS OF OPERATIONS
The following discussion of our results of operations for the years ended
December 31, 1996, 1997 and 1998 is based upon data derived from the statements
of operations data contained in our audited Consolidated Financial Statements
appearing elsewhere in this prospectus. The following table sets forth this data
as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Consumer access services........................................................ 63% 68% 82%
Business services............................................................... 1 3 6
Set-up fees and other........................................................... 36 29 12
--- --- ---
Total revenues.............................................................. 100 100 100
--- --- ---
Operating costs and expenses:
Cost of recurring revenues...................................................... 64 47 44
Cost of other revenues.......................................................... 13 5 1
Sales and marketing............................................................. 118 59 31
General and administrative...................................................... 28 20 20
Operations and customer support................................................. 23 21 22
Depreciation and amortization................................................... 15 12 11
--- --- ---
Total expenses.............................................................. 261 164 129
--- --- ---
Loss from operations................................................................ (161) (64) (29)
Interest expense (net).............................................................. (4) (4) (9)
--- --- ---
Net loss............................................................................ (165)% (68)% (38)%
--- --- ---
--- --- ---
</TABLE>
24
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES.
Our total revenues increased $9.4 million, or 53%, to $26.9 million in 1998
from $17.5 million in 1997. Subscriptions and renewals increased $10.0 million,
as reflected by the increase in consumer access services revenues, and
approximately $1.0 million was attributable to increased sales of business
services. These increases were offset by a $1.7 million decrease in subscriber
set-up fees and other revenues, resulting primarily from the elimination of
set-up fees applicable to annual prepaid consumer accounts made in connection
with a price increase for all consumer access and business access services in
the fourth quarter of 1997. New subscriptions increased in large part from the
expansion of our network marketing program, which accounted for 27,521 new
subscriber acquisitions in 1998 as compared to 10,050 new subscriber
acquisitions in 1997. Consumer access services revenues increased 84% in 1998
over 1997, primarily as a result of increases in our subscriber base and in
average revenues per subscriber due to the price increase in the fourth quarter
of 1997. Business services revenues increased 180% in 1998 from 1997 as we
expanded our offerings of dedicated and broadband access and other business
services in response to escalating customer demand. Revenues from set-up fees
and other revenues decreased 34% in 1998 from 1997, primarily as a result of our
decision in the fourth quarter of 1997 to discontinue charging set-up fees for
prepaid subscriptions and due to the receipt in 1997 of consulting fees of $1.0
million for a project that was completed in that year.
COST OF RECURRING REVENUES.
Cost of recurring revenues is comprised of the costs incurred in providing
consumer access services and business services. These costs include costs for
providing local telephone lines into each FlashNet-owned point of presence, the
use of third-party networks and the use of leased lines to connect each
FlashNet-owned point of presence and third-party point of presence to our hub
and to connect our hub to the Internet backbone. Cost of recurring revenues
increased $3.6 million, or 44%, to $11.8 million in 1998 from $8.2 million in
1997. Of this increase, $3.1 million was attributable to an increase in dial
tone costs associated with a higher level of subscribers on our network. As a
percentage of total revenues, cost of recurring revenues decreased to 44% in
1998 from 47% in 1997 primarily due to the increases in consumer access and
business services partially offset by a decline in set-up fees and other
revenues in 1998. As a percentage of revenues derived from consumer access
services and business services, cost of recurring revenues decreased to 50% in
1998 from 66% in 1997. This decrease resulted from the price increase in the
fourth quarter of 1997 and greater network efficiencies.
COST OF OTHER REVENUES.
Cost of other revenues consists of costs of installation software, premium
support costs, cost of merchandise sold and the cost of user guides and other
materials for representatives and distributors involved in our network marketing
program. Cost of other revenues decreased $450,000, or 56%, to $349,000 in 1998
from $799,000 in 1997. As a percentage of total revenues, cost of other revenues
decreased to 1% in 1998 from 5% in 1997. The decrease in cost of other revenues,
both in absolute dollars and as a percentage of total revenues, was primarily
the result of cost savings of $315,000 attributable to our obtaining a
royalty-free license for Netscape software in the fourth quarter of 1997 that
was previously purchased by us and resold to customers.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses consist primarily of media and production
costs, commissions and expenses related to our network marketing program, sales
and marketing overhead, and personnel costs. Sales and marketing expenses
decreased $2.1 million, or 20%, to $8.2 million in 1998 from $10.3 million in
1997. As a percentage of total revenues, sales and marketing expenses decreased
to 31% in 1998 from 59% in 1997. This decrease, both in absolute dollars and as
a percentage of total
25
<PAGE>
revenues, was attributable to a $3.8 million decline in media expenses offset by
an $1.5 million increase in expenses associated with our network marketing
program. Our reduction in media expenditures in 1998 was primarily due to our
decision to conserve cash resources and, to a lesser extent, to our decision to
purchase national media spots rather than local media spots, with the latter
being generally more expensive on a per-impression basis. We intend to increase
significantly our sales and marketing expenses in absolute dollars in the
foreseeable future to attract both consumer and business customers. See
"--Overview."
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses consist of personnel and related costs
associated with our executive and administrative functions and other
miscellaneous expenses. General and administrative expenses increased $1.8
million, or 53%, to $5.3 million in 1998 from $3.5 million in 1997. General and
administrative expenses increased primarily due to an increase in the number of
staff members, an increase in credit card processing fees and increased spending
on facilities and supplies. As a percentage of total revenues, general and
administrative expenses remained constant at 20%. We believe that general and
administrative expenses will continue to increase in absolute dollars for the
foreseeable future as our scope of operations continues to expand and due to
anticipated increased administrative costs associated with our becoming a public
company.
OPERATIONS AND CUSTOMER SUPPORT EXPENSES.
Operations and customer support expenses consist primarily of expenses
associated with daily support of our subscriber base, including customer service
and technical support. Operations and customer support expenses increased $2.3
million, or 63%, to $6.0 million in 1998 from $3.7 million in 1997. As a
percentage of total revenues, operations and customer support expenses increased
to 22% in 1998 from 21% in 1997. These increases were primarily due to the
addition of new customer care and technical personnel to support a larger
subscriber base. We believe that operations and customer support expenses will
continue to increase in absolute dollars as we continue to expand our customer
service and technical support capabilities.
DEPRECIATION AND AMORTIZATION.
We calculate depreciation using the straight line method over the estimated
useful life of the applicable assets. Depreciation and amortization expense
increased $1.0 million, or 49%, to $3.1 million in 1998 from $2.1 million in
1997. This increase primarily resulted from additional purchases of capital
equipment and software that were needed to support our expanding network. As a
percentage of total revenues, depreciation and amortization expense decreased
slightly to 11% in 1998 from 12% in 1997.
INTEREST EXPENSE (NET).
Interest expense (net) increased $1.8 million to $2.5 million in 1998 from
$714,000 in 1997. This increase was primarily attributable to interest paid on
borrowings of $6.5 million from Ascend Communications, Inc. in the fourth
quarter of 1997 and, to a lesser extent, capitalized leases for the acquisition
of additional networking equipment.
NET LOSS.
Net loss decreased $1.4 million to $10.3 million in 1998 from $11.7 million
in 1997. As a percentage of total revenues, net loss decreased to 38% in 1998
from 68% in 1997. In 1998, the net loss attributable to common shareholders
included $2.7 million related to preferred stock deemed distributions and
accretion.
26
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES.
Revenues increased $13.9 million, or 380%, to $17.5 million in 1997 from
$3.7 million in 1996. Of this increase, $9.6 million was attributable to higher
revenues from increased subscriptions for consumer access services, $3.7 million
was attributable to increased set-up fees and other revenues and $518,000
resulted from an increase in business services revenues. Consumer access
services revenues increased 422% in 1997 over 1996 primarily as a result of more
than 104,000 subscriber additions in 1997, which resulted from marketing
programs in core markets that were implemented in December 1996 and that
continued through the third quarter of 1997, as well as from overall industry
growth. Set-up fees and other revenues increased 282% in 1997 over 1996
primarily as a result of our increased number of new subscriptions and the
associated set-up fees charged with respect to all accounts until the fourth
quarter of 1997, at which time such fees for prepaid annual access service plans
were discontinued. In addition, set-up fees and other revenues benefitted from a
consulting engagement in 1997 that generated $1.0 million in revenue.
COST OF RECURRING REVENUES.
Cost of recurring revenues increased $5.9 million, or 250%, to $8.2 million
in 1997 from $2.3 million in 1996. Cost of recurring revenues increased in
absolute dollars primarily due to a $3.4 million increase in dial tone expenses
and a $1.2 million increase in expenses related to leased lines used to
transport Internet traffic from remote locations to our network operations
center. As a percentage of total revenues, cost of recurring revenues decreased
to 47% in 1997 from 64% in 1996. This percentage decrease was primarily
attributable to a price increase for access service plan renewals that was
instituted in May 1997, a price increase in access fees for renewals and new
subscriptions that was effected in December 1997 and economies of scale from
more effective utilization of FlashNet-owned points of presence and network
facilities over a significantly larger subscriber base.
COST OF OTHER REVENUES.
Cost of other revenues increased $326,000, or 69%, to $799,000 in 1997 from
$473,000 in 1996. Of this increase, $200,000 is related to an increase in
expenses for Netscape and other Internet browser software. As a percentage of
total revenues, cost of other revenues decreased to 5% in 1997 from 13% in 1996.
Cost of other revenues remained relatively constant as a percentage of related
revenues.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses increased $6.0 million, or 138%, to $10.3
million in 1997 from $4.3 million in 1996. This increase was primarily due to a
$5.4 million increase in billboard and radio advertising expenses. As a
percentage of total revenues, sales and marketing expenses decreased to 59% in
1997 from 118% in 1996. This percentage decrease was primarily attributable to
the significant increase in revenues relative to sales and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses increased $2.4 million, or 232%, to $3.4
million in 1997 from $1.0 million in 1996. General and administrative expenses
increased primarily due to an increase in the number of administrative
employees, an increase in credit card processing fees and increased spending on
facilities and supplies. As a percentage of total revenues, general and
administrative expenses decreased to 20% in 1997 from 28% in 1996. This
percentage decrease was attributable to our ability to leverage our existing
infrastructure to support our revenue growth.
27
<PAGE>
OPERATIONS AND CUSTOMER SUPPORT EXPENSES.
Operations and customer support expenses increased $2.9 million, or 343%, to
$3.7 million in 1997 from $832,000 in 1996. This increase was primarily due to
the addition of new customer support and technical support personnel to support
our larger subscriber base. As a percentage of total revenues, operations and
customer support expenses decreased to 21% in 1997 from 23% in 1996. This
percentage decrease was primarily attributable to the increase in revenues
relative to these expenses.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization expense increased $1.5 million, or 278%, to
$2.1 million in 1997 from $545,000 in 1996. This increase primarily was a result
of additional purchases of capital equipment and software needed to support our
expanding network. As a percentage of total revenues, depreciation and
amortization expense decreased to 12% in 1997 from 15% in 1996 due to network
and equipment efficiencies attained through a significantly larger subscriber
base.
INTEREST EXPENSE (NET).
Interest expense (net) increased $570,000, or 394%, to $714,000 in 1997 from
$144,000 in 1996. This increase resulted in large part from increased interest
under capital leases and accrued interest on convertible notes that were issued
in the second half of 1996 and that remained outstanding during 1997.
NET LOSS.
Net loss increased $5.6 million, or 93%, to $11.7 million in 1997 from $6.0
million in 1996. As a percentage of total revenues, net loss decreased to 68% in
1997 from 165% in 1996.
28
<PAGE>
UNAUDITED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly operating results
for the years ended December 31, 1997 and 1998. This data is also expressed as a
percentage of total revenues for the respective quarters. This information has
been derived from unaudited consolidated financial statements that, in our
opinion, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
------------ ---------- ---------- ---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Consumer access services......... $ 1,918 $ 3,063 $ 3,196 $ 3,765 $ 4,615 $ 5,080 $ 5,850
Business services................ 64 116 167 224 351 360 456
Set-up fees and other............ 782 1,217 1,626 1,399 919 791 947
------------ ---------- ---------- ---------- ------------ ---------- ----------
Total revenues................. 2,764 4,396 4,989 5,388 5,885 6,231 7,253
------------ ---------- ---------- ---------- ------------ ---------- ----------
Operating costs and expenses:
Cost of recurring revenues....... 1,078 1,956 2,576 2,604 2,724 2,956 3,004
Cost of other revenues........... 228 206 212 153 98 88 134
Sales and marketing.............. 2,767 2,757 3,084 1,692 998 1,800 2,388
General and administrative....... 666 788 999 1,000 908 1,223 1,397
Operations and customer
support........................ 593 882 1,121 1,087 1,035 1,326 1,681
Depreciation and amortization.... 436 506 543 576 748 763 774
------------ ---------- ---------- ---------- ------------ ---------- ----------
Total expenses................. 5,768 7,095 8,535 7,112 6,511 8,156 9,378
------------ ---------- ---------- ---------- ------------ ---------- ----------
Loss from operations............... (3,004) (2,699) (3,546) (1,724) (626) (1,925) (2,125)
Interest expense (net)............. (172) (190) (188) (164) (643) (647) (641)
------------ ---------- ---------- ---------- ------------ ---------- ----------
Net loss........................... (3,176) (2,889) (3,734) (1,888) (1,269) (2,572) (2,766)
Deemed dividends on redeemable
preferred stock.................. -- -- -- -- -- -- (2,687)
------------ ---------- ---------- ---------- ------------ ---------- ----------
Net loss attributable to common
shareholders..................... $ (3,176) $ (2,889) $ (3,734) $ (1,888) $ (1,269) $ (2,572) $ (5,453)
------------ ---------- ---------- ---------- ------------ ---------- ----------
------------ ---------- ---------- ---------- ------------ ---------- ----------
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
------------ ---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Consumer access services......... 70% 69% 64% 70% 78% 81% 81%
Business services................ 2% 3% 3% 4% 6% 6% 6%
Set-up fees and other............ 28% 28% 33% 26% 16% 13% 13%
------------ ---------- ---------- ---------- ------------ ---------- ----------
Total revenues................. 100% 100% 100% 100% 100% 100% 100%
------------ ---------- ---------- ---------- ------------ ---------- ----------
Operating costs and expenses:
Cost of recurring revenues....... 39% 45% 52% 48% 46% 47% 41%
Cost of other revenues........... 8% 5% 4% 3% 2% 1% 2%
Sales and marketing.............. 100% 63% 62% 31% 17% 29% 33%
General and administrative....... 24% 18% 20% 19% 15% 20% 19%
Operations and customer
support........................ 21% 20% 22% 20% 18% 21% 23%
Depreciation and amortization.... 16% 12% 11% 11% 13% 12% 11%
------------ ---------- ---------- ---------- ------------ ---------- ----------
Total expenses................. 208% 163% 171% 132% 111% 130% 129%
------------ ---------- ---------- ---------- ------------ ---------- ----------
Loss from operations............... (108)% (63)% (71)% (32)% (11)% (30)% (29)%
Interest expense (net)............. (6)% (4)% (4)% (3)% (11)% (10)% (9)%
------------ ---------- ---------- ---------- ------------ ---------- ----------
Net loss........................... (114)% (67)% (75)% (35)% (22)% (40)% (38)%
------------ ---------- ---------- ---------- ------------ ---------- ----------
------------ ---------- ---------- ---------- ------------ ---------- ----------
<CAPTION>
DEC. 31,
1998
----------
<S> <C>
Revenues:
Consumer access services......... $ 6,434
Business services................ 430
Set-up fees and other............ 660
----------
Total revenues................. 7,524
----------
Operating costs and expenses:
Cost of recurring revenues....... 3,113
Cost of other revenues........... 29
Sales and marketing.............. 3,016
General and administrative....... 1,739
Operations and customer
support........................ 1,974
Depreciation and amortization.... 784
----------
Total expenses................. 10,655
----------
Loss from operations............... (3,131)
Interest expense (net)............. (525)
----------
Net loss........................... (3,656)
Deemed dividends on redeemable
preferred stock.................. (54)
----------
Net loss attributable to common
shareholders..................... $ (3,710)
----------
----------
DEC. 31,
1998
----------
<S> <C>
Revenues:
Consumer access services......... 85%
Business services................ 6%
Set-up fees and other............ 9%
----------
Total revenues................. 100%
----------
Operating costs and expenses:
Cost of recurring revenues....... 41%
Cost of other revenues........... --
Sales and marketing.............. 40%
General and administrative....... 23%
Operations and customer
support........................ 26%
Depreciation and amortization.... 10%
----------
Total expenses................. 140%
----------
Loss from operations............... (40)%
Interest expense (net)............. (7)%
----------
Net loss........................... (47)%
----------
----------
</TABLE>
During the fourth quarter of 1997, we implemented a price increase for our
access services. As part of the price increase, we eliminated set-up fees
applicable to our prepaid consumer access accounts. As a result of these pricing
changes, set-up fees and other revenues declined on an absolute basis and as a
percentage of total revenues during the fourth quarter of 1997 and the first
quarter of 1998. Contributing to the decrease in set-up fees and other revenues
during the first quarter of 1998
29
<PAGE>
was the completion of a $1.0 million consulting contract that was fully
recognized during the last three quarters of 1997.
During the fourth quarter of 1997 and the first quarter of 1998, we
decreased our sales and marketing expenditures as the result of a concerted
effort to conserve cash resources and as a result of our focus on a more
efficient national network marketing program implemented in the first half of
1998. We believe that the growth in our subscriber base is highly correlated to
expenditures on sales and marketing activities and that the lower levels of
sales and marketing expenditures during the fourth quarter of 1997 and the first
half of 1998 resulted in slower rates of growth in our subscriber base during
these periods. In the second half of 1998, we used additional financial
resources to expand our sales and marketing activities, including hosting our
annual Flash Mania event for our independent network marketing representatives.
We plan to spend a significant portion of the proceeds from this offering to
continue the expansion of our sales and marketing activities during 1999. There
can be no assurance that these increased sales and marketing expenses will lead
to an increase in our subscriber base.
Due to the limited operating history of our company, we cannot forecast
operating expenses based on our historical operating results. As a result, we
establish expense levels based in part on future projections of revenues.
Revenues currently depend heavily on our ability to attract and retain
subscribers who purchase consumer Internet access services on an annual basis.
Future revenues will likely include more business services revenues, which will
depend upon our ability to attract and retain business customers. If actual
revenues are less than projected revenues, we may be unable to reduce expenses
proportionately, which would adversely affect our operating results, cash flows
and liquidity. See "Risk Factors--Our Quarterly Financial Results are Subject to
Significant Fluctuations."
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital and liquidity needs historically have related to our
sales and marketing activities, the development and expansion of our network
infrastructure, the establishment of our customer service and support operations
and general working capital needs. The capital needs of our company have been
met, in large part, by receipts from our prepaid subscriber customer base,
which, in turn, increased our deferred revenue liability. As we placed greater
emphasis on developing and expanding our network infrastructure, we sought
additional capital from other sources, including vendor capital leases and other
vendor financing arrangements and through private placements of our securities,
as further described below.
Cash used in operating activities of $5.2 million during 1998 primarily was
attributable to a $10.3 million net loss, partially offset by $3.0 million in
depreciation expenses and $1.9 million in non-cash interest expense. Cash used
in investing activities during 1998 was $1.4 million, principally as a result of
the purchase of property, plant and equipment to support increases in our
subscriber base. Cash provided from financing activities during 1998 was $6.1
million, which consisted primarily of $7.8 million (after transaction fees)
raised in a private placement of convertible preferred stock offset by debt
principal payments.
Cash provided by operations was $1.3 million for 1997, which was the result
of a $4.8 million increase in accounts payable, a $6.4 million increase in
deferred revenue and $2.0 million in depreciation expenses, offset by a net loss
of $11.7 million. Cash used in investing activities was $4.5 million for 1997,
which primarily related to the purchase of network equipment. Cash provided from
financing activities was $4.6 million for 1997, consisting primarily of
borrowings of $6.5 million from Ascend offset by debt principal payments.
The continued development and expansion of our sales and marketing efforts
and network infrastructure, as well as the further development or the possible
acquisition of new business services, are expected to require substantial cash
expenditures. As a result, we expect to continue to incur operating losses and
negative cash flows from operations for the foreseeable future. As of December
31, 1998, we had approximately $1.0 million of cash and cash equivalents
available for our working capital needs. We have budgeted our future capital
requirements based on current estimates of our future revenues and
30
<PAGE>
with a view to current competitive factors and the federal and state regulatory
environment pertaining to our business. We cannot be certain that actual
revenues will be in line with management's expectations or that expenditures
will not be significantly higher than anticipated. In addition, there can be no
assurance that we will be able to meet our strategic objectives or that we will
have access to adequate capital resources on a timely basis, or at all, or that
such capital will be available on terms that are acceptable to us. We continue
to consider potential acquisitions or other strategic arrangements that may fit
our strategic plan. Any such acquisitions or strategic arrangements likely would
require additional equity or debt financing, which may result in dilution to
investors in this offering. See "Risk Factors--We May Be Unable to Obtain the
Additional Capital Required to Grow Our Business" and "Use of Proceeds."
CONVERTIBLE NOTES.
From July 1996 through December 1996, we sold, in the aggregate, $635,000 in
principal amount of convertible notes due July 31, 1999. The convertible notes
bear interest at a rate of 12.0% per annum, with accrued interest payable
quarterly. We are required to pay the unpaid principal balance of the
convertible notes in three equal annual installments, the first and second of
which were made on July 31, 1997 and July 31, 1998, respectively. The notes are
convertible at the option of the holders thereof into shares of common stock at
the rate of one share per $2.94 of principal converted. At December 31, 1998,
the aggregate principal outstanding under the convertible notes was $202,000
with $297,000 in outstanding principal having been converted into 100,980 shares
of common stock prior to December 1998. In connection with the convertible notes
financing, we issued to the purchasers of such notes warrants to purchase
177,038 shares of common stock at an exercise price of $0.003 per share. These
warrants will expire if not exercised by July 31, 1999. As of December 31, 1998,
6,970 shares of common stock had been issued pursuant to warrant exercises, and
warrants to purchase 170,068 shares of common stock remained unexercised.
ASCEND PROMISSORY NOTE AND WARRANT.
In December 1997, we borrowed $6.5 million from Ascend pursuant to a secured
promissory note that bears interest at a fixed rate of 6.0% per annum, with
accrued interest payable monthly. The principal balance of the Ascend promissory
note is due upon the earliest of:
- December 10, 1999;
- The effective date of this offering; or
- A change in control of FlashNet. See "Use of Proceeds."
In connection with the Ascend promissory note financing, we issued to Ascend a
warrant to purchase 1,360,000 shares of common stock at an exercise price of
$0.003 per share. The warrant expires on the later of December 2007 or the fifth
anniversary of the closing date of this offering. If, at the expiration of its
term, the warrant has not been fully exercised, it will be deemed to have been
automatically converted at such time into a number of shares of common stock
determined by dividing (a) the aggregate fair market value of the shares for
which it was exercisable minus the aggregate exercise price of such shares by
(b) the fair market value of one share of common stock.
PREFERRED STOCK FINANCINGS.
In May 1998, we completed the sale of 749,587 shares of our Series A
convertible preferred stock, par value $1.00 per share, for an aggregate
purchase price of $4.6 million. In August 1998, we completed a sale of an
additional 614,498 shares of Series A convertible preferred Stock for an
aggregate purchase price of $3.7 million. Upon consummation of this offering,
the outstanding shares of Series A convertible preferred stock will convert into
an aggregate of 4,637,889 shares of common stock.
TERM LOAN FINANCING.
On January 15, 1999, we entered into a Term Loan Agreement with Goldman
Sachs Credit Partners L.P., pursuant to which we immediately received a fully
funded $5.0 million term loan. The term
31
<PAGE>
loan matures on January 15, 2000 and is secured by a lien on all of our assets
and the assets of our subsidiaries, ranking second in priority after the lien
securing the $6.5 million promissory note payable by us to Ascend. We are not
required to repay any portion of the principal of the term loan prior to the
maturity date. Interest accrues on the unpaid principal of the term loan at the
rate of 13% per annum and will be added monthly to principal for the first six
months of the loan. In the event that the term loan is not fully repaid by July
15, 1999, the interest rate increases to 15.5%, to apply retroactively, with
recalculations of the interest added to principal as if the rate had been 15.5%
beginning January 15, 1999. The first payment of interest is scheduled to be
made on August 15, 1999. Thereafter, interest payments are scheduled to be made
monthly until the maturity date. At repayment of the term loan, we will also be
required to pay Goldman Sachs Credit Partners L.P. a repayment fee, the amount
of which, expressed as a percentage of the unpaid principal, increases as the
maturity date approaches. The applicable percentage relating to the repayment
fee will range from 1.125% to 4.500%, which percentage will be determined as of
the date of the payment of principal of the term loan.
As part of the Goldman Sachs Credit Partners L.P. financing, FlashNet and
Goldman Sachs Credit Partners L.P. also became parties to a Common Stock
Purchase Option which provides Goldman Sachs Credit Partners L.P.'s assignee,
Goldman, Sachs & Co., a right to elect, at any time during the 180-day period
after the consummation of this offering, to purchase common stock of our company
in an amount equal to the original principal amount of the term loan. The price
for the common stock so purchased will be the per share price at which shares
are issued to the public in this offering. If the term loan is repaid in full
prior to July 15, 1999, no repayment fee will be due, and if previously paid
will be refunded, on any portion of the term loan which is effectively converted
to common stock of our company by Goldman, Sachs & Co.'s exercise of the Common
Stock Purchase Option.
RECENT ISSUANCES OF STOCK OPTIONS.
Following the initial filing of our registration statement for this
offering, we granted options to purchase 150,943 shares of common stock at an
exercise price of $5.88 per share and 15,980 shares of common stock at an
exercise price of $8.82 per share. In connection with these grants, we will
record deferred compensation of approximately $970,000 in 1999. This deferred
compensation will be amortized over the respective five-year and three-year
vesting periods of these options.
YEAR 2000
We recognize the need to ensure that the provisioning of access services and
business services, as well as our internal systems, will not be adversely
affected by Year 2000 software failures. We currently do not believe that the
Year 2000 issue will have a material effect on our internal network, computer
systems or operations. However, we are continuing to assess the potential impact
of the Year 2000 issue. In particular, we have established procedures for
evaluating and managing the risks and costs associated with this problem. Our
plan to resolve Year 2000 issues involves four phases: assessment, remediation,
testing and implementation. We have completed our assessment of all material
information technology systems, and based on this assessment, we currently
expect that our computer systems will be Year 2000 compliant by June 1999.
However, notwithstanding our assessment, we may experience degradation in the
performance of our network or other systems, or complete system failure if our
expectations are not realized or we encounter unforeseen difficulties. Any
performance degradation or system failure, whether of our internal systems or of
the systems of our customers, likely would have a material adverse effect on our
business, financial condition and results of operations.
Our customers maintain their Internet operations on commercially available
operating systems, which may be impacted by Year 2000 complications. In
addition, we rely on telecommunications providers and third-party vendors for
certain equipment and software included within our services that may not be Year
2000 compliant. We are in the early stages of conducting an audit of our
telecommunications providers and third-party suppliers as to the Year 2000
compliance of their systems, and plan to complete this audit in the second
quarter of 1999. To date, we have verbally contacted all of our major
telecommunications, information systems and software vendors concerning their
Year 2000 compliance
32
<PAGE>
and plan to obtain written responses from them prior to July 31, 1999 indicating
that they will be Year 2000 compliant prior to December 1999. We have not
obtained legally binding representations from any of these third-party vendors
with respect to their Year 2000 compliance. Communications to date from such
third parties indicate that these third parties expect, at this time, to be
compliant by the Year 2000 based on their progress to date. However, the
inability of a substantial number of third parties to complete their Year 2000
resolution process on a timely basis and in a manner compatible with our systems
could materially and adversely affect the operation of our internal systems or
our ability to provide consumer access services and business services.
The total cost of completing our Year 2000 plan is estimated to be less than
$1.0 million and is being expensed as incurred and funded through operating cash
flows. We expect that our expenses in 1999 related to all phases of our Year
2000 project will not be material. We have not established contingency plans in
case of failure of our information technology systems since we currently expect
that such systems will be Year 2000 compliant by mid-1999. In connection with
our assessment of third-party readiness and operating equipment, in the third
quarter of 1999 we plan to evaluate the necessity of contingency plans based on
the level of uncertainty regarding third-party compliance. In the event our
telecommunications providers or third-party suppliers do not expect to be Year
2000 compliant, our contingency plans may include replacing such third parties
or performing the particular services provided by such parties ourselves. See
"Risk Factors--We are Subject to Risks Associated with Year 2000 Compliance."
Our Year 2000 plans are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. Estimates on the status of
completion and the expected completion dates are based on progress to date
compared to the timetable established by our Year 2000 committee. We have not
employed the services of independent contractors to verify our assessment and
estimates related to the Year 2000 problem. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from these
plans. Specific factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes and similar
uncertainties.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
About Capital Structure" ("SFAS 129"), which establishes standards for
disclosing information about an entity's capital structure and is effective for
financial statements for periods ending after December 15, 1997. In June 1997,
the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements for fiscal years beginning after December 15, 1997. The FASB also
issued, in June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
131"), which establishes standards for the way public companies disclose
information about operating segments, products and services, geographic areas
and major customers. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. We have determined that comprehensive loss is
the same as net loss and have made the disclosures required under SFAS 129 and
SFAS 131. In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for fiscal quarters ending after
June 15, 1999. We do not expect the adoption of SFAS 133 to have a material
impact on our financial statements.
33
<PAGE>
BUSINESS
OVERVIEW
FlashNet is a nationwide provider of consumer Internet access and business
services. We provide our Internet access services through a national network
with 621 "points of presence" in 450 cities, covering approximately 70% of the
U.S. population. Points of presence are local telephone numbers through which
subscribers can access the Internet. We have entered into strategic network
arrangements with PSINet and Level 3 Communications. To date, we have
approximately 180,000 customers, including approximately 3,000 business
customers. Our services offerings are tailored to the specific demands of both
our consumer and business customers and include dial-up access, high speed
access and other value-added services.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND THE WEB.
The Internet is a collection of connected computer systems and networks that
link millions of public and private computers to form what is essentially the
largest computer network in the world. The Internet has experienced rapid growth
in recent years and is expected to continue to grow based on estimated increases
in the numbers of Web users, Web traffic and the number of Web sites.
International Data Corporation estimates that there were over 38 million Web
users in the United States and over 68 million worldwide at the end of 1997.
International Data Corporation projects that the number of Web users will
increase to over 135 million in the United States and over 319 million worldwide
by the end of 2002. In a report issued in April 1998, the U.S. Department of
Commerce estimates that traffic on the Internet is doubling every 100 days.
Additionally, Forrester Research estimates that the number of Web sites in the
United States will increase from approximately 450,000 in 1997 to nearly four
million in 2002. Several factors are contributing to the Internet's growth,
including:
- The proliferation of lower cost personal computers;
- Advances in the performance and speed of PCs, modems and networking
components;
- Improvements in network infrastructures;
- Easier and more competitive access to the Internet; and
- The increasing use of the Internet by businesses as a competitive tool.
The Internet has become an important global medium that enables millions of
people to obtain and share information and conduct business electronically.
ACCESSING THE INTERNET.
Internet access services represent the means by which Internet service
providers interconnect business and consumer users to the Internet's resources.
Access services vary from dial-up modem access for individuals and small
businesses to high speed dedicated transmission lines for broadband access by
large organizations. An Internet service provider provides Internet access
either by developing a proprietary network infrastructure or by purchasing
access service from a wholesale access vendor, or through a combination of both.
The rapid development and growth of the Internet have resulted in a highly
competitive and fragmented industry consisting of more than 4,800 Internet
service providers in the United States with an average customer base of less
than 5,000 subscribers. The vast majority of U.S.-based Internet service
providers conduct their operations within a single state or city, with only a
handful of Internet service providers, such as EarthLink and MindSpring, having
expanded the scope of their operations from a single region to nationwide
coverage. Due to the disparity between the large number of smaller Internet
service providers with limited resources and the emergence of a limited
34
<PAGE>
number of national Internet service providers with their associated economies of
scale, the Internet service provider industry is expected to undergo substantial
consolidation. Forrester Research projects that Internet service provider access
revenues in the United States will grow from approximately $6 billion in 1997 to
$38 billion in 2002.
GROWTH IN ELECTRONIC COMMERCE.
For many businesses, the Internet has created a new communication and sales
channel that enables companies to interact with large numbers of geographically
dispersed consumers and business partners. In the last several years, many
companies have emerged that focus solely on the Internet as the medium for
selling products or delivering services directly to purchasers, bypassing
traditional wholesale and retail channels. Furthermore, traditional businesses
are implementing sophisticated Web sites to effect electronic commerce
initiatives that offer competitive advantages. These businesses are deploying an
expanding variety of Internet-enabled applications, ranging from Web site
marketing and recruiting programs to on-line customer interaction systems,
integrated purchase order and "just-in-time" inventory solutions for key
customers and suppliers. These capabilities require increasingly complex Web
sites and support operations. In addition, advances in on-line security and
payment mechanisms are alleviating concerns associated with conducting
transactions in an open-platform environment, thus prompting more consumers and
businesses to use the Internet in conjunction with purchases and more businesses
to offer a greater breadth of electronic commerce services. International Data
Corporation estimates that the number of consumers buying goods and services on
the Internet will grow from 17.6 million in 1997 to over 128 million in 2002,
and that the total value of goods and services purchased over the Internet by
consumers and businesses will increase from approximately $12 billion in 1997 to
over $425 billion by 2002.
OUTSOURCING OF INTERNET OPERATIONS.
As the Web increasingly becomes synonymous with electronic commerce,
businesses are placing greater emphasis on their Internet transaction and
communication operations. Internet-based companies, and to a growing extent,
traditional businesses, require noncongested and scalable Internet operations to
allow them to perform digital communication and commerce transactions globally
over the Internet. Due to constraints posed by the lack of technical personnel
with Internet skills or experience, the high cost of advanced networking
equipment and the complexity of innovative Web solutions, many businesses are
unable to internally develop, maintain and continually enhance their facilities
and systems to conduct desired levels of Internet-based activities. As a result
of these constraints and other factors, many businesses are seeking to outsource
their facilities and systems requirements as the preferred means for providing
electronic commerce solutions. To this end, an increasing demand is developing
for:
- Dedicated and broadband Internet access services to support reliable, high
speed and/or constantly connected Internet access and communication;
- Web hosting and co-location services which enable businesses to obtain
equipment, technical expertise and infrastructure for their Internet needs
on an outsourced basis; and
- End-to-end electronic commerce solutions to sell goods and services on the
Web in a secure transaction environment.
By outsourcing their facilities and systems needs, businesses are able to focus
on their core competencies rather than expending vital resources to support
their Internet operations. Forrester Research estimates that over 40% of
Internet and internal corporate sites will be outsourced by 2002.
35
<PAGE>
THE OPPORTUNITY FOR INTERNET SERVICE PROVIDERS.
The number of businesses and consumers accessing the Internet is expected to
increase significantly in the foreseeable future. According to Forrester
Research, the market for providing access to the Internet for businesses and
consumers is expected to be approximately $18.4 billion in 2000. Additionally,
as businesses and consumers are developing greater levels of comfort in the use
of the Internet for electronic commerce, businesses are increasingly
implementing sophisticated electronic commerce solutions which, in turn, require
significantly greater bandwidth and other business services. In response, an
increasing number of Internet service providers are attempting to augment their
basic Internet access services with a wide range of business services. According
to International Data Corporation, the market for Web hosting and Internet
security business services is the fastest growing segment of the Internet
services market, with revenues expected to increase from approximately $350
million in 1997 to approximately $7 billion in 2000.
Internet service providers that offer both Internet access to broad segments
of the population and that offer a broad selection of business services are
positioned to attain greater economies of scale through lower network expansion
and marketing costs on a per-subscriber basis. Management believes that only a
few Internet service providers, and in particular, national Internet service
providers, will be in a position to benefit fully from this continued growth.
These Internet service providers likely will be characterized by:
- Their ability to respond quickly to market demands;
- Their ability to provide reliable coverage on a nationwide basis;
- Superior technical skills and customer support capabilities;
- Electronic commerce expertise and business services capabilities;
- Brand name recognition and the ability to exploit multiple marketing
channels; and
- Relatively lower network costs.
THE FLASHNET SOLUTION
We offer a full range of consumer Internet access services and a broad
selection of business services, both of which are offered nationwide at
competitive prices. We believe that our services provide customers with the
following benefits:
- FAST AND RELIABLE QUALITY SERVICE. Our systems and network infrastructure
are designed to provide consumer and business customers with fast and
reliable quality service through our state-of-the-art equipment, our
network operations center that is monitored on a 24 hours-a-day, seven
days-a-week basis by our technicians and third-party network providers.
- COST-EFFECTIVE ACCESS. We offer high quality Internet connectivity and
enhanced business services at price points that are generally lower than
those charged by other Internet service providers with national coverage.
We offer pre-bundled access services packages under monthly or prepaid
plans.
- ENHANCED BUSINESS SERVICES. We offer a broad selection of enhanced
business services that are focused on the practical needs of businesses to
support their Internet operations, and have planned future releases of
additional complementary business services. These services are further
described in "--Consumer Access and Business Services."
- NATIONWIDE NETWORK COVERAGE. Through our proprietary network and
agreements with wide area network circuit and points-of-presence
providers, including PSINet, MCIWorldCom and Level 3 Communications, our
access services cover 450 cities and approximately 70% of the population
of the United States.
- SUPERIOR CUSTOMER SUPPORT. We provide superior customer service and
support, with customer care and technical personnel available by telephone
and on-line on a 24 hours-a-day, seven days-a-week basis and additional
support resources available at our Web site. We believe that our
36
<PAGE>
emphasis on customer service and support was the primary contributor to
our ranking as the third best provider of overall quality service based on
a 1998 survey of 13 leading Internet service providers conducted by an
independent research firm.
- BRAND NAME RECOGNITION. We have made significant investments in, and have
applied a creative approach to, high visibility advertising, which has
included radio spots and prominent radio host endorsements, television
commercials, targeted direct mail campaigns and billboard placements. As a
result, we have achieved brand name recognition in our core markets that
enhances our customers' comfort and familiarity with having us as their
Internet access provider.
FLASHNET'S STRATEGY
Our objective is to become the leading nationwide provider of Internet
access and business services. Key elements of our business strategy include:
INCREASE SUBSCRIBER BASE.
We intend to increase aggressively our consumer and business subscriber base
by expanding our sales and marketing efforts within three primary channels:
- Direct response marketing through media campaigns and mass marketing;
- A network marketing program designed to penetrate rapidly the broad
segment of the population that currently does not have Internet access;
and
- Direct corporate sales targeted at prospective customers for business
services through a geographically dispersed sales force.
All three channels are designed to build brand name recognition and generate
high levels of customer growth while minimizing customer acquisition costs and
customer turnover. From January 1, 1997 to December 31, 1998, our sales and
marketing expenses were $18.5 million, which contributed to a significant
increase in our subscriber base during this period. We intend to continue to
dedicate significant resources to expand our sales and marketing activities.
EXPAND OFFERINGS OF ENHANCED BUSINESS SERVICES.
We intend to offer additional business services to address the developing
demand for the outsourcing of facilities and electronic commerce systems to
support the Internet operations of businesses. We believe that the market for
our expanded business services will support a more stable customer base, lower
customer maintenance and acquisition costs and provide higher margin revenue
opportunities. See "--Planned Services Offerings."
INCREASE REVENUES PER CUSTOMER.
By offering additional high bandwidth services and by releasing new services
that may be cross-sold to existing customers, we will seek to increase the
revenues we derive from our customers. As an additional means to increase
revenues per customer, we intend to introduce a broader variety of pre-bundled,
robust services packages and enhanced levels of access and business services. We
also will continually monitor and, when warranted, adjust our pricing policies
for access services and business services. For example, we have recently
increased the pricing of our basic access services offerings to approach the
pricing levels of other national providers of Internet access services.
EXPAND NETWORK COVERAGE AREA.
We are committed to the geographic expansion of our network coverage area
and intend to establish strategic relationships with third-party network
providers, such as our current arrangements with PSINet and Level 3
Communications, to service new markets initially. We will expand our
infrastructure in new markets to develop additional FlashNet-owned points of
presence where warranted by cost efficiencies and customer demand, which demand
will be influenced by our sales and marketing efforts. In addition, we intend to
develop points of presence to provide near 100% ubiquitous network coverage
throughout broad geographic regions, including over multiple existing points of
presence and
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areas that are not currently reached. These wide ranging points of presence are
known in our industry as "super points of presence."
OPTIMIZE NETWORK INFRASTRUCTURE.
We continually seek to optimize our network infrastructure by enhancing the
quality of our services to serve greater numbers of customers nationwide while
reducing our networking costs on a per-subscriber basis. To this end, we intend
to:
- Lease ports from third-party providers to maintain points of presence
where demand has not developed sufficiently to support direct FlashNet
ownership;
- Modify our network structure and allocate resources accordingly throughout
our operations;
- Continue to invest cost-effectively in networking components to upgrade
circuits and provide greater bandwidth;
- Deploy new and sophisticated networking management and monitoring tools
and technologies; and
- Exploit the competitive local exchange carrier certification of our
wholly-owned subsidiary in the State of Texas.
In addition, because business and consumer customers tend to demand access
services at alternate times of day, we also will seek to target additional
business customers for our access services as a means to decrease access costs
per subscriber.
EVALUATE STRATEGIC PARTNERSHIPS AND ACQUISITION OPPORTUNITIES.
We anticipate that the evolving dynamics of the Internet services industry
will present numerous opportunities for us to establish strategic partnerships
with current and new market participants. We will continue to evaluate and will
seek to complete strategic alliances with or acquisitions of other providers of
business services as a means to expand the scope of our business services
offerings. In addition, the current fragmented composition of and economies of
scale associated with the Internet service provider industry are expected to
result in consolidation of Internet service providers. We intend to pursue
aggressively acquisitions of other Internet service providers or the purchase of
their subscriber accounts on an opportunistic basis. Finally, with the advent of
Internet access through high speed transmissions over telephone local loops,
cable systems and wireless devices, we believe that opportunities will emerge to
partner with cable and wireless providers and other developers of new
technologies. We believe that these strategic partnerships will enable us to
expand the scope of our access services, utilize excess bandwidth capacity and
offer additional products and services.
CONSUMER ACCESS AND BUSINESS SERVICES
CONSUMER ACCESS SERVICES.
Our consumer access services are designed to provide subscribers with
simplified access to the Internet through a dial-up modem. All of our Internet
access accounts include:
- Unlimited access to the Internet;
- At least one e-mail account, which facilitates the subscriber's ability to
send and receive e-mail messages across the Internet;
- Newsgroup access for reading and posting of messages and other information
among Internet users;
- File transfer Internet protocol privileges which enable our customers to
place a file on our servers for public or private use or to retrieve files
placed on our servers by others; and
- A full point-to-point protocol or graphical interface for viewing of
pictures and graphics.
FlashNet also offers advanced filtering capabilities to reduce access to
material that may be unsuitable for family, business and institutional users.
All consumer access services include, for no additional
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charge, Netscape Communicator or Microsoft Internet Explorer, and other Internet
software, as well as technical assistance and customer support on a 24
hours-a-day, seven days-a-week basis, including Web-based support for many
products and services. See "--Customer Service and Support."
FlashNet currently offers a variety of options for providing customers with
Internet access, as described in the following table:
<TABLE>
<CAPTION>
ACCESS SERVICE DESCRIPTION TARGET CUSTOMERS CURRENT PRICING INFORMATION
<S> <C> <C> <C>
Basic Account Basic Account service that Consumer Internet $17.95/month with a $25
includes two e-mail accounts users set-up fee ($16.95 in some
and sufficient Web space to markets)(1)(2)
support traditional dial up
access speeds in most
markets.
Daytime Basic Account service with Small businesses $6.95 per month with a $35
Account(3) access from 7:00am to 5:00pm, set- up fee; $1.95 per hour
Monday through Friday for off- hours usage
Premium Account Basic Account service plus Consumers and small $19.95/month with a $25
four additional e-mail businesses set-up fee(1)(2)
accounts and additional Web
space.
Clean Internet Premium Account service plus Consumers, businesses $19.95/month with a $25
Account client-side and server-side and institutional set-up fee
filtering software. users
ISDN Dial Up Basic Account with digital Consumers and small $17.95/month with a $25
Account(3) service which provides faster businesses set-up fee ($16.95 in some
access--also known as markets)(1)(2)
integrated services digital
network ("ISDN") access.
High Speed Dial Basic Account with higher Small businesses $35.90/month with a $100 set-
Up ISDN speed ISDN access. up fee(1)
Account(3)
</TABLE>
- ------------------------------
(1) Discounts available in some markets if prepaid on an annual basis.
(2) $25 set-up fee does not apply if prepaid on an annual basis.
(3) Not available in all markets.
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<PAGE>
BUSINESS SERVICES.
We have introduced to market a variety of enhanced business services that
enable our business customers to obtain high speed Internet access, outsource
their Internet facilities and systems needs and undertake electronic commerce
initiatives. Information concerning our current offering of business services is
summarized in the following table:
<TABLE>
<CAPTION>
BUSINESS SERVICE DESCRIPTION TARGET CUSTOMERS PRICING INFORMATION
<S> <C> <C> <C>
Dedicated ISDN Basic Account access service with Small to medium-sized $144/month with a $50
Account(1) dedicated ISDN access in addition to businesses set-up fee(2)
six separate Internet addresses.
High Speed Basic Account with dedicated ISDN Small to medium-sized $288/month with a $250
Dedicated ISDN access in addition to 12 separate businesses set-up fee(2)
Account(1) Internet addresses.
Broadband Access A variety of services that provide Medium to large-sized Monthly fees start at
Solutions(1) access to the Internet at speeds businesses seeking $1,295 and vary
greater than regular phone lines or high bandwidth access depending on
ISDN service. solutions bandwidth; Set-up fees
apply
Web Hosting Services that provide space on our Consumers and small to Prices start at
Services(1) servers for customer Web pages and medium-sized $29.95/month with a
e-mail accounts. businesses $45 set-up fee(2)
Co-Location Services to enable customers to Small to medium-sized Monthly pricing based
Services locate equipment within our network businesses with on 1/4 rack increments
operations center which provides 24 business-critical Web and bandwidth usage;
hours-a-day, seven days-a-week sites or electronic Set-up fees apply
monitoring, uninterrupted power commerce systems
support, environment management,
electromagnetic surge protection,
radio frequency protection and
disaster recovery systems.
Electronic Provides business customers with the Small to medium-sized Prices range from
Commerce ability to sell merchandise from the businesses seeking $19.95 to
Solutions Internet, including reporting and easy- to-use, fully $99.95/month; Set-up
payment processing capabilities, functional electronic fees apply
catalogs, extra e-mail accounts, commerce solutions
extra Web space, database management
functionality, high speed data
transfer rates, secure payment
mechanisms and technical support.
Managed IP Various services to support an Small to medium-sized Quote basis
Services organization's Internet operations, businesses with IP
including the purchase of telephone network outsourcing
lines, managing portions of the needs
Internet for private purposes,
notifying other Internet providers
and their customers where to find
our customers' sites and managing
site addresses on the Internet.
</TABLE>
- ------------------------------
(1) Not available in all markets.
(2) Selected business accounts are discounted if prepaid on an annual basis.
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PLANNED SERVICES OFFERINGS
We intend to introduce to market several new business services to complement
our existing services offerings. We currently have plans to introduce the
following as additional services in the next 12 to 18 months:
<TABLE>
<CAPTION>
PLANNED SERVICE DESCRIPTION TARGET CUSTOMERS
<S> <C> <C>
Unified Messaging Services Allows multiple points of access Consumers as well as small and
to faxes, voice-mail and e-mail. medium-sized businesses
Features include text-to-speech
conversion and Web interface.
Intranet Server System A comprehensive suite of Internet Small to medium-sized businesses
services (e-mail, newsgroups,
calendars, databases, etc.) to
company-specific local area
network ("LAN") and wide area
network ("WAN") workstation
users.
Internet Security/Firewall Allows desired levels of Businesses and other
Solutions protection to LANs and WANs from organizations that regularly
unauthorized access by external receive and transmit sensitive
sources. digital information
800 Roaming Service Allows Internet access from Customers who travel to rural or
locations not served locally suburban areas where Internet
through a FlashNet point of access via a local call is not
presence. offered by us
Voice-Over IP Enables the use of the Internet Consumers and businesses
to make long distance telephone
calls without the standard toll
charges.
Fax-Over IP Enables the use of the Internet Consumers and businesses
to place long distance fax-to-fax
calls without the standard toll
charges.
</TABLE>
CUSTOMERS AND MARKETS
Our subscriber base currently consists of approximately 180,000 subscribers
for our access services. As a result of our concentrated sales and marketing
efforts within our core markets, approximately 50% of subscribers reside in
Texas, 12% in California and 12% in the metropolitan areas of Chicago, Illinois
and Detroit, Michigan, with the remaining subscriber base spread through other
markets across the nation. Notwithstanding, we believe that the planned
expansion of our sales and marketing activities, combined with our leasing
arrangements with PSINet and Level 3 Communications, extends our potential
customer base to most residents of the continental United States. We believe,
based on data collected from certain of our subscribers, that our consumer
subscribers tend to reflect the typical Internet user composite which, according
to a survey conducted by Forrester Research, indicates that 56% of Internet
users are male, 47% are between the ages of 25 and 45 and 30% are college
graduates. The average reported annual income of users in the Forrester Research
survey was approximately $55,000, or $20,000 higher than the median U.S. level.
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Customers for our business services consist of small and medium-sized
businesses and include professional organizations such as law firms, accounting
firms and medical offices with two to 50 employees. Since our inception, we have
accumulated approximately 3,000 customers for our business services. To date,
our business services customers have been located primarily in Texas. We intend
to grow our business services customer base by building our corporate sales
force and targeting small and medium-sized businesses nationwide.
SALES AND MARKETING
Our sales and marketing strategy consists of three components: direct
response marketing, a network marketing program and corporate direct sales.
Historically, our direct response and network marketing activities have led to
growth in our subscriber base. Moreover, we are aggressively developing a
corporate direct sales force to focus specifically on sales of dedicated and
high bandwidth access services and other business services to business
customers. These strategies are designed to build brand name recognition and
generate high levels of subscriber growth while minimizing subscriber
acquisition costs and customer turnover.
DIRECT RESPONSE MARKETING.
We engage in a variety of direct response marketing and various promotional
activities to stimulate consumer awareness of the value proposition offered by
our access services. These efforts are directed both to consumers who have not
previously subscribed to Internet access services and to Internet users who may
switch to our services after learning of their affordability and reliability. We
principally employ targeted high visibility media, including radio advertising,
television, direct mail distribution and billboards, to solicit new subscribers.
We advertise on television through nationally distributed channels and on a
regional, spot market basis. We also are testing consumer acquisition strategies
which entail the bundling of our access services with third-party hardware
products, such as devices that are specifically designed for ease of Internet
access.
In addition, we believe that a consumer's selection of an Internet service
provider often is strongly influenced by a personal referral. Accordingly, we
believe that our delivery of superior customer service and support and our
associated high levels of customer satisfaction have led to positive customer
referrals. These referrals, combined with our consumer marketing efforts geared
toward expanding our brand name identity, have attracted significant numbers of
new customers for our access services.
NETWORK MARKETING--THE FLASHNET OPPORTUNITY.
In June 1997, we instituted a network marketing program, referred to as the
"FlashNet Opportunity," as a novel approach within the Internet service provider
industry to expand rapidly our subscriber base. The program is designed to
establish and expand a network of independent representatives to sell our access
services. An individual or business entity may become an independent
representative of ours generally by paying a non-refundable fee of $199 for a
starting kit package that includes marketing materials and personal training by
our personnel or seasoned independent representatives. In general, each
independent representative is paid a commission for signing up new customers to
subscriptions for our services and is paid residual commissions as those
customers renew their subscriptions. We believe that the FlashNet Opportunity
assists us in lowering our cost of customer acquisition, reducing variable
technical support costs by utilizing independent representatives to aid in the
set-up and maintenance of new customers and reducing customer turnover as the
result of the customer's loyalty to his or her independent representative. As of
December 31, 1998, the FlashNet Opportunity included 5,424 independent
representatives and has been responsible for the acquisition of 37,571 new
subscribers since its inception.
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The FlashNet Opportunity is particularly well suited for individuals who
possess strong sales skills and are motivated by the prospect of supplementing
their sources of income under a flexible work schedule without the drawbacks
associated with other network marketing programs, such as:
- The need to purchase inventory;
- Requirements to meet monthly sales quotas; and
- Poorly defined commission credit systems resulting in commission disputes.
The commission structure of the FlashNet Opportunity also creates incentives for
independent representatives to recruit other independent representatives to the
program. For each sale of an access services subscription to a new customer that
is made by an independent representative who has been recruited to the program
by an existing independent representative, and for each renewal of that
subscription, a commission is paid to the existing independent representative in
addition to the commission paid to the independent representative who was
responsible for the new subscription or renewal. Additional commissions also are
paid to the existing independent representative as independent representatives
that were recruited into the program by the existing independent representative
recruit other independent representatives who, in turn, effect sales or renewals
of our access services. The commission tree extends as these recruited
independent representatives recruit other representatives, and as those
representatives recruit other representatives, such that a new subscription sale
or renewal may result in the payment of six separate commissions. The amount of
the commission paid to the existing independent representative in connection
with the sale or renewal will vary according to the level of the existing
independent representative within the chain of representatives above the
representative who received direct credit for the sale or renewal. As the
program continues to develop and mature, the total amount of commissions paid to
independent representatives per new subscriber will increase; however, we
believe that such total commissions nonetheless will be less than the costs for
new subscriber acquisitions through traditional sales and marketing activities.
CORPORATE AND COMMERCIAL SALES.
Our Corporate Sales Department is responsible for all sales of dedicated
analog and ISDN access service accounts, as well as sales of higher speed
broadband connections. The Corporate Sales Department also has responsibility
for sales of other enhanced business services. The department currently is based
within our Fort Worth headquarters, but we plan to establish geographically
dispersed direct sales operations across the core metropolitan areas serviced by
us. As of December 31, 1998, the Corporate Sales Department consisted of one
general sales manager, one regional sales manager and four additional sales
personnel. We plan to add to our corporate sales staff during 1999 and 2000 in
conjunction with the planned expansion of our enhanced business services.
CUSTOMER SERVICE AND SUPPORT
A key competitive factor that differentiates us from other Internet service
providers is our strong commitment to customer satisfaction, which is evidenced
by the quality of our customer service and support. We continually review
network utilization rates, and refine and expand our network as necessary, to
ensure high levels of network performance and reliability, which, in turn,
minimizes many customer service related issues. We maintain 24 hours-a-day,
seven days-a-week customer support for telephone inquiries, with technical
personnel available at all times to address customer questions and concerns. We
intend to continue dedicating the resources necessary to ensure that service
calls are promptly answered and addressed by a support representative, and that
customer issues are resolved on the first telephone call. Customers also can
access customer support services through our e-mail or access trouble-shooting
tips and configuration information, as well as network status and performance
reports, at our Web site. In addition, we have produced a series of
videocassettes to assist customers with Web site development and related
subjects and have published user guides to provide customers
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<PAGE>
with useful information about the Internet and its vast resources. We believe
that our emphasis on customer service and support was the primary contributor to
our ranking as the third best provider of overall quality service based on a
1998 survey of 13 leading Internet service providers conducted by an independent
research firm.
Consumer and business customers have very different support needs,
especially as to technical requirements and the sophistication of the user who
makes the customer service inquiry. We employ a tiered support system designed
to direct incoming calls to specialized support personnel as needed for
efficient problem resolution. As a result, customer care personnel generally
field relatively simple technical issues, miscellaneous account questions and
similar customer issues. Customer problems or issues that are more complex or
that affect a customer's business-critical operations are referred to our
technical support department for high-level resolution. In addition, we offer
premium support, which, for a per-minute charge, enables customers to speak to
our technical personnel to resolve questions or issues pertaining to any
non-connectivity related matter, such as techniques for Web page design or
support for products that were not sold by us.
NETWORK INFRASTRUCTURE
We have designed our network and related systems to provide fast and
reliable, high-quality access services, while minimizing the capital investment
needed for infrastructure. We frequently re-evaluate our network's structure and
design to leverage available resources in order to maintain or improve network
performance and cost. Our strategy is to remain indifferent to building our own
network versus leasing network from third-party providers, which will enable us
to maintain flexibility and scalability. Because we are not committed to leasing
or building our own network, we can take rapid advantage of the market
opportunities that develop due to technological advances or regulatory changes.
These opportunities may include, among other things, high speed access through a
cable network or access for Internet-enabled devices such as cell phones, pagers
and other appliances. We will modify our network over time to enhance its
performance, to provide access demanded by the market and to allow us to serve a
larger subscriber base. Our goal is to minimize both network costs and exposure
to technological obsolescence of equipment.
Our current network consists of a state-of-the-art network operations center
in Fort Worth, Texas, which is interconnected to 28 FlashNet-owned remote
facilities which collectively provide 211 points of presence. These facilities
also are connected to the networks of third-party providers, including PSINet
and Level 3 Communications, which together support 410 additional points of
presence. Through a total of 621 points of presence, we provide local exchange
access and remote switched access in most major metropolitan areas in the
continental United States, as well as smaller communities. The combined coverage
area encompasses over 450 cities and approximately 70% of the U.S. population.
We continuously monitor capacity demands on our network so that network
resources grow ahead of market demands. Generally, when 70% utilization of our
network occurs at peak hours in any given market, we order new capacity from our
third-party vendors or order the required new equipment to increase our capacity
to levels acceptable with forecasted demand. We have designed an intelligent
network management procedure to proactively provide system status information in
order to maintain 99.999% network availability.
NETWORK OPERATIONS CENTER.
Our Fort Worth network operations center monitors network traffic, quality
of services and security issues, as well as the performance of the equipment
located at each of our physical locations to ensure reliable service. This
facility also serves as the primary site for our delivery of business services.
We maintain state-of-the-art equipment and an uninterruptible power supply
within our network operations center. We staff our network operations center on
a 24 hour-a-day, seven days-a-week basis and
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<PAGE>
maintain responsibility for communications between our internal departments as
well as with external providers of services. We continue to enhance the
capabilities of the network operations center as our customer base grows.
NETWORK DESIGN.
Each of the 28 remote FlashNet-owned physical points of presence include
modern hardware along with routing equipment and associated leased-telephone
line interface devices. Modems are interconnected to switched telephone networks
serving the local area, and high speed telephone lines connect the point of
presence router to other sites within our network. The hardware and software
deployed at each physical facility allows us to analyze the performance of the
network and perform limited maintenance remotely. From time to time we will
lease new high speed telephone lines and install hardware into the network that
will allow more data traffic to travel over our network in a more efficient
fashion. Overall, our network separates physical and logical resources for
greater redundancy in case of catastrophic failures. We designed our network to
increase reliability by means of establishing redundancy of mission-critical
systems to minimize single points of failure.
COMPETITIVE LOCAL EXCHANGE CARRIER STATUS.
A wholly-owned subsidiary of ours recently received certification to conduct
operations as a competitive local exchange carrier in the State of Texas. In the
absence of competitive local exchange carrier status, we have been required to
purchase general business service to support delivery of access services to
customers from incumbent local exchange carriers and competitive local exchange
carriers on terms generally comparable to those provided to any other business
customer of these carriers. Our certification as a competitive local exchange
carrier enhances our ability to negotiate technical and price terms for our
network connections because the incumbent local exchange carriers, or local
telephone companies, are required by federal and state regulators to promote
competition by providing open access to the public telephone network. Incumbent
local exchange carriers must establish pricing and contract terms which allow
competitive local exchange carriers to resell telephone services in a profitable
fashion. Incumbent local exchange carriers are not required to provide the
prices and terms to non-competitive local exchange carriers. The status of
competitive local exchange carrier is only granted by a state public utilities
commission upon a company passing the certification requirements handed down by
the state public utilities commission. We intend to provide these telephone
services through our competitive local exchange carrier subsidiary, rather than
purchase such services from a third party at a higher cost. Furthermore, as a
competitive local exchange carrier, we are authorized to sell or resell
telecommunications services, in addition to providing Internet access services,
either directly to businesses and consumers or to other resellers. We may, in
the future, seek competitive local exchange carrier status in other states as
well. See "--Government Regulation."
STRATEGIC RELATIONSHIPS
PSINET.
We immediately transformed ourself into a national Internet service provider
in the first quarter of 1998 through an agreement entered into with PSINet. The
agreement provides us with access to 359 points of presence encompassing large
metropolitan service areas and broad segments of the U.S. population. We believe
that our agreement with PSINet has provided an effective and economically
attractive avenue to facilitate expansion of our subscriber base over a
nationwide coverage area, while providing us with the flexibility to build
FlashNet-owned points of presence in markets with sufficient subscriber density.
The agreement, which is scheduled to expire in December 2000, requires us to
remit monthly payments to PSINet based on a fixed dollar amount for each
subscriber to our National Access Plan. The agreement provides for an increase
in per-subscriber charges to PSINet commencing in July 1999 if and so long as
the number of our subscribers who access the Internet through PSINet's
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network is less than 50,000 subscribers. See "Risk Factors--Our Quarterly
Financial Results are Subject to Significant Fluctuations."
LYCOS.
We recently entered into a Co-Branding Agreement with Lycos, Inc. Lycos
provides a search engine, guides, directories, e-mail, personal home pages and
personal start pages which are accessible to all users of the Web. Under our
agreement, Lycos will create a co-branded version of a Lycos Web site that will
directly link our users to other Lycos sites. In addition, Lycos will pay us a
fee for users who are transferred to the co-branded site or the co-branded
personal start page as a result of selecting a link from our site. Lycos will
also promote our services through banner advertisements on other Web sites. In
connection with this agreement, we paid Lycos a one-time promotion fee of
$83,000 and will be obligated to pay Lycos a fee of $3.00 for each new
subscription to our service that is referred to us by Lycos after 10,000
subscriptions have been received. In addition, we have agreed to pay Lycos 5.0%
of the gross monthly revenue we receive from each of these Lycos-referred
subscribers for so long as the subscriber uses our access services, regardless
of any termination of the Co-Branding Agreement. Although the Co-Branding
Agreement provides for only a one-year initial term, we believe that our
relationship with Lycos will be a mutually beneficial, long-term relationship
that will contribute to increases in our subscriber base.
COMPETITION
The market for the provision of Internet access services is extremely
competitive and highly fragmented. As there are no significant barriers to
entry, we expect that competition will intensify. We believe that the primary
competitive factors determining success as an Internet service provider are:
- A reputation for reliability and high-quality service;
- Effective customer support;
- Access speed;
- Pricing;
- Effective marketing techniques for customer acquisition;
- Ease of use; and
- Scope of geographic coverage.
We believe that we have competed favorably based on these factors, particularly
due to:
- Our emphasis on providing fast and reliable, high quality services and
superior customer service and support;
- Our policy of pricing services at prices lower than or competitive to
those of other national Internet service providers; and
- Our three-pronged marketing strategy which includes a novel network
marketing approach to the sale of access services plans.
Notwithstanding, we cannot assure you that we will be able to continue to
compete successfully against current or future competitors or that competitive
pressures faced by us will not materially and adversely affect our business,
operating results or financial condition.
Our current and prospective competitors include many large companies that
have substantially greater market presence, brand name recognition and
financial, technical, marketing and other
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resources than us. With respect to our access and business services, we
currently compete, or expect to compete in the foreseeable future, with the
following:
- National Internet service providers, including EarthLink and MindSpring;
- Numerous regional and local Internet service providers, some of which have
significant market share in their particular market area;
- Established on-line information service providers, which provide basic
Internet access as well as proprietary information not available through
public Internet access, such as AOL;
- Providers of Web hosting, co-location and other Internet-based business
services, including AOL, Exodus and Verio;
- Computer hardware and software and other technology companies that provide
Internet connectivity with their products, including Gateway, IBM and
Microsoft;
- Telecommunications companies, including long distance carriers such as
AT&T, MCIWorldCom and Sprint, regional Bell operating companies and local
telephone companies;
- Operators that provide Internet access through television cable lines,
including TCI and Time Warner Cable;
- Electric utility companies;
- Communications companies;
- Companies that provide television or telecommunications through
participation in satellite systems; and
- Nonprofit or educational Internet access providers.
With respect to our potential competitors, we believe that manufacturers of
computer hardware and software products, media and telecommunications companies
and others will continue to enter the Internet services market, which will
intensify competition. In addition, as consumers and businesses increasingly
move on-line in greater numbers, we expect existing competitors to increase
further their emphasis on Internet access and electronic commerce initiatives,
resulting in even greater competition for us in our markets. The ability of
competitors or others to enter into business combinations, strategic alliances
or joint ventures, or to bundle their services and products with Internet
access, could place us at a significant competitive disadvantage.
Moreover, we expect to face competition in the future from companies that
provide connections to consumers' homes, such as telecommunications providers,
cable companies and electrical utility companies. For example, recent advances
in technology have enabled cable television operators to offer Internet access
through their cable facilities at significantly faster rates than existing
analog modem speeds. Such companies could include Internet access in their basic
bundle of services or offer such access for a nominal additional charge, or
could deny us access to their proprietary wire and cable connections for
purposes of providing Internet access services to our customers and prospective
customers. Any such developments could materially and adversely affect our
business, operating results and financial condition. See "Risk Factors--We May
Encounter Pricing Pressure Due to Intense Competition in Our Business."
GOVERNMENT REGULATION
REGULATION OF INTERNET ACCESS SERVICES.
We provide Internet access, in part, using telecommunications services
provided by carriers. Terms, conditions and prices for telecommunications
services are subject to economic regulation by state and
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federal agencies. We, as an Internet access provider, are not currently subject
to direct economic regulation by the Federal Communications Commission or any
state regulatory body, other than the type and scope of regulation that is
applicable to businesses generally. In April 1998, the Federal Communications
Commission reaffirmed that Internet access providers should be classified as
unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the Federal Telecommunications
Act of 1996. As a result, we are not subject to federal regulations applicable
to telephone companies and similar carriers merely because we provide our
services using telecommunications services provided by third-party carriers. To
date, no state has attempted to exercise economic regulation over Internet
access providers.
Governmental regulatory approaches and policies to Internet access providers
and others that use the Internet to facilitate data and communication
transmissions are continuing to develop and in the future we could be exposed to
regulation by the Federal Communications Commission or other federal agencies or
by state regulatory agencies or bodies. For example, the Federal Communications
Commission has expressed an intention to consider whether to regulate providers
of voice and fax services that employ the Internet or IP switching as
"telecommunications providers" even though Internet access itself would not be
regulated. The Federal Communications Commission is also considering whether
providers of Internet-based telephone services should be required to contribute
to the universal service fund, which subsidizes telephone service for rural and
low income consumers, or should pay carrier access charges on the same basis as
applicable to regulated telecommunications providers. To the extent that we
engage in the provision of Internet or Internet protocol based telephony or fax
services, we may become subject to regulations promulgated by the Federal
Communications Commission or states with respect to such activities. We cannot
assure you that such regulations will not adversely affect our ability to offer
certain enhanced business services in the future.
Furthermore, in a rulemaking proposal issued in August 1998, the Federal
Communications Commission has proposed that if an incumbent local exchange
carrier establishes a separate affiliate to pursue the deployment of advanced
telecommunications services, such as those offered by us, and if that affiliate
interconnects with the incumbent local exchange carrier's network on the same
terms and conditions as offered to the incumbent local exchange carrier's
competitors, then the affiliate would not be subject to the unbundling,
discounted resale or co-location obligations in the Federal Telecommunications
Act of 1996 that apply to incumbent local exchange carriers. Rather, the
affiliate would be treated like a competitive local exchange carrier. If the
Federal Communications Commission ultimately adopts this or any similar
proposal, we would likely face increased competition from incumbent local
exchange carrier affiliates and our access to providers of high speed data
technology could be curtailed, which could materially and adversely affect our
business, operating results and financial condition.
REGULATION OF THE INTERNET.
Due to the increasing popularity and use of the Internet by broad segments
of the population, it is possible that laws and regulations may be adopted with
respect to the Internet pertaining to content of Web sites, privacy, pricing,
encryption standards, consumer protection, electronic commerce, taxation, and
copyright infringement and other intellectual property issues. We cannot predict
the effect, if any, that any future regulatory changes or developments may have
on the demand for our access or enhanced business services. Changes in the
regulatory environment relating to the Internet access industry, including the
enactment of laws or promulgation of regulations that directly or indirectly
affect the costs of telecommunications access or that increase the likelihood or
scope of competition from national or regional telephone companies, could
materially and adversely affect our business, operating results and financial
condition.
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<PAGE>
REGULATIONS PERTINENT TO OUR COMPETITIVE LOCAL EXCHANGE CARRIER SUBSIDIARY.
We recently received authorization for our wholly-owned subsidiary to
conduct operations as a competitive local exchange carrier in the State of
Texas. To the extent that our competitive local exchange carrier subsidiary
conducts such operations, the telecommunications services that it provides will
be subject to regulation by federal, state and local governmental agencies.
State regulatory commissions exercise jurisdiction over intrastate services.
Municipalities and other local government agencies may regulate certain aspects
of our competitive local exchange carrier subsidiary's proposed operations, such
as use of rights-of-way. Although typically start-up telecommunications carriers
are not subject to all of the Federal Communications Commission regulations
applicable to incumbent local exchange carriers, such as price caps or
rate-of-return regulation, the Federal Telecommunications Act of 1996 requires
the Federal Communications Commission to establish a subsidy mechanism for
universal telephone service to which our competitive local exchange carrier
subsidiary will be required to contribute based on its telecommunications
revenues. In addition, the Federal Telecommunications Act of 1996 requires all
carriers, including competitive local exchange carriers and incumbent local
exchange carriers, to make their services available for resale by other
carriers, to interconnect their networks and ensure they interoperate and
provide non-discriminatory rights-of-way, offer reciprocal compensation for
termination of local telecommunication traffic, and provide dialing parity and
local telephone number portability. The Federal Telecommunications Act of 1996
further reserves to the individual states the authority to impose state
regulation of local exchange services, including state universal service subsidy
programs, so long as the state's regulations are not inconsistent with the
requirements of the Federal Telecommunications Act of 1996. We are unable to
predict the manner in which Texas, or any other state where our subsidiary may
receive certification as a competitive local exchange carrier, will seek to
regulate our subsidiary's telecommunications operations.
In the provision of interstate, intrastate and international services, our
competitive local exchange carrier subsidiary would generally be subject to
tariff or price list filing requirements pursuant to which the competitive local
exchange carrier subsidiary will be required to publicly disclose, or in some
instances obtain approval of, its terms, conditions and prices for
telecommunications services prior to or soon after offering such services. In
addition, individual states where our subsidiary conducts activities as a
competitive local exchange carrier may subject us to state certification
proceedings and intrastate and local tariff regulations. These certifications
generally require a showing that the carrier has adequate financial, managerial
and technical resources to offer the proposed services consistent with the
public interest. While uncommon, challenges to these tariffs and certification
proceedings by third parties could cause our competitive local exchange carrier
subsidiary to incur substantial legal and administrative expenses. Many states
also impose additional regulatory requirements, such as minimum service quality
reporting and customer service requirements and uniform local exchange carrier
accounting requirements. Under some state laws, changes in the ownership of a
competitive local exchange carrier's outstanding voting securities may require
prior approval of the state public utility commission. In certain jurisdictions,
an investor who acquires as little as 10% of a competitive local exchange
carrier's voting securities may have to obtain prior approval for the
acquisition of such securities because such ownership interest might be deemed
to constitute an indirect controlling interest in the carrier. See "Risk
Factors--State and Federal Government Regulation Could Require Us to Change Our
Business."
INTELLECTUAL PROPERTY
Although we believe that our success is more dependent upon our technical,
marketing and customer service expertise and capabilities than our proprietary
rights, our success and ability to compete effectively are dependent in part
upon our proprietary rights. We rely on a combination of copyright, trademark
and trade secret laws to protect our proprietary rights. "FlashNet" and our logo
are service
49
<PAGE>
marks for which service mark applications are pending. Additional service mark
applications are pending for the registration of other service marks used by us
in our business. We cannot assure you that the steps taken by us will be
adequate to prevent misappropriation of our technology or that third parties,
including competitors, will not independently develop technologies that are
substantially equivalent or superior to our proprietary technology. See "Risk
Factors--We Depend on the Protection of Our Proprietary Rights."
We have received authorization to use the products of each manufacturer of
software that is bundled in our software for users with personal computers
operating on the Windows or Macintosh platforms. While certain of the
applications included in our start-up kit for access services subscribers are
shareware that we have obtained permission to distribute or that are otherwise
in the public domain and freely distributable, certain other applications
included in the start-up kit have been licensed where necessary. We currently
intend to maintain or negotiate renewals of all existing software licenses and
authorizations as necessary, although we cannot be certain that such renewals
will be available to us on acceptable terms, if at all. We may also enter into
licensing arrangements in the future for other applications.
EMPLOYEES
As of December 31, 1998, we had 248 employees, including 66 in sales and
marketing, 92 in customer care and technical services and 90 in general and
administrative functions. Our employees are not covered by any collective
bargaining agreement, and we have never experienced a work stoppage. We believe
that our employee relations are good. We believe our future success will depend
in large part upon our continuing ability to attract and retain highly skilled
technical, sales, marketing and customer support personnel. See "Risk
Factors--Our Planned Aggressive Growth Will Strain Our Resources."
PROPERTIES
Our corporate offices are located at 1812 North Forest Park Boulevard, Fort
Worth, Texas where all executive, systems, sales and technical support functions
are housed. This facility, together with two additional Fort Worth facilities,
provides us with approximately 34,000 square feet under leases that expire in
July 1999. The aggregate monthly rental under such leases is approximately
$30,000. We also lease space, which is typically less than 100 square feet, to
house equipment in 28 remote facilities in various locations in our core
markets. We do not own any real estate. We believe that all of our facilities
are adequately maintained and suitable for their present use. Due to our
anticipated growth, we signed leases in February 1999 for two facilities
comprising approximately 68,000 square feet to replace our current facilities.
One facility of approximately 37,000 square feet is a sublease that will expire
in July 2002 and will be occupied during the month of March 1999 by call center
operations personnel. The second facility of approximately 31,000 square feet is
a lease that will expire in July 2009 and will be occupied during July 1999.
This facility will house our network operations center and other finance and
administrative functions. The aggregate monthly rental for these two facilities
will be approximately $51,000.
LEGAL PROCEEDINGS
We are not involved in any material pending legal proceedings.
REPORTS TO SHAREHOLDERS
We intend to furnish our shareholders annual reports containing audited
consolidated financial statements examined by our independent auditors and
quarterly reports containing unaudited consolidated financial statements for
each of the first three quarters of each fiscal year.
50
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and certain key employees, their ages as
of December 31, 1998 and their position(s) with FlashNet are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Albert Lee Thurburn.............................. 45 Chairman of the Board and Chief Executive Officer
Michael Scott Leslie............................. 35 President, Chief Operating Officer and Director
Andrew N. Jent................................... 29 Executive Vice President, Chief Financial Officer and
Secretary
Russell A. Wiseman............................... 34 Executive Vice President and Chief Sales and
Marketing Officer
James B. Francis, Jr.(2)......................... 50 Director
John B. Kleinheinz(1)(2)......................... 37 Director
Kevin A. Stadtler(1)(2).......................... 30 Director
KEY EMPLOYEES
Theresa G. Frey.................................. 33 President, FlashNet Marketing, Inc.
R. Todd Wallace.................................. 31 Vice President of Technology
Darryl G. Westbrook.............................. 33 Director of Customer Services
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
EXECUTIVE OFFICERS AND DIRECTORS.
ALBERT LEE THURBURN is one of our co-founders and has served as our Chief
Executive Officer and Chairman of the Board of Directors since our inception in
September 1995. Prior to that, Mr. Thurburn was a founder, President and
director of Mexico Information Services, Inc., a company formed in 1993 that was
focused on providing information about business opportunities in Mexico during
the implementation of the North American Free Trade Agreement. He received his
designation as a Certified Public Accountant in 1980 and worked for Arthur
Andersen & Co., an accounting firm, from January 1980 to January 1981, prior to
establishing his own accounting firm in Dallas, Texas in January 1981. Mr.
Thurburn received a B.A. in Accounting and an M.B.A. in International Business
from the University of Texas at Arlington.
MICHAEL SCOTT LESLIE is one of our co-founders and has served as our
President and Chief Operating Officer and as a director since our inception in
September 1995. From July 1995 to September 1995, he worked with Mr. Thurburn to
develop the concept of FlashNet. From June 1987 to July 1995, Mr. Leslie was
involved in the commercial real estate industry, most recently as President of
Eleven-O-Five, Inc., a managing general partner of real estate partnerships.
From June 1985 to May 1987, Mr. Leslie was employed as a Marketing Associate for
Comdisco, Inc., a high technology equipment financing company. Mr. Leslie
received a B.B.A. in Real Estate and Accounting from Southern Methodist
University.
ANDREW N. JENT has served as our Executive Vice President and Chief
Financial Officer since November 1998 and as Secretary since January 1999. From
April 1998 to November 1998, Mr. Jent served as Treasurer for OpTel Inc., a
competitive local exchange carrier and private cable operator. From June 1996 to
April 1998, Mr. Jent served as Vice President of Finance and Treasurer for US
One
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<PAGE>
Communications Corp., a competitive local exchange carrier. From February 1995
to June 1996, Mr. Jent served as Director of Finance for TresCom International,
an international long distance carrier. From May 1991 to February 1995, Mr. Jent
served in a variety of capacities, most recently as Treasurer, for Neodata
Services, Inc., a direct marketing company. Mr. Jent received a B.B.A. in
Finance from Texas Christian University.
RUSSELL A. WISEMAN has served as our Executive Vice President and Chief
Sales and Marketing Officer since January 1999. From July 1997 to December 1998,
Mr. Wiseman was employed by PrimeCo Personal Communications, L.P., a wireless
telephone services company, first as Vice President/ Strategic Planning and
later as Vice President/Corporate Marketing and Strategy Officer. From June 1992
to June 1997, Mr. Wiseman held several positions with P.A. Consulting Group, an
international management and technology consulting firm. From June 1986 to May
1992, Mr. Wiseman was employed by NYNEX Corporation. Mr. Wiseman received a
B.E.E. from Manhattan College School of Engineering and an MBA in International
Finance from Fordham University Graduate School of Business.
JAMES B. FRANCIS, JR. has served as one of our directors since December
1998. Since March 1998, Mr. Francis has been the Managing Partner of Texas Ltd.,
an investment company. He has also served as President of Francis Enterprises,
Inc., a governmental and public affairs consulting company, since June 1996.
From January 1986 to June 1996, Mr. Francis was a partner of Bright & Company,
an investment company partnership. From September 1980 to January 1986, Mr.
Francis was a senior management employee of Bright & Company. Mr. Francis is
also a director of Silverleaf Resorts, Inc., a time-share management company,
and the current Chairman of the Texas Department of Public Safety. Mr. Francis
received a B.A. in Political Science from Tulane University.
JOHN B. KLEINHEINZ has served as one of our directors since February 1996.
In January 1996, Mr. Kleinheinz founded Kleinheinz Capital Partners, an
investment management company, where he currently serves as President. From
April 1993 to December 1995, Mr. Kleinheinz served as a Principal of San Antonio
Capital, an investment firm. From January 1991 to December 1992, Mr. Kleinheinz
worked as a financial executive with TRI Securities, a global broker-dealer. Mr.
Kleinheinz received a B.A. in Economics from Stanford University.
KEVIN A. STADTLER has served as one of our directors since August 1998. Mr.
Stadtler is a Vice President with Applied Telecommunications Technologies, Inc.
("ATTI"), a venture capital and lease financing firm focused on the
communications industry, with which he has been affiliated since January 1996.
ATTI is affiliated with Commvest, L.L.C., of which Mr. Stadtler is also a Vice
President. From December 1994 to December 1995, Mr. Stadtler was an associate
with Saturn Asset Management, Inc. a venture capital firm. From June 1994 to
November 1994, Mr. Stadtler attended Harvard University's advanced studies
program. From November 1993 to May 1994, Mr. Stadtler was an associate with the
private investment fund manager Barron Capital Holdings, Inc. From June 1990 to
October 1993, Mr. Stadtler was in the Sales and Management Program at Xerox
Corporation. Mr. Stadtler received a B.A. in History from Villanova University.
KEY EMPLOYEES.
THERESA G. FREY has served as President of FlashNet Marketing, Inc., our
wholly-owned subsidiary that is responsible for administering the FlashNet
Opportunity network marketing program, since June 1998. From August 1996 to
April 1998, Ms. Frey served as Director of National Sales Programs at WVT, Inc.,
a network marketing company based in Dallas, Texas. From July 1990 to August
1996, Ms. Frey was Director of Marketing/Training and the Vice President of
Sales and Marketing at Total Integration, Inc., a systems integrator and
reseller of voice response and call distribution. Ms. Frey received a B.S. in
Education/English from Indiana University.
52
<PAGE>
R. TODD WALLACE has served as our Vice President of Technology since
February 1999. He served as our Director of Information Services from May 1998
until February 1999. From May 1991 to May 1998, Mr. Wallace was employed by
Excel Communications, a long distance carrier, most recently as its Manager of
IT-Architecture. Mr. Wallace received a B.B.A. in General Business from Stephen
F. Austin State University and an M.B.A. from the University of Dallas.
DARRYL G. WESTBROOK has served as our Director of Customer Services since
September 1996. From April 1995 to September 1996, Mr. Westbrook was a Team
Leader for Stream International, an outsourcing and support services firm for
technology companies. From March 1993 to April 1995, Mr. Westbrook was active in
restaurant management. Mr. Westbrook received a B.S. in Kinesiology and a
Teaching Certification in Secondary Education from the University of North
Texas.
BOARD COMPOSITION
We currently have five directors. Subsequent to this offering, we intend to
add two additional non-employee directors. Our Board of Directors is divided
into three classes:
- Class A directors, whose terms expire at the annual meeting of
shareholders to be held in 2000;
- Class B directors, whose terms expire at the annual meeting of
shareholders to be held in 2001; and
- Class C directors, whose terms expire at the annual meeting of
shareholders to be held in 2002.
Our only Class A director is Mr. Kleinheinz. The two non-employee directors to
be elected subsequent to this offering will also be Class A directors. Our Class
B directors are Mr. Stadtler and Mr. Francis. Our Class C directors are Mr.
Leslie and Mr. Thurburn. At each annual meeting of shareholders following
completion of this offering, our shareholders will elect the successors to
directors whose terms have expired to serve from the time of election and
qualification until the third annual meeting following election. This
classification of the Board of Directors may delay or prevent a change in
control or in the management of our company.
Each officer is elected by, and serves at the discretion of, the Board of
Directors. There are no family relationships among any of our directors or
executive officers.
COMMITTEES OF THE BOARD
The Audit Committee is currently composed of three of our non-employee
directors. The Audit Committee reviews, acts on and reports to the Board of
Directors with respect to various auditing and accounting matters, including the
selection of our independent accountants, the scope of the annual audits, fees
to be paid to the independent accountants, the performance of our independent
accountants and our accounting practices.
The Compensation Committee is currently composed of two of our non-employee
directors. The Compensation Committee establishes salaries, incentives and other
forms of compensation for our officers and other employees and administers our
incentive compensation and benefit plans.
DIRECTOR COMPENSATION
Directors receive no cash remuneration for serving on the Board of Directors
but are reimbursed for reasonable expenses incurred by them in attending Board
and Committee meetings. In December 1998, Mr. Francis was granted an option to
purchase 15,980 shares of common stock at an exercise price of $8.82 per share.
In January 1999, Mr. Stadtler was granted an option to purchase 15,980 shares of
common stock at an exercise price of $8.82 per share.
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<PAGE>
EMPLOYMENT CONTRACTS
We have entered into severance and change in control arrangements with
certain of our officers and key employees. See "Certain Transactions--Change in
Control Arrangements."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE.
The following Summary Compensation Table sets forth the compensation that
our Chairman of the Board and Chief Executive Officer and our President and
Chief Operating Officer earned for services rendered in all capacities to us
during the year ended December 31, 1998. No other executive officer currently
employed by us received salary and bonus in excess of $100,000 during 1998. Mr.
Jent, our Executive Vice President, Chief Financial Officer and Secretary,
commenced employment with us in November 1998. His current annual salary is
$125,000. We granted Mr. Jent an option to purchase 127,993 shares of common
stock at an exercise price of $3.53 per share in November 1998. Mr. Wiseman, our
Executive Vice President and Chief Sales and Marketing Officer, commenced
employment with us in January 1999. His current annual salary is $140,000. We
granted Mr. Wiseman an option to purchase 127,993 shares of common stock at an
exercise price of $5.88 per share in January 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION -------------
-------------------------- SECURITIES
SALARY ($) UNDERLYING
NAME AND PRINCIPAL POSITION (1) BONUS ($) OPTIONS(#)
- ------------------------------------------------------------------------ ------------- ----------- -------------
<S> <C> <C> <C>
Albert Lee Thurburn .................................................... $ 125,000 $ 3,000 127,993
Chairman of the Board
and Chief Executive Officer
Michael Scott Leslie ................................................... 125,000 3,000 127,993
President and Chief Operating
Officer
</TABLE>
- ------------------------------
(1) Salary includes amounts deferred under our 401(k) plan.
OPTION GRANTS IN LAST FISCAL YEAR.
The following table contains information concerning stock option grants made
to the officers named in the Summary Compensation Table appearing above during
the fiscal year ended December 31, 1998. No stock appreciation rights were
granted to the individuals during 1998. Each of the options listed in the
following table vests as to one-half of the option shares on December 11, 2000
and as to another one-fourth of the option shares on each of December 11, 2001
and December 11, 2002. Upon the death or disability of the optionee or upon our
dissolution or liquidation, merger, sale of substantially all of our assets or a
change in control, the option shares become fully vested. Each option has a
maximum term of ten years, subject to earlier termination in the event of the
optionee's cessation of employment with us or in the event of our dissolution,
liquidation, merger, sale of substantially all of our assets or a change in
control.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (3)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED IN 1998(1) SHARE(2) DATE 5% ($) 10% ($)
- ------------------------------------ ----------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Albert Lee Thurburn................. 127,993 21.7% $ 8.82 12/11/08 $ 97,041 $ 823,477
Michael Scott Leslie................ 127,993 21.7 8.82 12/11/08 97,041 823,477
</TABLE>
- ------------------------------
(1) Based on an aggregate of 590,444 options granted in 1998, exclusive of
51,000 options granted to consultants and 15,980 options granted to a
director.
(2) The exercise price may be paid in cash or, in the discretion of our Board of
Directors, through a cashless exercise procedure.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. Potential
realizable value is determined by multiplying the per share market price at
the time of grant, $5.88, by the stated annual appreciation rate compounded
annually for the term of the option (10 years), subtracting the exercise
price or base price per share from the product, and multiplying the
remainder by the number of options granted. Actual gains, if any, on stock
option exercises and common stock holdings are dependent on the future
performance of the common stock and overall stock market conditions. There
can be no assurance that the amounts reflected in this table will be
achieved.
FISCAL YEAR-END OPTION VALUES.
The following table sets forth information concerning the year-end number
and value of unexercised options with respect to each of the officers named in
the two immediately preceding tables. Neither of the named officers exercised
any stock options during 1998. The value of the unexercised in-the-money options
is based on a value of $15.00 per share of our common stock, which is the
assumed initial public offering price. Amounts reflected are based on the
assumed value minus the exercise price multiplied by the number of shares
acquired on exercise.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
(#) ($)
---------------------- ---------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ------------------------------------------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Albert Lee Thurburn.............................. -- 127,993 $ -- $ 790,997
Michael Scott Leslie............................. -- 127,993 -- 790,997
</TABLE>
BONUS ARRANGEMENTS
We currently have no formal bonus arrangements in place that are applicable
to our employees. However, various bonus arrangements are in place for executive
officers and certain key employees. In October 1996, the Board of Directors
authorized the award of a $3,000 bonus to each of Mr. Thurburn and Mr. Leslie
for each future 25,000 increase in the number of our subscribers. From October
1996 through December 31, 1998, we paid $18,000 to each of Mr. Thurburn and Mr.
Leslie as bonus awards pursuant to this arrangement. In addition, upon
completion of this offering, Mr. Thurburn and Mr. Leslie will each be paid a
$50,000 bonus. Ms. Frey is eligible for recruiting bonuses in 1998 and 1999
totaling up to $95,000, with the bonus amounts based on goals for expanding the
independent representative network within the FlashNet Opportunity program. In
addition, she will receive both a $1.00 bonus and a 0.25% residual commission
for each new customer signing up through the program.
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<PAGE>
1997 STOCK INCENTIVE PLAN
Our Board of Directors adopted our 1997 Stock Incentive Plan on March 4,
1997 and the shareholders approved the 1997 Stock Incentive Plan on April 1,
1997. The 1997 Stock Incentive Plan provides for the grant of incentive stock
options and non-qualified stock options to purchase common stock, stock
appreciation rights and restricted stock to our consultants, directors, officers
and key employees. The purpose of the 1997 Stock Incentive Plan is to attract
and retain skilled, qualified officers, directors and key employees, to motivate
them to achieve long-range goals and to further align their interests with those
of our other shareholders.
We have reserved 1,327,231 shares of common stock for issuance under the
1997 Stock Incentive Plan. As of the date of this prospectus, no shares had been
issued under the 1997 Stock Incentive Plan, options to purchase 728,722 shares,
at a weighted average exercise price of $5.99 per share, were outstanding, and
598,509 shares remained available for future grant. We also granted options to
purchase 189,380 shares to employees prior to the adoption of the 1997 Stock
Incentive Plan. Options for 15,470 of such shares, at an exercise price of $1.47
per share, remain outstanding and options for 173,910 of such shares have
expired. Shares of common stock subject to options issued under the 1997 Stock
Incentive Plan which expire or terminate prior to exercise will be available for
future issuance under the 1997 Stock Incentive Plan.
The Board's Compensation Committee administers the 1997 Stock Incentive
Plan. The 1997 Stock Incentive Plan administrator has discretion to determine
which eligible individuals are to receive option grants or other awards, the
number of shares subject to each grant, the status of any granted option as
either an incentive option or a non-statutory option under the federal tax laws,
the vesting schedule to be in effect for each option grant or stock award and
the maximum term for which each granted option is to remain outstanding.
The exercise price for options granted under the 1997 Stock Incentive Plan
may be paid in cash or in outstanding shares of common stock. Options may also
be exercised on a cashless basis through the same-day sale of the purchased
shares.
The 1997 Stock Incentive Plan administrator may determine that any stock
incentive granted under the 1997 Stock Incentive Plan, if not previously expired
or forfeited, will, in the case of an option, become fully exercisable, in the
case of an appreciation right, become fully payable or, in the case of a
restricted stock award, become fully vested upon the occurrence of a change in
control of our company. A change in control is defined as the consummation of
any one of the following:
- Dissolution or liquidation of our company;
- Merger of our company into another corporation, or any consolidation,
share exchange, combination, reorganization or similar transaction in
which FlashNet is not the survivor;
- Sale or transfer of at least a majority of our assets; or
- Sale or transfer of 50% or more of our issued and outstanding common stock
by our shareholders in a single transaction or in a series of related
transactions.
The Board may terminate, amend or modify the 1997 Stock Incentive Plan at
any time. However, no termination, amendment or modification may adversely
affect the rights of the holder of an outstanding stock incentive without that
holder's consent.
EMPLOYEE STOCK DISCOUNT PURCHASE PLAN
In February 1999, our Board of Directors adopted and our shareholders
approved our Employee Stock Discount Purchase Plan, which will become effective
on the closing of this offering. It is intended to give our employees desiring
to do so a convenient means of purchasing shares of common stock
56
<PAGE>
through payroll deductions while also providing an incentive to participate by
permitting purchases at a discounted price. We have reserved 340,000 shares of
common stock for issuance in connection with the plan. We believe that ownership
of stock by employees will foster greater employee interest in our success,
growth and development.
Each of our employees will be eligible to participate in the Employee Stock
Discount Purchase Plan if he or she has been employed by us for more than three
months and is customarily employed for at least 20 hours per week and more than
five months in a calendar year. Participation will be discretionary with each
eligible employee. Elections to participate and purchases of stock will be made
on the basis of offering periods. Offering periods will end on each March 31,
June 30, September 30 and December 31 with the initial offering period
commencing upon the consummation of this offering. Each participating employee
will contribute to the Employee Stock Purchase Discount Plan by choosing a
payroll deduction in any specified amount, with a 10% maximum deduction per
payroll period.
Each participating employee's contributions will be used to purchase shares
of common stock for the employee at the end of each calendar quarter. With the
exception of the initial offering period, the cost per share will be 85% of the
lower of the closing price of our common stock on the Nasdaq National Market on
the first or the last day of the applicable offering period. For the initial
offering period, the cost per share will be the lower of the initial public
offering price in this offering or 85% of the closing price of our common stock
on the last day of the offering period.
The number of shares otherwise subject to purchase by an employee at the end
of each offering period will be reduced proportionately if the number of shares
available under the plan, or available with respect to the offering period, is
not sufficient to satisfy the purchase rights of all employees on such purchase
date. In addition, the number of shares otherwise subject to purchase on a
purchase date will be reduced to the extent necessary to ensure that the
employee's right to acquire shares under the plan does not accrue at a rate
which exceeds $25,000 in fair market value for each calendar year during which
the employee was an active participant in the plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board's Compensation Committee consists of Mr. Kleinheinz and Mr.
Stadtler. To date, no member of the Compensation Committee has served as an
officer or employee of our company or any of our subsidiaries. No member of the
Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or its Compensation Committee.
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CERTAIN TRANSACTIONS
CONVERTIBLE NOTES
From July 1996 through December 1996, we sold a total of $635,000 in
principal amount of 12% convertible notes and warrants to purchase a total of
177,038 shares of common stock at an exercise price of $0.003 per share to a
number of investors, including Mr. Kleinheinz, Mr. Thurburn and Mr. Leslie. Mr.
Kleinheinz is one our directors; Mr. Thurburn is our Chairman of the Board and
Chief Executive Officer; and Mr. Leslie is one of our directors and our
President and Chief Operating Officer. In 1997 and 1998, Mr. Kleinheinz
converted a total of $34,000 of his note into 11,560 shares of common stock, Mr.
Thurburn converted a total of $4,000 of his note into 1,360 shares of common
stock and Mr. Leslie converted a total of $18,000 of his note into 6,120 shares
of common stock. The sale of notes to Mr Kleinheinz, Mr. Thurburn and Mr. Leslie
was on terms no less favorable to us than we could have obtained in a similar
transaction with unaffiliated third parties.
ASCEND FINANCING
On December 10, 1997, we borrowed $6.5 million from Ascend under the terms
of a Secured Promissory Note with a maturity date of December 10, 1999.
Principal of the Ascend note is payable prior to the maturity date on the
earlier of the effective date of an initial public offering by us providing
gross proceeds in excess of $12 million or the date of a change in control of
our company. Interest on the note accrues at the rate of 6.0% per annum, payable
monthly. The Ascend note is secured by a lien on all of our assets. Until the
note is paid in full, its terms require us to make all future equipment
acquisitions from Ascend if Ascend offers equipment performing the desired
functions at performance levels that we reasonably deem necessary. We intend to
pay the Ascend note in full upon completion of this offering. In connection with
the Ascend financing, we issued to Ascend a warrant to purchase 1,360,000 shares
of common stock, at an exercise price of $0.003 per share, that is exercisable
until the fifth anniversary of the closing date of this offering. If, at the
expiration of its term, the warrant has not been fully exercised, then it will
be deemed to have been automatically converted at such time into a number of
shares of common stock determined by dividing (a) the aggregate fair market
value of the shares for which it was exercisable minus the aggregate exercise
price of such shares by (b) the fair market value of one share of common stock.
Ascend has "piggyback" registration rights and certain demand registration
rights with respect to the shares of common stock issuable upon exercise of the
warrant. See "Principal Shareholders."
SERIES A CONVERTIBLE PREFERRED STOCK FINANCINGS
On May 6, 1998, the Board of Directors designated shares of our authorized
but unissued preferred stock as Series A convertible preferred stock. We issued
1,364,085 shares of Series A convertible preferred stock in May and August of
1998, at a purchase price of $6.07 per share, for total cash consideration to us
of approximately $8.3 million. Upon closing of this offering, the Series A
convertible preferred stock will be automatically converted, without further
action on our part or the holders thereof, into 4,637,889 shares of common
stock. At such time, rights and restrictions applicable to the Series A
convertible preferred stock, including any redemption rights and special voting
rights, will terminate and be of no further force or effect. Holders of the
Series A convertible preferred stock will be entitled to "piggyback" and certain
demand registration rights with respect to the shares of common stock into which
the shares of the Series A convertible preferred stock are converted. See
"Shares Eligible for Future Sale."
In the May 1998 transaction, we sold 172,980 shares of Series A convertible
preferred stock to certain independent investors, 411,862 shares to ISP
Investors, L.P., and 164,745 shares to Fourteen Hill Capital, LP. In the August
1998 transaction, we sold 268,534 shares of Series A convertible preferred stock
to certain independent investors, an additional 16,474 shares to ISP Investors,
L.P., an additional 164,745 shares to Fourteen Hill Capital, LP and 164,745
shares to ATTI. Mr. Kleinheinz, one of our directors, is the sole shareholder,
director and principal officer of the general partner of ISP Investors,
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L.P. Mr. Stadtler, who became one of our directors in August 1998, is the Vice
President of ATTI. See "Principal Shareholders" for more information regarding
our securities which are held by the two directors, ISP Investors, L.P.,
Fourteen Hill Capital, LP and ATTI. The sale of Series A convertible preferred
stock to ISP Investors, L.P., Fourteen Hill Capital, LP and ATTI was on terms no
less favorable to us than we could have obtained in a similar transaction with
unaffiliated third parties.
CHANGE IN CONTROL ARRANGEMENTS
We have entered into a severance agreement with Mr. Jent, our Executive Vice
President, Chief Financial Officer and Secretary. Under the agreement, we must
pay Mr. Jent a severance amount equal to 12 months of salary if his employment
is terminated without cause prior to November 3, 2001, or if he resigns for
"good reason" after a change in control. Generally, "good reason" is defined as
a material change in the nature or scope of Mr. Jent's duties that is, taken as
a whole, inconsistent with the position held by Mr. Jent at the time of the
change in control.
We have also entered into a severance agreement with Mr. Wiseman, our
Executive Vice President and Chief Sales and Marketing Officer. Under the
agreement, in the event Mr. Wiseman's employment is terminated for any reason,
we must pay Mr. Wiseman an amount required to increase his annualized base
salary through the date of termination of employment from $140,000 to $180,000.
In addition, if Mr. Wiseman's employment is terminated by us without cause or if
he resigns for good reason after a change in control, we must pay Mr. Wiseman:
- $180,000 if such termination or resignation occurs prior to his completion
of six months of employment;
- $150,000 if such termination or resignation occurs after six months of
employment and before 12 months of employment; and
- $100,000 if such termination or resignation occurs after 12 months of
employment and before 24 months of employment.
The second of the two severance provisions expires on January 25, 2001.
Mr. Thurburn and Mr. Leslie are parties to noncompetition agreements with
us, restricting them from engaging in certain competitive activities during
their employment and for a one-year period following termination of their
employment. If we terminate either officer's employment without cause or if
either of the officers resigns for "good reason," then in order for the affected
officer's noncompetition agreement to remain in effect, we are required to make
a lump sum cash payment to the terminated officer. Generally, "good reason" is
defined as a material change in the nature or scope of the officer's duties that
is, taken as a whole, inconsistent with the position held by the officer on the
date he signed his agreement. In the case of Mr. Thurburn, good reason will not
exist solely by virtue of Mr. Thurburn being relieved of the title and duty of
only one of the offices of Chairman of the Board or Chief Executive Officer. The
amount of the lump sum payment is the greater of:
- The officer's actual aggregate salary and bonus received during the 12
months preceding termination or resignation, as applicable; or
- The sum of the officer's annualized salary in effect immediately preceding
termination or resignation and the cash bonus for the then-current fiscal
year earned by the officer through the date of termination or resignation.
FUTURE TRANSACTIONS
All future transactions, including loans between us and our officers,
directors, principal shareholders and their affiliates, are required by the
Board to be approved by a majority of the Board, including a majority of the
independent and disinterested outside directors on the Board, and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of the date of this prospectus, on a pro forma
basis to reflect the automatic conversion upon completion of this offering of
the outstanding shares of the Series A convertible preferred stock into
4,637,889 shares of common stock, by:
- Each person who is known by us to own beneficially more than five percent
of the common stock;
- Each of our directors;
- Each of our executive officers; and
- All executive officers and directors as a group.
The numbers set forth in the following table assume no exercise of the
underwriters' over-allotment option. Beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options held by that person that are currently exercisable or exercisable within
60 days of the date of this prospectus are deemed outstanding. These shares,
however, are not deemed outstanding for the purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, each shareholder named
in the table has sole voting and investment power with respect to the shares set
forth opposite such shareholder's name. Unless otherwise indicated, the address
for the following shareholders is c/o FlashNet Communications, Inc., 1812 North
Forest Park Boulevard, Fort Worth, Texas 76102.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING NUMBER OF OFFERING
NAME AND ADDRESS OF BENEFICIAL ------------------- SHARES --------------------------
OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------- ---------- ------- ---------- ---------------- -------
<S> <C> <C> <C> <C> <C>
Ascend Communications, Inc.(1)..... 1,360,000 11.8% -- 1,360,000 9.2%
Applied Telecommunications
Technologies, Inc.(2)............. 560,133 5.5 -- 560,133 4.2
Fourteen Hill Capital, LP(3)....... 1,120,266 11.0 -- 1,120,266 8.4
ISP Investors, L.P.(4)............. 1,666,394 16.3 -- 1,666,394 12.4
Thomas K. Reed, Jr.(5)............. 646,000 6.3 -- 646,000 4.8
James A. Ryffel(6)................. 748,000 7.3 -- 748,000 5.6
James B. Francis, Jr.(7)........... -- -- -- -- --
Andrew N. Jent..................... -- -- -- -- --
John B. Kleinheinz(8).............. 2,377,334 23.2 -- 2,377,334 17.7
Michael Scott Leslie(9)............ 798,320 7.8 -- 798,320 6.0
Kevin A. Stadtler(10).............. 560,133 5.5 -- 560,133 4.2
Albert Lee Thurburn(11)............ 746,844 7.3 -- 746,844 5.6
Russell A. Wiseman(12)............. 2,667 * -- 2,667 *
All directors and executive
officers as a group (7
persons)(13)...................... 4,485,298 43.8 -- 4,485,298 33.5
</TABLE>
- --------------------------
* Represents less than 1% of the outstanding shares of common stock.
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(1) Includes a warrant immediately exercisable for 1,360,000 shares of common
stock. The address for Ascend Communications, Inc. is 1701 Harbor Bay
Parkway, Alameda, California 94502. Ascend Communications, Inc. is a
publicly-held corporation with shares traded on the Nasdaq Stock Market.
(2) The address for Applied Telecommunications Technologies, Inc. is 20 William
Street, Wellesley, Massachusetts 02481. ATTI is controlled by Dennis P.
Cameron. Mr. Cameron owns 100% of the voting shares of ATTI and is a
director and its president.
(3) The address for Fourteen Hill Capital, LP is 1700 Montgomery Street, Suite
25, San Francisco, California 94111. Fourteen Hill Capital, LP is controlled
by Point West Capital Corporation, a publicly-held corporation with shares
traded on the Nasdaq Stock Market. Point West Capital Corporation is the
sole member of Fourteen Hill Management L.L.C. which is the general partner
and primary interest owner of Fourteen Hill Capital, LP.
(4) The address for ISP Investors, L.P. is 201 Main Street, Suite 2001, Fort
Worth, Texas 76102. ISP Investors, L.P. is controlled by John B. Kleinheinz.
Mr. Kleinheinz, one of our directors, is the sole shareholder, director and
primary officer of Kleinheinz Capital Partners, Inc., the general partner of
ISP Investors, L.P.
(5) The address for Mr. Reed is 1070 Mansion Ridge Road, Santa Fe, New Mexico
87501.
(6) Includes 34,000 shares of common stock held by Mr. Ryffel as custodian for
one of his children. Mr. Ryffel disclaims beneficial ownership of such
shares. The address for Mr. Ryffel is 3113 South University Drive #600, Fort
Worth, Texas 76109.
(7) The address for Mr. Francis is 2911 Turtle Creek, Suite 925, Dallas, Texas
75219.
(8) Includes 5,440 shares of common stock issuable upon conversion of a note,
13,940 shares of common stock issuable on exercise of a warrant and
1,666,394 shares held by ISP Investors, L.P. Mr. Kleinheinz, one of our
directors, is the sole shareholder, director and primary officer of the
general partner of ISP Investors, L.P. He disclaims beneficial ownership of
the shares held by ISP Investors, L.P. except to the extent of his pecuniary
interest in them arising from his ownership interest in the general partner
of that entity. Mr. Kleinheinz's address is c/o ISP Investors, L.P.
(9) Includes 2,380 shares of common stock issuable upon conversion of a note and
6,970 shares of common stock issuable upon exercise of a warrant.
(10) Includes 560,133 shares held by ATTI. Mr. Stadtler, one of our directors,
is a vice president of ATTI. He disclaims beneficial ownership of the shares
held by ATTI. Mr. Stadtler's address is c/o Applied Telecommunications
Technologies, Inc.
(11) Includes 340 shares of common stock issuable upon conversion of a note and
1,394 shares of common stock issuable upon exercise of a warrant.
(12) The number of shares beneficially owned by Mr. Wiseman is the number of
shares of common stock subject to options held by him which will be
exercisable upon consummation of this offering, determined by dividing
$40,000 by the assumed initial public offering price per share.
(13) Includes 8,160 shares of common stock issuable on conversion of notes,
22,304 shares of common stock issuable upon exercise of warrants, 3,077
shares of common stock issuable upon exercise of options, 1,666,394 shares
held by ISP Investors, L.P. and 560,133 shares held by ATTI.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
no par value, and 5,000,000 shares of preferred stock, $1.00 par value. As of
the date of this prospectus, there are outstanding:
- 5,577,319 shares of common stock, held of record by 51 shareholders;
- Options to purchase an aggregate of 744,192 shares of common stock at a
weighted average exercise price of $5.89 per share;
- Warrants to purchase 1,675,027 shares of common stock at an exercise price
of $0.003 per share;
- $161,333 in principal amount of notes convertible into 161,000 shares of
common stock;
- 1,364,085 shares of Series A convertible preferred stock which will be
automatically converted into 4,637,889 shares of common stock upon
completion of this offering; and
- An option to acquire up to $5.0 million worth of common stock at the
initial public offering price, which expires 180 days after the
consummation of this offering.
Assuming no exercise of the underwriters' over-allotment option and assuming no
exercise of outstanding stock options or warrants or conversion of convertible
notes, there will be 13,415,207 shares of common stock outstanding after giving
effect to the sale of the shares of common stock to the public in this offering.
The following summary of the material provisions of our common stock,
preferred stock, Restated Articles of Incorporation and Bylaws is qualified by
reference to the provisions of applicable law and to our Restated Articles of
Incorporation and Bylaws included as exhibits to the Registration Statement of
which this prospectus is a part.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, that may be declared from
time to time by the Board of Directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of holders of preferred
stock, if any. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
PREFERRED STOCK
Our Board of Directors has the authority to issue preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the shareholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of FlashNet without further action by our shareholders and may adversely
affect the voting, dividend and other rights of the holders of common stock. As
further discussed below, the issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. At present, we have no
plans to issue any shares of preferred stock after this offering.
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ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED ARTICLES OF INCORPORATION,
BYLAWS AND TEXAS LAW
RESTATED ARTICLES OF INCORPORATION AND BYLAWS.
Pursuant to our Restated Articles of Incorporation, our Board of Directors
may issue additional shares of common stock or establish one or more series of
preferred stock having the number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights, preferences and
limitations that the Board of Directors may fix without shareholder approval.
Any additional issuance of common stock or designation of rights, preferences,
privileges and limitations with respect to preferred stock could have the effect
of impeding or discouraging the acquisition of control of us by means of a
merger, tender offer, proxy contest or otherwise, including a transaction in
which our shareholders would receive a premium over the market price for their
shares, and thereby protects the continuity of our management. Specifically, if
in the due exercise of its fiduciary obligations, the Board of Directors were to
determine that a takeover proposal was not in our best interest, shares could be
issued by the Board of Directors without shareholder approval in one or more
transactions that might prevent or render more difficult or costly the
completion of the takeover by:
- Diluting the voting or other rights of the proposed acquiror or insurgent
shareholder group;
- Putting a substantial voting block in institutional or other hands that
might undertake to support the incumbent Board of Directors; or
- Effecting an acquisition that might complicate or preclude the takeover.
Our Bylaws provide that the Board of Directors shall be divided into three
classes of one or more directors each, with each class elected for three-year
terms expiring in successive years. Our Restated Articles of Incorporation also
allow the Board of Directors to fix the number of directors in the Bylaws with
no minimum or maximum number of directors required. Cumulative voting in the
election of directors is specifically denied in the Restated Articles of
Incorporation. The effect of these provisions may be to delay or prevent a
tender offer or takeover attempt that a shareholder might consider to be in his
or her best interest, including attempts that might result in a premium over the
market price for the shares held by the shareholders.
Our Restated Articles of Incorporation and Bylaws provide that special
meetings of shareholders generally can be called only by the President or the
Board of Directors or by holders of at least 25% of our voting stock and provide
for an advance notice procedure for the nomination, other than by or at the
direction of the Board of Directors or a committee of the Board of Directors, of
candidates for election as directors as well as for other shareholder proposals
to be considered at annual meetings of shareholders. In general, we must receive
notice of intent to nominate a director or raise business at such meetings not
less than 30 nor more than 60 days before the meeting. The notice must contain
certain information concerning the person to be nominated or the matters to be
brought before the meeting and concerning the shareholder submitting the
proposal. These provisions of the Bylaws:
- May preclude a nomination for the election of directors or preclude the
conduct of business at a particular annual meeting if the proper
procedures are not followed; and
- May discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of us, even if the conduct of such solicitation or attempt
might be beneficial to us and our shareholders.
TEXAS TAKEOVER STATUTE.
Upon completion of this offering, we will be subject to Part Thirteen of the
Texas Business Corporation Act ("Part Thirteen"), which became effective on
September 1, 1997. Subject to certain exceptions, Part Thirteen prohibits a
Texas corporation which is an issuing public corporation from
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engaging in any business combination with any affiliated shareholder for a
period of three years following the date that such shareholder became an
affiliated shareholder, unless:
- Prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
shareholder becoming an affiliated shareholder; or
- The business combination is approved by at least two-thirds of the
outstanding voting shares that are not beneficially owned by the
affiliated shareholder or an affiliate or associate of the affiliated
shareholder at a meeting of shareholders called not less than six months
after the affiliated shareholder's share acquisition date.
In general, Part Thirteen defines an affiliated shareholder as any entity or
person beneficially owning 20% or more of the outstanding voting stock of the
issuing public corporation and any entity or person affiliated with or
controlling or controlled by such entity or person. Part Thirteen defines a
business combination to include, among other similar types of transactions, any
merger, share exchange, or conversion of an issuing public corporation involving
an affiliated shareholder.
Part Thirteen may have the effect of inhibiting a non-negotiated merger or
other business combination that we may be involved in.
INDEMNIFICATION ARRANGEMENTS
Our Restated Articles of Incorporation limit the liability of our directors
for monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the Texas Business Corporation Act.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our Restated Articles of
Incorporation permit us to indemnify our directors and officers to the fullest
extent permitted by Texas law, including in circumstances in which
indemnification is otherwise discretionary under Texas law.
Under Texas law, a corporation may indemnify a director or officer or other
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a director, officer, employee or
agent of the corporation, if it is determined that such person:
- Conducted himself or herself in good faith;
- Reasonably believed, in the case of conduct in his or her official
capacity as a director or officer of the corporation, that his or her
conduct was in the corporation's best interests, and, in all other cases,
that his or her conduct was at least not opposed to the corporation's best
interests; and
- In the case of any criminal proceeding, had no reasonable cause to believe
that his or her conduct was unlawful.
Any such person may be indemnified against judgments, penalties (including
excise and similar taxes), fines, settlements and reasonable expenses actually
incurred by the person in connection with the proceeding. If the person is found
liable to the corporation or is found liable on the basis that personal benefit
was improperly received by the person, the indemnification is limited to
reasonable expenses actually incurred by the person in connection with the
proceeding, and must not be made in respect of any proceeding in which the
person is found liable for willful or intentional misconduct in the performance
of his or her duty to the corporation.
Prior to the consummation of this offering, we plan to enter into
indemnification agreements with each of our directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the Texas Business Corporation Act.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is BancBoston, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices and impair our ability to raise
capital through the sale of equity securities.
Upon completion of this offering, we will have outstanding 13,415,207 shares
of common stock, or 13,865,207 shares if the underwriters' over-allotment option
is exercised in full, assuming no exercise or conversion of options, warrants or
convertible notes after the date of this prospectus. Of these shares, the
3,200,000 shares offered hereby, or 3,650,000 shares if the underwriters'
over-allotment option is exercised in full, will be freely tradable without
restriction or further registration under the Securities Act, unless purchased
by "affiliates" of ours as that term is defined in Rule 144 under the Securities
Act. The remaining 10,215,207 shares of common stock outstanding upon completion
of this offering will be "restricted securities" as that term is defined in Rule
144.
Upon the expiration of certain lock-up agreements entered into by our
securities holders with the underwriters, beginning 180 days after the date of
this prospectus, 8,299,349 shares held by certain of our shareholders will
become eligible for sale, subject to the volume limitations, manner of sale and
notice requirements of Rule 144, and 1,900,559 shares held by certain other
shareholders of ours will become eligible for sale without regard to the volume
limitations and manner of sale and notice requirements of Rule 144. As of the
date of this prospectus, a total of 15,300 shares held by shareholders who have
not entered into lock-up agreements are eligible for sale immediately without
regard to the volume limitations and manner of sale and notice requirements of
Rule 144. In addition, as of the date of this prospectus, there were options
outstanding to purchase an aggregate of 744,193 shares of common stock. Pursuant
to lock-up provisions contained in the stock option agreements or separate
lock-up agreements, 96,503 shares underlying such options will become eligible
for sale pursuant to Rule 701 beginning 180 days after the date of this
prospectus and the remaining 647,690 shares underlying such options will become
eligible for sale pursuant to Rule 701 more than 180 days after the date of this
prospectus as such options vest. Also, as of the date of this prospectus, an
aggregate of 1,729,758 shares of common stock were issuable upon exercise of
outstanding warrants and the conversion of outstanding convertible notes. After
the expiration of lock-up agreements, and subject to exercise or conversion of
the warrants and notes, 1,368,160 of such shares will become eligible for sale
subject to the volume limitations, manner of sale and notice requirements of
Rule 144 and 44,418 shares will become eligible for sale without regard to the
volume limitations and manner of sale and notice requirements of Rule 144. As of
the date of this prospectus, a total of 2,153 shares issuable upon conversion of
outstanding convertible notes held by noteholders who have not entered into
lock-up agreements will be eligible for sale immediately upon completion of this
offering without regard to the volume limitations and manner of sale and notice
requirements of Rule 144. The remaining 315,027 of the shares underlying such
notes and warrants will be eligible for sale under Rule 144 beginning one year
following the date of exercise of warrants. Finally, based on a value of $15.00
per share of our common stock, which is the assumed initial public offering
price, Goldman, Sachs & Co. has the right, at any time during the 180-day period
after the consummation of this offering, to elect to purchase up to 333,333
shares of our common stock. Subject to Goldman, Sachs & Co.'s exercise of such
right, beginning one year after the date of such exercise, the shares so
purchased by Goldman, Sachs & Co. will become eligible for sale under Rule 144.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who owns shares that were purchased from us, or any
affiliate of ours, at least one year
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previously, is entitled to sell in "brokers' transactions" or to market makers,
within any three-month period, a number of shares that does not exceed the
greater of:
- One percent of the then outstanding shares of common stock, which is
approximately 134,152 shares immediately after this offering, or
approximately 138,652 shares if the underwriters' over-allotment option is
exercised in full; or
- The average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which the required notice of such
sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are generally subject to the availability of current public
information about us. Any person, or persons whose shares are aggregated, who
owns shares that were purchased from us, or any affiliate of ours, at least two
years previously and who has not been an affiliate of ours at any time during
the 90 days preceding a sale, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations or manner of sale, public
information or notice requirements of Rule 144. Under Rule 701, persons who
purchase shares from us upon exercise of options granted prior to the date of
this prospectus are entitled to sell such shares in the public markets
commencing 90 days after the date of this prospectus in reliance on Rule 144
without having to comply with the holding period requirements thereof and, in
the case of non-affiliates of ours, without having to comply with the volume
limitations, or public information or notice requirements thereof.
Within 90 days after the date of this prospectus, we intend to file a
registration statement or registration statements under the Securities Act
covering the shares of common stock reserved for issuance under the 1997 Stock
Incentive Plan and the Employee Stock Discount Purchase Plan. See
"Management--1997 Stock Incentive Plan" and "--Employee Stock Discount Purchase
Plan." Such registration statement or registration statements will become
effective upon filing, thus permitting the resale of such shares in the public
markets without restriction under the Securities Act, subject, however, to
applicable lock-up arrangements and limitations applicable to affiliates.
After this offering, the holders of approximately 6,344,237 shares of common
stock outstanding or issuable upon conversion of notes or exercise of warrants,
and Goldman, Sachs & Co., to the extent it exercises its investment option under
the Common Stock Purchase Option issued in January 1999, will be entitled to
certain rights with respect to the registration of the shares of common stock
held by them under the Securities Act. Under the terms of the agreements between
us and the holders of such registrable securities, if we propose to register any
of our securities under the Securities Act, either for our own account or for
the account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to include
shares of the common stock held by them in the registration. Additionally,
certain holders are also entitled to demand registration rights pursuant to
which they may require us to file a registration statement under the Securities
Act at our expense with respect to their shares of common stock, and we are
required to use our best efforts to effect such registration. All of these
registration rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in such registration.
66
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., J.C. Bradford & Co. and EVEREN Securities,
Inc. (the "Representatives"), have severally agreed with us, subject to the
terms and conditions set forth in the underwriting agreement, to purchase from
us the number of shares of common stock set forth opposite their names below.
The underwriters are committed to purchase and pay for all such shares if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------
<S> <C>
BancBoston Robertson Stephens Inc...................................................
J.C. Bradford & Co..................................................................
EVEREN Securities, Inc..............................................................
----------
Total............................................................................. 3,200,000
----------
----------
</TABLE>
We have been advised by the Representatives that the underwriters propose to
offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
such price less a concession of not in excess of $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters as stated herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or in
part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 450,000 additional shares of common stock at the same price per
share as we will receive for the 3,200,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 3,200,000 shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
3,200,000 shares are being sold. We will be obligated, pursuant to the option,
to sell shares to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock offered hereby. If such option is exercised
in full, the total public offering price, underwriting discounts and commissions
and proceeds to us will be $ , $ and $ , respectively.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS. With the exception of holders of 54,500 shares of
outstanding common stock, holders of options and warrants to purchase 185,385
shares of common stock and holders of
67
<PAGE>
convertible notes convertible into 2,152 shares of common stock, each of our
executive officers, directors, shareholders of record, optionholders,
warrantholders and holders of convertible notes has agreed with the
Representatives, for a period of 180 days after the date of this prospectus,
subject to certain exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock owned as of the date of this prospectus or, with certain exceptions,
thereafter acquired directly by such holders or with respect to which they have
or hereafter acquire the power of disposition, without the prior written consent
of BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to the lock-up agreements. There are no agreements
between the Representatives and any of our shareholders providing consent by the
Representatives to the sale of shares prior to the expiration of the period of
180 days after this prospectus.
FUTURE SALES. In addition, we have agreed that during the period of 180
days after this prospectus, we will not, subject to certain exceptions, without
the prior written consent of BancBoston Robertson Stephens:
- Consent to the disposition of any shares held by shareholders prior to the
expiration of the period of 180 days after this prospectus; or
- Issue, sell, contract to sell or otherwise dispose of, any shares of
common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock, other than (1) the sale of shares in this
offering, (2) the issuance of common stock upon the exercise or conversion
of outstanding options, warrants or convertible securities, (3) our
issuance of incentive awards under the 1997 Stock Incentive Plan and (4)
our issuance of common stock under the Employee Stock Discount Purchase
Plan. See "Shares Eligible for Future Sale."
LISTING. We have filed an application to have the common stock approved for
quotation on the Nasdaq National Market under the symbol "FLAS."
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price for
the common stock offered hereby will be determined through negotiations between
us and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
Representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
STABILIZATION. The Representatives have advised us that, pursuant to
Regulation M under the Securities Act, certain persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with this offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The Representatives have advised us that
such transactions may be
68
<PAGE>
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
SALE OF SHARES TO SBC. At our request, the underwriters have reserved up to
$3.0 million worth of common stock to be issued by us and offered hereby for
sale, at the initial public offering price, to SBC Communications Inc. We have
assumed in this prospectus that we will sell 200,000 shares of our common stock
to SBC based upon an assumed initial public offering price of $15 per share,
with net proceeds to us of $3.0 million. The maximum number of shares we sell to
SBC will be equal to $3.0 million divided by the initial public offering price.
This maximum number of shares may be either higher or lower than 200,000 shares
depending upon the actual initial public offering price.
DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up
to 150,000 shares of common stock to be issued by us and offered hereby for
sale, at the initial public offering price, to directors, officers, employees,
business associates and related persons of FlashNet. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as the other shares offered hereby.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Cantey & Hanger, L.L.P., Fort Worth, Texas and certain legal matters in
connection with this offering will be passed upon for us by Brobeck, Phleger &
Harrison LLP, Austin, Texas. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998, and
for the years ended December 31, 1996, 1997 and 1998 appearing in this
prospectus and Registration Statement have been audited by Deloitte & Touche
LLP, independent auditors, as set forth in their report appearing herein, and
are included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the common stock offered hereby. This
prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules to the Registration Statement. For
further information with respect to us and the common stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
prospectus concerning the contents of any contract or any other document are
complete with respect to the material provisions of such contract or document;
reference is made in each instance to the copy of such contract or any other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Public Reference Room of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Commission. Information on the operation of the
69
<PAGE>
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The Commission also maintains a Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at the
address HTTP://WWW.SEC.GOV.
70
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997
and 1998................................................................................................. F-4
Consolidated Statements of Shareholders' Deficit for the Years Ended December 31, 1996, 1997 and 1998...... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997
and 1998................................................................................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
FlashNet Communications, Inc.
We have audited the accompanying consolidated balance sheets of FlashNet
Communications, Inc. (the "Company") and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of operations, shareholders'
deficit and cash flows for the years ended December 31, 1996, 1997 and 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for the years ended December 31, 1996, 1997 and 1998 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Fort Worth, Texas
February 23, 1999 (March 11, 1999 as to
the last paragraph in Note 12)
F-2
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
-------------- -------------- PRO FORMA
SHAREHOLDERS'
DEFICIT AT
DECEMBER 31,
1998 (NOTE 6)
--------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 1,569,719 $ 1,038,325
Accounts receivable, net of allowance for uncollectible accounts of
$35,068 and $28,091 in 1997 and 1998, respectively................. 494,470 391,248
Prepaid expenses and other current assets............................ 377,331 1,290,633
-------------- --------------
Total current assets............................................... 2,441,520 2,720,206
PROPERTY AND EQUIPMENT, net............................................ 8,396,423 6,821,409
SOFTWARE LICENSES, net of accumulated amortization of $25,000 and
$68,379 in 1997 and 1998, respectively............................... 46,700 5,968
OTHER ASSETS........................................................... 115,350 185,453
-------------- --------------
TOTAL.................................................................. $ 10,999,993 $ 9,733,036
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations......................... $ 1,446,273 $ 1,824,048
Current portion of convertible notes payable......................... 160,566 185,970
Note payable......................................................... -- 4,834,000
Trade accounts payable............................................... 6,634,393 5,334,722
Accrued payroll and related expenses................................. 169,740 535,163
Other accrued expenses............................................... 319,996 437,986
Deferred revenue..................................................... 10,545,586 12,324,906
-------------- --------------
Total current liabilities.......................................... 19,276,554 25,476,795
CAPITAL LEASE OBLIGATIONS, net of current portion...................... 1,806,089 52,329
CONVERTIBLE NOTES PAYABLE, net of current portion...................... 185,303 --
NOTE PAYABLE........................................................... 3,168,000 --
-------------- --------------
Total liabilities.................................................. 24,435,946 25,529,124
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SERIES A PREFERRED STOCK, $1.00 par value; 1,375,000 shares
authorized, 1,364,085 issued and outstanding at December 31, 1998.... -- 7,910,660 $ --
SHAREHOLDERS' DEFICIT:
Common stock, no par value, 50,000,000 shares authorized, 5,487,219
and 5,528,868 issued and outstanding at December 31, 1997 and 1998,
respectively....................................................... 701,910 3,443,506 11,354,166
Warrants to purchase common stock.................................... 3,711,590 3,704,699 3,704,699
Accumulated deficit.................................................. (17,849,453) (30,854,953) (30,854,953)
-------------- -------------- --------------
Total shareholders' deficit........................................ (13,435,953) (23,706,748) $ (15,796,088)
-------------- -------------- --------------
--------------
TOTAL.................................................................. $ 10,999,993 $ 9,733,036
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Consumer access services........................................ $ 2,286,414 $ 11,941,762 $ 21,978,809
Business services............................................... 53,032 571,259 1,596,777
Set-up fees and other........................................... 1,314,990 5,023,756 3,315,996
------------- -------------- --------------
Total......................................................... 3,654,436 17,536,777 26,891,582
------------- -------------- --------------
OPERATING COSTS AND EXPENSES:
Cost of recurring revenues...................................... 2,348,287 8,214,601 11,796,283
Cost of other revenues.......................................... 472,916 798,886 349,159
Sales and marketing............................................. 4,328,891 10,299,651 8,202,097
General and administrative...................................... 1,039,010 3,453,311 5,267,882
Operations and customer support................................. 830,346 3,683,207 6,016,136
Depreciation and amortization................................... 544,959 2,061,011 3,068,761
------------- -------------- --------------
Total......................................................... 9,564,409 28,510,667 34,700,318
------------- -------------- --------------
LOSS FROM OPERATIONS.............................................. (5,909,973) (10,973,890) (7,808,736)
INTEREST EXPENSE.................................................. (148,815) (735,362) (2,529,745)
INTEREST AND OTHER INCOME......................................... 4,341 21,096 73,532
------------- -------------- --------------
NET LOSS.......................................................... (6,054,447) (11,688,156) (10,264,949)
DEEMED DISTRIBUTIONS AND ACCRETION ON REDEEMABLE PREFERRED
STOCK........................................................... -- -- (2,740,551)
------------- -------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS...................... $ (6,054,447) $ (11,688,156) $ (13,005,500)
------------- -------------- --------------
------------- -------------- --------------
NET LOSS PER SHARE:
Basic and diluted............................................... $ (1.15) $ (2.15) $ (2.36)
------------- -------------- --------------
------------- -------------- --------------
Supplemental (unaudited)........................................ $ (1.66)
--------------
--------------
SHARES USED IN COMPUTATION:
Basic and diluted............................................... 5,266,389 5,448,786 5,504,726
------------- -------------- --------------
------------- -------------- --------------
Supplemental (unaudited)........................................ 7,821,100
--------------
--------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
WARRANTS TO
COMMON STOCK PURCHASE TOTAL
---------------------- COMMON ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT STOCK DEFICIT DEFICIT
--------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996...................... 3,527,075 $ 157,500 $ -- $ (106,850) $ 50,650
Issuance of common stock.................... 1,893,844 305,000 -- -- 305,000
Issuance of warrants........................ -- -- 424,000 -- 424,000
Net loss.................................... -- -- -- (6,054,447) (6,054,447)
--------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1996.................... 5,420,919 462,500 424,000 (6,161,297) (5,274,797)
Conversion of notes payable................. 66,300 195,000 -- -- 195,000
Warrants retired............................ -- 44,410 (44,410) -- --
Issuance of warrants........................ -- -- 3,332,000 -- 3,332,000
Net loss.................................... -- -- -- (11,688,156) (11,688,156)
--------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1997.................... 5,487,219 701,910 3,711,590 (17,849,453) (13,435,953)
Conversion of notes payable................. 34,679 102,000 -- -- 102,000
Exercise of warrants........................ 6,970 6,912 (6,891) -- 21
Deemed distributions related to issuance of
redeemable preferred stock................ -- 2,632,684 -- (2,632,684) --
Accretion of discount related to redeemable
preferred stock........................... -- -- -- (107,867) (107,867)
Net loss.................................... -- -- -- (10,264,949) (10,264,949)
--------- ----------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1998.................... 5,528,868 $ 3,443,506 $3,704,699 $ (30,854,953) $ (23,706,748)
--------- ----------- ----------- ------------- -------------
--------- ----------- ----------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................ $(6,054,447) $ (11,688,156) $ (10,264,949)
Adjustments to reconcile net loss to net cash provided (used) in
operating activities:
Depreciation...................................................... 536,209 2,039,761 3,010,420
Amortization of debt discount..................................... 43,311 211,150 1,892,502
Amortization of software licenses................................. 6,250 18,750 50,444
Amortization of organizational costs.............................. 2,500 5,946 7,897
Provision for allowance for uncollectible accounts................ 28,414 100,000 21,073
Gain on sale of equipment......................................... -- 11,905 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...................... (286,512) (283,313) 82,149
Increase in prepaid expenses and other current assets........... (171,642) (200,293) (913,302)
Increase in other assets........................................ (58,345) (53,576) (78,000)
Increase (decrease) in accounts payable and accrued
liabilities................................................... 2,256,173 4,827,031 (816,268)
Increase in deferred revenue.................................... 4,110,020 6,352,467 1,779,330
----------- ------------- -------------
Net cash provided (used) by operating activities.............. 411,931 1,341,672 (5,228,704)
----------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net............................ (966,845) (4,663,538) (1,435,406)
Purchases of software............................................... (71,700) -- (9,711)
Proceeds from sale of equipment..................................... -- 202,594 --
----------- ------------- -------------
Net cash used in investing activities......................... (1,038,545) (4,460,944) (1,445,117)
----------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and stock purchase
warrants.......................................................... 635,000 6,500,000 --
Principal payments under capital lease obligations.................. (200,829) (1,921,422) (1,551,386)
Principal payments under convertible notes payable.................. -- (27,000) (109,000)
Proceeds from issuance of common stock.............................. 305,000 -- 21
Proceeds from issuance of preferred stock........................... -- -- 7,802,792
----------- ------------- -------------
Net cash provided by financing activities..................... 739,171 4,551,578 6,142,427
----------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 112,557 1,432,306 (531,394)
CASH AND CASH EQUIVALENTS,BEGINNING OF PERIOD......................... 24,856 137,413 1,569,719
----------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................. $ 137,413 $ 1,569,719 $ 1,038,325
----------- ------------- -------------
----------- ------------- -------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest.............................................. $ 88,342 $ 512,377 $ 637,222
Equipment acquired under capital leases and through issuance of
warrants.......................................................... 4,618,435 858,587 --
Additional common stock issued upon conversion of long-term debt.... -- 195,000 102,000
Deemed distributions and accretion on redeemable preferred
stock............................................................. -- -- 2,740,551
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL--FlashNet Communications, Inc. and its wholly-owned subsidiaries,
FlashNet Marketing, Inc. ("FlashNet Marketing") and FlashNet Telecom, Inc.
("FlashNet Telecom") (collectively referred to as the "Company") were organized
on September 25, 1995, June 16, 1997 and May 18, 1998, respectively. The Company
is a nationwide provider of consumer internet access services and business
services through a national network with 621 "points of presence" in 450 cities.
FlashNet Marketing is a marketing organization designed to increase utilization
of the Company's services through customer incentive marketing programs.
FlashNet Telecom is licensed as the Company's competitive local exchange
carrier.
The Company has experienced operating losses since inception, and expects
that it will continue to incur net losses as it expends substantial resources on
sales and marketing as it attempts to increase its market share. The Company's
operations are subject to certain risks and uncertainties including, among
other: (i) risks associated with technology and regulatory trends; (ii) evolving
industry standards; (iii) dependence on its network infrastructure and
suppliers; (iv) growth and acquisitions; (v) actual and prospective competition
by entities with greater financial and other resources; and (vi) the development
of the Internet market. Inability to obtain additional financing or refinancing
on acceptable terms could necessitate changes in the Company's operating plans.
There can be no assurance that the Company will be successful in achieving or
sustaining profitability and positive cash flow in the future.
The Company's Board of Directors has authorized the filing of a registration
statement with the Securities and Exchange Commission that would permit the
Company to sell shares of the Company's common stock in connection with a
proposed initial public offering.
MANAGEMENT ESTIMATES--In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
CONSOLIDATION--Significant intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS--The Company considers all short-term, highly
liquid investments with an original maturity date of three months or less at
date of purchase to be cash equivalents. Cash and cash equivalents are stated at
cost, which approximates fair value.
CREDIT RISK--The Company's accounts receivable potentially subject the
Company to credit risk, as collateral is generally not required. The Company's
risk of loss is limited due to advance billings to customers for services, the
use of preapproved charges to customer credit cards, and the ability to
terminate access on delinquent accounts. The large number of customers
comprising the customer base mitigates the concentration of credit risk.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful life of
five years. Leasehold improvements are amortized over the shorter of the term of
the related lease or the estimated useful lives of the assets.
EQUIPMENT UNDER CAPITAL LEASE--The Company leases certain of its data
communications equipment and other fixed assets under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lesser of
the present value of aggregate future minimum lease payments, or
F-7
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the fair value of the assets under lease. Assets under these capital leases are
depreciated over the shorter of the term of the related lease (generally 36
months) or the useful life of the asset.
LONG-LIVED ASSETS--The Company periodically evaluates the recoverability of
its long-lived assets and would recognize impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. No such impairments have been identified to
date. The Company assesses the impairment of long-lived assets when events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable.
REVENUE RECOGNITION--Amounts received upon the sale or renewal of prepaid
annual and monthly subscriptions are recorded as deferred revenue through a 30
day money back cancellation period and then amortized over the remaining period
in which service is provided. Annual subscribers canceling after the initial 30
day period are treated as monthly subscribers. Such subscribers are refunded the
difference between their prepaid amounts and retroactive set-up fees and monthly
rates for the period of service. Distributor sign-up and renewal fees are also
recorded as deferred revenue and amortized over the life of the related
agreements.
COST OF REVENUES--Cost of recurring revenue consists primarily of the
monthly costs of telecommunications facilities necessary to provide subscriber
services and are recognized as incurred. Costs of other revenues include costs
of installation, software, premium support costs, cost of merchandise sold and
the cost of user guides and other materials for representative and distributors
and are recognized as incurred. New customer bonuses paid to distributors and
continuing residual commission expenses are expensed as incurred.
ADVERTISING COSTS--The Company expenses all advertising costs as incurred.
Advertising expense for the years ended December 31, 1996, 1997 and 1998 was
$3,725,080, $7,477,729 and $5,821,128, respectively.
COMMON STOCK-BASED COMPENSATION--The Company accounts for its employee
stock-based compensation in accordance with the provisions of Accounting
Principles Board Opinion No. 25 ("APB No. 25") and provides pro forma
disclosures in the notes to the financial statements, as if the measurement
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS
No. 123") had been adopted. The Company has adopted SFAS No. 123 for stock based
compensation related to nonemployees.
INCOME TAXES--The shareholders of the Company had elected that the Company
be taxed as an S Corporation as provided by the Internal Revenue Code. As a
result, income tax was not imposed at the corporate level and the Company's
income or loss was reportable by the individual shareholders for Federal income
tax purposes until the Company revoked its S Corporation effective January 1,
1997.
Deferred income taxes are provided in 1997 and 1998 under the liability
method for temporary differences between revenue and expenses recognized for tax
return and financial reporting purposes.
NET LOSS PER SHARE--Share and per share amounts have been adjusted
retroactively for the 3.4-to-1 stock split which was approved in February 1999
to become effective March 11, 1999. Basic loss per share is computed using the
weighted average number of common shares outstanding. Options, warrants and
convertible securities are not included in the computation of diluted loss per
share as the effects would be antidilutive. Supplemental loss per share
(unaudited) reflects the assumed conversion of preferred stock (see Note 6).
F-8
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SOURCE OF SUPPLIES--The Company relies on local telephone companies and
other companies to provide data communications capacity. Although management
believes alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could have an adverse effect on
operating results.
The Company attempts to maintain multiple vendors for its modems, terminal
servers and high-performance routers, which are important components of its
network. If the suppliers are unable to meet the Company's needs as it expands
its network infrastructure, the Company may experience delays and increased
costs, which would adversely affect operating results.
RECENT ACCOUNTING PRONOUNCEMENTS--In February 1997, the FASB issued SFAS No.
129, "Disclosure of Information About Capital Structure," which establishes
standards for disclosing information about an entity's capital structure and is
effective for financial statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements for fiscal years beginning after
December 15, 1997. The FASB also issued, in June 1997, SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for the way public companies disclose information about
operating segments, products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for fiscal
quarters ending after June 15, 1999.
The Company has made the disclosures under SFAS No. 129 in Note 6. In
accordance with SFAS 130, the Company has determined that comprehensive loss is
the same as net loss. Pursuant to SFAS 131, the Company conducts its business
within one industry segment, presents its financial statements to reflect how
the "key operating decision maker" views the business and has made the
appropriate enterprise-wide disclosures. The Company does not expect the
adoption of SFAS No. 133 to have a material impact on its financial statements.
The Company will continue to review these statements over time to determine if
any additional disclosures are necessary based on evolving circumstances.
RECLASSIFICATION--Certain reclassifications have been made to prior period
amounts to conform with the 1998 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1998
------------- -------------
Data communications equipment.................................. $ 10,198,002 $ 10,922,137
Office and other equipment..................................... 644,585 1,089,596
Purchased software............................................. 93,764 361,461
------------- -------------
10,936,351 12,373,194
Less accumulated depreciation.................................. (2,539,928) (5,551,785)
------------- -------------
$ 8,396,423 $ 6,821,409
------------- -------------
------------- -------------
</TABLE>
F-9
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment includes $4,726,491 of data communications equipment
under capital leases at December 31, 1997 and 1998. Depreciation expense charged
to operations was $536,209, $2,039,761 and $3,010,420 in the years ended
December 31, 1996, 1997 and 1998, respectively, and included, $249,347,
$1,395,697 and $1,586,689, respectively, pertaining to property under capital
lease.
3. CAPITAL LEASE OBLIGATIONS
During 1996 and 1997, the Company entered into capital leases with minimum
payments totaling $5,513,431 and $981,663, respectively, for new data
communications equipment and other fixed assets. The Company's capital lease
obligations are generally payable in 36 monthly installments from the dates of
purchase and include bargain purchase options at the end of the lease term.
Future minimum lease payments under capital leases at December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999............................................................ $1,875,973
2000............................................................ 53,062
---------
Total minimum lease payments.................................... 1,929,035
Less amounts representing interest and approximately $24,000 of
unamortized value attributed to warrants (see Note 6).......... 52,658
---------
Present value of future minimum lease payments.................. 1,876,377
Less current portion............................................ 1,824,048
---------
$ 52,329
---------
---------
</TABLE>
4. CONVERTIBLE NOTES PAYABLE
During 1996, the Company issued units of convertible notes payable totaling
$635,000 and stock warrants exercisable at $0.003 per share for 177,038 shares
of common stock, which were assigned a value of $175,000. The remaining
principal balance of the notes is due in July 1999 and bears 12% annual
interest, payable quarterly. At December 31, 1997 and 1998, the notes payable
are presented net of approximately $67,000 and $16,000, respectively, in
unamortized discount. After giving effect to the value assigned to the warrants,
the notes payable bear an approximate effective annual interest rate of 25%. The
outstanding balance of the notes payable is convertible at $2.94 per share, into
an aggregate of 68,442 shares of the Company's common stock at July 31, 1999.
5. NOTE PAYABLE
In December 1997, the Company entered into an agreement with a vendor to
borrow $6,500,000. Warrants initially exercisable at $0.003 per share for
1,360,000 shares of the Company's common stock were issued as part of the
agreement and were assigned a value of $3,332,000 (see Note 6). Substantially
all of the Company's assets serve as collateral to the note payable. The
principal balance of the note payable is due and payable at the earlier of
December 28, 1999 or the effective date of a defined initial public offering by
the Company providing gross proceeds in excess of $12 million or a change of
control. Interest accrues at 6.0% per annum and is payable monthly. At December
31, 1997 and 1998, the principal balance outstanding was $6,500,000 and is
presented net of approximately $3,332,000 and $1,666,000, respectively, in
unamortized discount. After giving effect to the value assigned to the warrants,
the note payable bears an approximate effective annual interest rate of 35%.
F-10
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK
At December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Convertible notes payable........................................................ 68,442
Convertible preferred stock...................................................... 4,637,889
Warrants......................................................................... 1,709,877
Stock options.................................................................... 832,174
----------
7,248,382
----------
----------
</TABLE>
REDEEMABLE CONVERTIBLE PREFERRED STOCK--In May and August 1998, the Company
issued a total of 1,364,085 shares of its redeemable Series A Convertible
Preferred Stock to investors including among others, affiliates of certain
directors, for $8,280,000 and incurred stock issuance costs of $477,207. The
Company has recorded dividends of $2,632,684 for the deemed difference on the
date of issuance between the issuance price of the Preferred Stock and the fair
value of the common stock into which the Preferred Stock is convertible. Each
share of the Series A Convertible Preferred Stock is convertible into 3.4
shares, adjusted for stock splits or recapitalizations, of the Company's common
stock at the option of the holder and is automatically converted upon
consummation of an underwritten public offering of the Company's common stock in
which the proceeds are at least $15 million, and which reflects a pre-offering
valuation of the Company's outstanding equity of at least $50 million. Assuming
conversion of the Series A Convertible Preferred Stock into shares of common
stock on December 31, 1998, the pro forma number of, and stated value of common
shares outstanding, would have been 10,166,758 and $11,354,166, respectively.
Holders of Series A Convertible Preferred Stock are entitled to voting
rights equivalent to the number of common shares issuable if converted. The
Series A Convertible Preferred Stockholders have the exclusive right to elect
two-sevenths of the members of the board of directors but do not participate
with the holders of common stock in the election of other directors. The holders
of the Series A Convertible Preferred Stock have the right to require redemption
after November 7, 2000. The Company may redeem all outstanding shares after May
7, 2003. While the Series A Convertible Preferred Stock is outstanding, no
dividends may be declared or paid on any capital stock of the Company. The
holders of the Company's Series A Convertible Preferred Stock have a liquidation
preference equal to their initial investment. Any assets remaining after the
preferred liquidation preference will be distributed to the holders of common
stock.
WARRANTS--During 1996, the Company entered into an agreement to issue
warrants to purchase shares of common stock at $0.003 per share in connection
with a lease line for equipment. The 179,809 warrants were assigned a value of
$249,000 and will expire at the later of the termination of the lease line or
July 1999.
Warrants issued with the Company's convertible notes payable are exercisable
at $0.003 per share through July 1999 for 170,068 shares. Warrants issued with
the Company's note payable are exercisable at $0.003 per share for 1,360,000
shares through the earlier of December 2007 or the fifth anniversary of a
defined initial public offering.
STOCK OPTIONS--During 1997, the Company adopted a Stock Incentive Plan (the
"Plan"). The Plan provides for the issuance of incentive and non-qualified stock
options to key employees and directors of the Company. The total number of
shares of common stock authorized and reserved for issuance under
F-11
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
the Plan is 815,514 shares. As of December 31, 1998, options to purchase 214,190
shares of common stock remained available for grant under the Plan. Options vest
over periods ranging from 0 to 5 years. At December 31, 1998, options granted
prior to the adoption of the Plan to purchase 16,660 shares were outstanding and
fully vested. Stock option activity from January 1, 1996 through December 31,
1998 is summarized by the following:
<TABLE>
<CAPTION>
EXERCISABLE
------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
January 1, 1996............................................. -- -- -- --
Granted................................................... 53,550 $ 0.97 -- --
----------
December 31, 1996........................................... 53,550 0.97 17,000 $ 0.79
Granted................................................... 88,230 1.81 -- --
Cancelled................................................. (20,400) 0.90 -- --
----------
December 31, 1997........................................... 121,380 1.59 64,090 1.16
Granted................................................... 657,424 5.41 -- --
Cancelled................................................. (160,820) 1.87 -- --
----------
December 31, 1998........................................... 617,984 5.58 74,970 3.11
----------
----------
</TABLE>
Options outstanding as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE OPTIONS YEARS TO CURRENTLY
PRICE DATE OF GRANT OUTSTANDING EXPIRATION EXERCISABLE
- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$1.47 1996 16,660 0.83 15,470
----------- -----------
$2.35-3.53 1998 312,358 8.23 42,500
$5.88-8.82 1998 288,966 9.53 17,000
----------- -----------
617,984 74,970
----------- -----------
----------- -----------
</TABLE>
The Company applies the provisions of APB No. 25 and related interpretations
in accounting for its stock options. Accordingly, no compensation cost has been
recognized as the exercise price assigned to the options at the date of grant
equaled or exceeded the estimated fair market value for options granted through
December 31, 1998. Had compensation cost for the Company's stock options been
F-12
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
determined based on the fair value at the grant dates for awards consistent with
the method prescribed by SFAS No. 123, the Company's supplemental net loss and
loss per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Net loss attributable to common shareholders:
Actual...................................... $ (6,054,447) $ (11,688,156) $ (13,005,500)
Supplemental................................ $ (6,060,447) $ (11,710,156) $ (13,033,500)
Basic and diluted loss per share:
Actual...................................... $ (1.15) $ (2.15) $ (2.36)
Supplemental................................ $ (1.15) $ (2.15) $ (2.37)
</TABLE>
The weighted average fair value of options granted during 1996, 1997 and
1998 was estimated at $0.68, $0.56 and $2.62 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the grants: risk-free interest rates of 6.00% in 1996 and
1997 and 5.00% in 1998, dividend yield of 0%, expected lives of three years in
1996, 1997 and 1998 and no expected volatility (because the Company's stock has
not been publicly traded).
7. COMMITMENTS AND CONTINGENCIES
Commitments--Guaranteed monthly levels of telecommunication services with
certain of the Company's telecommunication vendors at December 31, 1998
aggregate to the following annual amounts:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
---------------
<S> <C>
1999............................................................................ $ 1,744,800
2000............................................................................ 849,200
2001............................................................................ 351,000
------------
$ 2,945,000
------------
------------
</TABLE>
The Company leases certain of its facilities and billboards under
non-cancelable operating leases expiring in various years through 2009. Total
rent expense for all operating leases amounted to $287,896, $1,806,054 and
$1,560,491 in the years ended December 31, 1996, 1997 and 1998, respectively.
F-13
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
---------------
<S> <C>
1999............................................................................ $ 794,067
2000............................................................................ 896,996
2001............................................................................ 631,050
2002............................................................................ 546,750
2003............................................................................ 446,751
Thereafter...................................................................... 2,457,128
------------
$ 5,772,742
------------
------------
</TABLE>
CONTINGENCIES--The Company is subject to certain 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, operating results or cash flows of the Company.
8. INCOME TAXES
No provision for income taxes has been recognized as the Company incurred
net operating losses for income tax purposes.
Deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 3,800,000 $ 8,100,000
Book depreciation in excess of tax............................ 150,000 450,000
Other......................................................... -- 100,000
------------- -------------
Total deferred tax assets................................... 3,950,000 8,650,000
Deferred tax liabilities........................................ -- --
------------- -------------
Net deferred tax asset.......................................... 3,950,000 8,650,000
Valuation allowance............................................. (3,950,000) (8,650,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company has provided a valuation allowance for net deferred tax assets,
as it is more likely than not that these assets will not be realized.
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $21 million for income tax purposes. These net operating loss
carryforwards begin to expire in 2012 and may be limited in their use due to
significant changes in the Company's ownership.
F-14
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The differences between the Company's effective tax rate and the federal
statutory rate of 34% are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
----- -----
<S> <C> <C>
Income tax benefit at statutory rate...................................... (34)% (34)%
State tax benefit, net of federal benefit................................. (3) (3)
Valuation allowance....................................................... 37 37
-- --
Total income tax expense.................................................. --% --%
-- --
-- --
</TABLE>
9. EMPLOYEE SAVINGS PLAN
During 1997, the Company began sponsoring an employee savings plan under
Section 401(k) of the Internal Revenue Code. The plan does not provide for
Company contributions.
10. FAIR VALUE OF INSTRUMENTS
The Company has estimated the fair value of financial instruments as of
December 31, 1997 and 1998. The estimated fair value amounts are determined by
using available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The Company's financial instruments include: accounts receivable, accounts
payable, notes payable and capital leases. The Company has estimated that the
carrying amount of accounts receivable and accounts payable approximates fair
value due to the short-term maturities of these instruments.
The Company's notes payable bear fixed interest rates and are privately
placed with unique terms and no active market. The fair value of such financial
instruments was determined by discounting future cash flows at current market
yields, which were determined based on the market yields for similar instruments
with similar terms. The following is a summary of both the carrying values and
fair values of such instruments.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1997 1998
-------------------------- --------------------------
HISTORICAL HISTORICAL
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Convertible notes payable................. $ 346,000 $ 348,000 $ 185,970 $ 216,882
Note payable.............................. 3,168,000 3,009,000 4,834,000 5,091,906
</TABLE>
F-15
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's reserve accounts:
<TABLE>
<CAPTION>
BEGINNING CHARGES TO
OF PERIOD OPERATIONS DEDUCTIONS END OF PERIOD
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Accounts receivable balance...............
Period ended December 31, 1996............ $ -- $ 28,414 $ -- $ 28,414
Year ended December 31, 1997.............. 28,414 100,000 93,346 35,068
Year ended December 31, 1998.............. 35,068 21,073 28,050 28,091
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
During January 1999, options to purchase 150,943 and 15,980 shares of common
stock at $5.88 per share and $8.82 per share, respectively, were granted to
officers, directors, and employees under the Plan. In conjunction with these
grants, the Company will recognize unearned deferred compensation expense of
$970,000 for the difference between the total exercise price and fair market
value of the options. This expense will be amortized over the vesting periods
ranging from 3 to 5 years from the date of grant.
During January 1999, the Company entered into a $5.0 million term loan
agreement with Goldman Sachs Credit Partners L.P. ("Goldman Sachs"). The term
loan matures January 15, 2000, initially bears interest at 13%, is subject to a
repayment fee of 1.13% to 4.50% of the repaid principal and is secured by a
second lien on the Company's assets. As part of this financing, a Goldman Sachs
affiliate obtained the right to acquire within 180 days of the consummation of
an initial public offering up to $5.0 million of the Company's common stock at
the initial public offering price.
During February 1999, the Company's Board of Directors and shareholders
approved a change in the number of authorized shares of common stock to
50,000,000, and approved a 3.4-to-1 stock split. Such change in authorized
shares and stock split became effective March 11, 1999. The board of directors
has increased the number of shares authorized and reserved under the Plan to
1,327,230 shares.
F-16
<PAGE>
// Inside Back Cover //
Graphic depicts FlashNet's Internet home page. The FlashNet name and logo
are on the top of the home page and the FlashNet mission statement is written
beneath. The text of the mission statement states:
"FlashNet Communications is committed to serving its customers with pride,
friendliness and enthusiasm. FlashNet's mission is to make Internet access easy
and affordable for the mainstream Internet user while at the same time
maximizing our return on investment. FlashNet is committed to providing a stable
work environment for its employees, along with the opportunity for personal
growth and professional fulfillment. FlashNet encourages creativity and
innovation in our employees and we value their expression of individuality in
service to our customers.
FlashNet believes that the Internet should be affordable for everyone and
that people from all walks of life should have access to all that the Internet
has to offer. FlashNet is a responsible member of the local community. This
means we support organizations, both local and national, that are committed to
improving the opportunities and standard of living from our neighbors. We
believe in helping provide access to technology to the underprivileged who would
otherwise suffer greatly because of their lack of access to innovations and
advances such as the Internet. FlashNet would like to help bridge the skills and
knowledge gap so that those among us who are less fortunate can have access to
the same opportunities we have. In this regard, FlashNet supports various
charitable groups around the nation.
FlashNet believes the potential uses for the Internet have only begun to be
explored. The next several years should be one of the most exciting times in our
nation's history and FlashNet intends to remain at the forefront of providing
Internet access to everyone. FlashNet believes that the market in affordable
consumer-based access to the Internet offers substantial opportunity for the
Company and its business partners today, tomorrow and beyond."
<PAGE>
// OUTSIDE BACK COVER //
Graphic depicts FlashNet's logo in the center of the page.
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meaning assigned to them in the prospectus which forms
a part of this Registration Statement.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 15,281
NASD fee........................................................ 5,330
Nasdaq National Market listing fee.............................. 12,800
Printing and engraving expenses................................. 300,000
Legal fees and expenses......................................... 550,000
Accounting fees and expenses.................................... 250,000
Blue sky fees and expenses...................................... 3,000
Transfer agent fees............................................. 10,000
Miscellaneous................................................... 53,589
---------
Total....................................................... $1,200,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant has authority under Articles 2.02A.(16) and 2.02-1 of the
Texas Business Corporation Act to indemnify its directors and officers to the
extent provided for in such statute. The registrant's Restated Articles of
Incorporation permit indemnification of directors and officers to the fullest
extent permitted by law.
The Texas Business Corporation Act provides in part that a corporation may
indemnify a director or officer or other person who was, is, or is threatened to
be made a named defendant or respondent in a proceeding because the person is or
was a director, officer, employee or agent of the corporation, if it is
determined that such person:
- Conducted himself in good faith;
- Reasonably believed, in the case of conduct in his official capacity as a
director or officer of the corporation, that his conduct was in the
corporation's best interests, and, in all other cases, that his conduct
was at least not opposed to the corporation's best interests; and
- In the case of any criminal proceeding, had no reasonable cause to believe
that his conduct was unlawful.
A corporation may indemnify a person under the Texas Business Corporation
Act against judgments, penalties (including excise and similar taxes), fines,
settlement, and reasonable expenses actually incurred by the person in
connection with the proceeding. If the person is found liable to the corporation
or is found liable on the basis that personal benefit was improperly received by
the person, the indemnification is limited to reasonable expenses actually
incurred by the person in connection with the proceeding, and shall not be made
in respect of any proceeding in which the person shall have been found liable
for willful or intentional misconduct in the performance of his duty to the
corporation.
II-1
<PAGE>
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Article Twelve of the registrant's Restated Articles of Incorporation
provides that, to the fullest extent permitted by the Texas Business Corporation
Act as the same exists or as it may hereafter be amended, no director of the
registrant shall be personally liable to the registrant or its shareholders for
monetary damages for breach of fiduciary duty as a director.
Prior to consummation of this offering, the registrant will enter into
indemnification agreements with each of its directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the Texas Business Corporation Act.
Concurrent with the completion of this offering, the registrant will carry
directors and officers liability insurance with policy limits of $10,000,000.
Reference is made to Section 8 of the underwriting agreement to be filed as
Exhibit 1.1 hereto, indemnifying the officers and directors of the registrant
against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its formation on September 25, 1995, the registrant has issued and
sold or otherwise transferred the below listed unregistered securities. These
issuances were deemed exempt from registration under the Securities Act in
reliance on either (i) Section 4(2) of the Securities Act, as transactions not
involving any public offering, or (ii) Rule 701 promulgated under the Securities
Act. No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
1. Soon after its formation, FlashNet issued 743,750 shares of common stock to
Albert Lee Thurburn, FlashNet's Chairman of the Board and Chief Executive
Officer, and 318,750 shares of common stock to Michael Scott Leslie,
FlashNet's President, in exchange for services rendered to FlashNet prior to
September 28, 1995. Such shares were deemed to have an aggregate value, as
of the date of issuance, which value was determined in good faith by the
Board of Directors, of $8,750 in the case of Mr. Thurburn, and $3,750, in
the case of Mr. Leslie.
2. On January 27, 1996, FlashNet sold a total of 4,250,000 shares of common
stock for an aggregate purchase price of $250,000. Michael Scott Leslie,
FlashNet's President, purchased 637,500 of such shares and the remaining
shares were sold to independent investors.
3. From July 1996 through December 1996, FlashNet sold a total of $635,000 in
principal amount of 12% convertible notes, together with warrants to
purchase a total of 177,038 shares of common stock at an exercise price of
$0.003 per share, to a total of 25 purchasers. Each purchaser is a party to
a separate purchase agreement dated as of July 8, 1996. Interest accrues at
the rate of 12% per annum and is to be paid on January 31, April 30, July 31
and October 31 of each year. FlashNet was required to pay one-third of the
original principal amount of the notes on each of July 31, 1997 and July 31,
1998, except to the extent converted. The remaining unpaid or unconverted
principal balance of the notes is due July 31, 1999. The principal amount of
the notes is convertible into common stock at a rate of $2.94 per share,
subject to adjustment solely for stock splits or combinations. The warrants
are exercisable in whole or in part at any time after December 31, 1996 and
prior to July 31, 1999. A total of $80,000 in principal amount of the notes
and warrants to purchase a total of 22,304 shares of common stock were sold
to executive officers and directors of the registrant and the remaining
notes and warrants were sold to independent investors. As of December 31,
1998:
- The remaining outstanding principal of the notes was $201,300, $24,000 of
which was held by affiliates;
II-2
<PAGE>
- A total of $297,000 in principal amount of the notes had been converted
into 100,980 shares of common stock, 19,040 of which are held by
affiliates; and
- Warrants to acquire 170,068 shares of common stock were outstanding and
unexercised, of which warrants to purchase 22,304 shares of common stock
were held by affiliates.
4. In December 1996, FlashNet sold 108,420 shares of our common stock to
Stephen B. Markwardt, a director of FlashNet, for a cash purchase price of
$200,000.
5. On May 7, 1998, FlashNet sold 749,587 shares of our newly designated Series
A Convertible Preferred Stock for a total cash purchase price of $4,550,000.
An additional 614,498 shares of the preferred stock were sold on August 3,
1998 for a total cash purchase price of $3,730,000. Of the 1,364,085 shares
sold, 984,351 shares were sold to entities who were controlled by or became
affiliates as a result of their purchase and 379,734 shares were sold to
independent investors.
6. On January 15, 1999, FlashNet entered into a Term Loan Agreement with
Goldman Sachs Credit Partners L.P., pursuant to which FlashNet immediately
received a fully funded $5 million term loan. The term loan matures on
January 15, 2000 and is secured by a lien on all of FlashNet's assets and
the assets of its subsidiaries, ranking second in priority after a lien
securing the $6.5 million promissory note payable to Ascend. There is no
required payment of principal of the term loan prior to the maturity date.
Interest accrues on the unpaid principal of the term loan at the rate of 13%
per annum and will be added monthly to principal for the first six months of
the loan. In the event that the term loan is not fully repaid by July 15,
1999, the interest rate increases to 15.5%, to apply retroactively, with
recalculations of the interest added to principal as if the rate had been
15.5% beginning January 15, 1999. The first payment of interest is scheduled
to be made on August 15, 1999. Thereafter interest payments are scheduled to
be made monthly until the maturity date. At repayment of the term loan,
FlashNet must also pay Goldman Sachs Credit Partners L.P. a repayment fee,
the amount of which, expressed as a percentage of the unpaid principal,
increases as the maturity date approaches. The applicable percentage
relating to the repayment fee will range from 1.125% to 4.500%, which
percentage will be determined as of the date of the payment of any principal
of the term loan. As part of the Goldman Sachs Credit Partners L.P.
financing, FlashNet also entered into a Common Stock Purchase Option which
provides Goldman Sachs Credit Partners L.P.'s assignee, Goldman, Sachs &
Co., a right to elect, at any time during the 180 day period after the
consummation of this offering, to purchase FlashNet common stock in an
amount equal to the original principal amount of the term loan. The price
for the common stock so purchased will be the per share price at which
shares are issued to the public in this offering. If the term loan is repaid
in full prior to July 15, 1999, no repayment fee will be due, and if
previously paid will be refunded, on any portion of the term loan which is
effectively converted to common stock by Goldman, Sachs & Co.'s exercise of
the Common Stock Purchase Option.
II-3
<PAGE>
7. FlashNet has from time to time granted to employees options to purchase
common stock. The following table sets forth certain information regarding
such grants:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICES
UNDERLYING OPTIONS PER SHARE
------------------ ---------------
<S> <C> <C>
Inception through September 30, 1996.......................................... N/A N/A
October 1, 1996 through September 30, 1997.................................... 34,000 $ 0.59
17,000 $ 0.79
17,000 $ 1.18
94,180 $ 1.47
27,200 $ 1.76
30,600 $ 2.35
October 1, 1997 through the date hereof....................................... 206,465 $ 2.35
161,993 $ 3.53
167,943 $ 5.88
287,946 $ 8.82
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<S> <C>
1.1 TRIANGLE Form of Underwriting Agreement dated February 19, 1999.
3.1 TRIANGLE Restated Articles of Incorporation of FlashNet, dated February 18, 1998.
3.2 TRIANGLE Certificate of Designations of Series A Convertible Preferred Stock of FlashNet,
dated May 7, 1998 and Statement of Increase in Number of Shares of Series A
Convertible Preferred Stock of FlashNet, dated July 31, 1998.
3.3 TRIANGLE Bylaws of FlashNet, adopted September 27, 1995.
3.4 TRIANGLE Restated Articles of Incorporation of FlashNet, adopted February 22, 1999.
3.5 TRIANGLE Bylaws of FlashNet, adopted February 12, 1999.
3.6 TRIANGLE Articles of Amendment to Articles of Incorporation of FlashNet, adopted March
10, 1999.
4.1 TRIANGLE 12% Convertible Notes Purchase Agreement, dated July 8, 1996, between FlashNet
and a purchaser of such notes. Each purchaser is a party to an identical
agreement with FlashNet.
4.2 TRIANGLE Common Stock Purchase Agreement, dated December 5, 1996, between FlashNet and
Stephen B. Markwardt.
4.3 TRIANGLE Secured Promissory Note, dated December 10, 1997, payable by FlashNet to Ascend
Communications, Inc.
4.4 TRIANGLE Warrant to Purchase Common Stock, issued by FlashNet to Ascend Communications,
Inc. on December 10, 1997.
4.5 TRIANGLE Stock Purchase Agreement, dated May 7, 1998, by and among FlashNet, Apogee Fund
LP, Emmett M. Murphy, ISP Investors, L.P., Scott M. Kleberg, J. Luther King,
Jr., Scott C. Hollmann, and Fourteen Hill Capital, LP.
4.6 TRIANGLE Registration Rights Agreement, dated May 7, 1998, by and among FlashNet and the
investors named in 4.5 above.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
4.7 TRIANGLE First Amendment to Stock Purchase Agreement, dated August 3, 1998, by and among
Apogee Fund LP; Emmett M. Murphy; ISP Investors, L.P.; Scott M. Kleberg; J.
Luther King, Jr.; Scott C. Hollmann; Fourteen Hill Capital, LP; Applied
Telecommunications Technologies, Inc.; Paul Castro; UD Donna Manning IRA;
Faith Griffin; Youssef Squali; Jeffrey N. Wilkes; George P. Jenkins Insurance
Trust, U/A 6/28/91, James P. Jenkins, Robert N. Jenkins and Richard G.
Jenkins, Trustees; James P. Jenkins; Frank A. Klepetko; Q Ventures, L.P. and
FlashNet.
4.8 TRIANGLE First Amendment to Registration Rights Agreement, dated August 3, 1998, by and
among the investors named in 4.7 above and FlashNet.
4.9 TRIANGLE Term Loan Agreement, dated January 15, 1999, between FlashNet and Goldman Sachs
Credit Partners L.P.
4.10 TRIANGLE Term Note, dated January 15, 1999, payable by FlashNet to Goldman Sachs Credit
Partners L.P.
4.11 TRIANGLE Borrower Pledge and Security Agreement, dated January 15, 1999, between FlashNet
and Goldman Sachs Credit Partners L.P.
4.12 TRIANGLE Subsidiary Pledge and Security Agreement, dated January 15, 1999, between
FlashNet's subsidiaries and Goldman Sachs Credit Partners L.P.
4.13 TRIANGLE Trademark Security Agreement, dated January 15, 1999, between FlashNet and
Goldman Sachs Credit Partners L.P.
4.14 TRIANGLE Common Stock Purchase Option, dated January 15, 1999, between FlashNet and
Goldman Sachs Credit Partners L.P.
4.15 TRIANGLE Second Amendment to Registration Rights Agreement, dated January 15, 1999, by
and among the Investors named in 4.7 above, FlashNet and Goldman Sachs Credit
Partners L.P.
4.16 TRIANGLE Specimen Certificate for shares of common stock.
5.1 Opinion of Cantey & Hanger, L.L.P.
10.1 TRIANGLE Master Lease Agreement, dated June 7, 1996, between FlashNet, as Lessee, and
Ascend Credit Corporation, as Lessor.
10.2 TRIANGLE Master Lease Agreement, dated October 31, 1996, between FlashNet, as Lessee, and
Shiva Corporation, as Lessor.
10.3 TRIANGLE Letter lease agreement, dated September 27, 1996, between FlashNet and U.S.
Robotics.
10.4 TRIANGLE Letter lease agreement, dated October 14, 1996, between FlashNet and U.S.
Robotics.
10.5+ Master Lease Agreement, dated June 12, 1997, between FlashNet, as Lessee, and
EMC 2 Corporation, as Lessor.
10.6 TRIANGLE Warrant letter agreement, dated July 31, 1996, between FlashNet and ACSI
Advanced Technologies, Inc.
10.7 TRIANGLE Letter agreement, dated June 17, 1997, between FlashNet and ACSI Advanced Data
Services, Inc. (successor to ACSI Advanced Technologies, Inc.)
10.8 TRIANGLE Management Consulting Services Agreement, dated June 17, 1997, between FlashNet
and ACSI Advanced Data Services, Inc.
10.9 TRIANGLE WebSite Management Company, Inc. 1997 Stock Incentive Plan.
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
10.10 TRIANGLE Office Lease, dated June 14, 1996, between FlashNet, as Tenant, and Colonial
Savings, F. A., as Landlord, including Addendum, dated May 23, 1997.
10.11 TRIANGLE Lease Agreement, dated February 13, 1998, between FlashNet and Leonard
Properties.
10.12 TRIANGLE Merchant Bank Credit Card Agreement, dated June 29, 1998, between FlashNet and
First Charter Bank, N.A.
10.13 TRIANGLE Agreement, dated December 12, 1997, between FlashNet and Summit National Bank.
10.14 TRIANGLE Netscape Communications Corporation Network Service Provider Distribution
Agreement, dated March 26, 1996, between FlashNet and Netscape Communications
Corporation.
10.15+ Software License and Support Agreement, dated August 28, 1998, between FlashNet
and Portal Software, Inc.
10.16 TRIANGLE Software Distribution and Licensing Agreement, dated December 24, 1996, between
FlashNet and Solid Oak Software, Inc.
10.17+ Shopsite Distributor Agreement, dated June 11, 1998, between FlashNet and Open
Market, Inc.
10.18+ PSINet Wholesale Usage Agreement, dated February 17, 1998, between FlashNet and
PSINet, Inc. and Amendment No. 1 to PSINet Wholesale Usage Agreement, dated
November 10, 1998
10.19 TRIANGLE Noncompetition and Nondisclosure Agreement, dated May 7, 1998, by and between
FlashNet and A. Lee Thurburn.
10.20 TRIANGLE Noncompetition and Nondisclosure Agreement, dated May 7, 1998, by and between
FlashNet and Michael Scott Leslie.
10.21 TRIANGLE Letter Agreement between FlashNet and Andrew N. Jent, dated November 3, 1998.
10.22 TRIANGLE Letter Agreement between FlashNet and Terri Frey, dated June 24, 1998.
10.23 TRIANGLE Letter Agreement between FlashNet and R. Todd Wallace, dated March 23, 1998.
10.24 Intentionally omitted.
10.25 TRIANGLE Letter Agreement between FlashNet and Russel A. Wiseman, dated January 7, 1999.
10.26 TRIANGLE Lease Agreement between FlashNet and Mercantile Partners, L.P., dated February
10, 1999.
10.27 TRIANGLE Sublease Agreement between FlashNet and AST Research, Inc., dated March 1, 1999.
21.1 TRIANGLE Subsidiaries of FlashNet.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Cantey & Hanger, L.L.P. Reference is made to Exhibit 5.1.
23.3 TRIANGLE Consent of Brobeck, Phleger & Harrison LLP.
24.1 TRIANGLE Power of Attorney (see page II-7).
27.1 TRIANGLE Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed. Confidential treatment requested as to certain portions,
which portions are omitted and filed separately with the Securities and
Exchange Commission.
TRIANGLE Previously filed.
II-6
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
No financial statement schedules of FlashNet are included in Part II of this
registration statement because the information required to be set forth therein
is not applicable or is shown in the Consolidated Financial Statements or the
Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Texas Business Corporation Act, the Restated Articles
of Incorporation or the Bylaws of the registrant, the Underwriting Agreement, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Fort Worth, State of Texas, on March 15, 1999.
<TABLE>
<S> <C> <C>
FLASHNET COMMUNICATIONS, INC.
By: /s/ ALBERT LEE THURBURN
-----------------------------------------
Albert Lee Thurburn
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman and Chief
/s/ ALBERT LEE THURBURN Executive Officer
- ------------------------------ (principal executive March 15, 1999
Albert Lee Thurburn officer)
MICHAEL SCOTT LESLIE*
- ------------------------------ President, Chief Operating March 15, 1999
Michael Scott Leslie Officer and Director
Executive Vice President,
ANDREW N. JENT* Chief Financial Officer
- ------------------------------ and Secretary (principal March 15, 1999
Andrew N. Jent financial and accounting
officer)
JOHN B. KLEINHEINZ*
- ------------------------------ Director March 15, 1999
John B. Kleinheinz
KEVIN A. STADTLER*
- ------------------------------ Director March 15, 1999
Kevin A. Stadtler
JAMES B. FRANCIS, JR.*
- ------------------------------ Director March 15, 1999
James B. Francis, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ALBERT LEE THURBURN
-------------------------
Albert Lee Thurburn
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
1.1 TRIANGLE Form of Underwriting Agreement dated February 19, 1999.
3.1 TRIANGLE Restated Articles of Incorporation of FlashNet, dated February 18, 1998.
3.2 TRIANGLE Certificate of Designations of Series A Convertible Preferred Stock of FlashNet,
dated May 7, 1998 and Statement of Increase in Number of Shares of Series A
Convertible Preferred Stock of FlashNet, dated July 31, 1998.
3.3 TRIANGLE Bylaws of FlashNet, adopted September 27, 1995.
3.4 TRIANGLE Restated Articles of Incorporation of FlashNet, adopted February 22, 1999.
3.5 TRIANGLE Bylaws of FlashNet, adopted February 12, 1999.
3.6 TRIANGLE Articles of Amendment to Articles of Incorporation of FlashNet, adopted March
10, 1999.
4.1 TRIANGLE 12% Convertible Notes Purchase Agreement, dated July 8, 1996, between FlashNet
and a purchaser of such notes. Each purchaser is a party to an identical
agreement with FlashNet.
4.2 TRIANGLE Common Stock Purchase Agreement, dated December 5, 1996, between FlashNet and
Stephen B. Markwardt.
4.3 TRIANGLE Secured Promissory Note, dated December 10, 1997, payable by FlashNet to Ascend
Communications, Inc.
4.4 TRIANGLE Warrant to Purchase Common Stock, issued by FlashNet to Ascend Communications,
Inc. on December 10, 1997.
4.5 TRIANGLE Stock Purchase Agreement, dated May 7, 1998, by and among FlashNet, Apogee Fund
LP, Emmett M. Murphy, ISP Investors, L.P., Scott M. Kleberg, J. Luther King,
Jr., Scott C. Hollmann, and Fourteen Hill Capital, LP.
4.6 TRIANGLE Registration Rights Agreement, dated May 7, 1998, by and among FlashNet and the
investors named in 4.5 above.
4.7 TRIANGLE First Amendment to Stock Purchase Agreement, dated August 3, 1998, by and among
Apogee Fund LP; Emmett M. Murphy; ISP Investors, L.P.; Scott M. Kleberg; J.
Luther King, Jr.; Scott C. Hollmann; Fourteen Hill Capital, LP; Applied
Telecommunications Technologies, Inc.; Paul Castro; UD Donna Manning IRA;
Faith Griffin; Youssef Squali; Jeffrey N. Wilkes; George P. Jenkins Insurance
Trust, U/A 6/28/91, James P. Jenkins, Robert N. Jenkins and Richard G.
Jenkins, Trustees; James P. Jenkins; Frank A. Klepetko; Q Ventures, L.P. and
FlashNet.
4.8 TRIANGLE First Amendment to Registration Rights Agreement, dated August 3, 1998, by and
among the investors named in 4.7 above and FlashNet.
4.9 TRIANGLE Term Loan Agreement, dated January 15, 1999, between FlashNet and Goldman Sachs
Credit Partners L.P.
4.10 TRIANGLE Term Note, dated January 15, 1999, payable by FlashNet to Goldman Sachs Credit
Partners L.P.
4.11 TRIANGLE Borrower Pledge and Security Agreement, dated January 15, 1999, between FlashNet
and Goldman Sachs Credit Partners L.P.
4.12 TRIANGLE Subsidiary Pledge and Security Agreement, dated January 15, 1999, between
FlashNet's subsidiaries and Goldman Sachs Credit Partners L.P.
4.13 TRIANGLE Trademark Security Agreement, dated January 15, 1999, between FlashNet and
Goldman Sachs Credit Partners L.P.
4.14 TRIANGLE Common Stock Purchase Option, dated January 15, 1999, between FlashNet and
Goldman Sachs Credit Partners L.P.
4.15 TRIANGLE Second Amendment to Registration Rights Agreement, dated January 15, 1999, by
and among the Investors named in 4.7 above, FlashNet and Goldman Sachs Credit
Partners L.P.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.16 TRIANGLE Specimen Certificate for shares of common stock.
5.1 Opinion of Cantey & Hanger, L.L.P.
10.1 TRIANGLE Master Lease Agreement, dated June 7, 1996, between FlashNet, as Lessee, and
Ascend Credit Corporation, as Lessor.
10.2 TRIANGLE Master Lease Agreement, dated October 31, 1996, between FlashNet, as Lessee, and
Shiva Corporation, as Lessor.
10.3 TRIANGLE Letter lease agreement, dated September 27, 1996, between FlashNet and U.S.
Robotics.
10.4 TRIANGLE Letter lease agreement, dated October 14, 1996, between FlashNet and U.S.
Robotics.
10.5+ Master Lease Agreement, dated June 12, 1997, between FlashNet, as Lessee, and
EMC 2 Corporation, as Lessor.
10.6 TRIANGLE Warrant letter agreement, dated July 31, 1996, between FlashNet and ACSI
Advanced Technologies, Inc.
10.7 TRIANGLE Letter agreement, dated June 17, 1997, between FlashNet and ACSI Advanced Data
Services, Inc. (successor to ACSI Advanced Technologies, Inc.)
10.8 TRIANGLE Management Consulting Services Agreement, dated June 17, 1997, between FlashNet
and ACSI Advanced Data Services, Inc.
10.9 TRIANGLE WebSite Management Company, Inc. 1997 Stock Incentive Plan.
10.10 TRIANGLE Office Lease, dated June 14, 1996, between FlashNet, as Tenant, and Colonial
Savings, F. A., as Landlord, including Addendum, dated May 23, 1997.
10.11 TRIANGLE Lease Agreement, dated February 13, 1998, between FlashNet and Leonard
Properties.
10.12 TRIANGLE Merchant Bank Credit Card Agreement, dated June 29, 1998, between FlashNet and
First Charter Bank, N.A.
10.13 TRIANGLE Agreement, dated December 12, 1997, between FlashNet and Summit National Bank.
10.14 TRIANGLE Netscape Communications Corporation Network Service Provider Distribution
Agreement, dated March 26, 1996, between FlashNet and Netscape Communications
Corporation.
10.15+ Software License and Support Agreement, dated August 28, 1998, between FlashNet
and Portal Software, Inc.
10.16 TRIANGLE Software Distribution and Licensing Agreement, dated December 24, 1996, between
FlashNet and Solid Oak Software, Inc.
10.17+ Shopsite Distributor Agreement, dated June 11, 1998, between FlashNet and Open
Market, Inc.
10.18+ PSINet Wholesale Usage Agreement, dated February 17, 1998, between FlashNet and
PSINet, Inc. and Amendment No. 1 to PSINet Wholesale Usage Agreement, dated
November 10, 1998
10.19 TRIANGLE Noncompetition and Nondisclosure Agreement, dated May 7, 1998, by and between
FlashNet and A. Lee Thurburn.
10.20 TRIANGLE Noncompetition and Nondisclosure Agreement, dated May 7, 1998, by and between
FlashNet and Michael Scott Leslie.
10.21 TRIANGLE Letter Agreement between FlashNet and Andrew N. Jent, dated November 3, 1998.
10.22 TRIANGLE Letter Agreement between FlashNet and Terri Frey, dated June 24, 1998.
10.23 TRIANGLE Letter Agreement between FlashNet and R. Todd Wallace, dated March 23, 1998.
10.24 Intentionally omitted.
10.25 TRIANGLE Letter Agreement between FlashNet and Russel A. Wiseman, dated January 7, 1999.
10.26 TRIANGLE Lease Agreement between FlashNet and Mercantile Partners, L.P., dated February
10, 1999.
10.27 TRIANGLE Sublease Agreement between FlashNet and AST Research, Inc., dated March 1, 1999.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
21.1 TRIANGLE Subsidiaries of FlashNet.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Cantey & Hanger, L.L.P. Reference is made to Exhibit 5.1.
23.3 TRIANGLE Consent of Brobeck, Phleger & Harrison LLP.
24.1 TRIANGLE Power of Attorney (see page II-7).
27.1 TRIANGLE Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed. Confidential treatment requested as to certain portions,
which portions are omitted and filed separately with the Securities and
Exchange Commission.
TRIANGLE Previously filed.
<PAGE>
March 15, 1999
FlashNet Communications, Inc.
1812 North Forest Park Boulevard
Fort Worth, Texas 76102
Ladies and Gentlemen:
We have assisted in the preparation and filing by FlashNet
Communications, Inc. (the "Company") of a Registration Statement on Form S-1,
No. 333-69277, as amended (the "Registration Statement"), with the Securities
and Exchange Commission, relating to the sale of up to 3,664,286 shares (the
"Shares") of Common Stock, no par value per share, of the Company. A form of
underwriting agreement (the "Underwriting Agreement") is filed as an exhibit
to the Registration Statement.
We have examined such records and documents and have made such
examination of laws as we considered necessary to form a basis for the
opinion set forth herein. In our examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, and the conformity with the originals of all documents submitted
to us as copies thereof.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and, when sold and paid for in accordance
with the terms of the Underwriting Agreement, will be validly issued, fully
paid and nonassessable.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated. We hereby
consent to the use of our name in the Registration Statement under the
caption "Legal Matters" in the related Prospectus and consent to the filing
of this opinion as an exhibit thereto.
Very truly yours,
/s/ CANTEY & HANGER, L.L.P.
-------------------------------
CANTEY & HANGER, L.L.P.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement No.
333-69277 of FlashNet Communications, Inc. of our report dated February 23, 1999
(March 11, 1999 as to the last paragraph in Note 12) appearing in the
Prospectus, which is part of this Registration Statement and to the reference to
us under the headings "Selected Consolidated Financial and Operating Data" and
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Fort Worth, Texas
March 15, 1999
