<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1999
REGISTRATION NO. 333-69217
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
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
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF REGISTRATION
TO BE REGISTERED OFFERING PRICE(1) FEE
<S> <C> <C>
Common Stock, no par value........................................ $48,300,000 $13,428(2)
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
(2) Of this amount, $12,788 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 FEBRUARY 24, 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]
3,000,000 SHARES
COMMON STOCK
FlashNet Communications, Inc. is offering 3,000,000 shares of our common
stock. This is FlashNet's initial public offering. We have applied for approval
for quotation on the Nasdaq National Market under the symbol "FLAS" for the
shares we are offering. We anticipate that the initial public offering price
will be between $12.00 and $14.00 per share.
------------------------
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....................................... $ $
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.
EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1999.
2
<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.
3
<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
ASSUMES: (A) AN INCREASE IN OUR AUTHORIZED CAPITAL STOCK AND A 3.4-FOR-1 SPLIT
OF OUR ISSUED AND OUTSTANDING COMMON STOCK WHICH WILL OCCUR PRIOR TO THE
COMPLETION OF THIS OFFERING; (B) 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; (C) NO EXERCISE OR CONVERSION
OF STOCK OPTIONS, WARRANTS OR CONVERTIBLE NOTES AFTER DECEMBER 31, 1998; AND (D)
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.......................... 3,000,000 shares
Common stock to be outstanding after the offering......... 13,197,018 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 $ 29,608
Total assets.......................................................... 9,733 38,303
Working capital....................................................... (22,757) 10,647
Total debt............................................................ 6,896 2,062
Total shareholders' equity (deficit).................................. (23,707) 17,608
</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:
- 68,442 shares of common stock issuable to holders of our convertible notes
upon the conversion of such notes;
- 1,709,877 shares of common stock issuable to our warrant holders when they
exercise their warrants for $0.003 per share;
- 781,592 shares of common stock issuable to our stock option holders upon
the exercise of outstanding stock options at a weighted average exercise
price of $5.72 per share; and
- 384,615 shares (assuming an initial public offering price of $13.00 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>
WE FACE RISKS ASSOCIATED WITH SYSTEM FAILURE
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 FACE RISKS ASSOCIATED WITH TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
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.
WE DEPEND ON THE CONTINUED GROWTH IN INTERNET USAGE
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.
10
<PAGE>
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.
OUR CORPORATE SALES PROGRAM DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN
QUALIFIED SALES PERSONNEL
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.
OUR NETWORK MARKETING PROGRAM DEPENDS ON OUR ABILITY TO RECRUIT INDEPENDENT
SALES REPRESENTATIVES
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,
11
<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.
OUR NETWORK MARKETING PROGRAM IS SUBJECT TO RISKS ASSOCIATED WITH GOVERNMENT
REGULATION
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.
OUR BUSINESS MAY BE SUBJECT TO STATE AND FEDERAL GOVERNMENT REGULATION
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 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.
12
<PAGE>
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.
OUR NETWORK AND COMPUTER SYSTEMS ARE SUBJECT TO SECURITY RISKS
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 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.
13
<PAGE>
WE ARE SUBJECT TO RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
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.
14
<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.
THE PRICE OF OUR STOCK MAY BE VOLATILE
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.
OUR STOCK PRICE MAY BE AFFECTED WHEN ADDITIONAL SHARES ARE SOLD
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
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.
15
<PAGE>
CERTAIN SHAREHOLDERS HAVE 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, 7,068,434 shares of our common
stock, representing approximately 54% of the voting power after this offering.
These shareholders will beneficially own or control, collectively, approximately
52% 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.
16
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the 3,000,000 shares of
common stock offered by us are estimated to be $35,070,000, or $40,510,500 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 $13.00 per share.
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.
17
<PAGE>
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 $13.00 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 13,166,759 shares issued and
outstanding pro forma, as adjusted..................................... 3,443 46,424
Warrants to purchase common stock........................................ 3,705 3,705
Accumulated deficit...................................................... (30,855) (32,521)
---------- -----------
Total shareholders' equity (deficit)................................... (23,707) 17,608
---------- -----------
Total capitalization................................................. $ (15,744) $ 17,660
---------- -----------
---------- -----------
</TABLE>
18
<PAGE>
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 3,000,000 shares of common stock in this offering (at an
assumed initial public offering price of $13.00 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 $17.6 million, or $1.34 per share. This represents an
immediate increase in pro forma net tangible book value of $2.89 per share to
our existing shareholders and an immediate dilution of $11.66 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.......................................... $ 13.00
Pro forma deficit in net tangible book value per share at December 31, 1998............ $ (1.55)
Increase per share attributable to new investors....................................... 2.89
---------
Pro forma net tangible book value per share after this offering.......................... 1.34
---------
Dilution per share to new investors...................................................... $ 11.66
---------
---------
</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................................ 10,166,758 77.2% $ 8,622,998 18.1% $ 0.85
New investors(1)..................................... 3,000,000 22.8 39,000,000 81.9 13.00
------------ ----- ----------- -----
Total............................................ 13,166,758 100.0% $47,622,998 100.0%
------------ ----- ----------- -----
------------ ----- ----------- -----
</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 3,450,000
shares, or 25.3% 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)............... $ (0.10) $ (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,
are paid 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
23
<PAGE>
network design, thereby enhancing our ability to address new markets and
improving the efficiency and 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.
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<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
37
<PAGE>
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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<PAGE>
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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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--Our Business May Be Subject to State and Federal Government
Regulation."
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.
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<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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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.
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<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 $13.00 per share of our common stock, which is the
assumed initial public offering price. Amounts reflected are based on the
assumed value minus the exercise price multiplied by the number of shares
acquired on exercise.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
(#) ($)
---------------------- ---------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ------------------------------------------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Albert Lee Thurburn.............................. -- 127,993 $ -- $ 535,011
Michael Scott Leslie............................. -- 127,993 -- 535,011
</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
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<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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<PAGE>
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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<PAGE>
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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<PAGE>
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 9.3%
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 8.5
ISP Investors, L.P.(4)............. 1,666,394 16.3 -- 1,666,394 12.6
Thomas K. Reed, Jr.(5)............. 646,000 6.3 -- 646,000 4.9
James A. Ryffel(6)................. 850,000 8.3 -- 850,000 6.4
James B. Francis, Jr.(7)........... -- -- -- -- --
Andrew N. Jent..................... -- -- -- -- --
John B. Kleinheinz(8).............. 2,377,334 23.3 -- 2,377,334 18.0
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 5.7
Russell A. Wiseman(12)............. 3,077 * -- 3,077 *
All directors and executive
officers as a group (7
persons)(13)...................... 4,485,708 43.9 -- 4,485,708 33.9
</TABLE>
- --------------------------
* Represents less than 1% of the outstanding shares of common stock.
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<PAGE>
(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 of Needham, Massachusetts. 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) 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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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
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:
- 5,559,129 shares of common stock, held of record by 48 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 1,681,997 shares of common stock at an exercise price
of $0.003 per share;
- $194,333 in principal amount of notes convertible into 66,073 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 13,197,018 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, as in effect
upon the closing of this offering, 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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<PAGE>
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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<PAGE>
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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<PAGE>
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 13,197,018 shares
of common stock, or 13,647,018 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
3,000,000 shares offered hereby, or 3,450,000 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 10,197,018 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, 8,394,378 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 1,787,340 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 1,748,060 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 13,485 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 321,997 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 $13.00
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 384,615
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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<PAGE>
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 131,970 shares immediately after this offering, or
approximately 136,470 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 6,344,349 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.
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<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............................................................................. 3,000,000
----------
----------
</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 3,000,000 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 3,000,000 shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
3,000,000 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 214,020 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 13,485 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.
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 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.
69
<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>
The accompanying consolidated financial statements give effect to the
completion of the 3.4 to 1 stock split of FlashNet's common stock which will
take place on the effective date of the offering. The following report is in the
form which will be furnished by Deloitte & Touche LLP upon completion of the
stock split of FlashNet's common stock described in Note 12 to the consolidated
financial statements and assuming that from February 23, 1999 to the date of
such completion no other material events have occurred that would affect the
accompanying consolidated financial statements or required disclosures therein.
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.
As discussed in Note 1 to the consolidated financial statements, in
1998, the Company retroactively changed its method of accounting for revenue
recognition of subscriber set-up fees and distributor sign-up fees.
Deloitte & Touche LLP
Fort Worth, Texas
February 23, 1999 ( as to Note 12)"
DELOITTE & TOUCHE LLP
Fort Worth, Texas
February 23, 1999
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.
In connection with the planned registration of the Company's Common Stock
with the Securities and Exchange Commission, the Company has retroactively
adopted a new method of accounting for revenue recognition of subscriber set-up
fees and distributor sign-up fees. Previously, the Company recognized revenue
for subscriber set-up fees and distributor sign-up fees as income when received.
The Company has restated its 1998, 1997 and 1996 consolidated financial
statements for this accounting change.
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.
F-8
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET LOSS PER SHARE--Share and per share amounts have been adjusted
retroactively for the 3.4-to-1 stock split which was approved by in February
1999 to become effective upon consummation of the initial public offering. 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).
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.
F-9
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-10
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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%.
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.
F-11
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
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 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 15,470 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>
F-12
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
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
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 will become effective at the moment immediately preceding
consummation of the Company's initial public offering. 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............................................ $ 13,428
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................................................... 55,442
---------
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 $194,333, $24,000 of
which was held by affiliates;
II-2
<PAGE>
- A total of $304,000 in principal amount of the notes had been converted
into 103,360 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 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 Form of Restated Articles of Incorporation of FlashNet, as in effect upon
closing of this offering.
3.5 Form of Bylaws of FlashNet, as in effect upon closing of this offering.
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 Specimen Certificate for shares of common stock.
5.1 Opinion of Cantey & Hanger, L.L.P.
10.1 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 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 Lease Agreement between FlashNet and Mercantile Partners, L.P., dated February
10, 1999.
10.27 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 Consent of Brobeck, Phleger & Harrison LLP.
24.1 TRIANGLE Power of Attorney (see page II-7).
27.1 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. 2 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 February 23, 1999.
<TABLE>
<S> <C> <C>
FLASHNET COMMUNICATIONS, INC.
By: /s/ MICHAEL SCOTT LESLIE
-----------------------------------------
Michael Scott Leslie
PRESIDENT AND CHIEF OPERATING 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
ALBERT LEE THURBURN* Executive Officer
- ------------------------------ (principal executive February 23, 1999
Albert Lee Thurburn officer)
/s/ MICHAEL SCOTT LESLIE
- ------------------------------ President, Chief Operating February 23, 1999
Michael Scott Leslie Officer and Director
Executive Vice President,
ANDREW N. JENT* Chief Financial Officer
- ------------------------------ and Secretary (principal February 23, 1999
Andrew N. Jent financial and accounting
officer)
JOHN B. KLEINHEINZ*
- ------------------------------ Director February 23, 1999
John B. Kleinheinz
KEVIN A. STADTLER*
- ------------------------------ Director February 23, 1999
Kevin A. Stadtler
JAMES B. FRANCIS, JR.*
- ------------------------------ Director February 23, 1999
James B. Francis, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MICHAEL SCOTT
LESLIE
-------------------------
Michael Scott Leslie
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
1.1 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 Form of Restated Articles of Incorporation of FlashNet, as in effect upon
closing of this offering.
3.5 Form of Bylaws of FlashNet, as in effect upon closing of this offering.
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.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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 Specimen Certificate for shares of common stock.
5.1 Opinion of Cantey & Hanger, L.L.P.
10.1 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 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.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.26 Lease Agreement between FlashNet and Mercantile Partners, L.P., dated February
10, 1999.
10.27 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 Consent of Brobeck, Phleger & Harrison LLP.
24.1 TRIANGLE Power of Attorney (see page II-7).
27.1 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>
DRAFT - 2/19/99
FLASHNET COMMUNICATIONS, INC.
COMMON STOCK
_______________ SHARES
UNDERWRITING AGREEMENT
________________ __, 1999
BANCBOSTON ROBERTSON STEPHENS INC.
J.C. BRADFORD & CO.
EVEREN SECURITIES, INC.
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street
Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
FlashNet Communications, Inc., a Texas corporation (hereinafter
called the "Company"), addresses you as the Representatives of each of the
persons, firms and corporations listed in SCHEDULE A hereto (herein
collectively called the "Underwriters") and hereby confirms its respective
agreements with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
___________ shares of its authorized and unissued Common Stock, no par value
per share (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to
____________ additional shares of the Company's Common Stock, no par value
per share (the "Option Shares"), as provided in Section 7 hereof. As used in
this Agreement, the term "Shares" shall include the Firm Shares and the
Option Shares. All shares of Common Stock, no par value per share, of the
Company to be outstanding after giving effect to the sales contemplated
hereby, including the Shares, are hereinafter referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-69277)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses
- ------------------------
Plus an option to purchase up to _______________ additional shares from
the Company to cover over-allotments.
<PAGE>
subject to completion and such abbreviated registration statements pursuant
to Rule 462(b) of the Rules and Regulations as may have been required prior
to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and
such abbreviated registration statements as may hereafter be required. Copies
of such registration statement and amendments, of each related prospectus
subject to completion (the "Preliminary Prospectuses") and of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
have been delivered to you. The Company and the transactions contemplated by
this Agreement meet the requirements for filing on Form S-1 under the Act.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare
and promptly file with the Commission the information omitted from the
registration statement pursuant to Rule 430A(a) or, if BancBoston Robertson
Stephens Inc., on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or
(c), as applicable, of the Rules and Regulations pursuant to subparagraph
(1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a
post-effective amendment to the registration statement (including a final
form of prospectus). If the registration statement relating to the Shares
has not been declared effective under the Act by the Commission, the Company
will prepare and promptly file an amendment to the registration statement,
including a final form of prospectus, or, if BancBoston Robertson Stephens
Inc., on behalf of the several Underwriters, shall agree to the utilization
of Rule 434 of the Rules and Regulations, the information required to be
included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became
or becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files
a term sheet pursuant to Rule 434 of the Rules and Regulations, the
information deemed to be a part of the registration statement at the time it
became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and
Regulations) and, in the event of any amendment thereto or the filing of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations relating thereto after the effective date of such registration
statement, shall also mean (from and after the effectiveness of such
amendment or the filing of such abbreviated registration statement) such
registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement
shall mean the prospectus relating to the Shares as included in such
Registration Statement at the time it becomes effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of
the Registration Statement at the time it became effective pursuant to Rule
430A(b) of the Rules and Regulations); PROVIDED, HOWEVER, that if in reliance
on Rule 434 of the Rules and Regulations and with the consent of BancBoston
Robertson Stephens Inc., on behalf of the several Underwriters, the Company
shall have provided to the Underwriters a term sheet pursuant to Rule 434(b)
or (c), as applicable, prior to the time that a confirmation is sent or given
for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean
the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by the Company and
circulated by the Underwriters to all prospective purchasers of the Shares
(including the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters
for such use. If in reliance on Rule 434 of the Rules and Regulations and
with the consent of BancBoston Robertson Stephens Inc., on behalf of the
several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time
that a confirmation is sent or given for purposes of Section 2(10)(a) of the
Act, the Prospectus and the term sheet, together, will not be materially
different from the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any
<PAGE>
Preliminary Prospectus or instituted proceedings for that purpose, and each
such Preliminary Prospectus has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date,
has not included any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the time the
Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased,
(i) the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained and will contain all material information
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and (iii) the
Prospectus, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that none of the representations and warranties contained in this
subparagraph (b) shall apply to information contained in or omitted from the
Registration Statement or Prospectus, or any amendment or supplement thereto,
in reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter specifically for use
in the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of the State of Texas with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Prospectus; except as disclosed in the Prospectus, the
Company owns all of the outstanding capital stock of its subsidiaries free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest; each of the Company and its subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure
to be so qualified or be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise; no proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing, or seeking to revoke, limit or curtail,
such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from
state, federal and other regulatory authorities which are material to the
conduct of its business, all of which are valid and in full force and effect;
each material contract or other instrument to which the Company or any of its
subsidiaries is a party or by which its properties or business is or may be
bound or affected has been duly and validly executed by the Company or such
subsidiary and is in full force and effect in all material respects and is
enforceable against the parties thereto in accordance with its terms; neither
the Company nor any of its subsidiaries is in violation of its respective
Articles of Incorporation or bylaws or in efault in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or instrument to
which it is a party or by which it or any of its properties may be bound; and
neither the Company nor any of its subsidiaries is in material violation of
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its properties. The Company does not
own or control, directly or indirectly, any stock or other ownership interest
in any corporation, association or other entity other than all of the issued
and outstanding capital stock of FlashNet Marketing, Inc., a Texas
corporation, and FlashNet Telecom, Inc., a Texas corporation.
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement
hereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other
<PAGE>
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence
of indebtedness, or under any lease, contract, indenture, mortgage, deed of
trust, loan agreement, license agreement, joint venture or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its subsidiaries or their respective properties may be
bound, (ii) the Articles of Incorporation or bylaws of the Company or any of
its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company or
any of its subsidiaries or over their respective properties. No consent,
approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties is required for the execution and delivery of this
Agreement and the consummation by the Company or any of its subsidiaries of
the transactions herein contemplated, except such as may be required under
the Act or under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.
(e) There is not pending or, to the best of the Company's
knowledge, threatened, any action, suit, claim or proceeding against the
Company, any of its subsidiaries or any of their respective officers or any
of their respective properties, assets or rights before any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets
or rights, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company or any of its subsidiaries of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the
Act or the Rules and Regulations which have not been accurately described in
all material respects in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in
the Prospectus under the caption "Capitalization" and conforms in all
material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly
state the substance of the instruments defining the capitalization of the
Company); the Firm Shares and the Option Shares to be purchased from the
Company hereunder have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable,
and will be sold free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest; and no preemptive right, co-sale
right, registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Firm Shares or Option Shares
to be purchased from the Company hereunder or the issuance and sale thereof,
other than those that have been expressly waived prior to the date hereof and
those that will automatically expire upon and will not apply to the
consummation of the transactions contemplated hereby to be consummated on the
Closing Date. No further approval or authorization of any shareholder, the
Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Shares except as may be required under the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or under
state or other securities or Blue Sky laws. All issued and outstanding
shares of capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable and were
not issued in violation of or subject to any preemptive right, or other
rights to subscribe for or purchase shares and, except as disclosed in the
Prospectus, are owned by the Company free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest. Except as
disclosed in the Prospectus and the financial statements of the Company, and
the related notes thereto, included in
<PAGE>
the Prospectus, neither the Company nor any subsidiary has outstanding any
options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or any
such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents, in
all material respects, the information required to be shown with respect to
such plans, arrangements, options and rights.
(g) Deloitte & Touche LLP, which has examined the
consolidated financial statements of the Company, together with the related
schedules and notes, as of December 31, 1998 and 1997 and for each of the
years in the three (3) year period ended December 31, 1998 filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent accountants within the meaning of the Act and the
Rules and Regulations; the audited consolidated financial statements of the
Company, together with the related schedules and notes, and the unaudited
consolidated financial information, forming part of the Registration
Statement and Prospectus, fairly present the financial position and the
results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information,
filed with the Commission as part of the Registration Statement, have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected, summary and quarterly financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with
the audited financial statements presented therein. No other financial
statements or schedules are required to be included in the Registration
Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has
not been (i) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (ii) any
transaction that is material to the Company and its subsidiaries considered
as one enterprise, except transactions entered into in the ordinary course of
business, (iii) any obligation, direct or contingent, that is material to the
Company and its subsidiaries considered as one enterprise that has been
incurred by the Company or any of its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries
that is material to the Company and its subsidiaries considered as one
enterprise, (v) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company or any of its subsidiaries, or (vi)
any loss or damage (whether or not insured) to the property of the Company or
any of its subsidiaries which has been sustained or will have been sustained
which has or is expected to have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and
marketable title to all properties and assets described in the Registration
Statement and Prospectus as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest, other than such
as would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (ii) the
agreements to which the Company or any of its subsidiaries is a party
described in the Registration Statement and Prospectus are valid agreements,
enforceable by the Company and its subsidiaries (as applicable), except as
the enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to the
best of the Company's knowledge, the other contracting party or parties
thereto are not in material breach or material default under any of such
agreements, and (iii) each of the Company and its subsidiaries has valid and
enforceable leases for all properties described in the Registration Statement
and Prospectus as leased by it, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as
<PAGE>
set forth in the Registration Statement and Prospectus, the Company owns or
leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have each timely filed
all necessary federal, state and foreign income and franchise tax returns and
have paid all taxes shown thereon as due, and there is no tax deficiency that
has been or, to the best of the Company's knowledge, might be asserted
against the Company or any of its subsidiaries that might have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise; and all tax liabilities are
adequately provided for on the books of the Company and its subsidiaries.
(k) Except as described in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has any employee
benefit plans (including, without limitation, profit sharing plans) or
deferred compensation arrangements.
(l) The Company and its subsidiaries maintain insurance with
insurers of recognized financial responsibility of the types and in the
amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company or its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect; neither
the Company nor any such subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise.
(m) To the best of the Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists
or is imminent; and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers,
subassemblers, value added resellers, subcontractors, independent software
vendors, original equipment manufacturers, or authorized dealers, franchisees
or distributors that might be expected to result in a material adverse change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(n) Each of the Company and its subsidiaries owns or
possesses adequate rights to use all patents, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names and
copyrights which are necessary to conduct its businesses as described in the
Registration Statement and Prospectus; the expiration of any patents, patent
rights, trade secrets, trademarks, service marks, trade names or copyrights
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; the Company has
not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of the Company by others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names or copyrights; and the Company has not received
any notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names
or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise.
(o) The statements in the Prospectus under the heading
"Certain Transactions" set forth all existing agreements, arrangements,
understandings or transactions or proposed agreements, arrangements,
<PAGE>
understandings or transactions, between or among the Company, on the one
hand, and any officer, director or shareholder of the Company, or with any
partner, affiliate or associate of any of the foregoing persons or entities,
on the other hand, required to be set forth or described thereunder.
(p) The Common Stock has been approved for quotation on The
Nasdaq National Market, subject to official notice of issuance.
(q) There are no issues related to the Company's or any of
its subsidiaries' preparedness for the Year 2000 that (i) are of a character
required to be described or referred to in the Registration Statement or
Prospectus by the Act or the Rules and Regulations which have not been
accurately described in the Registration Statement or Prospectus or (ii)
might reasonably be expected to result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or that might materially affect their properties, assets or
rights. All internal computer systems and each Constituent Component (as
defined below) of those systems and all computer-related products and each
Constituent Component of those products of the Company and each of its
subsidiaries fully comply with the Year 2000 Qualification Requirements.
"Year 2000 Qualification Requirements" means that the internal computer
systems and each Constituent Component of those systems and all
computer-related products and each Constituent Component of these products of
the Company and each of its Subsidiaries (i) have been reviewed to confirm
that they store, process (including sorting and performing mathematical
operations, calculations and computations), input and output data containing
date and information correctly regardless of whether the date contains dates
and times before, on or after January 1, 2000, (ii) have been designated to
ensure date and time entry recognition, calculations that accommodate same
century and multi-century formulas and date values, leap year recognition and
calculations, and date data interface values that reflect the century, (iii)
accurately manage and manipulate data involving dates and times, including
single century formulas and multi-century formulas, and will not cause an
abnormal ending scenario within the application or generate incorrect values
or invalid results involving such dates, (iv) accurately process any date
rollover, and (v) accept and respond to two-digit year date input in a manner
that resolves any ambiguities as to the century. "Constituent Component"
means all software (including operating systems, programs, packages and
utilities), firmware, hardware, networking components, and peripherals
provided as part of the configuration.
(r) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to conduct, its affairs in such a manner as to ensure that it will not
become an "investment company" or a company "controlled" by an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
(s) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option
Shares are to be purchased, as the case may be, and (ii) the completion of
the distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted
by the Act.
(t) Neither the Company nor any of its subsidiaries has at
any time during the last five (5) years (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or permitted by the laws
of the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
<PAGE>
(v) Except for __________, each officer and director of the
Company, each beneficial owner of any shares of Common Stock and each holder
of any option or other right to purchase or receive shares of Common Stock
has agreed in writing that such person will not, for a period of 180 days
from the date that the Registration Statement is declared effective by the
Commission (the "Lock-up Period"), offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") 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 (collectively, "Securities")
now owned or hereafter acquired directly by such person or with respect to
which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a
distribution to partners or shareholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of BancBoston Robertson
Stephens Inc. The foregoing restriction has been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result
in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or
grant of any right (including, without limitation, any put or call option)
with respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Such person has also agreed
and consented to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by such person
except in compliance with this restriction. Furthermore, each such person
has also agreed that, without the prior written consent of BancBoston
Robertson Stephens Inc., such person will not, during the period ending with
the conclusion of the Lock-Up Period, make any demand for or exercise any
right with respect to, the registration of any Securities. The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and shareholders have agreed to
such or similar restrictions (the "Lock-up Agreements") presently in effect
or effected hereby. The Company hereby represents and warrants that, prior
to the conclusion of the Lock-Up Period, it will not release any of its
officers, directors, shareholders, optionees or holders of any other rights
to purchase or receive shares of Common Stock from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent of
BancBoston Robertson Stephens Inc.
(w) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the
Registration Statement and the Prospectus, (iii) the Company will not be
required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended
(42 U.S.C. Section 9601, ET SEQ.), or otherwise designated as a contaminated
site under applicable state or local law.
(x) Each of the Company and its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(y) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
<PAGE>
officers or directors of the Company or any of the members of the families of
any of them, except as disclosed in the Registration Statement and the
Prospectus.
(a) The Company has not incurred any liability for any
finder's fees or similar payments in connection with the transactions
contemplated hereby.
(aa) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of
Cuba or with any person or affiliate located in Cuba.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company at a purchase price of $__.__ per share, the number
of Firm Shares set forth in Section 1 hereof. The obligation of each
Underwriter to the Company shall be to purchase from the Company that number
of Firm Shares which is set forth opposite the name of such Underwriter in
Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made
against payment of the purchase price therefor by the several Underwriters by
Federal or other funds immediately available in San Francisco at the offices
of Cantey & Hanger, L.L.P., 2100 Burnett Plaza, 801 Cherry Street, Fort
Worth, Texas (or at such other place as may be agreed upon among the
Representatives and the Company), at 7:00 A.M., San Francisco time (a) on the
third (3rd) full business day following the first day that Shares are traded,
(b) if this Agreement is executed and delivered after 1:30 P.M., San
Francisco time, the fourth (4th) full business day following the day that
this Agreement is executed and delivered or (c) at such other time and date
not later than seven (7) full business days following the first day that
Shares are traded as the Representatives and the Company may determine (or at
such time and date to which payment and delivery shall have been postponed
pursuant to Section 10 hereof), such time and date of payment and delivery
being herein called the "Closing Date"; PROVIDED, HOWEVER, that if the
Company has not made available to the Representatives copies of the
Prospectus within the time provided in Section 4(d) hereof, the
Representatives may, in their sole discretion, postpone the Closing Date
until no later than two (2) full business days following delivery of copies
of the Prospectus to the Representatives. The certificates for the Firm
Shares to be so delivered will be made available to you at such office or
such other location including, without limitation, in New York City, as you
may reasonably request for checking at least one (1) full business day prior
to the Closing Date and will be in such names and denominations as you may
request, such request to be made at least two (2) full business days prior to
the Closing Date. If the Representatives so elect, delivery of the Firm
Shares may be made by credit through full fast transfer to accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior
to the Closing Date for the Firm Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public
offering price of $__.__ per share. After the initial public offering, the
several Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last sentence of the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters) and in the second, third and tenth paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company that the
<PAGE>
statements made therein do not include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the parties
hereto, to become effective as promptly as possible; the Company will use its
best efforts to cause any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations as may be required subsequent to the date
the Registration Statement is declared effective to become effective as
promptly as possible; the Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the
Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the
Rules and Regulations, the Company will provide evidence satisfactory to you
that the Prospectus and term sheet meeting the requirements of Rule 434(b) or
(c), as applicable, of the Rules and Regulations, have been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (7) of
Rule 424(b) of the Rules and Regulations; if for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the
time period prescribed; it will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information; promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to
the Registration Statement or Prospectus which, in the opinion of counsel for
the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have
occurred as a result of which the Prospectus or any other prospectus relating
to the Shares as then in effect would include any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the Act; and it will file no amendment or supplement
to the Registration Statement or Prospectus, or, prior to the end of the
period of time in which a prospectus relating to the Shares is required to be
delivered under the Act, which shall not previously have been submitted to
you a reasonable time prior to the proposed filing thereof or to which you
shall reasonably object in writing, subject, however, to compliance with the
Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order
should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the
<PAGE>
securities laws of such jurisdictions as you may designate and to continue
such qualifications in effect for so long as may be required for purposes of
the distribution of the Shares, except that the Company shall not be required
in connection therewith or as a condition thereof to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction in which it is not otherwise required to be so qualified or to
so execute a general consent to service of process. In each jurisdiction in
which the Shares shall have been qualified as above provided, the Company
will make and file such statements and reports in each year as are or may be
required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term
sheet under Rule 434, in no event later than the first (1st) full business
day following the first day that Shares are traded, copies of the
Registration Statement (three of which will be signed and which will include
all exhibits), each Preliminary Prospectus, the Prospectus and any amendments
or supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you
may from time to time reasonably request. Notwithstanding the foregoing, if
BancBoston Robertson Stephens Inc., on behalf of the several Underwriters,
shall agree to the utilization of Rule 434 of the Rules and Regulations, the
Company shall provide to you copies of a Preliminary Prospectus updated in
all respects through the date specified by you in such quantities as you may
from time to time reasonably request.
(e) If the Company elects to rely on Rule 462(b) under the
Securities Act, the Company shall file a Rule 462(b) Registration Statement
with the Commission in compliance with Rule 462(b) under the Securities Act
prior to the time confirmations are sent or given, as specified by Rule
462(b)(2) under the Securities Act, and shall pay the applicable fees in
accordance with Rule 111 under the Securities Act.
(f) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the
Registration Statement, an earnings statement (which will be in reasonable
detail but need not be audited) complying with the provisions of Section
11(a) of the Act and covering a twelve (12) month period beginning after the
effective date of the Registration Statement.
(g) During a period of five (5) years after the date hereof,
the Company will furnish to its shareholders as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) within one hundred
twenty (120) days after the end of each fiscal year and will make available
unaudited quarterly reports of operations for each of the first three
quarters of the fiscal year within sixty (60) days after the end of each
fiscal quarter, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's shareholders, (ii)
concurrently with furnishing to its shareholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, of shareholders' equity, and of cash flows of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon
of independent certified public accountants, (iii) as soon as they are
available, copies of all reports (financial or other) mailed to shareholders,
(iv) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, any securities exchange
or the NASD, (v) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released
to shareholders or prepared by the Company or any of its subsidiaries, and
(vi) any additional information of a public nature concerning the Company,
its subsidiaries or any of their businesses which you may reasonably request.
During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and such subsidiaries
are consolidated, and shall be accompanied by similar financial statements
for any significant subsidiary which is not so consolidated.
(h) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
<PAGE>
(i) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(j) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11(a) hereof, or
if the Underwriters shall terminate this Agreement pursuant to Section
11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) reasonably incurred by the Underwriters in investigating or
preparing to market or marketing the Shares.
(k) If at any time during the ninety (90) day period after
the Registration Statement becomes effective, any publication or event
relating to or involving the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith consult with you concerning the substance of and
advisability of disseminating a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such
publication or event.
(l) For a period of twenty-five (25) days following the date
the Registration Statement is declared effective by the Commission, the
Company will not issue any press release or engage in any other publicity
without the Representatives' prior written consent, other than normal
customary releases issued in the ordinary course of the Company's business or
those releases required by law.
(m) During the Lock-Up Period, the Company will not, without
the prior written consent of BancBoston Robertson Stephens Inc., effect the
Disposition of, directly or indirectly, any Securities other than (i) the
sale of the Firm Shares and the Option Shares to be sold by the Company
hereunder, (ii) the Company's issuance of options or Common Stock under the
Company's presently authorized 1999 Employee Stock Purchase Plan or its
presently authorized WebSite Management Company, Inc. 1997 Stock Incentive
Plan (together, the "Option Plans"), (iii) issuances of Common Stock upon
conversion of presently outstanding convertible notes or Preferred Stock,
(iv) issuances of Common Stock upon exercise of presently outstanding
warrants and (v) issuances of Common Stock upon exercise of the Common Stock
Purchase Option dated January 15, 1999, presently held by Goldman Sachs & Co.
(n) During a period of ninety (90) days from the effective
date of the Registration Statement, the Company will not file a registration
statement registering shares under the Option Plans or any other employee
benefit plan.
(o) The Company will conduct its affairs in such a manner so
as to ensure that the Company will not be an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses
in connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters,
the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any
Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of
Attorney, and any
<PAGE>
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if
any; the cost of all certificates representing the Shares and transfer
agents' and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies
of the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of
the foregoing; NASD filing fees and the cost of qualifying the Shares under
the laws of such jurisdictions as you may designate (including filing fees
and fees and disbursements of Underwriters' Counsel in connection with such
NASD filings and Blue Sky qualifications); and all other expenses directly
incurred by the Company in connection with the performance of its obligations
hereunder. The provisions of this Section 5(a)(i) are intended to relieve
the Underwriters from the payment of the expenses and costs which the Company
hereby agrees to pay.
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) listed
from time to time in THE WALL STREET JOURNAL which represents the base rate
on corporate loans posted by a substantial majority of the nation's thirty
(30) largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date
of such request.
(b) In addition to their other obligations under Section 8(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Underwriters' obligation to reimburse the Company for such expenses and
the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within
thirty (30) days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis
on which such amounts shall be apportioned among the reimbursing parties,
shall be settled by arbitration conducted under the provisions of the
Constitution and Rules of the Board of Governors of the New York Stock
Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing
the arbitration tribunal. In the event the party demanding arbitration does
not make such designation of an arbitration tribunal in such demand or
notice, then the party responding to said demand or notice is authorized to
do so. Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Sections 5(a)(ii) and 5(b) hereof and
will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses which is created by the provisions of Sections 8(a)
and 8(b) hereof or the obligation to contribute to expenses which is created
by the provisions of Section 8(d) hereof.
<PAGE>
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein
shall be subject to the accuracy, as of the date hereof and the Closing Date
and any later date on which Option Shares are to be purchased, as the case
may be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective
not later than 2:00 P.M., San Francisco time, on the date following the date
of this Agreement, or such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to
the knowledge of the Company or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise)
shall have been complied with to the reasonable satisfaction of Underwriters'
Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of
the Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and such counsel shall have been furnished with such papers and information
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
the following opinion of Cantey & Hanger, L.L.P., counsel for the Company,
dated the Closing Date or such later date on which Option Shares are to be
purchased addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company and each Significant Subsidiary (as
that term is defined in Regulation S-X of the Act) has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the State of Texas;
(ii) The Company and each Significant Subsidiary has
the corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction, if any, in which the ownership or leasing of
its properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or to be in good standing would
not have a material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiaries
considered as one enterprise;
(iv) To such counsel's knowledge, the Company does not
own or control, directly or indirectly, any stock or other ownership interest
in any corporation, association or other entity other than all of the issued
and outstanding capital stock of each of FlashNet Marketing, Inc. and
FlashNet Telecom, Inc.;
(v) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the date stated therein, and the issued and
outstanding shares of capital stock of the Company have been duly and validly
issued and are fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal
or other similar right;
(vi) All issued and outstanding shares of capital stock
of each Significant Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, have not been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right and, except as disclosed in the Prospectus, are owned by the
Company free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest;
(vii) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized
<PAGE>
and, upon issuance and delivery against payment therefor in accordance with
the terms hereof, will be duly and validly issued and fully paid and
nonassessable, and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right;
(viii) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(ix) The information in the Prospectus under the
captions "Description of Capital Stock," to the extent that it constitutes a
summary of matters of law or legal conclusions, has been reviewed by such
counsel and is a fair summary of such matters and conclusions; and the form
of certificate evidencing the Common Stock and filed as an exhibit to the
Registration Statement complies with Texas law;
(x) The description in the Registration Statement and
the Prospectus of the Restated Articles of Incorporation and bylaws of the
Company and of statutes are accurate and fairly present the information
required to be presented by the Act and the applicable Rules and Regulations;
(xi) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a party
of a character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the Registration
Statement which are not described or referred to therein or filed as required;
(xii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than performance
of the Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
Company's Restated Articles of Incorporation or bylaws or (b) result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, any bond, debenture, note or other evidence of
indebtedness, or any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument known to such
counsel to which the Company is a party or by which its properties are bound,
or any applicable statute, rule or regulation, or any order, writ or decree
of any court, government or governmental agency or body having jurisdiction
over the Company or over any of its subsidiaries, or over their properties or
operations (other than statutes, rules, regulations, orders, writs or decrees
relating to the Company's regulatory compliance and covered by the opinion of
counsel referenced in Section 6(e));
(xiii) No consent, approval, authorization or order or
qualification with any court, government or governmental agency or body
having jurisdiction over the Company or over any of its subsidiaries or over
any of their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated
<PAGE>
(other than consents, approvals, authorizations, orders or qualifications
relating to the Company's regulatory compliance and covered by the opinion of
counsel referenced in Section 6(e)), except such as have been obtained under
the Act or such as may be required under state or other securities or Blue
Sky laws in connection with the purchase and the distribution of the Shares
by the Underwriters;
(xiv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or any of
its subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations, other
than those described therein;
(xv) To such counsel's knowledge, neither the Company
nor any of its subsidiaries is presently in material violation of (a) its
respective Articles of Incorporation or bylaws, (b) any applicable statute,
rule or regulation or (c) any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company or over any
of its subsidiaries, or over any of their properties or operations; and
(xvi) To such counsel's knowledge, except as set forth
in the Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of Common Stock
or other securities, because of the filing of the Registration Statement by
the Company have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement or
have included securities in the Registration Statement pursuant to the
exercise of and in full satisfaction of such rights.
In addition, you shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Brobeck, Phleger & Harrison LLP, special securities
counsel for the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the
Underwriters, to the effect that:
(i) This Agreement has been duly authorized, executed
and delivered by the Company, and assuming the due authorization, execution
and delivery thereof by you, is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights and remedies
generally, and subject, as to enforceability, to general equitable principles
(whether relief is sought in a proceeding at law or in equity) and except as
rights to indemnification thereunder may be limited by applicable law or
public policy relating thereto;
<PAGE>
(ii) The Registration Statement has been duly
authorized and executed by the Company and the filing of such document with
the Commission has been duly authorized by the Company;
(iii) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission;
(iv) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the consolidated financial
statements (including supporting schedules) and notes thereto and other
financial and statistical data derived therefrom as to which such counsel
need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements
of the Act and the applicable Rules and Regulations;
(v) The Shares have been approved for quotation on The
Nasdaq National Market, upon issuance as contemplated by this Agreement; and
(vi) The Company is not, and after giving effect to the
offering and sale of the Shares and the application of the proceeds therefrom
as described in the Prospectus, will not be, an "investment company" or a
person "controlled" by an "investment company" within the meaning of the 1940
Act.
In addition, each of Brobeck Phleger & Harrison LLP and Cantey &
Hanger, L.L.P. shall state that it has participated in conferences with
officials and other representatives of the Company, the Representatives,
Underwriters' Counsel and the independent certified public accountants of the
Company, at which conferences the contents of the Registration Statement and
Prospectus and related matters were discussed, and although it has not
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus and is not an expert on FCC
regulatory matters or issues, nothing has come to the attention of such
counsel which leads it to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on
the Closing Date and on any later date on which Option Shares are to be
purchased, the Registration Statement and any amendment or supplement thereto
(other than the financial statements including supporting schedules and notes
thereto and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement and the Prospectus
and any amendment or supplement thereto (except as aforesaid) contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinions may rely as to questions
of law not involving the laws of the United States or the State of Texas upon
opinions of local counsel, as to questions of law addressed by special
regulatory counsel upon the opinion of such counsel, and as to questions of
fact upon representations or certificates of officers of the Company and of
government officials, in which case their opinion is to state that they are
so relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to
<PAGE>
you, as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
the following opinion of ______________, special regulatory counsel for the
Company, dated the Closing Date or such later date on which Option Shares are
to be purchased addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
(i) The information in the Prospectus under the captions
"Risk Factors--Government Regulation" and "Business--Government Regulation,"
to the extent that it constitutes a summary of matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions.
(ii) With respect to the Company's regulatory compliance,
the performance of this Agreement and the consummation of the transactions
herein contemplated (other than performance of the Company's indemnification
obligations hereunder, concerning which no opinion need be expressed) will
not result in a material breach or violation of any of the terms and
provisions of, or constitute a default under any applicable statute, rule or
regulation, or any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company or over any
of its subsidiaries or over their respective properties or operations; and
(iii) With respect to the Company's regulatory compliance,
no consent, approval, authorization or order or qualification with any court,
government or governmental agency or body having jurisdiction over the
Company or over any of its subsidiaries or over any of their properties or
operations is necessary in connection with the consummation by the Company of
the transactions herein contemplated.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, in
form and substance satisfactory to you, with respect to the sufficiency of
all such corporate proceedings and other legal matters relating to this
Agreement and the transactions contemplated hereby as you may reasonably
require, and the Company shall have furnished to such counsel such documents
as they may have requested for the purpose of enabling them to pass upon such
matters.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Deloitte & Touche LLP addressed to the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a
date not more than five (5) business days prior to the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be,
and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect
any changes in the facts described in the Original Letter since the date of
such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in
your sole judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. The Original
Letter from Deloitte & Touche LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning
<PAGE>
of the Act and the applicable published Rules and Regulations, (ii) set forth
their opinion with respect to their examination of the consolidated balance
sheets of the Company as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the twelve (12) months ended December 31, 1998, 1997 and 1996, (iii)
state that Deloitte & Touche LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Deloitte & Touche LLP as
described in SAS 71 on the financial statements for each of the quarters in
the eight-quarter period ended December 31, 1998 (the "Interim and Quarterly
Financial Statements"), (iv) state that in the course of such review, nothing
came to their attention that leads them to believe that any material
modifications need to be made to any of the Interim and Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, and
(v) address other matters agreed upon by Deloitte & Touche LLP and you. In
addition, you shall have received from Deloitte & Touche LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements
as of December 31, 1998, did not disclose any weaknesses in internal controls
that they considered to be material weaknesses.
(h) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, signed by the
Chief Executive Officer and the Chief Financial Officer of the Company, to
the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the Closing
Date or any later date on which Option Shares are to be purchased, as the
case may be, except where the representation or warranty explicitly is made
as of another date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to the Closing Date or any later date on which Option Shares are to be
purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all material
respects conformed to the requirements of the Act and the Rules and
Regulations; the Registration Statement, and any amendment or supplement
thereto, did not and does not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; the Prospectus, and any
amendment or supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth
in an amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has
not been (a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its subsidiaries considered
as one enterprise, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material to the
Company and its subsidiaries considered as one enterprise that has been
incurred by the Company or its subsidiaries, except obligations incurred in
the ordinary course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company or any of its subsidiaries that is
material to the Company and its subsidiaries considered as one enterprise,
(e) any dividend or distribution of any kind declared,
<PAGE>
paid or made on the capital stock of the Company or any of its subsidiaries,
or (f) any loss or damage (whether or not insured) to the property of the
Company or any of its subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each beneficial
owner of any shares of Common Stock and each holder of any option or other
right to purchase or receive shares of Common Stock (other than _________) in
writing prior to the date hereof that such person will not, during the
Lock-up Period, effect the Disposition of any Securities now owned or
hereafter acquired directly by such person or with respect to which such
person has or hereafter acquires the power of disposition, otherwise than (i)
as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners
or shareholders of such person, provided that the distributees thereof agree
in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of BancBoston Robertson Stephens Inc. The foregoing
restriction shall have been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be
disposed of by someone other than the such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Such person will have also agreed and consented
to the entry of stop transfer instructions with the Company's transfer agent
against the transfer of the Securities held by such person except in
compliance with this restriction. Furthermore, such person will have also
agreed that, without the prior written consent of BancBoston Robertson
Stephens Inc., such person will not, during the period ending with the
conclusion of the Lock-Up Period, make any demand for or exercise any right
with respect to, the registration of any Securities.
(j) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to the accuracy of the
representations and warranties of the Company herein, as to the performance
by the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you with
such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants to the several Underwriters, for the
purpose of covering over-allotments in connection with the distribution and
sale of the Firm Shares only, a nontransferable option to purchase up to an
aggregate of ____________ Option Shares at the purchase price per share for
the Firm Shares set forth in Section 3 hereof. Such option may be exercised
by the Representatives on behalf of the several Underwriters on one (1) or
more occasions in whole or in part during the period of thirty (30) days
after the date on which the Firm Shares are initially offered to the public,
by giving written notice to the Company. The number of Option Shares to be
purchased by each Underwriter upon the exercise of such option shall be the
same proportion of the total number of Option Shares to be purchased by the
several Underwriters pursuant to the exercise of such option as the number of
Firm Shares purchased by such Underwriter (set forth in Schedule A hereto)
bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the
Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several
<PAGE>
Underwriters pursuant to the exercise of the option granted by this Section 7
shall be made against payment of the purchase price therefor by the several
Underwriters by federal or other funds immediately available in San
Francisco. In the event of any breach of the foregoing, the Company shall
reimburse the Underwriters for the interest lost and any other expenses borne
by them by reason of such breach. Such delivery and payment shall take place
at the offices of Cantey & Hanger, L.L.P., 2100 Burnett Plaza, 801 Cherry
Street, Fort Worth, Texas, or at such other place as may be agreed upon among
the Representatives and the Company (i) on the Closing Date, if written
notice of the exercise of such option is received by the Company at least two
(2) full business days prior to the Closing Date, or (ii) on a date which
shall not be later than the third (3rd) full business day following the date
the Company receives written notice of the exercise of such option, if such
notice is received by the Company less than two (2) full business days prior
to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for
checking at least one (1) full business day prior to the date of payment and
delivery and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to such date of
payment and delivery. If the Representatives so elect, delivery of the
Option Shares may be made by credit through full fast transfer to accounts at
The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose funds shall not have been received by you prior to the
date of payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any
such Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment
and delivery for such Option Shares) to the accuracy of and compliance with
the representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company, and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6 hereof, and
to the condition that all proceedings taken at or prior to the payment date
in connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and
you shall have been furnished with all such documents, certificates and
opinions as you may reasonably request in order to evidence the accuracy and
completeness of any of the representations, warranties or statements, the
performance of any of the covenants or agreements of the Company or the
satisfaction of any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD),
under the Act, the Exchange Act or otherwise, specifically including, but not
limited to, losses, claims, damages or liabilities (or actions in respect
thereof) arising out of or based upon (i) any breach of any representation,
warranty, agreement or covenant of the Company herein contained, (ii) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal
or other expenses reasonably incurred by it in connection with investigating
or defending any such loss, claim, damage, liability or action; PROVIDED,
HOWEVER,
<PAGE>
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, such Preliminary Prospectus or
the Prospectus, or any such amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof; and PROVIDED, FURTHER, that
the indemnity agreement provided for in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, charges, liabilities or
litigation based upon any untrue statement or alleged untrue statement of
material fact or omission or alleged omission to state therein a material
fact purchased Shares, if a copy of the Prospectus in which such untrue or
alleged untrue statement or omission or alleged omission was corrected has
not been sent or given to such person within the time required by the Act and
the Rules and Regulations thereunder, unless such failure is the result of
noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the
Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company against any losses, claims, damages
or liabilities, joint or several, to which the Company may become subject
under the Act or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of such Underwriter herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Underwriter, directly or
through you, specifically for use in the preparation thereof, and agrees to
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer
of the Company who signed the Registration Statement and each director of the
Company and each person, if any, who controls the Company within the meaning
of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 8. In case any such action is
brought against any indemnified party, and it notified the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it shall elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER,
that if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are
<PAGE>
different from or additional to those available to the indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties. Upon
receipt of notice from the indemnifying party to such indemnified party of
the indemnifying party's election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not
be liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall not
be liable for the expenses of more than one separate counsel (together with
appropriate local counsel) approved by the indemnifying party representing
all the indemnified parties under Section 8(a) or 8(b) hereof who are parties
to such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action or (iii)
the indemnifying party shall have authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party. In no event
shall any indemnifying party be liable in respect of any amounts paid in
settlement of any action unless the indemnifying party shall have approved
the terms of such settlement; PROVIDED, that such consent shall not be
unreasonably withheld. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is
or could have been a party and indemnification could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
Section 8 but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that this Section 8
provides for indemnification in such case, all the parties hereto shall
contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so
that, except as set forth in Section 8(e) hereof, the Underwriters severally
and not jointly are responsible pro rata for the portion represented by the
percentage that the underwriting discount bears to the initial public
offering price, and the Company is responsible for the remaining portion,
PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute
any amount in excess of the amount by which the underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount of
damages which such Underwriter has otherwise required to pay and (ii) no
person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation. The contribution
agreement in this Section 8(d) shall extend upon the same terms and
conditions to, and shall inure to the benefit of, each person, if any, who
controls any Underwriter or the Company within the meaning of the Act or the
Exchange Act and each officer of the Company who signed the Registration
Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel
during the negotiations regarding the provisions hereof including, without
limitation, the provisions of this Section 8, and are fully informed
regarding said provisions. They further acknowledge that the provisions of
this Section 8 fairly allocate the risks in light of the ability of the
parties to investigate the Company and its business in order to assure that
adequate disclosure is made in the Registration Statement and Prospectus as
required by the Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter within the meaning of the Act or the Exchange
Act, or by or on behalf of the Company, or any of their respective officers,
directors or controlling persons within the meaning of the Act or the
Exchange Act, and shall survive the delivery of the Shares to the several
Underwriters hereunder or the termination
<PAGE>
of this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such
Firm Shares in accordance with the terms hereof, and if the aggregate number
of Firm Shares which such defaulting Underwriter or Underwriters so agreed
but failed to purchase does not exceed 10% of the Firm Shares, the remaining
Underwriters shall be obligated, severally in proportion to their respective
commitments hereunder, to take up and pay for the Firm Shares of such
defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters
agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the
remaining Underwriters shall have the right, but shall not be obligated, to
take up and pay for (in such proportions as may be agreed upon among them)
the Firm Shares which the defaulting Underwriter or Underwriters so agreed
but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing
Date shall be postponed for twenty-four (24) hours to allow the several
Underwriters the privilege of substituting within twenty-four (24) hours
(including non-business hours) another underwriter or underwriters (which may
include any nondefaulting Underwriter) satisfactory to the Company. If no
such underwriter or underwriters shall have been substituted as aforesaid by
such postponed Closing Date, the Closing Date may, at the option of the
Company, be postponed for a further twenty-four (24) hours, if necessary, to
allow the Company the privilege of finding another underwriter or
underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If
it shall be arranged for the remaining Underwriters or substituted
underwriter or underwriters to take up the Firm Shares of the defaulting
Underwriter or Underwriters as provided in this Section 10, (i) the Company
shall have the right to postpone the time of delivery for a period of not
more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement, supplements to
the Prospectus or other such documents which may thereby be made necessary,
and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to
be purchased by the defaulting Underwriter or Underwriters or substitute
another underwriter or underwriters as aforesaid and the Company shall not
find or shall not elect to seek another underwriter or underwriters for such
Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, the Company shall not be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than
for some reason permitted under this Agreement, to purchase the number of
Firm Shares agreed by such Underwriter to be purchased hereunder, which
Underwriter shall remain liable to the Company and the other Underwriters for
damages, if any, resulting from such default) be liable to the Company
(except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which
the Shares are first generally offered by the Underwriters to the public by
letter, telephone, telegram or telecopy, whichever shall first occur. By
giving notice as set forth in
<PAGE>
Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as
hereinafter specified at any time on or prior to the Closing Date or on or
prior to any later date on which Option Shares are to be purchased, as the
case may be, (i) if the Company shall have failed, refused or been unable to
perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled
is not fulfilled, including, without limitation, any change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise
from that set forth in the Registration Statement or Prospectus, which, in
your sole judgment, is material and adverse, or (ii) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange
or on the American Stock Exchange or in the over the counter market by the
NASD, or trading in securities generally shall have been suspended on either
such exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York, California or Texas
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or
(iv) if there shall have been a material adverse change in the general
political or economic conditions or financial markets as in your reasonable
judgment makes it inadvisable or impracticable to proceed with the offering,
sale and delivery of the Shares, or (v) if there shall have been an outbreak
or escalation of hostilities or of any other insurrection or armed conflict
or the declaration by the United States of a national emergency which, in the
reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus. In the event of termination pursuant to subparagraph (i)
above, the Company shall remain obligated to pay costs and expenses pursuant
to Sections 4(i), 5 and 8 hereof. Any termination pursuant to any of
subparagraphs (ii) through (v) above shall be without liability of any party
to any other party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement
from becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall
be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o BancBoston Robertson Stephens Inc., 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company,
such notice shall be mailed, delivered, telegraphed (and confirmed by letter)
or telecopied (and confirmed by letter) to 1812 North Forest Park Boulevard,
Fort Worth, Texas 76102, telecopier number (817) 870-0296, Attention: M.
Scott Leslie, President.
13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling
persons within the meaning of the Act or the Exchange Act, officers and
directors referred to in Section 8 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors and assigns
and said controlling persons and said officers and directors, and for the
benefit of no other person or entity. No purchaser of any of the Shares from
any Underwriter shall be construed a successor or assign by reason merely of
such purchase.
<PAGE>
In all dealings with the Company under this Agreement, you shall
act on behalf of each of the several Underwriters, and the Company shall be
entitled to act and rely upon any statement, request, notice or agreement
made or given by you jointly or by BancBoston Robertson Stephens Inc. on
behalf of you.
14. APPLICABLE LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several
counterparts, each of which will constitute an original.
[Signature page follows]
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company and the several Underwriters.
Very truly yours,
FLASHNET COMMUNICATIONS, INC.
By:
A. Lee Thurburn
Chief Executive Officer
Accepted as of the date first above written:
BANCBOSTON ROBERTSON STEPHENS INC.
J.C. BRADFORD & CO.
EVEREN SECURITIES, INC.
On their behalf and on behalf of each of the several
Underwriters named in Schedule A hereto.
By: BANCBOSTON ROBERTSON STEPHENS INC.
By:
Authorized Signatory
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
TO BE PURCHASED
---------------
UNDERWRITERS
- ------------
<S> <C>
BancBoston Robertson Stephens Inc.
J.C. Bradford & Co.
EVEREN Securities, Inc.
Total
</TABLE>
<PAGE>
FLASHNET COMMUNICATIONS, INC.
RESTATED ARTICLES OF INCORPORATION
Pursuant to the provisions of Article 4.07 of the Texas Business
Corporation Act, FlashNet Communications, Inc., a Texas corporation (the
"Corporation"), hereby adopts these Restated Articles of Incorporation (the
"Restated Articles"), which accurately reflect the original Articles of
Incorporation and all amendments thereto that are in effect to date
(collectively, the "Original Articles") and as further amended by such Restated
Articles as hereinafter set forth and which contain no other change in any
provision thereof.
ARTICLE I
The name of the Corporation is FlashNet Communications, Inc.
ARTICLE II
The Original Articles are amended by these Restated Articles as follows:
(a) Article Four is amended in its entirety to increase the number of
authorized shares of common stock from 5,000,000 to 50,000,000, to effect a
split of 3.4 shares for each one share of common stock outstanding, to
increase the number of authorized shares of preferred stock from 2,000,000 to
5,000,000 and to more specifically vest in the Board of Directors the
authority to issue preferred stock in one or more series and to set the
designations, rights and preferences of the preferred stock; (b) Article
Eight is amended in its entirety to provide that the number of directors
shall be set forth in the Bylaws; (c) Article Ten is added regarding
transactions between the Corporation and its directors or officers; (d)
Article Eleven is added to state indemnification provisions; (e) Article Ten
is redesignated as Article Twelve and restated to limit director liability;
(f) Article Eleven is redesignated as Article Thirteen and restated to permit
written consents by shareholders; (g) Article Fourteen is added regarding
special meetings of shareholders; and (h) Article Fifteen is added regarding
adoption, revision and repeal of Bylaws.
ARTICLE III
Each such amendment made by the Restated Articles has been effected in
conformity with the provisions of the Texas Business Corporation Act and the
Original Articles and each amendment made by the Restated Articles was duly
adopted by the shareholders of the Corporation on February 22, 1999.
ARTICLE IV
The number of shares outstanding at the time of adoption of the Restated
Articles was 1,626,838 shares of common stock and 1,364,085 shares of Series
A Convertible Preferred Stock, all of which were entitled to vote on the
Restated Articles as so amended. The number of shares of common stock voted
for the Restated Articles was 1,501,613 and the number of shares of preferred
stock voted for the Restated Articles was 1,331,136. The number of
RESTATED ARTICLES OF INCORPORATION Page 1
<PAGE>
shares of common stock voted against the Restated Articles was zero and the
number of shares of preferred stock voted against the Restated Articles was
zero.
ARTICLE V
The Original Articles are hereby superseded by the following Restated
Articles, which accurately copy the entire text thereof as amended as set forth
above:
RESTATED ARTICLES OF INCORPORATION
OF
FLASHNET COMMUNICATIONS, INC.
ARTICLE ONE
THE NAME OF THE CORPORATION IS FLASHNET COMMUNICATIONS, INC.
ARTICLE TWO
THE PERIOD OF ITS DURATION IS PERPETUAL.
ARTICLE THREE
THE CORPORATION IS ORGANIZED FOR THE PURPOSE OF PROVIDING INTERNET SERVICES
TO THE GENERAL PUBLIC, COMMERCIAL INTERESTS AND OTHERS, AND THE TRANSACTION OF
ANY AND ALL LAWFUL BUSINESS FOR WHICH A CORPORATION MAY BE INCORPORATED UNDER
THE TEXAS BUSINESS CORPORATION ACT.
ARTICLE FOUR
THE AGGREGATE NUMBER OF SHARES WHICH THE CORPORATION SHALL HAVE THE
AUTHORITY TO ISSUE IS 55,000,000 SHARES, CONSISTING OF (i) 50,000,000 SHARES
OF COMMON STOCK, WITHOUT PAR VALUE, AND (ii) 5,000,000 SHARES OF PREFERRED
STOCK, $1.00 PAR VALUE.
EACH OF THE CORPORATION'S COMMON SHARES ISSUED AND OUTSTANDING IMMEDIATELY
PRIOR TO THE TAKING EFFECT OF THIS ARTICLE FOUR IS HEREBY CHANGED INTO 3.4
COMMON SHARES.
THE AGGREGATE STATED CAPITAL OF THE COMMON SHARES ISSUED AND OUTSTANDING
UPON THE TAKING EFFECT OF THIS ARTICLE FOUR SHALL BE THE SAME AS THE AGGREGATE
STATED CAPITAL OF THE COMMON SHARES ISSUED AND OUTSTANDING IMMEDIATELY PRIOR TO
THE TAKING EFFECT OF THIS ARTICLE FOUR.
EACH CERTIFICATE REPRESENTING ONE OR MORE COMMON SHARES ISSUED AND
OUTSTANDING IMMEDIATELY PRIOR TO THE TAKING EFFECT OF THIS ARTICLE FOUR SHALL
THEREAFTER REPRESENT THE SAME NUMBER OF COMMON SHARES; AND THE CORPORATION SHALL
ISSUE TO OR UPON THE ORDER OF EACH HOLDER
RESTATED ARTICLES OF INCORPORATION Page 2
<PAGE>
OF RECORD, AS OF THE CLOSE OF BUSINESS ON THE DAY THIS ARTICLE FOUR TAKES
EFFECT, AN ADDITIONAL CERTIFICATE OR CERTIFICATES REPRESENTING 2.4 COMMON
SHARES FOR EACH COMMON SHARE THERETOFORE REPRESENTED BY SUCH OUTSTANDING
SHARE CERTIFICATE.
THE FOLLOWING IS A STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS,
AND RELATIVE RIGHTS, INCLUDING VOTING RIGHTS, IN RESPECT OF THE CLASSES OF STOCK
OF THE CORPORATION AND OF THE AUTHORITY WITH RESPECT THERETO EXPRESSLY VESTED IN
THE BOARD OF DIRECTORS OF THE CORPORATION:
COMMON STOCK
(1) EACH SHARE OF COMMON STOCK OF THE CORPORATION SHALL HAVE IDENTICAL
RIGHTS AND PRIVILEGES IN EVERY RESPECT. THE HOLDERS OF SHARES OF COMMON STOCK
SHALL BE ENTITLED TO VOTE UPON ALL MATTERS SUBMITTED TO A VOTE OF THE
SHAREHOLDERS OF THE CORPORATION AND SHALL BE ENTITLED TO ONE VOTE FOR EACH SHARE
OF COMMON STOCK HELD.
(2) SUBJECT TO THE PRIOR RIGHTS AND PREFERENCES, IF ANY, APPLICABLE TO
SHARES OF THE PREFERRED STOCK OR ANY SERIES THEREOF, THE HOLDERS OF SHARES OF
THE COMMON STOCK SHALL BE ENTITLED TO RECEIVE SUCH DIVIDENDS (PAYABLE IN CASH,
STOCK, OR OTHERWISE) AS MAY BE DECLARED THEREON BY THE BOARD OF DIRECTORS AT ANY
TIME AND FROM TIME TO TIME OUT OF ANY FUNDS OF THE CORPORATION LEGALLY AVAILABLE
THEREFOR.
(3) IN THE EVENT OF ANY VOLUNTARY OR INVOLUNTARY LIQUIDATION, DISSOLUTION,
OR WINDING-UP OF THE CORPORATION, AFTER DISTRIBUTION IN FULL OF THE PREFERENTIAL
AMOUNTS, IF ANY, TO BE DISTRIBUTED TO THE HOLDERS OF SHARES OF THE PREFERRED
STOCK OR ANY SERIES THEREOF, THE HOLDERS OF SHARES OF THE COMMON STOCK SHALL BE
ENTITLED TO RECEIVE ALL OF THE REMAINING ASSETS OF THE CORPORATION AVAILABLE FOR
DISTRIBUTION TO ITS SHAREHOLDERS, RATABLY IN PROPORTION TO THE NUMBER OF SHARES
OF THE COMMON STOCK HELD BY THEM. A LIQUIDATION, DISSOLUTION, OR WINDING-UP OF
THE CORPORATION, AS SUCH TERMS ARE USED IN THIS PARAGRAPH (3), SHALL NOT BE
DEEMED TO BE OCCASIONED BY OR TO INCLUDE ANY MERGER OF THE CORPORATION WITH OR
INTO ONE OR MORE CORPORATIONS OR OTHER ENTITIES, ANY ACQUISITION OR EXCHANGE OF
THE OUTSTANDING SHARES OF ONE OR MORE CLASSES OR SERIES OF THE CORPORATION, OR
ANY SALE, LEASE, EXCHANGE, OR OTHER DISPOSITION OF ALL OR A PART OF THE ASSETS
OF THE CORPORATION.
PREFERRED STOCK
(4) SHARES OF THE PREFERRED STOCK MAY BE ISSUED FROM TIME TO TIME IN ONE
OR MORE SERIES, THE SHARES OF EACH SERIES TO HAVE SUCH DESIGNATIONS,
PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS, INCLUDING VOTING RIGHTS, AS SHALL
BE STATED AND EXPRESSED HEREIN OR IN A RESOLUTION OR RESOLUTIONS PROVIDING FOR
THE ISSUE OF SUCH SERIES ADOPTED BY THE BOARD OF DIRECTORS OF THE CORPORATION.
EACH SUCH SERIES OF PREFERRED STOCK SHALL BE DESIGNATED SO AS TO DISTINGUISH THE
SHARES THEREOF FROM THE SHARES OF ALL OTHER SERIES AND CLASSES. THE BOARD OF
DIRECTORS OF THE CORPORATION IS HEREBY EXPRESSLY AUTHORIZED, SUBJECT TO THE
LIMITATIONS PROVIDED BY LAW, TO ESTABLISH AND DESIGNATE SERIES OF THE PREFERRED
STOCK, TO FIX THE NUMBER OF SHARES CONSTITUTING EACH SERIES, AND TO FIX THE
DESIGNATIONS AND THE PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS, INCLUDING
VOTING RIGHTS, OF THE SHARES OF EACH SERIES AND THE VARIATIONS OF THE RELATIVE
RIGHTS AND PREFERENCES AS BETWEEN SERIES, AND TO INCREASE AND TO DECREASE THE
NUMBER OF SHARES CONSTITUTING EACH SERIES, PROVIDED THAT THE BOARD OF DIRECTORS
MAY NOT DECREASE THE NUMBER OF SHARES WITHIN A SERIES TO LESS THAN THE
RESTATED ARTICLES OF INCORPORATION Page 3
<PAGE>
NUMBER OF SHARES WITHIN SUCH SERIES THAT ARE THEN ISSUED. THE RELATIVE POWERS,
RIGHTS, PREFERENCES, AND LIMITATIONS MAY VARY BETWEEN AND AMONG SERIES OF
PREFERRED STOCK IN ANY AND ALL RESPECTS SO LONG AS ALL SHARES OF THE SAME SERIES
ARE IDENTICAL IN ALL RESPECTS, EXCEPT THAT SHARES OF ANY SUCH SERIES ISSUED AT
DIFFERENT TIMES MAY HAVE DIFFERENT DATES FROM WHICH DIVIDENDS THEREON CUMULATE.
THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE CORPORATION WITH RESPECT TO EACH
SERIES SHALL INCLUDE, BUT SHALL NOT BE LIMITED TO, THE AUTHORITY TO DETERMINE
THE FOLLOWING:
(a) THE DESIGNATION OF SUCH SERIES;
(b) THE NUMBER OF SHARES INITIALLY CONSTITUTING SUCH SERIES;
(c) THE RATE OR RATES AND THE TIMES AT WHICH DIVIDENDS ON THE SHARES
OF SUCH SERIES SHALL BE PAID, THE PERIODS IN RESPECT OF WHICH DIVIDENDS ARE
PAYABLE, THE CONDITIONS UPON SUCH DIVIDENDS, THE RELATIONSHIP AND
PREFERENCES, IF ANY, OF SUCH DIVIDENDS TO DIVIDENDS PAYABLE ON ANY OTHER
CLASS OR SERIES OF SHARES, WHETHER OR NOT SUCH DIVIDENDS SHALL BE
CUMULATIVE, PARTIALLY CUMULATIVE, OR NONCUMULATIVE, IF SUCH DIVIDENDS SHALL
BE CUMULATIVE OR PARTIALLY CUMULATIVE, THE DATE OR DATES FROM AND AFTER
WHICH, AND THE AMOUNTS IN WHICH, THEY SHALL ACCUMULATE, WHETHER SUCH
DIVIDENDS SHALL BE SHARE DIVIDENDS, CASH OR OTHER DIVIDENDS, OR ANY
COMBINATION THEREOF, AND IF SUCH DIVIDENDS SHALL INCLUDE SHARE DIVIDENDS,
WHETHER SUCH SHARE DIVIDENDS SHALL BE PAYABLE IN SHARES OF THE SAME OR ANY
OTHER CLASS OR SERIES OF SHARES OF THE CORPORATION (WHETHER NOW OR
HEREAFTER AUTHORIZED), OR ANY COMBINATION THEREOF, AND THE OTHER TERMS AND
CONDITIONS, IF ANY, APPLICABLE TO DIVIDENDS ON SHARES OF SUCH SERIES;
(d) WHETHER OR NOT THE SHARES OF SUCH SERIES SHALL BE REDEEMABLE OR
SUBJECT TO REPURCHASE AT THE OPTION OF THE CORPORATION OR THE HOLDER
THEREOF OR UPON THE HAPPENING OF A SPECIFIED EVENT, IF SUCH SHARES SHALL BE
REDEEMABLE, THE TERMS AND CONDITIONS OF SUCH REDEMPTION, INCLUDING BUT NOT
LIMITED TO THE DATE OR DATES UPON OR AFTER WHICH SUCH SHARES SHALL BE
REDEEMABLE, THE AMOUNT PER SHARE WHICH SHALL BE PAYABLE UPON SUCH
REDEMPTION, WHICH AMOUNT MAY VARY UNDER DIFFERENT CONDITIONS AND AT
DIFFERENT REDEMPTION DATES, AND WHETHER SUCH AMOUNT SHALL BE PAYABLE IN
CASH, PROPERTY, OR RIGHTS, INCLUDING SECURITIES OF THE CORPORATION OR
ANOTHER CORPORATION;
(e) THE RIGHTS OF THE HOLDERS OF SHARES OF SUCH SERIES (WHICH MAY
VARY DEPENDING UPON THE CIRCUMSTANCES OR NATURE OF SUCH LIQUIDATION,
DISSOLUTION, OR WINDING UP) IN THE EVENT OF THE VOLUNTARY OR INVOLUNTARY
LIQUIDATION, DISSOLUTION, OR WINDING UP OF THE CORPORATION AND THE
RELATIONSHIP OR PREFERENCE, IF ANY, OF SUCH RIGHTS TO RIGHTS OF HOLDERS OF
STOCK OF ANY OTHER CLASS OR SERIES. A LIQUIDATION, DISSOLUTION, OR WINDING
UP OF THE CORPORATION, AS SUCH TERMS ARE USED IN THIS SUBPARAGRAPH (e),
SHALL NOT BE DEEMED TO BE OCCASIONED BY OR TO INCLUDE ANY MERGER OF THE
CORPORATION WITH OR INTO ONE OR MORE CORPORATIONS OR OTHER ENTITIES, ANY
ACQUISITION OR EXCHANGE OF THE OUTSTANDING SHARES OF ONE OR MORE CLASSES OR
SERIES OF THE CORPORATION, OR ANY SALE, LEASE, EXCHANGE, OR OTHER
DISPOSITION OF ALL OR A PART OF THE ASSETS OF THE CORPORATION;
(f) WHETHER OR NOT THE SHARES OF SUCH SERIES SHALL HAVE VOTING POWERS
AND, IF SUCH SHARES SHALL HAVE SUCH VOTING POWERS, THE TERMS AND CONDITIONS
THEREOF, INCLUDING,
RESTATED ARTICLES OF INCORPORATION Page 4
<PAGE>
BUT NOT LIMITED TO, THE RIGHT OF THE HOLDERS OF SUCH SHARES TO VOTE AS A
SEPARATE CLASS EITHER ALONE OR WITH THE HOLDERS OF SHARES OF ONE OR MORE
OTHER CLASSES OR SERIES OF STOCK AND THE RIGHT TO HAVE MORE (OR LESS)
THAN ONE VOTE PER SHARE; PROVIDED, HOWEVER, THAT THE RIGHT TO CUMULATE
VOTES FOR THE ELECTION OF DIRECTORS IS EXPRESSLY DENIED AND PROHIBITED;
(g) WHETHER OR NOT A SINKING FUND SHALL BE PROVIDED FOR THE
REDEMPTION OF THE SHARES OF SUCH SERIES AND, IF SUCH A SINKING FUND SHALL
BE PROVIDED, THE TERMS AND CONDITIONS THEREOF;
(h) WHETHER OR NOT A PURCHASE FUND SHALL BE PROVIDED FOR THE SHARES
OF SUCH SERIES AND, IF SUCH A PURCHASE FUND SHALL BE PROVIDED, THE TERMS
AND CONDITIONS THEREOF;
(i) WHETHER OR NOT THE SHARES OF SUCH SERIES, AT THE OPTION OF EITHER
THE CORPORATION OR THE HOLDER OR UPON THE HAPPENING OF A SPECIFIED EVENT,
SHALL BE CONVERTIBLE INTO STOCK OF ANY OTHER CLASS OR SERIES AND, IF SUCH
SHARES SHALL BE SO CONVERTIBLE, THE TERMS AND CONDITIONS OF CONVERSION,
INCLUDING, BUT NOT LIMITED TO, ANY PROVISION FOR THE ADJUSTMENT OF THE
CONVERSION RATE OR THE CONVERSION PRICE;
(j) WHETHER OR NOT THE SHARES OF SUCH SERIES, AT THE OPTION OF EITHER
THE CORPORATION OR THE HOLDER OR UPON THE HAPPENING OF A SPECIFIED EVENT,
SHALL BE EXCHANGEABLE FOR SECURITIES, INDEBTEDNESS, OR PROPERTY OF THE
CORPORATION AND, IF SUCH SHARES SHALL BE SO EXCHANGEABLE, THE TERMS AND
CONDITIONS OF EXCHANGE, INCLUDING, BUT NOT LIMITED TO, ANY PROVISION FOR
THE ADJUSTMENT OF THE EXCHANGE RATE OR THE EXCHANGE PRICE; AND
(k) ANY OTHER PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS AS SHALL
NOT BE INCONSISTENT WITH THE PROVISIONS OF THIS ARTICLE FOUR OR THE
LIMITATIONS PROVIDED BY LAW.
(5) EXCEPT AS OTHERWISE REQUIRED BY LAW OR IN ANY RESOLUTION OF THE BOARD
OF DIRECTORS CREATING ANY SERIES OF PREFERRED STOCK, THE HOLDERS OF SHARES OF
PREFERRED STOCK AND ALL SERIES THEREOF WHO ARE ENTITLED TO VOTE SHALL VOTE
TOGETHER WITH THE HOLDERS OF SHARES OF COMMON STOCK, AND NOT SEPARATELY BY
CLASS.
ARTICLE FIVE
THE STREET ADDRESS OF THE CORPORATION'S REGISTERED OFFICE IS 1812 NORTH
FOREST PARK BOULEVARD, FORT WORTH, TEXAS 76102, AND THE NAME OF ITS REGISTERED
AGENT AT THAT ADDRESS IS M. SCOTT LESLIE.
ARTICLE SIX
THE CORPORATION WILL NOT COMMENCE BUSINESS UNTIL IT HAS RECEIVED
CONSIDERATION OF THE VALUE OF $1,000.00, CONSISTING OF MONEY, LABOR DONE OR
PROPERTY ACTUALLY RECEIVED, FOR THE ISSUANCE OF ITS SHARES.
RESTATED ARTICLES OF INCORPORATION Page 5
<PAGE>
ARTICLE SEVEN
NO SHAREHOLDER OR OTHER PERSON SHALL HAVE A PREEMPTIVE RIGHT TO ACQUIRE ANY
TREASURY SHARES, PRESENTLY AUTHORIZED SHARES, OR SHARES THE CORPORATION MAY
HEREAFTER BE AUTHORIZED TO ISSUE. SHARES OF THE CORPORATION MAY BE ISSUED AND
SOLD FROM TIME TO TIME BY DIRECTION OF THE BOARD OF DIRECTORS AND UPON SUCH
TERMS AND CONDITIONS AS THE BOARD OF DIRECTORS MAY DEEM PROPER AND ADVISABLE.
ARTICLE EIGHT
THE NUMBER OF DIRECTORS SHALL BE AS SET FORTH IN THE BYLAWS OF THE
CORPORATION. THE NAME AND ADDRESS OF EACH CURRENT DIRECTOR IS:
JAMES B. FRANCIS, JR. 2911 TURTLE CREEK
SUITE 925
DALLAS, TX 75219
JOHN B. KLEINHEINZ 201 MAIN STREET
SUITE 2001
FORT WORTH, TEXAS 76102
MICHAEL SCOTT LESLIE 1812 N. FOREST PARK BLVD.
FORT WORTH, TEXAS 76102
KEVIN STADTLER 20 WILLIAM STREET
WELLESLEY, MASSACHUSETTS 02181
ALBERT LEE THURBURN 1812 N. FOREST PARK BLVD.
FORT WORTH, TEXAS 76102
ARTICLE NINE
CUMULATIVE VOTING BY THE SHAREHOLDERS AT ANY ELECTION FOR DIRECTORS IS
PROHIBITED. THE SHAREHOLDERS ENTITLED TO VOTE FOR DIRECTORS IN THE ELECTION MAY
CAST ONLY ONE VOTE PER DIRECTORSHIP FOR EACH SHARE HELD.
ARTICLE TEN
NO CONTRACT OR TRANSACTION BETWEEN THE CORPORATION AND ONE OR MORE OF ITS
DIRECTORS OR OFFICERS, OR BETWEEN THE CORPORATION AND ANY OTHER CORPORATION,
PARTNERSHIP, ASSOCIATION, OR OTHER ORGANIZATION IN WHICH ONE OR MORE OF ITS
DIRECTORS OR OFFICERS ARE DIRECTORS OR OFFICERS OR HAVE A FINANCIAL INTEREST,
SHALL BE VOID OR VOIDABLE SOLELY FOR THIS REASON, SOLELY BECAUSE THE DIRECTOR OR
RESTATED ARTICLES OF INCORPORATION Page 6
<PAGE>
OFFICER IS PRESENT AT OR PARTICIPATES IN THE MEETING OF THE BOARD OF DIRECTORS
OR COMMITTEE THEREOF WHICH AUTHORIZES THE CONTRACT OR TRANSACTION, OR SOLELY
BECAUSE HIS OR THEIR VOTES ARE COUNTED FOR SUCH PURPOSE, IF:
(a) THE MATERIAL FACTS AS TO HIS RELATIONSHIP OR INTEREST AND AS TO
THE CONTRACT OR TRANSACTION ARE DISCLOSED OR ARE KNOWN TO THE BOARD OF
DIRECTORS OR THE COMMITTEE, AND THE BOARD OF DIRECTORS OR COMMITTEE IN GOOD
FAITH AUTHORIZES THE CONTRACT OR TRANSACTION BY THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE DISINTERESTED DIRECTORS, EVEN THOUGH THE DISINTERESTED
DIRECTORS BE LESS THAN A QUORUM; OR
(b) THE MATERIAL FACTS AS TO HIS RELATIONSHIP OR INTEREST AND AS TO
THE CONTRACT OR TRANSACTION ARE DISCLOSED OR ARE KNOWN TO THE SHAREHOLDERS
ENTITLED TO VOTE THEREON, AND THE CONTRACT OR TRANSACTION IS SPECIFICALLY
APPROVED IN GOOD FAITH BY VOTE OF THE SHAREHOLDERS; OR
(c) THE CONTRACT OR TRANSACTION IS FAIR AS TO THE CORPORATION AS OF
THE TIME IT IS AUTHORIZED, APPROVED, OR RATIFIED BY THE BOARD OF DIRECTORS,
A COMMITTEE THEREOF, OR THE SHAREHOLDERS.
COMMON OR INTERESTED DIRECTORS MAY BE COUNTED IN DETERMINING THE PRESENCE OF A
QUORUM AT A MEETING OF THE BOARD OF DIRECTORS OR OF A COMMITTEE WHICH AUTHORIZES
THE CONTRACT OR TRANSACTION.
THIS PROVISION SHALL NOT BE CONSTRUED TO INVALIDATE A CONTRACT OR
TRANSACTION WHICH WOULD BE VALID IN THE ABSENCE OF THIS PROVISION OR TO SUBJECT
ANY DIRECTOR OR OFFICER TO ANY LIABILITY THAT HE WOULD NOT BE SUBJECT TO IN THE
ABSENCE OF THIS PROVISION.
ARTICLE ELEVEN
THE CORPORATION SHALL HAVE THE POWER AND AUTHORITY TO INDEMNIFY ANY PERSON
TO THE FULLEST EXTENT PERMITTED BY LAW.
ARTICLE TWELVE
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, A DIRECTOR OF THE
CORPORATION SHALL NOT BE LIABLE TO THE CORPORATION OR ITS SHAREHOLDERS FOR
MONETARY DAMAGES FOR AN ACT OR OMISSION IN THE DIRECTOR'S CAPACITY AS A
DIRECTOR, EXCEPT THAT THIS ARTICLE TWELVE DOES NOT ELIMINATE OR LIMIT THE
LIABILITY OF A DIRECTOR OF THE CORPORATION TO THE EXTENT THE DIRECTOR IS FOUND
LIABLE FOR:
(a) A BREACH OF THE DIRECTOR'S DUTY OF LOYALTY TO THE CORPORATION OR
ITS SHAREHOLDERS;
(b) AN ACT OR OMISSION NOT IN GOOD FAITH THAT CONSTITUTES A BREACH OF
DUTY OF THE DIRECTOR TO THE CORPORATION OR AN ACT OR OMISSION THAT INVOLVES
INTENTIONAL MISCONDUCT OR A KNOWING VIOLATION OF THE LAW;
RESTATED ARTICLES OF INCORPORATION Page 7
<PAGE>
(c) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action taken within
the scope of the director's office; or
(d) an act or omission for which the liability of a director is
expressly provided by an applicable statute.
Any repeal or amendment of this Article Twelve by the shareholders of the
Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director of the Corporation arising
from an act or omission occurring prior to the time of such repeal or amendment.
In addition to the circumstances in which a director of the Corporation is not
personally liable as set forth in the foregoing provisions of this Article
Twelve, a director shall not be liable to the Corporation or its shareholders to
such further extent as permitted by any law hereafter enacted, including without
limitation any subsequent amendment to the Texas Miscellaneous Corporation Laws
Act or the Texas Business Corporation Act.
ARTICLE THIRTEEN
Any action which may be taken, or which is required by law or the Articles
of Incorporation or Bylaws of the Corporation to be taken, at any annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall have been signed by the holder or holders of shares
having not less than the minimum number of votes that would be necessary to take
such action at a meeting at which the holders of all shares entitled to vote on
the action were present and voted.
ARTICLE FOURTEEN
A special meeting of the shareholders of the Corporation may only be called
by the President or Board of Directors of the Corporation or the holders of not
less than 25 percent of all the shares entitled to vote at the proposed special
meeting or by such other person or persons as may be so authorized by the Bylaws
of the Corporation.
ARTICLE FIFTEEN
The power to amend or repeal the Corporation's Bylaws and to adopt new
Bylaws shall be reserved exclusively to the Board of Directors of the
Corporation.
ARTICLE VI
Pursuant to the provisions of Article 10.03 of the Texas Business
Corporation Act, the effectiveness of these Restated Articles is conditioned
upon and delayed until the moment immediately preceding the closing of a
Qualified IPO, as such term is defined in the Certificate of Designations of
the Company's Series A Convertible Preferred Stock (the "Series A Stock"). At
such time, all issued and outstanding shares of the Series A Stock will be
automatically converted into shares of the Company's common stock in
accordance with Section 10(a) of such Certificate of Designations and the
Series A Stock and all references to such series contained in the Company's
Articles of Incorporation shall be eliminated. The date of the 90th day after
the date of the filing of these Restated Articles is May 24, 1999.
RESTATED ARTICLES OF INCORPORATION Page 8
<PAGE>
EXECUTED as of February 23, 1999.
FLASHNET COMMUNICATIONS, INC.
By: /s/ M. Scott Leslie
________________________________
M. Scott Leslie, President
RESTATED ARTICLES OF INCORPORATION Page 9
<PAGE>
AMENDED AND RESTATED
BYLAWS OF
FLASHNET COMMUNICATIONS, INC.
1. OFFICES
1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be
located in Fort Worth, Texas.
1.2 OTHER OFFICES. The Corporation may also have offices at such other
places within or without the State of Texas as the Board of Directors may
from time to time determine or the business of the Corporation may require.
2. MEETINGS OF SHAREHOLDERS
2.1 ANNUAL MEETING. The annual meeting of shareholders for the
election of Directors and such other business as may properly be brought
before the meeting shall be held at such place within or without the State of
Texas and at such date and time as shall be designated by the Board of
Directors and stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
2.2 SPECIAL MEETINGS. Special meetings of the shareholders may be
called (a) by the President or the Board of Directors, or (b) by the holders
of at least 25% of all the shares entitled to vote at the proposed meeting.
The record date for determining shareholders entitled to call a special
meeting shall be the date the first shareholder signs the call and notice of
that meeting. Only business within the purpose or purposes described in the
notice of a special meeting of shareholders may be conducted at such meeting.
2.3 NOTICE AND WAIVERS OF NOTICE.
(a) Written notice stating the place, date and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than 10 nor more than
60 days before the date of the meeting, either personally or by mail, by or
at the direction of the President, the Secretary, or the officer or persons
calling the meeting, to each shareholder entitled to vote at such meeting.
If mailed, such notice shall be deemed to be delivered when deposited in
the United States mail addressed to the shareholder at his address as it
appears on the share transfer records of the Corporation.
(b) Notice may be waived in writing signed by the person or persons
entitled to such notice. Such waiver may be executed at any time before or
after the holding of such meeting. Attendance at a meeting shall
constitute a waiver of notice, except where the person attends for the
express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called.
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(c) Any notice required to be given to any shareholder, under any
provision of the Texas Business Corporation Act, as amended (the "Act"),
the Articles of Incorporation or these Bylaws, need not be given to the
shareholder if (1) notice of two consecutive annual meetings and all
notices of meetings held during the period between those annual meetings,
if any, or (2) all (but in no event less than two) payments (if sent by
first class mail) of distributions or interest on securities during a
12-month period have been mailed to that person, addressed at his address
as shown on the records of the Corporation, and have been returned
undeliverable. Any action or meeting taken or held without notice to such
a person shall have the same force and effect as if the notice had been
duly given and, if the action taken by the Corporation is reflected in any
articles or document filed with the Secretary of State, those articles or
that document may state that notice was duly given to all persons to whom
notice was required to be given. If such a person delivers to the
Corporation a written notice setting forth his then current address, the
requirement that notice be given to that person shall be reinstated.
2.4 RECORD DATE. For the purpose of determining shareholders entitled
to notice of or to vote at any meeting of shareholders or any adjournment
thereof, or entitled to receive payment of any dividend, the Board of
Directors may in advance establish a record date which must be at least 10
but not more than 60 days prior to such meeting. If the Board of Directors
fails to establish a record date, the record date shall be the date on which
notice of the meeting is mailed.
2.5 VOTING LIST.
(a) The officer or agent having charge of the stock transfer books
for shares of the Corporation shall make, at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to
vote at such meeting or any adjournment thereof, arranged in alphabetical
order, with the address of and the number of shares held by each, which
list, for a period of ten days prior to such meeting, shall be kept on file
at the registered office of the Corporation and shall be subject to
inspection by any shareholder at any time during usual business hours.
Such list shall also be produced and kept open at the time and place of the
meeting and shall be subject to the inspection of any shareholder during
the whole time of the meeting. The original stock transfer book shall be
prima facie evidence as to who are the shareholders entitled to examine
such list or transfer books or vote at any meeting of shareholders.
(b) Failure to comply with the requirements of this section shall
not affect the validity of any action taken at such meeting.
(c) An officer or agent having charge of the stock transfer books
who shall fail to prepare the list of shareholders or keep the same on file
for a period of ten days, or produce and keep it open for inspection as
provided in this section, shall be liable to any shareholder suffering
damage on account of such failure, to the extent of such damage. In the
event that such officer or agent does not receive notice of a meeting of
shareholders sufficiently in advance of the date of such meeting reasonably
to enable him to comply with the duties prescribed by these Bylaws, the
Corporation, but not such officer or agent
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shall be liable to any shareholder suffering damage on account of such
failure, to the extent of such damage.
2.6 QUORUM OF SHAREHOLDERS. With respect to any matter, a quorum shall
be present at a meeting of shareholders if the holders of a majority of the
shares entitled to vote on that matter are represented at the meeting, in
person or by proxy, unless otherwise provided in the Articles of
Incorporation in accordance with the Act. Unless otherwise provided in the
Articles of Incorporation, the shareholders represented in person or by proxy
at a meeting of shareholders at which a quorum is not present may adjourn the
meeting until such time and to such place as may be determined by a vote of
the holders of a majority of the shares represented in person or by proxy at
that meeting.
2.7 WITHDRAWAL OF QUORUM. Unless otherwise provided in the Articles of
Incorporation, once a quorum is present at a meeting of shareholders, the
shareholders represented in person or by proxy at the meeting may conduct
such business as may properly be brought before the meeting until it is
adjourned, and the subsequent withdrawal from the meeting of any shareholder
or the refusal of any shareholder represented in person or by proxy to vote
shall not effect the presence of a quorum at the meeting.
2.8 VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS. With
respect to any matter, other than the election of Directors or a matter for
which the affirmative vote of the holders of a specified portion of the
shares entitled to vote is required by the Act, the affirmative vote of the
holders of a majority of the shares represented in person or by proxy at a
meeting of shareholders at which a quorum is present shall be the act of the
shareholders, unless otherwise provided in the Articles of Incorporation.
2.9 VOTING IN THE ELECTION OF DIRECTORS. Directors shall be elected in
the manner provided in the Articles of Incorporation.
2.10 METHOD OF VOTING. The holders of outstanding shares of capital
stock of the Corporation shall be entitled to vote on matters submitted to a
vote of shareholders as provided in the Articles of Incorporation. Any
shareholder may vote either in person or by proxy executed in writing by the
shareholder. No proxy shall be valid after 11 months from the date of its
execution, unless otherwise provided in the proxy.
2.11 ACTION WITHOUT MEETINGS.
(a) To the extent so provided in the Articles of Incorporation,
any action required by law to be taken at any annual or special meeting of
shareholders, or any action that may be taken at any annual or special
meeting of shareholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting
forth the action so taken, shall be signed by the holder or holders of
shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which the holders of all
shares entitled to vote on the action were present or represented and
voted.
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(b) Every written consent shall bear the date of signature of each
shareholder who signs the consent. No written consent shall be effective
to take the action that is the subject of the consent unless, within
60 days after the date of the earliest dated consent delivered to the
Corporation in the manner required by law, a consent or consents signed by
the holder or holders of shares having not less than the minimum number of
votes that would be necessary to take the action that is the subject of the
consent delivered to the Corporation by delivery to its registered office,
to its principal office or to an officer or agent of the Corporation having
custody of the books in which proceedings of meetings of shareholders are
recorded. Delivery shall be by hand or certified or registered mail,
return receipt requested. Delivery to the Corporation's principal office
shall be addressed to the President or the Chief Executive Officer of the
Corporation.
(c) A telegram, telex, cablegram, or similar transmission by a
shareholder, or a photographic, photostatic, facsimile, or similar
reproduction of a writing signed by a shareholder, shall be regarded as
signed by the shareholder for purposes of this section.
(d) Prompt notice of the taking of any action by shareholders
without a meeting by less than unanimous written consent shall be given to
those shareholders who did not consent in writing to the action.
2.12 CONDUCT OF MEETING. The Chairman of the Board, if such office has
been filled, and, if not or if the Chairman of the Board is absent or
otherwise unable to act, the President shall preside at all meetings of
shareholders. The Secretary shall keep the records of each meeting of
shareholders. In the absence or inability to act of any such officer, such
officer's duties shall be performed by the officer given the authority to act
for such absent or non-acting officer under these Bylaws or by a person
appointed by the meeting.
2.13 SHAREHOLDER PROPOSALS AT ANNUAL MEETINGS. At an annual meeting of
the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
otherwise properly brought before the meeting by or at the direction of the
Board of Directors or otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements, for business
to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary
of the Corporation. To be timely, a shareholder's notice must be delivered
to or mailed and received at the principal executive offices of the
Corporation not less than 30 days nor more than 60 days prior to the meeting;
provided, however, that in the event that less than 40 day's notice or prior
public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A shareholder's notice to the Secretary shall set forth
as to each matter the shareholder proposes to bring before the annual
meeting, (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such
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business at the annual meeting, (ii) the name and record address of the
shareholder proposing such business, (iii) the class and number of shares of
the Corporation that are beneficially owned by the shareholder, and (iv) any
material interest of the shareholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at
the annual meeting except in accordance with the procedures set forth in this
section 2.13, provided, however, that nothing in this section 2.13 shall be
deemed to preclude discussion by any shareholder of any business properly
brought before the annual meeting in accordance with said procedure.
2.14 NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS. In
addition to any other applicable requirements, only persons who are nominated
in accordance with the following procedures shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of
the Corporation may be made at a meeting of shareholders by or at the
direction of the Board of Directors, by any nominating committee or person
appointed by the Board of Directors or by any shareholder of the Corporation
entitled to vote for the election of Directors at the meeting who complies
with the notice procedures set forth in this section 2.14. Such nominations,
other than those made by or at the direction of the Board of Directors, shall
be made pursuant to timely notice in writing to the Secretary of the
Corporation. To be timely, a shareholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 30 days nor more than 60 days prior to the meeting; provided,
however, that in the event that less than 40 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made. Such
shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or re-election as a Director,
(i) the name, age, business address and residence address of the person,
(ii) the principal occupation or employment of the person, (iii) the class
and number of shares of the Corporation beneficially owned by the person, and
(iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of Directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended; and
(b) as to the shareholder giving the notice, (i) the name and record address
of the shareholder, and (ii) the class and number of shares of the
Corporation beneficially owned by the shareholder. The Corporation may
require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of
such proposed nominee to serve as a Director of the Corporation. No person
shall be eligible for election as a Director of the Corporation unless
nominated in accordance with the procedures set forth herein. These
provisions shall not apply to nomination of any persons entitled to be
separately elected by holders of preferred stock.
2.15 INSPECTORS. The Board of Directors may, in advance of any meeting
of shareholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If any of the inspectors so appointed shall fail to
appear or act, the Chairman of the meeting shall, or if inspectors shall not
have been appointed, the Chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality
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and according to the best of his ability. The inspectors shall determine the
number of shares of capital stock of the Corporation outstanding and the
voting power of each, the number of shares represented at the meeting, the
existence of a quorum, and the validity and effect of proxies and shall
receive votes, ballots, or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate
all votes, ballots, or consents, determine the results, and do such acts as
are proper to conduct the election or vote with fairness to all shareholders.
On request of the Chairman of the meeting, the inspectors shall make a
report in writing of any challenge, request, or matter determined by them and
shall execute a certificate of any fact found by them. No Director or
candidate for the office of Director shall act as an inspector of an election
of Directors. Inspectors need not be shareholders.
3. DIRECTORS
3.1 POWERS. The powers of the Corporation shall be exercised by or
under authority of, and the business and affairs of the Corporation and all
corporate powers shall be managed under the direction of, the Board of
Directors.
3.2 NUMBER, TERM OF OFFICE AND QUALIFICATIONS. The property and
business of the Corporation shall be managed and controlled by a Board of
Directors consisting of seven Directors or such other number of Directors as
shall be determined from time to time by the Board of Directors. The Board
of Directors shall be divided into three classes, to be known as Classes "A,"
"B" and "C, with the term of office of one class expiring each year. Class A
shall consist of one or more Directors, each to hold office for an initial
term expiring on the date of the 2000 annual meeting of shareholders; Class B
shall consist of one or more Directors, each to hold office for an initial
term expiring on the date of the 2001 annual meeting of shareholders; and
Class C shall consist of one or more Directors, each to hold office for an
initial term expiring on the date of the 2002 annual meeting of shareholders,
or, in each case, until his successor shall be elected and shall have
qualified. Subject to the foregoing, at each annual meeting of shareholders
a single class of Directors shall be elected to succeed the Directors whose
terms shall have expired, and to hold office for a term expiring at the third
succeeding annual meeting of shareholders. In the event of an increase or
decrease in the number of Directors, any newly created or eliminated
Directorships shall be apportioned among the classes so as to make all
classes as nearly equal as possible; provided, however, that no decrease in
the number of Directors shall have the effect of shortening the term of an
incumbent Director. Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of 60% of the remaining Directors. A Director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any Directorship to be filled by reason of an
increase in the number of Directors shall be filled by election at an annual
meeting or at a special meeting of shareholders called for that purpose or
may be filled by the Board of Directors for a term of office continuing only
until the next election of one or more directors by the shareholders;
provided that the Board of Directors may not fill more than two such
directorships during the period between any two successive annual meetings
of shareholders. Directors need not be residents of the State of Texas or
shareholders of the Corporation.
3.3 ELECTION. The Directors shall be elected at the annual meetings of
the shareholders, and each Director elected shall serve until his successor
shall have been elected and qualified.
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3.4 REMOVAL OF DIRECTORS. At any meeting of shareholders called
expressly for the purpose of removing a Director, any Director or the entire
Board of Directors may be removed, with or without cause, by a vote of the
holders of a majority of the shares then entitled to vote at an election of
Directors.
4. MEETINGS OF THE BOARD OF DIRECTORS
4.1 PLACE. Meetings of the Board of Directors, regular or special, may
be held either within or without the State of Texas.
4.2 REGULAR MEETINGS. Regular meetings of the Board of Directors shall
be held at such dates and times and at such places as shall from time to time
be determined by the Board of Directors. Regular meetings may be held with
or without notice, as determined by the Board of Directors.
4.3 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by the Chairman of the Board of Directors or the President and
shall be called by the Secretary on the written request of any two Directors.
Notice of each special meeting of the Board of Directors shall be given to
each Director at least 48 hours before the meeting is scheduled to convene.
4.4 NOTICE AND WAIVER OF NOTICE. Attendance of a Director at any
meeting shall constitute a waiver of notice of such meeting, except where a
Director attends for the express purpose of objecting to the transaction of
any business on the ground that the meeting is not lawfully called or
convened. Except as may be otherwise provided by law or by the Articles of
Incorporation or by these Bylaws, neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Board of Directors
need be specified in the notice or waiver of notice of such meeting.
4.5 QUORUM OF DIRECTORS; VOTE REQUIRED. At all meetings of the Board
of Directors a majority of the Directors shall constitute a quorum for the
transaction of business and the act of a majority of the Directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors. If a quorum shall not be present at any meeting of Directors, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present.
4.6 ACTION WITHOUT MEETINGS. Any action required or permitted to be
taken at a meeting of the Board of Directors or any committee may be taken
without a meeting if a consent in writing, setting forth the action so taken,
is signed by all the members of the Board of Directors or committee, as the
case may be.
4.7 COMMITTEES.
(a) The Board of Directors, by resolution adopted by a majority of
the full Board of Directors, may designate from among its members one or
more committees, each of which shall be comprised of one or more of its
members, and may designate one or
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more of its members as alternate members of any committee, who may, subject
to any limitations imposed by the Board of Directors, replace absent or
disqualified members at any meeting of that committee. Any such committee,
to the extent provided in such resolution shall have and may exercise all
of the authority of the Board of Directors, subject to the limitations set
forth below and in the Act.
(b) No committee of the Board of Directors shall have the authority
of the Board of Directors in reference to:
1. amending the Articles of Incorporation, except that a
committee may, to the extent provided in the resolution
designating that committee or in the Articles of Incorporation
or the Bylaws, exercise the authority of the Board of
Directors vested in it in accordance with Article 2.13 of the
Act;
2. proposing a reduction of the stated capital of the Corporation
in the manner permitted by Article 4.12 of the Act;
3. approving a plan of merger or share exchange of the Corporation;
4. recommending to the shareholders the sale, lease, or exchange
of all or substantially all of the property and assets of the
Corporation otherwise than in the usual and regular course of
its business;
5. recommending to the shareholders a voluntary dissolution of the
Corporation or a revocation thereof;
6. amending, altering, or repealing these Bylaws of the Corporation
or adopting new Bylaws of the Corporation;
7. filling vacancies in the Board of Directors;
8. filling vacancies in or designating alternate members of any
such committee;
9. filling any Directorship to be filled by reason of an increase
in the number of Directors;
10. electing or removing officers of the Corporation or members or
alternate members of any such committee;
11. fixing the compensation of any member or alternate members of
such committee; or
12. altering or repealing any resolution of the Board of Directors
that by its terms provides that it shall not be so amendable or
repealable.
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(c) Unless the resolution designating a particular committee, the
Articles of Incorporation, or these Bylaws expressly so provide, no
committee of the Board of Directors shall have the authority to authorize a
distribution or to authorize the issuance of shares of the Corporation.
(d) The designation of a committee of the Board of Directors and
the delegation thereto of authority shall not operate to relieve the Board
of Directors, or any member thereof, of any responsibility imposed by law.
4.8 COMPENSATION. The Directors shall receive such compensation for
their services as Directors as may be determined by resolution of the Board
of Directors. Each Director shall be reimbursed for travel and other
reasonable out-of-pocket expenses incurred by such Director in attending
regular and special meetings of the Board of Directors or any committee. The
receipt of compensation or reimbursement of expenses shall not preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor.
5. OFFICERS
5.1 ELECTION, NUMBER, QUALIFICATION, TERM, COMPENSATION. The officers
of the Corporation shall be elected by the Board of Directors and shall
consist of a President, a Vice President, a Secretary and a Treasurer. The
Board of Directors may also elect a Chairman of the Board, additional Vice
Presidents, one or more assistant secretaries and assistant treasurers and
such other officers and assistant officers and agents as it shall deem
necessary, who shall hold their offices for such terms and shall have such
authority and exercise such powers and perform such duties as shall be
determined from time to time by the Board by resolution not inconsistent with
these Bylaws. Two or more offices may be held by the same person. None of
the officers need be Directors except the President. The Board of Directors
shall have the power to enter into contracts for the employment and
compensation of officers for such terms as the Board deems advisable. The
salaries of all officers of the Corporation shall be fixed by the Board of
Directors.
5.2 REMOVAL. The officers of the Corporation shall hold office until
their successors are elected or appointed and qualify, or until their death
or until their resignation or removal from office. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board,
with or without cause. Such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Election or appointment
of an officer shall not of itself create contract rights.
5.3 VACANCIES. Any vacancy occurring in any office of the Corporation
by death, resignation, removal or otherwise shall be filled by the Board of
Directors.
5.4 AUTHORITY. Officers and agents shall have such authority and
perform such duties in the management of the Corporation as may be provided
in these Bylaws.
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5.5 CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside at all meetings of the Board of Directors and of the
shareholders and shall have such other powers and duties as may from time to
time be prescribed by the Board of Directors upon written directions given to
him pursuant to resolutions duly adopted by the Board of Directors.
5.6 VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board, if
elected, shall preside at meetings of the Board of Directors and of
shareholders in the absence of the Chairman of the Board. The Vice Chairman
of the Board shall have such other powers and duties as from time to time may
be prescribed by the Board of Directors.
5.7 PRESIDENT. The President shall be the chief executive officer of
the Corporation, shall have general and active management of the business and
affairs of the Corporation and shall see that all orders and resolutions of
the Board of Directors are carried into effect. He shall preside at all
meetings of the shareholders and of the Board of Directors, unless a Chairman
of the Board or Vice Chairman of the Board has been elected, in which event
the President shall preside at meetings of the shareholders and of the Board
of Directors in the absence or disability of the Chairman of the Board or
Vice Chairman of the Board.
5.8 VICE PRESIDENT. Vice Presidents, including executive vice
presidents and senior vice presidents, in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence
or disability of the President, perform the duties and have the authority and
exercise the powers of the President. They shall perform such other duties
and have such other authority and powers as the Board of Directors may from
time to time prescribe or as the President may from time to time delegate.
5.9 SECRETARY. The Secretary shall attend all meetings of the Board of
Directors and all meetings of shareholders and record all of the proceedings
of the meetings of the Board of Directors and of the shareholders in a minute
book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given,
notice of all meetings of the shareholders and special meetings of the Board
of Directors, and shall perform such other duties as may be prescribed by the
Board of Directors or President, under whose supervision he shall be. He
shall keep in safe custody the seal of the Corporation and, when authorized
by the Board of Directors, shall affix the same to any instrument requiring
it and, when so affixed, it shall be attested by his signature or by the
signature of an Assistant Secretary or of the Treasurer.
5.10 TREASURER.
(a) The Treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate accounts and records of
receipts, disbursements and other transactions in books belonging to the
Corporation, and shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors.
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(b) The Treasurer shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of
Directors, at its regular meetings, or when the President or Board of
Directors so requires, an account of all his transactions as Treasurer and
of the financial condition of the Corporation.
(c) If required by the Board of Directors, the Treasurer shall
give the Corporation a bond of such type, character and amount as the Board
of Directors may require.
5.11 ASSISTANT SECRETARY AND ASSISTANT TREASURER. In the absence of
the Secretary or Treasurer, an Assistant Secretary or Assistant Treasurer,
respectively shall perform the duties of the Secretary or Treasurer.
Assistant Treasurers may be required to give bond as provided in
section 5.10(c). The assistant secretaries and assistant treasurers, in
general shall have such powers and perform such duties as the Treasurer or
Secretary, respectively, or the Board of Directors or President may prescribe.
6. CERTIFICATES REPRESENTING SHARES
6.1 CERTIFICATES. The shares of the Corporation shall be represented
by certificates signed by the President or a Vice President and the Secretary
or an Assistant Secretary of the Corporation, and may be sealed with the seal
of the Corporation or a facsimile thereof. The signatures of the President
or Vice President and the Secretary or Assistant Secretary upon a certificate
may be facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee
of the Corporation. The certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued. Each
certificate shall state on the face thereof the holder's name, the number and
class of shares, and the par value of such shares or a statement that such
shares are without par value.
6.2 PAYMENT, ISSUANCE. Shares may be issued for such consideration,
not less than the par value thereof, as may be fixed from time to time by the
Board of Directors. The consideration for the payment of shares shall
consist of money paid, labor done or property actually received. Shares may
not be issued until the full amount of the consideration fixed therefor has
been paid.
6.3 LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed upon
the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing such issue of
a new certificate, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, prescribe such terms and
conditions as it deems expedient and may require such indemnities as it deems
adequate to protect the Corporation from any claim that may be made against
it with respect to any such certificate alleged to have been lost or
destroyed.
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6.4 REGISTRATION OF TRANSFER. Shares of stock shall be transferable
only on the books of the Corporation by the holder thereof in person or by
his duly authorized attorney. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto
and the old certificate canceled and the transaction recorded upon the books
of the Corporation.
6.5 REGISTERED OWNER. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as of the record date
as the owner of shares to receive dividends or other distributions, and to
vote as such owner, and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except
as otherwise provided by the laws of the State of Texas. The person in whose
name the shares are or were registered in the stock transfer books of the
Corporation as of the record date shall be deemed to be the owner of the
shares registered in his name at that time. Neither the Corporation nor any
of its officers, Directors, or agents shall be under any liability for making
such a distribution to a person in whose name shares were registered in the
stock transfer books as of the record date or to the heirs, successors, or
assigns of the person, even though the person, or his heirs, successors, or
assigns, may not possess a certificate for shares.
7. DIVIDENDS
7.1 DECLARATION AND PAYMENT. Subject to the Act and the Articles of
Incorporation, dividends may be declared by the Board of Directors, in its
discretion, at any regular or special meeting, pursuant to law and may be
paid in cash, in property or in the Corporation's own shares.
7.2 RESERVES. Before payment of any dividend, the Board of Directors,
by resolution, may create a reserve or reserves out of the Corporation's
surplus or designate or allocate any part or all of such surplus in any
manner for any proper purpose or purposes, and may increase, create, or
abolish any such reserve, designation, or allocation in the same manner.
8. GENERAL PROVISION
8.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
8.2 SEAL. The corporate seal shall be in such form as may be
prescribed by the Board of Directors. The seal may be used by causing it or
a facsimile thereof to be impressed or affixed or in any manner reproduced.
8.3 MINUTES. The Corporation shall keep correct and complete books
and records of account and shall keep minutes of the proceedings of its
shareholders and Board of Directors, and shall keep at its registered office
or principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving names and addresses of all
shareholders and the number and class of the shares held by each.
AMENDED AND RESTATED BYLAWS OF FLASHNET COMMUNICATIONS, INC. Page 12
<PAGE>
8.4 AMENDMENT. The power to amend or repeal these Bylaws and adopt new
Bylaws shall be reserved exclusively to the Board of Directors. These Bylaws
may be altered, amended or repealed and new Bylaws may be adopted by the
Board of Directors, at any meeting of the Board of Directors at which a
quorum is present, provided notice of the proposed alteration, amendment, or
repeal is contained in the notice of the meeting.
8.5 NOTICE. Any notice to Directors or shareholders shall be in
writing and shall be delivered personally or mailed to the Directors or
shareholders at their respective addresses appearing on the books of the
Corporation. Notice by mail shall be deemed to be given at the time when the
same shall be deposited in the United States mail, postage prepaid. Notice
to Directors may also be given by facsimile transmittal. Whenever any notice
is required to be given under the provisions of applicable statutes or of the
Articles of Incorporation or of these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or
after the time stated therein, shall be deemed equivalent to the giving of
such notice.
Dated: February 12, 1999
__________________
/s/ Andrew N. Jent
_________________________________________
Andrew N. Jent, Executive Vice President,
Chief Financial Officer and Secretary
AMENDED AND RESTATED BYLAWS OF FLASHNET COMMUNICATIONS, INC. Page 13
<PAGE>
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE COMMON STOCK
OF TEXAS
NUMBER SHARES
[LOGO]
FLASHNET COMMUNICATIONS, INC.
THIS CERTIFICATE IS TRANSFERRABLE SEE REVERSE FOR -----------------
IN BOSTON, MASSACHUSETTS OR CERTAIN DEFINITIONS CUSIP 338527 10 4
NEW YORK, NEW YORK -----------------
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE PER
SHARE, OF
FLASHNET COMMUNICATIONS, INC., transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon surrender
of this Certificate properly endorsed. This Certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the duly authorized officers of the Corporation have
hereunto subscribed their names.
Dated:
/s/ Andrew N. Jent /s/ M. Scott Leslie
Executive Vice President, President and Chief Operating Officer
Chief Financial Officer
and Secretary
Countersigned and Registered:
BANKBOSTON, N.A.
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
FLASHNET COMMUNICATIONS, INC.
The Corporation is authorized to issue Common Stock, no par value per
share, and Preferred Stock, par value $1.00 per share.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof
and the qualifications, limitations or restrictions of such preferences
and/or rights.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT--......Custodian......
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act.....................................
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
---------------------------------------------
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: 19
--------------------------------- ----
NOTICE: X
THE SIGNATURE(S) TO THIS --------------------------------------
ASSIGNMENT MUST CORRESPOND Signature
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE X
CERTIFICATE IN EVERY --------------------------------------
PARTICULAR,WITHOUT Signature
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
----------------------------------------
THE SIGNATURE SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION AS
DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
----------------------------------------
SIGNATURE(S) GUARANTEED BY:
----------------------------------------
<PAGE>
February 23, 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,
as amended through February 23, 1999 (the "Registration Statement"), with the
Securities and Exchange Commission, relating to the sale of up to 3,450,000
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>
- -------------------------------------------------------------------------------
MASTER LEASE AGREEMENT
No. 9018
-----
This Master Lease Agreement (the "MLA") is entered into by and between Ascend
Credit Corporation ("Lessor"), having its principal place of business at 1275
Harbor Bay Parkway, Alameda, CA 94502 and Website Management Company, Inc.
dba FlashNet Communications ("Lessee"), having its principal place of
business at 2805 West Seventh Street, Fort Worth, TX 76107
1. LEASE AGREEMENT. Lessor agrees to lease to Lessee, and Lessee
agrees to lease from Lessor, the equipment (the "Equipment") referenced in
each of the Schedules (the "Schedule" or "Schedules") which incorporate this
MLA therein (the "Lease").
2. TERM. Each Lease shall be effective upon the execution of the
MLA and the related Schedule by the Lessor and the Lessee. The lease term
(the "Lease Term") of the Equipment referenced in each of the Schedules shall
commence on the rent commencement date specified in each Schedule (the "Rent
Commencement Date"). The Rent Commencement Date shall be the date 30 days
from the date that the Equipment is shipped by the supplier (the "Ship Date")
as evidenced by a shipping document provided by the supplier related to the
Equipment (the "Shipping Document"). Lessor will provide Lessee with a copy
of the Shipping Document evidencing the Ship Date.
3. RENT. The rent (the "Rent") for the Equipment referenced in any
Schedule shall be as stated in such Schedule and shall be payable according
to the provisions of such Schedule. If any amount payable under a Schedule is
not received by Lessor within 10 days of the due date, Lessee agrees to pay
an overdue Charge, as defined herein, with respect to such amount.
4. SELECTION AND ASSIGNMENT. Lessee will select the type, quantity and
Supplier of each item of Equipment designated in a Schedule, and Lessee
hereby assigns to Lessor all of its right, title and interest in and to the
related equipment purchase agreement, a copy of which has been provided to
Lessor by Lessee (the "Agreement"). The Agreement may be amended with the
consent of Lessor. Any such assignment with respect to Equipment shall
become binding upon Lessor when Lessor and Lessee have entered into a Lease
with respect to such Equipment and as of the Rent Commencement Date
referenced in such Lease. Upon such an assignment becoming effective, Lessor
shall be obligated to purchase the Equipment from the Supplier in accordance
with the provisions of the Agreement. It is expressly agreed that Lessee
shall at all times remain liable to Supplier under the Agreement to perform
all duties and obligations of Lessee thereunder, except for the obligation to
purchase the Equipment to the extent expressly assumed by the Lessor
hereunder, and that the Lessee shall be entitled to the same rights of the
purchaser of the Equipment under the Agreement, except such right, title and
interest in the Equipment retained exclusively by the Lessor as owner of the
Equipment. Lessor shall have no liability for a Supplier's failure to meet
the terms and conditions of the Agreement.
5. DELIVERY AND INSTALLATION. Lessee shall be responsible for payment
of all transportation, packing, installation, testing and other charges
associated with the delivery, installation or use of any Equipment which are
not included in the Agreement with respect to such Equipment.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT, ITS
MERCHANTABILITY, OR ITS FITNESS FOR A PARTICULAR PURPOSE. LESSOR SHALL NOT BE
LIABLE TO LESSEE OR ANY OTHER PERSON FOR DIRECT, INDIRECT, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM LESSEE'S USE OF THE
EQUIPMENT, OR FOR DAMAGES BASED ON STRICT OR ABSOLUTE TORT LIABILITY OR
LESSOR'S PASSIVE NEGLIGENCE. LESSEE HEREBY ACKNOWLEDGES THAT ANY
MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO THE EQUIPMENT ARE FOR
THE BENEFIT OF BOTH LESSOR AND LESSEE. NOTWITHSTANDING THE FOREGOING,
LESSEE'S OBLIGATIONS TO PAY EACH RENT PAYMENT DUE, OR OTHERWISE PERFORM ITS
OBLIGATIONS, UNDER THIS LEASE ARE ABSOLUTE AND UNCONDITIONAL.
7. TITLE TO AND LOCATION OF EQUIPMENT. Lessor shall retain title to
each item of Equipment. Lessee, at its expense, shall protect Lessor's title
and keep the Equipment free from all claims, liens, encumbrances and legal
processes. The Equipment is personal property and is not to be regarded as
part of the real estate on which it may be situated. If requested by Lessor,
Lessee will, at Lessee's expense, furnish a landlord or mortgagee waiver with
respect to the Equipment. The Equipment shall not be removed from the
location specified in the Schedule without the written consent of Lessor.
Lessee shall, upon Lessor's request, affix and maintain plates, tags or other
identifying labels, showing Lessor's ownership of the Equipment in a
prominent position on the Equipment.
8. USE OF EQUIPMENT, INSPECTION AND REPORTS. The use of the Equipment
by Lessee shall conform with all applicable laws, insurance policies, and
warranties of the manufacturer or Supplier of the Equipment. Lessor shall
have the right to inspect the Equipment at the premises where the Equipment
is located. Lessee shall notify Lessor promptly of any claims, liens,
encumbrances or legal processes with respect to the Equipment.
9. FURTHER ASSURANCES. Lessee shall execute and deliver to Lessor such
instruments as Lessor deems necessary for the confirmation of this Lease and
Lessor's rights hereunder. Lessor is authorized to file financing statements
signed only by the Lessor in accordance with the Uniform Commercial Code, or
financing statements signed by Lessor as Lessee's attorney-in-fact. Any such
filing with respect to the Equipment leased pursuant to a true lease shall
not be deemed evidence of any intent to create a security interest under the
Uniform Commercial Code.
10. MAINTENANCE AND REPAIRS. Lessee shall, at its expense, maintain
each item of Equipment in good condition, normal wear and tear excepted.
Lessee shall not make any addition, alteration, or attachment to the
Equipment without Lessor's prior written consent. Lessee shall make no
repair, addition, alteration or attachment to the Equipment which interferes
with the normal operation or maintenance thereof, creates a safety hazard, or
might result in the creation of a mechanic's or materialman's lien.
11. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to
perform any of its obligations under a Lease, Lessor may perform any act or
make any payment which Lessor deems necessary for the maintenance and
preservation of the Equipment subject thereto and Lessor's title thereto. All
sums so paid by Lessor (together with all related Overdue Charges), and
reasonable attorneys' fees incurred by Lessor in connection therewith, shall
be additional rent payable to Lessor on demand. The performance of any such
act or the making of any such payment by Lessor shall not be deemed a waiver
or release of any obligation or default on the part of Lessee.
12. INDEMNIFICATION. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, and its agents, employees,
officers, directors, partners and successors and assigns, from and against,
all liabilities, obligations, losses, damages, injuries, claims, demands,
penalties, actions, costs and expenses, including, without limitation,
reasonable attorneys' fees, of whatever kind and nature, in contract or in
tort, arising out of the use, condition, operation, ownership, selection,
delivery, leasing or return of any item of Equipment, regardless of when, how
and by whom operated, or any failure on the part of Lessee to perform or
comply with any of its obligations under a Lease, excluding, however, any of
the foregoing which result from the gross negligence or willful misconduct of
Lessor. Such indemnities and assumptions of liabilities and obligations shall
continue in full force and effect, notwithstanding the expiration or other
termination of such Lease. Nothing contained in any Lease shall authorize
Lessee to operate the Equipment subject thereto so as to incur or impose any
liability on, or obligation for or on behalf of, Lessor.
13. NO OFF-SET. All Rents shall be paid by Lessee irrespective of any
off-set, counterclaim, recoupment, defense or other right which Lessee may
have against Lessor, the manufacturer or Supplier of the Equipment or any
other party.
14. ASSIGNMENT BY LESSEE. Lessee shall not, without Lessor's prior
written consent, (a) sell, assign, transfer, pledge, hypothecate, or
otherwise dispose of, encumber or suffer to exist a lien upon or against, any
of the Equipment or any Lease or any interest therein, by operation of law or
otherwise, or (b) sublease or lend any of the Equipment or permit any of the
Equipment to be used by anyone other than Lessee.
15. ASSIGNMENT BY LESSOR. Lessor may assign, sell or encumber its
interest in any of the Equipment and any Lease. Upon Lessor's written
consent, Lessee shall pay directly to the assignee of any such interest all
Rent and other sums due under an assigned Lease. THE RIGHTS OF ANY SUCH
ASSIGNEE SHALL NOT BE SUBJECT TO ANY ABATEMENT, DEDUCTION, OFF-SET,
COUNTERCLAIM, RECOUPMENT, DEFENSE OR OTHER RIGHT WHICH LESSEE MAY HAVE
AGAINST LESSOR OR ANY OTHER PERSON OR ENTITY. Notwithstanding the foregoing,
any such assignment (a) shall be subject to Lessee's right to possess and use
the Equipment subject to a Lease so long as Lessee is not in default
thereunder, and (b) shall not release any of Lessor's obligations hereunder.
16. RETURN OF EQUIPMENT. Unless Lessee has exercised its option, if
any, to renew a lease or purchase the Equipment subject thereto, upon
expiration of the then current Lease Term of such Lease, Lessee shall, at its
expense, cause such Equipment to be removed, disassembled, and placed in the
same condition as when delivered to Lessee (reasonable wear and tear
excepted) and properly crate such Equipment for shipment and deliver it to a
common carrier designated by Lessor. Lessee will ship such Equipment, F.O.B.
destination, to any address specified in writing by Lessor within the
continental United States. All additions, attachments, alterations and
repairs made or placed upon any of the Equipment shall become part of such
Equipment and shall be the property of Lessor.
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
17. EVENTS OF DEFAULT. The occurrence of any of the following shall be
deemed to constitute an Event of Default hereunder; (a) Lessee fails to pay
Rent, any other amount it is obligated to pay under a Lease or any other
amount it is obligated to pay to Lessor and does not cure such failure within
10 days of such amount becoming due; (b) Lessee fails to perform or observe
any obligation or covenant to be performed or observed by Lessee hereunder or
under any Schedule, including, without limitation, supplying all requested
documentation, and does not cure such failure within 10 days of receiving
written notice thereof from Lessor; (c) any warranty, representation or
statement made or furnished to Lessor by or on behalf of Lessee is proven to
have been false in any material respect when made or furnished; (d) the
attempted sale or encumbrance by Lessee of the Equipment, or the making of
any levy, seizure or attachment thereof or thereon; or (e) the dissolution,
termination of existence, discontinuance of business, insolvency, or
appointment of a receiver of any part of the property of Lessee, assignment
by Lessee for the benefit of creditors, the commencement of proceedings under
any bankruptcy, reorganization or arrangement laws by or against Lessee, or
any other act of bankruptcy on the part of Lessee.
18. REMEDIES OF LESSOR. At any time after the occurrence of any Event
of Default, Lessor may exercise one or more of the following remedies: (a)
Lessor may terminate any or all of the Leases with respect to any or all items
of Equipment subject thereto; (b) Lessor may recover from Lessee all Rent and
other amounts then due and to become due under any or all of the Leases; (c)
Lessor may take possession of any or all items of Equipment, wherever the
same may be located, without demand or notice, without any court order or
other process of law and without liability to Lessee for any damages
occasioned by such taking of possession, and any such taking of possession
shall not constitute a termination of any Lease; (d) Lessor may demand that
Lessee return any or all items of Equipment to Lessor in accordance with
Paragraph 16; and (e) Lessor may pursue any other remedy available at law or
in equity, including, without limitation, seeking damages, specific
performance or an injunction.
Upon repossession or return of any item of the Equipment, Lessor shall
sell, lease or otherwise dispose of such item in a commercially reasonable
manner, with or without notice and on public or private bid, and apply the
net proceeds thereof (after deducting the estimated fair market value of such
item at the expiration of the term of the applicable Lease, in the case of a
sale, or the rents due for any period beyond the scheduled expiration of such
Lease, in the case of any subsequent lease of such item, and all expenses,
including, without limitation, reasonable attorneys' fees, incurred in
connection therewith) towards the Rent and other amounts due under such
Lease, with any excess net proceeds to be retained by Lessor.
Each of the remedies under this Lease shall be cumulative, and not
exclusive, and in addition to any other remedy referred to herein or
otherwise available to Lessor in law or in equity. Any repossession or
subsequent sale or lease by Lessor of any item of Equipment shall not bar an
action for a deficiency as herein provided, and the bringing of an action or
the entry of judgment against Lessee shall not bar Lessor's right to
repossess any or all items of Equipment.
19. CREDIT AND FINANCIAL INFORMATION. Within 90 days of the close of
each of Lessee's fiscal years, Lessee shall deliver to Lessor a copy of
Lessee's annual report, if any, and an audited balance sheet and profit and
loss statement with respect to such year. If audited financial statements of
Lessee for such year are not prepared, Lessee may provide financial
statements certified by an officer of Lessee. At Lessor's request, Lessee
shall deliver to Lessor a balance sheet and profit and loss statement for any
of its fiscal quarters, certified by an officer of Lessee.
20. INSURANCE. As of the date that risk of loss for the Equipment
passes from the Supplier to the Lessee under the terms of the Agreement,
Lessee shall obtain and maintain through the end of the Lease Term of each
Lease (and any renewal or extension thereof), at its own expense, property
damage and personal liability insurance and insurance against loss or damage
to the Equipment, including, without limitation, loss by fire (with extended
coverage), theft and such other risks of loss as are customarily insured
against with respect to the types of Equipment leased hereunder and by the
types of businesses in which such Equipment will be used by Lessee. Such
insurance shall be in such amounts, with such deductibles, in such form and
with such insurers as shall be satisfactory to Lessor; provided, however,
that the amount of the insurance against loss or damage to the Equipment
shall not be less than the greater of the replacement value of the Equipment,
from time to time, or the original purchase price of the Equipment. Each
insurance policy shall name Lessee as an insured and Lessor as an additional
insured or loss payee, and shall contain a clause requiring the insurer to
give Lessor at least 30 days prior written notice of any alteration in the
terms of such policy or of the cancellation thereof. Lessee shall furnish to
Lessor a certificate of insurance or other evidence satisfactory to Lessor
that such insurance coverage is in effect; provided, however, that Lessor
shall be under no duty either to ascertain the existence of or to examine
such insurance policy or to advise Lessee in the event such insurance
coverage shall not comply with the requirements hereof. Lessee shall give
Lessor prompt notice of any damage to, or loss of, any of the Equipment, or
any part thereof, or any personal injury or property damage occasioned by the
use of any of the Equipment.
21. TAXES. Lessee hereby assumes liability for, and shall pay when due,
and, on a net after-tax basis, shall indemnify, protect and hold harmless
Lessor against all fees, taxes and governmental charges (including, without
limitation, interest and penalties) of any nature imposed on or in any way
relating to Lessor. Lessee, any item of Equipment or any Lease, except state
and local taxes on or measured by Lessor's net income (other than any such
tax which is in substitution for or relieves Lessee from the payment of taxes
it would otherwise be obligated to pay or reimburse to Lessor as herein
provided) and federal taxes on Lessor's net income. Lessee shall, at its
expense, file when due with the appropriate authorities any and all tax and
similar returns, and reports required to be filed with respect thereto, for
which it has indemnified Lessor hereunder or, if requested by Lessor, notify
Lessor of all such requirements and furnish Lessor with all information
required for Lessor to effect such filings. Any fees, taxes or other charges
paid by Lessor upon failure of Lessee to make such payments shall, at
Lessor's option, become immediately due from Lessee to Lessor and shall be
subject to the Overdue Charge from the date paid by Lessor until the date
reimbursed by Lessee.
22. SEVERABILITY. If any provision of any Lease is held to be invalid
by a court of competent jurisdiction, such invalidity shall not affect the
other provisions of such Lease or any provision of any other Lease.
23. NOTICES. All notices hereunder shall be in writing and shall be
deemed given when sent by certified mail, postage prepaid, return receipt
requested, addressed to the party to which it is being sent at its address
set forth herein or to such other address as such party may designate in
writing to the other party.
24. AMENDMENTS, WAIVERS AND EXTENSIONS. This MLA and each Schedule
constitute the entire agreement between Lessor and Lessee with respect to the
lease of the Equipment subject to such Schedule, and supersede all previous
communications, understandings, and agreements, whether oral or written,
between the parties with respect to such subject matter. No provision of any
Lease may be changed, waived, amended or terminated except by a written
agreement, specifying such change, waiver, amendment or termination, signed
by both Lessee and Lessor, except that Lessor may insert, on the appropriate
schedule, the serial number of Equipment, after delivery of such equipment,
and the Installation Date for the Equipment, after receiving a Certificate of
Installation with respect thereto. No waiver by Lessor of any Event of
Default shall be construed as a waiver of any future Event of Default or any
other Event of Default. At the expiration of the Lease Term with respect to a
Lease, upon notice given by Lessee at least ninety (90) days prior thereto,
(a) such Lease shall be renewed or the Equipment subject thereto shall be
purchased under the terms and conditions set forth herein for a term and rent
amount or purchase price, as the case may be, to be agreed upon, or (b) if no
such agreement is reached prior to the expiration of such Lease Term or such
notice specifies that Lessee intends to return the Equipment, then Lessee
shall return the Equipment to Lessor in the manner prescribed in Paragraph 16
of this MLA. In the absence of Lessor's timely receipt of the notice
contemplated by the preceding sentence, the Lease shall be automatically
extended, on a month-to-month basis, until terminated (upon notice by either
party given at least ninety (90) days prior to the end of the month on which
the termination is to be effective) or until renewed or the Equipment subject
thereto is purchased by agreement of the parties. Unless otherwise agreed,
Lessee shall continue to pay Rent for each month following such Lease Term
until the Equipment subject to such Lease is returned pursuant to Paragraph
16 of this MLA.
25. CONSTRUCTION. This MLA shall be governed by and construed in
accordance with the internal laws, but not the choice of laws provisions, of
the State of California. The titles of the sections of this MLA are for
convenience only and shall not define or limit any of the terms or provisions
hereof. Time is of the essence in each of the provisions hereof.
26. PARTIES. This MLA shall be binding upon, and inure to the benefit
of, the permitted assigns, representatives and successors of the Lessor and
Lessee. If there is more than one Lessee named in this MLA, the liability of
each shall be joint and several.
27. COUNTERPARTS. Each Lease may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
28. OVERDUE CHARGE. Overdue Charge shall mean an amount equal to 2% per
month of any payment under a Lease which is past due, including, without
limitation, any amounts not included in any payment of Rent hereunder, or the
highest charge permitted by law, whichever is lower.
The person executing this MLA on behalf of Lessee hereby certifies that he or
she has read, and is duly authorized to execute, this MLA.
Accepted by:
Website Management Company, Inc.
Ascend Credit Corporation LESSEE: dba FlashNet Communications
------------------------------------
BY: BY: /S/ M. SCOTT LESLIE
------------------------- ----------------------------------------
NAME: NAME: M. SCOTT LESLIE
----------------------- --------------------------------------
PRINT PRINT
TITLE: TITLE: President
----------------------- -------------------------------------
DATE: DATE: June 7, 1996
----------------------- --------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ADDENDUM
This Addendum is to Master Lease Agreement No. 9018, by and between Ascend
Credit Corporation ("Lessor") and Website Management Company, Inc. dba
Flashnet Communications ("Lessee").
In Section 17. EVENTS OF DEFAULT, item (e): the word "insolvency" is replaced
with the words "inability to pay debts when due".
Except as modified by this Addendum, the terms and conditions of the Master
Lease Agreement shall remain in full force and effect.
ACCEPTED BY:
LESSOR: LESSEE:
ASCEND CREDIT CORPORATION WEBSITE MANAGEMENT COMPANY, INC. DBA
FLASHNET COMMUNICATIONS
BY: /s/ Mark E. Alman BY: /s/ M. Scott Leslie
---------------------------- ---------------------------------
NAME: Mark E. Alman NAME: M. Scott Leslie
-------------------------- -------------------------------
TITLE: Corporate Finance Mgr. TITLE: President
------------------------- ------------------------------
DATE: 6/14/96 DATE: June 7, 1996
----------------------- -------------------------------
<PAGE>
ASCEND CREDIT CORPORATION
1275 HARBOR BAY PARKWAY
ALAMEDA, CA 94502
[LOGO]
TEL. (310) 747-2772
FAX (310)337-2668
March 27, 1997
Mr. Scott Leslie
Website Management Company, Inc, dba FlashNet Communications
2805 West Seventh Street
Fort Worth, TX 76107
Re: Master Lease 9018, Schedule No. 1
By signing the acknowledgment below you agree the equipment is operating to
expectations and to the following revision of the above referenced Lease and
Schedule.
Due to equipment problems the Lease and Schedule referenced above have been
amended to reflect the following payment and term restructure. No payments
are due from Website Management Company, Inc, dba FlashNet Communications for
the period December 1, 1996 to March 31, 1997. Monthly rental payments in the
amount of $3,970.20 (net of tax) will resume effective April 1, 1997 and will
continue through September 30, 1998, An interim rent payment of $1,152.66
will be made for the period of October 1, 1998 through October 10, 1998. This
revision extends the original lease term from 24 months to 28 months.
Acknowledged and Accepted
Ascend Credit Corporation Website Management Company, Inc. dba
FlashNet Communications
BY: /S/ MARK E. ALMAN BY: /S/ M. SCOTT LESLIE
------------------------- ---------------------------------
NAME: MARK E. ALMAN NAME: M. SCOTT LESLIE
----------------------- -------------------------------
TITLE: CORP. FINANCE MGR. TITLE: PRESIDENT
---------------------- ------------------------------
DATE: 3-28-97 DATE: 3/27/97
----------------------- -------------------------------
<PAGE>
LEASE SCHEDULE
No. 01
---------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement, Number 9018
-----------------------------
between Ascend Credit Corporation (Lessor) and
Website Management Company, Inc. dba FlashNet Communications (Lessee).
- -------------------------------------------------------------
1. SUPPLIER: Ascend Communications, Inc.
-----------------------------------------------------------------
2. LOCATION OF EQUIPMENT: FlashNet Communications, 2805 West Seventh Street,
---------------------------------------------------
Fort Worth, TX 76107
--------------------------------------------------------------------------
3. EQUIPMENT VALUE: $ 84,924.00 (exclusive of sales and/or use taxes).
----------------
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph 6
and its expiration date shall be 24 months after such Rent
-----
Commencement Date.
5. RENT: $ 3,970.20 per month (exclusive of sales and/or use taxes) due and
-------------
payable at the Rent Commencement Date and on the same date of each
succeeding month of the Lease Term. The advance Rent payment shall be
$ 3,970.20. This amount is $ N/A for the first month,
----------- --------------
$ 3,970.20 for the last 1 month(s), of the Lease Term.
-------------- -----
6. RENT COMMENCEMENT DATE: July 10, 1996 .
------------------
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for Fair Market Value ("FMV"), not to exceed seven percent (7%) of the
Equipment value, on the expiration of this Lease or any renewal term,
provided Lessee is not in default of any of its obligations under this
Lease on such expiration date. This purchase option may only be
exercised by Lessee's written notice to Lessor not earlier than 180 days,
nor later than 90 days, prior to the end of the Lease Term or any
renewal term. The purchase price for such Equipment shall be payable
upon the expiration date of such term. FMV shall be equal to the value
of the Equipment installed and in use, with consideration given to the
age, condition, utility and replacement costs for the Equipment. In the
event that Lessor and Lessee are unable to agree upon the purchase price
for the Equipment, such purchase price will be determined by an
independent appraiser to be selected by Lessor. Lessee shall be
responsible for all applicable sales and/or use taxes on the Equipment.
Upon exercise of this purchase option and payment of the purchase price,
Lessor shall execute and deliver to Lessee such documents as Lessee may
reasonably request in order to vest in Lessee all right, title and
interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss; (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that
he or she has read, and is duly authorized to execute, this Schedule
Accepted by:
Ascend Credit Corporation LESSEE: Website Management Company, Inc. dba
FlashNet Communications
------------------------------------
BY: /s/ Mark E. Alman BY: /s/ M. Scott Leslie
------------------------------ ----------------------------------------
NAME: Mark E. Alman NAME: M. Scott Leslie
----------------------------- ---------------------------------------
Print Print
TITLE: Corporate Finance Mgr. TITLE: President
---------------------------- --------------------------------------
DATE: 6/14/96 DATE: June 7, 1996
----------------------------- ---------------------------------------
<PAGE>
[LETTERHEAD] [LOGO]
March 27, 1997
Mr. Scott Leslie
Website Management Company, Inc. dba FlashNet Communications
2805 West Seventh Street
Fort Worth, TX 76107
Re: Master Lease 9018, Schedule No. 2
By signing the acknowledgment below you agree the equipment is operating to
expectations and to the following revision of the above referenced Lease and
Schedule.
Due to equipment problems the Lease and Schedule referenced above have been
amended to reflect the following payment and term restructure. No payments
are due from Website Management Company, Inc. dba FlashNet Communications for
the period December 1, 1996 to March 31, 1997. Monthly rental payments in the
amount of $6,438.18 (net of tax) will resume effective April 1, 1997 and will
continue through September 30, 1998. An interim rent payment of $3,946.02
will be made for the period of October 1, 1998 through October 20, 1998. This
revision extends the original lease term from 24 months to 28 months.
Acknowledged and Accepted
Ascend Credit Corporation Website Management Company, Inc. dba
FlashNet Communications
By: /s/ Mark E. Alman By: /s/ M. Scott Leslie
------------------------------ ------------------------------------
Name: Mark E. Alman Name: M. Scott Leslie
----------------------------- -----------------------------------
Title: Corp. Finance Mgr. Title: President
---------------------------- ----------------------------------
Date: 3-28-97 Date: 3/27/97
----------------------------- -----------------------------------
<PAGE>
LEASE SCHEDULE
No. 02
---------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement, Number 9018,
-----------------------------
between Ascend Credit Corporation (Lessor) and
Website Management Company, Inc. dba FlashNet Communications (Lessee).
- -------------------------------------------------------------
1. SUPPLIER: Ascend Communications, Inc.
-----------------------------------------------------------------
2. LOCATION OF EQUIPMENT: FlashNet Communications, 2805 West Seventh Street,
---------------------------------------------------
Fort Worth, TX 76107
--------------------------------------------------------------------------
3. EQUIPMENT VALUE: $ 137,715.00 (exclusive of sales and/or use taxes).
----------------
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph 6
and its expiration date shall be 24 months after such Rent
-----
Commencement Date.
5. RENT: $ 6,438.18 per month (exclusive of sales and/or use taxes) due and
-------------
payable at the Rent Commencement Date and on the same date of each
succeeding month of the Lease Term. The advance Rent payment shall be
$ 6,438.18 . This amount is $ N/A for the first month,
---------------- --------------
$ 6,438.18 for the last 1 month(s), of the Lease Term.
-------------- -----
6. RENT COMMENCEMENT DATE: July 20, 1996
------------------
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for Fair Market Value ("FMV"), not to exceed seven percent (7%) of the
Equipment value, on the expiration of this Lease or any renewal term,
provided Lessee is not in default of any of its obligations under this
Lease on such expiration date. This purchase option may only be
exercised by Lessee's written notice to Lessor not earlier than 180 days,
nor later than 90 days, prior to the end of the Lease Term or any
renewal term. The purchase price for such Equipment shall be payable
upon the expiration date of such term. FMV shall be equal to the value
of the Equipment installed and in use, with consideration given to the
age, condition, utility and replacement costs for the Equipment. In the
event that Lessor and Lessee are unable to agree upon the purchase price
for the Equipment, such purchase price will be determined by an
independent appraiser to be selected by Lessor. Lessee shall be
responsible for all applicable sales and/or use taxes on the Equipment.
Upon exercise of this purchase option and payment of the purchase price,
Lessor shall execute and deliver to Lessee such documents as Lessee may
reasonably request in order to vest in Lessee all right, title and
interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss; (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that
he or she has read, and is duly authorized to execute, this Schedule
Accepted by:
Ascend Credit Corporation LESSEE: Website Management Company, Inc. dba
FlashNet Communications
------------------------------------
BY: /s/ Mark E. Alman BY: /s/ M. Scott Leslie
------------------------------ ----------------------------------------
NAME: Mark E. Alman NAME: M. Scott Leslie
----------------------------- ---------------------------------------
Print Print
TITLE: Corporate Finance Mgr. TITLE: President
---------------------------- --------------------------------------
DATE: 6/14/96 DATE: June 7, 1996
----------------------------- ---------------------------------------
<PAGE>
[LETTERHEAD] [LOGO]
March 27, 1997
Mr. Scott Leslie
Website Management Company, Inc. dba FlashNet Communications
2805 West Seventh Street
Fort Worth, TX 76107
Re: Master Lease 9018, Schedule No. 3
By signing the acknowledgment below you agree the equipment is operating to
expectations and to the following revision of the above referenced Lease and
Schedule.
Due to equipment problems the Lease and Schedule referenced above have been
amended to reflect the following payment and term restructure. No payments
are due from Website Management Company, Inc. dba FlashNet Communications for
the period December 1, 1996 to March 31, 1997. Monthly rental payments in the
amount of $3,862.91 (net of tax) will resume effective April 1, 1997 and
will continue through October 31, 1998. An interim rent payment of $1,993.76
will be made for the period of November 1, 1998 through November 17, 1998.
This revision extends the original lease term from 24 months to 28 months.
Acknowledged and Accepted
Ascend Credit Corporation Website Management Company, Inc. dba
FlashNet Communications
By: /s/ Mark E. Alman By: /s/ M. Scott Leslie
------------------------------ ------------------------------------
Name: Mark E. Alman Name: M. Scott Leslie
----------------------------- -----------------------------------
Title: Corporate Finance Mgr. Title: President
---------------------------- ----------------------------------
Date: 3-28-97 Date: 3/27/97
----------------------------- -----------------------------------
<PAGE>
- -------------------------------------------------------------------------------
LEASE SCHEDULE NO. 03
----------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement, Number 9018 between Ascend Credit
Corporation (Lessor) and Website Management Company, Inc. dba FlashNet
Communications (Lessee).
1. SUPPLIER: Ascend Communications, Inc.
2. LOCATION OF EQUIPMENT: FlashNet Communications, 2805 West Seventh
Street, Fort Worth, TX 76107
3. EQUIPMENT VALUE: $82,629.00 (exclusive of sales and/or use taxes).
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph
6 and its expiration date shall be 24 months after such Rent
Commencement Date.
5. RENT: $3,862.91 per month (exclusive of sales and/or use taxes) due and
payable at the Rent Commencement Date and on the same date of each
succeeding month of the Lease Term. The advance Rent payment shall be
$3,862.91. This amount is $ N/A for the first month, $3,862.91 for the
last 1 month(s), of the Lease Term.
6. RENT COMMENCEMENT DATE: August 17, 1996
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for its fair market value for continued use ("FMV"), on the expiration
of this Lease or any renewal term, provided Lessee is not in default of
any of its obligations under this Lease on such expiration date. This
purchase option may only be exercised by Lessee's written notice to
Lessor not earlier than 180 days, nor later than 90 days, prior to the
end of the Lease Term or any renewal term. The purchase price for such
Equipment shall be payable upon the expiration date of such term. FMV
shall be equal to the value of the Equipment installed and in use, with
consideration given to the age, condition, utility and replacement costs
for the Equipment. In the event that Lessor and Lessee are unable to
agree upon the purchase price for the Equipment, such purchase price
will be determined by an independent appraiser to be selected by Lessor.
Lessee shall be responsible for all applicable sales and/or use taxes on
the Equipment. Upon exercise of this purchase option and payment of the
purchase price, Lessor shall execute and deliver to Lessee such
documents as Lessee may reasonably request in order to vest in Lessee
all right, title and interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss: (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that
he or she has read, and is duly authorized to execute, this Schedule.
Accepted by:
Website Management Company, Inc. dba
Ascend Credit Corporation LESSEE: FlashNet Communications
------------------------------------
BY: /s/ MARK E. ALMAN BY: /s/ M. SCOTT LESLIE
-------------------------- ----------------------------------------
NAME: MARK E. ALMAN NAME: M. SCOTT LESLIE
------------------------ --------------------------------------
PRINT PRINT
TITLE: CORPORATE FINANCE MGR. TITLE: PRESIDENT
------------------------ -------------------------------------
DATE: 7/24/96 DATE: June 16, 1996
------------------------ --------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ASCEND CREDIT CORPORATION
1275 HARBOR BAY PARKWAY
ALAMEDA, CA 94502
[LOGO]
TEL. (310) 747-2773
FAX (310) 337-2668
March 27, 1997
Mr. Scott Leslie
Website Management Company, Inc. dba FlashNet Communications
2805 West Seventh Street
Fort Worth, TX 76107
Re: Master Lease 9018, Schedule No. 4
By signing the acknowledgment below you agree the equipment is operating to
expectations and to the following revision of the above referenced Lease and
Schedule.
Due to equipment problems the Lease and Schedule referenced above have been
amended to reflect the following payment and term restructure. No payments
are due from Website Management Company, Inc. dba FlashNet Communications for
the period September 19, 1996 to March 31, 1997. Monthly rental payments in
the amount of $9,013.45 (net of tax) will resume effective April 1, 1997 and
will continue through March 31, 1999. This revision extends the original
lease term from 24 months to 30 months.
Acknowledged and Accepted
Ascend Credit Corporation Website Management Company, Inc. dba
FlashNet Communications
BY: /s/ MARK E. ALMAN BY: /s/ M. SCOTT LESLIE
----------------------------- ----------------------------------------
NAME: MARK E. ALMAN NAME: M. SCOTT LESLIE
--------------------------- --------------------------------------
TITLE: CORPORATE FINANCE MANAGER TITLE: PRESIDENT
--------------------------- -------------------------------------
DATE: 3/28/97 DATE: 3/27/97
--------------------------- --------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
LEASE SCHEDULE No. 04
---------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement Number 9018 between Ascend Credit
Corporation (Lessor) and Website Management Company, Inc. dba FlashNet
Communications (Lessee).
1. SUPPLIER: Ascend Communications
2. LOCATION OF EQUIPMENT 2805 West Seventh Street, Fort Worth, TX 76107
3. EQUIPMENT VALUE: $192,801.00 (exclusive of sales and/or use taxes).
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph
6 and its expiration date shall be 24 months after such Rent
Commencement Date.
5. RENT: $9,013.45 per month (exclusive of sales and/or use taxes) due and
payable at the Rent Commencement Date and on the same date of each
succeeding month of the Lease Term. The advance Rent payment shall be
$9,013.45. This amount is $ N/A for the first month, $9,013.45 for the last
1 month(s), of the Lease Term.
6. RENT COMMENCEMENT DATE: 9/19/96
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for its Fair Market Value ("FMV"), not to exceed seven percent (7%) of the
Equipment value, on the expiration of this Lease or any renewal term,
provided Lessee is not in default of any of its obligations under this
Lease on such expiration date. This purchase option may only be
exercised by Lessees written notice to Lessor not earlier than 180 days,
nor later than 90 days, prior to the end of the Lease Term or any
renewal term. The purchase price for such Equipment shall be payable
upon the expiration date of such term. FMV shall be equal to the value
of the Equipment installed and in use, with consideration given to the
age, condition, utility and replacement costs for the Equipment. In the
event that Lessor and Lessee are unable to agree upon the purchase price
for the Equipment, such purchase price will be determined by an
independent appraiser to be selected by Lessor. Lessee shall be
responsible for all applicable sales and/or use taxes on the Equipment.
Upon exercise of this purchase option and payment of the purchase price,
Lessor shall execute and deliver to Lessee such documents as Lessee may
reasonably request in order to vest in Lessee all right, title and
interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss: (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that he
or she has read, and is duly authorized to execute, this Schedule
Accepted by:
Website Management Company, Inc. dba
Ascend Credit Corporation LESSEE: FlashNet Communications
BY: /s/ MARK E. ALMAN BY: /s/ WILLIAM F. KACZYNSKI JR.
-------------------------- ----------------------------------------
NAME: MARK E. ALMAN NAME: WILLIAM F. KACZYNSKI JR.
------------------------ --------------------------------------
PRINT PRINT
TITLE: CORPORATE FINANCE MGR. TITLE: CHIEF FINANCIAL OFFICER
------------------------ -------------------------------------
DATE: 8/24/96 DATE: August 19, 1996
------------------------ --------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ASCEND CREDIT CORPORATION
1275 HARBOR BAY PARKWAY
ALAMEDA, CA 94502
[LOGO]
TEL. (310) 747-2773
FAX (310) 337-2668
March 27, 1997
Mr. Scott Leslie
Website Management Company, Inc. dba FlashNet Communications
2805 West Seventh Street
Fort Worth, TX 76107
Re: Master Lease 9018, Schedule No. 5
By signing the acknowledgment below you agree the equipment is operating to
expectations and to the following revision of the above referenced Lease and
Schedule.
Due to equipment problems the Lease and Schedule referenced above have been
amended to reflect the following payment and term restructure. No payments
are due from Website Management Company, Inc. dba FlashNet Communications for
the period December 5, 1996 to March 31, 1997. Monthly rental payments in the
amount of $5,836.44 (net of tax) will resume effective April 1, 1997 and
will continue through March 31, 2000. This revision extends the original
lease term from 37 months to 41 months.
Acknowledged and Accepted
Ascend Credit Corporation Website Management Company, Inc. dba
FlashNet Communications
BY: /s/ MARK E. ALMAN BY: /s/ M. SCOTT LESLIE
-------------------------- ----------------------------------------
NAME: MARK E. ALMAN NAME: M. SCOTT LESLIE
------------------------ --------------------------------------
TITLE: CORP. FINANCE MGR. TITLE: PRESIDENT
------------------------ -------------------------------------
DATE: 3/28/97 DATE: 3/27/97
------------------------ --------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
LEASE SCHEDULE No. 05
---------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement, Number 9018, between Ascend Credit
Corporation (Lessor) and Website Management Company, Inc. dba FlashNet
Communications (Lessee).
1. SUPPLIER: Ascend Communication, Inc.
2. LOCATION OF EQUIPMENT: FlashNet Communications, 1812 N. Forest Park
Blvd., Fort Worth, TX 76102
3. EQUIPMENT VALUE: $195,264.00 (exclusive of sales and/or use taxes).
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph
6 and its expiration date shall be 37 months after such Rent
Commencement Date.
5. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXX. SEE ADDENDUM
6. RENT COMMENCEMENT DATE: 11/5/96.
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for Fair Market Value ("FMV"), not to exceed five percent (5%) of the
Equipment value, on the expiration of this Lease or any renewal term,
provided Lessee is not in default of any of its obligations under this
Lease on such expiration date. This purchase option may only be
exercised by Lessee's written notice to Lessor not earlier than 180 days,
nor later than 90 days, prior to the end of the Lease Term or any
renewal term. The purchase price for such Equipment shall be payable
upon the expiration date of such term. FMV shall be equal to the value
of the Equipment installed and in use, with consideration given to the
age, condition, utility and replacement costs for the Equipment. In the
event that Lessor and Lessee are unable to agree upon the purchase price
for the Equipment, such purchase price will be determined by an
independent appraiser to be selected by Lessor. Lessee shall be
responsible for all applicable sales and/or use taxes on the Equipment.
Upon exercise of this purchase option and payment of the purchase price,
Lessor shall execute and deliver to Lessee such documents as Lessee may
reasonably request in order to vest in Lessee all right, title and
interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss; (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that
he or she has read, and is duly authorized to execute, this Schedule
Accepted by:
Ascend Credit Corporation LESSEE: Website Management Company, Inc. dba
FlashNet Communications
BY: /s/ MARK E. ALMAN BY: /s/ WILLIAM F. KACZYNSKI, JR
-------------------------- ----------------------------------------
NAME: MARK E. ALMAN NAME: WILLIAM F. KACZYNSKI, JR
------------------------ --------------------------------------
PRINT PRINT
TITLE: CORP. FINANCE MGR. TITLE: CFO
------------------------ -------------------------------------
DATE: 10/11/96 DATE: 9/30/96
------------------------ --------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ADDENDUM
This Addendum is to Schedule No. 5 (the "Schedule") to Master Lease
Agreement No. 9018, by and between Ascend Credit Corporation ("Lessor") and
Website Management Company, Inc. dba FlashNet Communications ("Lessee").
Paragraph 5 - Paragraph 5 is deleted and replaced by the following:
"Rent 19,526.40 for the first month (exclusive of sales and/or use taxes),
$5,836.44 for the next thirty-six months (exclusive of sales and/or use
taxes). The advance rental payment shall be $19,526.40. This amount
included $19,526.40 for the first month.
Except as modified by this Addendum, the terms and conditions of the Schedule
shall remain in full force and effect.
Accepted by:
Ascend Credit Corporation Lessee: Website Management Company, Inc. dba
FlashNet Communications
By: /s/ MARK E. ALMAN By: /s/ WILLIAM F. KACZYNSKI JR.
----------------------------- ----------------------------------------
Name: MARK E. ALMAN Name: WILLIAM F. KACZYNSKI JR.
--------------------------- --------------------------------------
Title: CORPORATE FINANCE MANAGER Title: CFO
--------------------------- -------------------------------------
Date: 10/11/96 Date: 9/30/96
--------------------------- --------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
LEASE SCHEDULE No. 06
----------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement, Number 9018, between Ascend Credit
Corporation (Lessor) and Website Management Company, Inc. dba FlashNet
Communications (Lessee).
1. SUPPLIER: Ascend Communication, Inc.
2. LOCATION OF EQUIPMENT: See Attachment A
3. EQUIPMENT VALUE: $2,034,000.00 (exclusive of sales and/or use taxes).
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph
6 and its expiration date shall be 36 months after such Rent
Commencement Date.
5. RENT: $60,125.04 per month (exclusive of sales and/or use taxes) due and
payable at the Rent Commencement Date and on the same date of each
succeeding month of the Lease Term. The advance Rent payment shall be
$60,125.04. This amount is $ N/A for the first month and $60,125.04 for the
last 1 month(s), of the Lease Term.
6. RENT COMMENCEMENT DATE: April 29, 1997.
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for its fair market value for continued use ("FMV"), on the expiration of
this Lease or any renewal term, provided Lessee is not in default of any
of its obligations under this Lease on such expiration date. This
purchase option may only be exercised by Lessee's written notice to Lessor
not earlier than 180 days, nor later than 90 days, prior to the end of
the Lease Term or any renewal term. The purchase price for such Equipment
shall be payable upon the expiration date of such term. FMV shall be
equal to the value of the Equipment installed and in use, with
consideration given to the age, condition, utility and replacement costs
for the Equipment. In the event that Lessor and Lessee are unable to
agree upon the purchase price for the Equipment, such purchase price will
be determined by an independent appraiser to be selected by Lessor.
Lessee shall be responsible for all applicable sales and/or use taxes on
the Equipment. Upon exercise of this purchase option and payment of the
purchase price, Lessor shall execute and deliver to Lessee such documents
as Lessee may reasonably request in order to vest in Lessee all right,
title and interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss; (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that
he or she has read, and is duly authorized to execute, this Schedule
Accepted by:
Ascend Credit Corporation LESSEE: Website Management Company, Inc. dba
FlashNet Communications
BY: /s/ MARK E. ALMAN BY: /s/ WILLIAM F. KACZYNSKI JR.
-------------------------- ----------------------------------------
NAME: MARK E. ALMAN NAME: WILLIAM F. KACZYNSKI JR.
------------------------ --------------------------------------
Print Print
TITLE: CORP. FINANCE MGR. TITLE: CFO
------------------------ -------------------------------------
DATE: 4/29/97 DATE: 4/28/97
------------------------ --------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
LEASE SCHEDULE No. 07
---------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement, Number 9018, between Ascend Credit
Corporation (Lessor) and Website Management Company, Inc. dba FlashNet
Communications (Lessee).
1. SUPPLIER: Ascend Communications, Inc.
2. LOCATION OF EQUIPMENT: See Attachment A
3. EQUIPMENT VALUE: $943,776.00
(exclusive of sales and/or use taxes).
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph
6 and its expiration date shall be 36 months after such Rent
Commencement Date.
5. RENT: $27,898.02 per month (exclusive of sales and/or use taxes) due and
payable at the Rent Commencement Date and on the same date of each
succeeding month of the Lease Term. The advance Rent payment shall be
$27,898.02. This amount is $ N/A for the first month and $27,898.02
for the last 1 month(s), of the Lease Term.
6. RENT COMMENCEMENT DATE: July 25, 1997
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for its fair market value for continued use ("FMV"), on the expiration of
this Lease or any renewal term, provided Lessee is not in default of any
of its obligations under this Lease on such expiration date. This
purchase option may only be exercised by Lessee's written notice to
Lessor not earlier than 180 days, nor later than 90 days, prior to the
end of the Lease Term or any renewal term. The purchase price for such
Equipment shall be payable upon the expiration date of such term. FMV
shall be equal to the value of the Equipment installed and in use, with
consideration given to the age, condition, utility and replacement costs
for the Equipment. In the event that Lessor and Lessee are unable to
agree upon the purchase price for the Equipment, such purchase price will
be determined by an independent appraiser to be selected by Lessor.
Lessee shall be responsible for all applicable sales and/or use taxes on
the Equipment. Upon exercise of this purchase option and payment of the
purchase price, Lessor shall execute and deliver to Lessee such documents
as Lessee may reasonably request in order to vest in Lessee all right,
title and interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss; (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that he
or she has read, and is duly authorized to execute, this Schedule
Accepted by:
Ascend Credit Corporation LESSEE: Website Management Company, Inc. dba
FlashNet Communications
BY: /s/ MARK E. ALMAN BY: /s/ WILLIAM F. KACZYNSKI JR.
----------------------------- ----------------------------------------
NAME: MARK E. ALMAN NAME: WILLIAM F. KACZYNSKI JR.
--------------------------- --------------------------------------
Print Print
TITLE: CORPORATE FINANCE MANAGER TITLE: CFO
--------------------------- -------------------------------------
DATE: July 30, 1997 DATE: 7/28/97
------------------------ --------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
LEASE SCHEDULE No. 08
---------
This Schedule and its supplements incorporate by this reference the terms and
conditions of the Master Lease Agreement, Number 9018, between Ascend Credit
Corporation (Lessor) and Website Management Company, Inc. dba FlashNet
Communications (Lessee).
1. SUPPLIER: Ascend Communications, Inc.
2. LOCATION OF EQUIPMENT: 1812 N. Forest Park Blvd., Fort Worth, TX 76102
3. EQUIPMENT VALUE: $550,000.00 (exclusive of sales and/or use taxes).
4. LEASE TERM: The Lease Term of the Equipment described in this Schedule
shall begin on the Rent Commencement Date referenced below in Paragraph
6 and its expiration date shall be 36 months after such Rent
Commencement Date.
5. RENT: $16,995.00 per month (exclusive of sales and/or use taxes) due
and payable at the Rent Commencement Date and on the same date of each
succeeding month of the Lease Term. The advance Rent payment shall be
$N/A. This amount is $N/A for the first month and $N/A for the last
N/A month(s), of the Lease Term.
6. RENT COMMENCEMENT DATE: July, 98.
7. PURCHASE OPTION: Lessee shall have the option to purchase the Equipment
for its fair market value for continued use ("FMV"), on the expiration of
this Lease or any renewal term, provided Lessee is not in default of any
of its obligations under this Lease on such expiration date. This
purchase option may only be exercised by Lessee's written notice to
Lessor not earlier than 180 days, nor later than 90 days, prior to the
end of the Lease Term or any renewal term. The purchase price for such
Equipment shall be payable upon the expiration date of such term. FMV
shall be equal to the value of the Equipment installed and in use, with
consideration given to the age, condition, utility and replacement costs
for the Equipment. In the event that Lessor and Lessee are unable to
agree upon the purchase price for the Equipment, such purchase price will
be determined by an independent appraiser to be selected by Lessor.
Lessee shall be responsible for all applicable sales and/or use taxes on
the Equipment. Upon exercise of this purchase option and payment of the
purchase price, Lessor shall execute and deliver to Lessee such documents
as Lessee may reasonably request in order to vest in Lessee all right,
title and interest in the Equipment.
8. RENEWAL OPTION: Lessee shall have the option to renew this Lease, on the
expiration date of this Lease or any renewal term, for the fair market
rental for the continued use of the Equipment ("FMR") and on such other
terms as may be agreed upon by Lessor and Lessee prior to such
expiration date, provided Lessee is not in default of any of its
obligations under this lease on such expiration date. This renewal
option may only be exercised by Lessee's written notice to Lessor not
earlier than 180 days, nor later than 90 days, prior to the end of the
Lease Term or any renewal term. FMR shall be equal to the value of the
monthly rental of the Equipment installed and in use, with consideration
given to the age, condition, utility and replacement costs for the
Equipment, for the renewal term.
9. TAX BENEFITS: Lessee understands that Lessor intends to claim the "Tax
Benefits", consisting of the maximum Modified Accelerated Cost Recovery
System deductions for the minimum useful life applicable to each item of
Equipment, as provided by Sections 168(b) and (c) of the Internal
Revenue Code of 1986, and analogous benefits under state law, with
respect to the Equipment. Lessee represents and warrants that: (i)
Lessee has not been, is not now, and during the term of this Lease will
not become, and will not allow the Equipment to be used by or leased to,
a tax-exempt entity or government agency; and (ii) Lessee is not now,
and during the term of this Lease will not become, a public utility.
Without limitation by the preceding sentence, Lessee agrees not to take
any action, fail to take any action, or misstate any fact which may
result in any loss to Lessor of the Tax Benefits.
Lessee agrees to pay promptly to Lessor an amount which will fully
compensate Lessor, on an after-tax basis, for any loss of the Tax
Benefits, plus interest, penalties and additions to tax, any loss in
time value of the Tax Benefits, and any taxes imposed on any such
compensation payment, resulting from Lessee's acts, omissions or
misstatements, including, without limitation, with respect to the
representations and warranties in the preceding paragraph. A loss of Tax
Benefits occurs at the earliest of: (i) the happening of any event
causing the loss; (ii) payment by Lessor of any additional tax resulting
from the loss; or (iii) any adjustment to the tax return of Lessor.
Lessor's right to recovery of a loss of Tax Benefits shall survive the
expiration or termination of this Lease.
10. DESCRIPTION OF EQUIPMENT: See Schedule A which is attached hereto and
made a part hereof by this reference.
The person executing this Schedule on behalf of Lessee hereby certifies that he
or she has read, and is duly authorized to execute, this Schedule
Accepted by:
Ascend Credit Corporation LESSEE: Website Management Company, Inc. dba
FlashNet Communications
BY: BY: /s/ M. SCOTT LESLIE
-------------------------- ----------------------------------------
NAME: NAME: M. SCOTT LESLIE
------------------------ --------------------------------------
Print Print
TITLE: TITLE: PRESIDENT
------------------------ -------------------------------------
DATE: DATE: 7/31/98
------------------------ --------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT, made by and between LEONARD PROPERTIES, a
partnership, hereinafter called Lessor, and FLASHNET COMMUNICATIONS, INC.
hereinafter called Lessee.
WITNESSETH:
1. LOCATION AND TERM: Lessor does hereby demise, let and lease unto Lessee
the following described property:
Approximately 9,810 square feet of space in Lessor's 33,810
square foot building situated on Lot 5, Block 2, Midway
Industrial Park, City of Richland Hills, Tarrant County, Texas,
said space also known as 7435 Airport Freeway, Fort Worth, Texas
76118;
hereinafter called premises, for a term of twelve (12) months, commencing on
March 1, 1998 and ending on February 28, 1999 to be used as an office for
accounting and custom care call center, and warehouse and kit assembly
facility and not otherwise, under the following terms and conditions:
2. RENT: Lessee agrees to pay to the Lessor at the principal office of the
Lessor in Fort Worth, Tarrant County, Texas, a rental in the amount of (FIVE
THOUSAND SEVEN HUNDRED TWENTY TWO AND 50/100 DOLLARS ($5,722.50), for each
month of the term hereof, payable in advance without demand on the first day
of each month, and rent shall begin upon delivery of possession of the
premises to Lessee with the first payment to be made on the first day of the
following month. Payments not made within ten (10) days of said due date
shall be subject to a late charge of $.10 for each one dollar of each
installment more than (10) days past due to cover the extra handling expense.
If delivery of the premises is made on other than the first day of the month,
then rental for that month will be prorated. Prior delivery of possession
shall not affect the expiration date of the term of the lease.
3. USE OF PREMISES: Lessee agrees that its use of the premises and all
improvements thereon shall comply with all of the rules, regulations,
ordinances and laws of all governmental authorities applicable to said
premises and the business conducted therein, and will hold the Lessor
harmless from all claims and causes of action arising out of the Lessee's
occupancy and use of the premises during the term of this agreement. Lessee
agrees that it will not perform any acts or carry on any practices which will
injure the building or the use of the premises or constitute a nuisance to
other tenants or neighboring property owners. The Lessee shall keep the
interior and exterior of the premises in a good, clean and orderly manner.
Outside storage will not be permitted except by prior written permission of
Lessor.
4. REPAIRS BY LESSOR: Lessor shall, at its expense, maintain and keep in good
repair the structural portions of the exterior walls, foundation and roof of
the building except that the Lessor shall not be required to maintain or
repair the windows, overhead doors or plate glass in the building. Lessor
shall keep the common area, including the landscaping, parking lot, and
common lighting in good order and repair.
The Lessee shall give the Lessor written notice of defects or the need
for repairs. The Lessor shall not be responsible for any damages to property
or person caused by any portion of the building becoming out of repair until
the Lessor has had reasonable opportunity to have the same repaired after
being notified of such need by the Lessee. After repairs are commenced, they
shall be completed promptly in a good and workmanlike manner.
The Lessor shall not be obligated to repair any damage caused by the
acts of the Lessee, its agents, employees, customers, invitees or guests. The
Lessor shall not be obligated to make any other improvements or repairs of
any kind except as herein provided.
5. REPAIRS BY LESSEE: All maintenance and repairs with respect to the
leased premises and any fixtures attached thereto which are not the
obligation of the Lessor shall be made by the Lessee. The Lessee's obligation
to maintain and repair includes, but is not limited to, the plumbing,
electrical wiring and equipment, heating and air-conditioning equipment,
plate and window glass, overhead doors, pest control and other interior
improvements. The Lessee covenants to take good care of the property and the
fixtures and suffer no waste.
<PAGE>
6. ALTERATIONS AND REMODELING: Lessee shall have the right, at its sole cost
and expense, during the term of this lease to alter or remodel the demised
premises provided that the alterations or remodeling does not change the
exterior design of the building or result in a structural change of the
building.
Any alteration, addition or improvement resulting in a change in the
exterior design of the building or resulting structural change of the
building shall not be made without the prior written approval of the Lessor.
All alterations, additions and improvements, including light fixtures,
air-conditioning and heating equipment, which may be made on or attached to
the premises shall become a part and remain upon and be surrendered with the
premises at the end of the lease; provided, however, that if Lessor so elects
and notifies the Lessee ten (10) days before the termination of the lease,
the Lessee shall, at its expense, remove such alterations and additions from
the premises and restore the premises as near as practicable to the condition
it was in at the beginning of this lease, which removal shall occur before
vacating the premises.
7. TAXES: Lessor agrees to pay all ad valorem taxes and special assessments
levied against the demised premises. Lessee shall render and pay all personal
property taxes and all other occupational or use taxes or license fee which
may accrue as a result of the use of the demised premises.
8. UTILITIES: Lessee shall pay for all water, electricity, gas and other
utilities used in the premises. At the option of Lessor, Lessor may furnish
electricity or gas to Lessee in which case Lessee shall pay Lessor upon invoice,
for such utilities used at the same rate that Lessee would pay if Lessee
purchased such utility services direct from a public utility company.
9. INSURANCE: Lessor agrees to obtain and retain in force a policy of hazard
insurance providing fire and extended coverage protection on the demised
premises with the proceeds payable to the Lessor. Lessee agrees that it shall
not keep anything on the premises or use or occupy the premises in such a
manner as will result in an increase in the rates for fire and extended
coverage above the rates customarily charged for building of this type
construction.
Lessee shall be responsible for insuring its personal property.
10. ASSIGNMENTS: Lessee shall not assign this lease agreement or sublease
all or any part of the premises without the prior written consent of the
Lessor, which consent will not be unreasonably withheld, or occupy or permit
the same to be occupied for any business or purpose deemed extra hazardous on
account of fire. Should the Lessee request permission to assign or sublease
the demised premises and such consent is granted, then it is specifically
understood and agreed that Lessee herein shall remain as fully liable for the
fulfillment of every condition of this lease regardless of assignment or
sublease.
Lessor shall have the right to transfer or assign this lease in whole or
in part but shall remain fully liable for the covenants and obligations
imposed on the Lessor herein.
11. DESTRUCTION OF PREMISES: If any part of the leased premises shall be
damaged by fire, the elements, casualty or otherwise, but is not thereby
rendered untenable or unfit for occupancy, then the Lessor shall, at its
expense, cause such damage to be repaired and the rent shall not be abated and
the insurance proceeds from such damaged shall be paid to and retained by the
Lessor.
If the leased premises shall be damaged by fire, the elements, casualty
or otherwise so that the leased premised are rendered partially untenable or
unfit for occupancy, then the Lessor, at is expense, shall cause the damage
to be repaired and the rent shall be abated proportionately from the time of
the damage until the leased premises are repaired and fit for occupancy, and
the insurance proceeds from such damage shall be paid to and retained by the
Lessor.
If the leased premises shall be damaged by fire, the elements, casualty
or otherwise so that the leased premises are totally destroyed or rendered
more than 70% unfit for occupancy, then either party reserves the right to
cancel this lease within 30 days after the casualty occurs, and if either
party exercises such option, then this lease shall come to an end in the same
manner as though the term had expired, and the insurance proceeds from such
damage shall be paid to and retained by the Lessor. In the event the lease is
not canceled, then the Lessor shall, at its expense, rebuild the leased
premises to substantially the same condition they were in prior to the
casualty and the rent shall be abated during the time that they are unfit for
occupancy, and the insurance proceeds shall be paid and retained by the
Lessor.
12. MORTGAGES: Lessor shall have the right to mortgage the demised premises
and all its rights hereunder. The Lessee covenants and agrees to execute and
deliver upon request by the Lessor, its successors or assigns, such further
instrument subordinating this lease to any such mortgage lien if such
subordination provides that the mortgagee shall recognize the validity and
continuance of the lease in the event of a foreclosure of the Lessor's
interest.
The mortgagee or trustee under any mortgage or deed of trust and the
owner and holder of the indebtedness secured hereby shall not become
personally liable upon the covenants of this lease until they or their
assigns shall become the owner of the Lessor's interest hereunder.
13. DEFAULT BY LESSOR: In the event the Lessor fails to perform any of the
covenants under this lease within ten (10) days after written notice from the
Lessee, then the Lessee may cure such default for the account and at the
expense of the Lessor by deducting such amount from the rent with interest at
ten (10%) percent per annum.
<PAGE>
14. DEFAULT BY LESSEE: If the Lessee fails to pay the rent when due or
defaults in the performance of the agreements, conditions, covenants or terms
contained herein, then the Lessor may enforce performance of this lease in
any of the modes provided by law; and this lease may be forfeited at Lessor's
option if such default continues for a period of ten (10) days after the
Lessor notifies the Lessee of such default and of its intention to declare
the lease forfeited; and thereafter (unless the Lessee shall have completely
removed or cured said default) this lease shall cease and come to an end as
if that were the day originally fixed herein for the expiration of the term;
and the Lessor, its agent, attorney or those claiming under it, shall have
the right, without further notice or demand, to re-enter and remove all
persons and all of the Lessee's property therefrom without being deemed
guilty in any manner of trespass and without prejudice to any remedies for
arrears of rent or breach of covenant.
If any of the events described in the preceding paragraph should occur
and Lessor resumes possession of the premises, then Lessor may re-lease the
premises for the remainder of the term at the best rent the Lessor may
obtain, and Lessee agrees that, notwithstanding the termination of this lease
and possession regained by the Lessor, Lessee will indemnify the Lessor
against any and all loss of rent which the Lessor may sustain during the
remainder of the term of the lease by reason of such termination.
The Lessor shall have a statutory lessor's lien and in addition, Lessor
is given an express lien as security for the rent described herein upon all
the chattels, implements, fixtures, furniture, tools, machinery, or other
personal property which the Lessee now or at any time during the term of the
lease may place upon the demised premises.
If on account of any breach or default by the Lessee of any of Lessee's
obligations contained herein it shall become necessary for the Lessor to
employ an attorney to enforce or defend any of the Lessor's rights or
remedies hereunder, then Lessor shall be entitled to recover a reasonable
attorney's fee from the Lessee.
In the event the Lessee should default in the performance of any
agreement, covenant, condition or term contained herein, then Lessor may
perform the same for Lessee's account, and any amount paid or any expense of
liability incurred by Lessor in the performance of same shall be deemed
additional rent payable by Lessee with interest at ten (10%) percent from
date of payment by Lessor until repayment by Lessee.
15. SURRENDER OF PREMISES: Upon the termination of this lease, the Lessee
shall deliver the demised premises clean and in good order and condition with
natural deterioration only accepted. Upon the termination of this lease,
Lessee shall promptly remove all trade fixtures and personal property and
shall repair any damage caused by such removal unless otherwise agreed upon
in writing by the Lessor.
16. HOLDING OVER BY LESSEE: In the event Lessee holds over after the
expiration of this lease, it shall be deemed to be occupying said premises as
a lessee from month-to-month at 150% of the rental rate of the last month of
the lease term just ended, and subject to all of the conditions, provisions
and obligations of this lease insofar as the same are applicable to a
month-to-month tenancy.
17. PARKING: Lessor grants to the Lessee the right to park motor vehicles
and the right of ingress and egress for itself and its employees, customers,
patrons, invitees and guests over the parking area serving the leased
premises, said area to be specified by Lessor. Lessee agrees that its motor
vehicles and those of its employees will be parked only in this specified
area. Lessor reserves the right of ingress and egress to itself and the other
tenants of Lessor on this and adjacent premises.
18. SIGNS: Lessee shall not place or paint any signs at, on, or about the
premises or paint the exterior walls of the building without the prior
written consent of the Lessor; and the Lessor shall have the right to remove
any sign or signs in order to paint the building or premises or to make any
other repairs or alterations.
19. POSSESSION AND ENJOYMENT: The Lessor covenants that the Lessee, upon
making the payments and performing the conditions and covenants prescribed
herein, shall have peaceful and quiet enjoyment of the leased premises. It is
agreed that by occupying the premises, that Lessee accepts the premises and
acknowledges that they are in the condition called for in this lease, and
that all conditions precedent to Lessee's occupying the premises have been
fulfilled by Lessor.
20. COVENANT TO HOLD HARMLESS: Lessor shall not be liable to the Lessee or
to the Lessee's employees, customers, invitees or visitors for any damage to
person or property caused by an act, omission or neglect of Lessee, and the
Lessee agrees to hold the Lessor harmless from all claims from any such
damage whether the injury occurs on or off the demised premises.
21. ACCESS BY LESSOR: Lessor shall have the right to enter upon the premises
at all reasonable hours to inspect the same or to clean and make repairs to
the premises or any property owned or controlled by the Lessor. Commencing
ninety (90) days prior to the termination of this lease, Lessor may place
"For Lease" signs in and about the premises and may have reasonable access to
the premises for the purpose of exhibiting same to prospective tenants.
22. WAIVER: No waiver by the Lessor of any default or breach of any term,
covenant, condition or provision hereof shall be treated as a waiver of any
subsequent default or breach of the same or any other term, covenant,
condition or provision hereof.
<PAGE>
23. NOTICE: Any notice provided for herein shall be considered sufficient if
the letter containing the same is deposited in the United States mail with
postage prepaid addressed to the Lessor at 7457 Airport Freeway, Fort Worth,
Texas, 76118, or addressed to the Lessee at 7435 AIRPORT FREEWAY, FORT WORTH,
TEXAS 76118.
24. SECURITY DEPOSIT: Lessor hereby acknowledges receipt of a security
deposit in the amount of FIVE THOUSAND SEVEN HUNDRED TWENTY TWO AND 50/100
DOLLARS ($5.722.50) that will be refunded to Lessee upon completion of the
lease provided Lessee is not in default under any terms of the lease. Lessor
shall have the right to apply the funds in the security deposit to pay the
rent, any expenses or correct any default by the Lessee which the Lessee
fails to pay or correct after ten (10) days notice in writing from the
Lessor. If at any time the deposit with the Lessor becomes less than the
amount specified above, then the Lessee shall replenish such security deposit
upon request by the Lessor.
25. OPERATIONS ESCALATOR: Lessee shall pay to Lessor, annually, Lessee's
prorata part of operating expenses for the building in which the premises
leased to Lessee are located to the extent that the total of those expenses
exceeds seventy-three cents ($.73) per square foot. For this purpose,
"operating expenses" include ad valorem taxes on the building and the tract
of land on which it is located, the cost of fire and extended coverage
insurance and liability insurance, any utilities paid by Lessor that are
common to the building, common area maintenance, including parking lot
sweeping, yard and landscape maintenance, sprinkler system maintenance, and
maintenance of exterior lighting fixtures and equipment. Lessor shall bill
Lessee for Lessee's prorata part of annual operating expenses, and payment of
Lessee's prorata part will be due within thirty days after receipt of
Lessor's billing. Lessee's prorata part of operating expenses shall be
determined as follows:
a) After year end, Lessor shall determine the total annual operating
expenses;
b) The total annual operating expenses shall be divided by 33,810,
being the number of square feet in the building to arrive at the
total annual operating expenses per square foot;
c) The amount, if any, by which total annual operating expenses per
square foot exceeds seventy-three cents ($.73) shall be
multiplied by 9,810, being the number of square feet in the
premises leased to Lessee, and the product of this multiplication
will be Lessee's prorata part of operating expenses to be paid to
Lessor.
If total annual operating expenses per square foot are seventy-three
cents ($.73) or less, no payment for operating expenses will be due
from Lessee to Lessor.
26. OTHER: Lessor will warrant the air conditioning units for major repairs
or replacement of compressors and heat exchangers for the entire term of the
lease. Normal maintenance and minor repairs shall be the responsibility of
the Lessee. The units will be in good working order on occupancy.
27. SIGN BAND: The exterior lighting for the sign band is on one meter.
Lessor will pay this bill for the entire center and prorate the expenses to
the individual tenants. Lessee's share of this expense is 4/14 of the entire
bill.
IN WITNESS WHEREOF, the parties have executed this instrument in
triplicate on this the 13th day of February, 1998.
LESSOR:
LEONARD PROPERTIES
By /s/ James N. Ford
--------------------------------
James N. Ford, General Manager
LESSEE:
FLASHNET COMMUNICATIONS, INC.
By /s/ [illegible]
--------------------------------
<PAGE>
BASIC LEASE INFORMATION
Lease Date: February 10, 1999.
Tenant: FLASHNET COMMUNICATIONS, INC.
Address of Tenant: 3001 Meacham Blvd., Suite 100
Fort Worth, Texas 76137
Attention: Bob Carpenter
Landlord: Mercantile Partners, L.P., a Texas limited partnership
Address of 2650 Meacham Blvd.
Landlord: Fort Worth, Texas 76137-4203
Phone No.: (817) 831-4106
Attention: Brian L. Randolph
Common Areas: Areas devoted to corridors, elevator foyers, restrooms,
mechanical rooms, janitor closets, and other similar
facilities for the use of all tenants on the particular
floor of the Building, excluding vending areas, meeting
rooms, recreational areas, and the like for the use of all
tenants in the Building.
Premises: Suite No. 100 which is located in the office building
located at 3001 Meacham Blvd., Fort Worth, Texas, and known
as Mercantile Center One Building (the "Building") as more
particularly described in EXHIBIT A attached hereto and made
a part hereof.
Lease Term: A term of ten (10) years commencing on July 1, 1999 (the
"Commencement Date"), and continuing until June 30, 2009.
Basic Rental: See Rider 1 to this lease.
Security Deposit: - 0 -
Tenant's
Proportionate
Share: The percentage is 26.8% which expresses the ratio between
the number of square feet of Rentable Area comprising the
Premises (30,866), and the 115,024 square feet of Rentable
Area contained in the Building.
Rentable Area: Shall refer to (i) in the case of a single tenancy floor,
all floor area within the inside surface of the outer glass
or exterior walls of the Building,
1
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excluding only the areas ("Service Areas" or "Building
Common Areas" "Common Areas") within the outside walls used
for elevator equipment rooms, building stairs, fire towers,
elevator shafts, flues, vents, stacks, pipe shafts, and
vertical ducts, but including any Service Areas which are
for the specific use of the particular tenant, such
as special stairs or elevators, plus an allocation of
the square footage of the Building's lobbies, corridors,
mechanical rooms, vending areas, meeting rooms, recreational
areas, and the like for the use of all tenants in the
Building, and (ii) in the case of a floor to be occupied by
more than one tenant, all floor areas within the inside
surface of the outer glass or exterior walls enclosing the
Premises on such floor and measured to the midpoint of the
walls separating the Premises from areas leased by or held
for lease to other tenants or from Common Areas, plus an
allocation of all the Common Areas located on such floor,
plus an allocation of the square footage of the Building's
lobbies, vending areas, meeting rooms, recreational areas,
and the like for the use of all tenants in the Building.
No deductions from Rentable Area shall be made for
columns or projections necessary to the Building. The
Rentable Area in the Premises will be calculated on the
basis of the foregoing definition and stipulated for all
purposes hereof to be 30,866 square feet.
Estimated
Commencement
Date: July 1, 1999.
Base Year
Expenses: The total amount of actual Operating Expenses incurred with
respect to the Building during the 1999 calendar year.
The foregoing Basic Lease Information and definitions are hereby incorporated
into and made a part of the lease identified hereinabove. Each reference in
the lease to any of the information and definitions set forth in the Basic
Lease Information shall mean and refer to the information and definitions
hereinabove set forth and shall be used in conjunction with and limited by
all references thereto in the provisions of the lease. In the event of any
conflict between any Basic Lease Information and the lease, the lease shall
control.
LANDLORD: TENANT:
MERCANTILE PARTNERS, L.P., FLASHNET COMMUNICATIONS, INC.,
a Texas limited partnership a Texas corporation
By: Mercantile Corporation By: /s/ M. Scott Leslie
of Fort Worth, a Texas Printed Name: M. Scott Leslie
corporation, General Title: President
Partner
By: /s/ Richard Griffin
---------------------------
Printed Name: Richard Griffin
-----------------
Title: Vice President
------------------------
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS AND BASIC PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . .1
2. LEASE GRANT; OPTION TO RENEW;
SPECIAL TERMINATION PROVISION . . . . . . . . . . . . . . . . . . . . . . . . .1
3. RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
4. LANDLORD'S OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
5. TENANT'S ADDITIONAL RENTAL OBLIGATION . . . . . . . . . . . . . . . . . . . . .6
6. CONSTRUCTION OF FINISH WORK IN PREMISES . . . . . . . . . . . . . . . . . . . .7
7. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
8. TENANT'S REPAIRS AND ALTERATIONS. . . . . . . . . . . . . . . . . . . . . . . .8
9. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . .9
10. INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
11. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
12. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
13. INSPECTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
15. FIRE OR OTHER CASUALTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
16. HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
17. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
18. EVENTS AND DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
19. REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
20. SURRENDER OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2l. ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
22. LANDLORD'S LIEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
23. MECHANICS' LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3
<PAGE>
24. NO SUBROGATION; LIABILITY INSURANCE . . . . . . . . . . . . . . . . . . . . . 20
25. TENANT'S NEED FOR LARGER SPACE;
RIGHT OF FIRST REFUSAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
26. CHANGE OF BUILDING NAME . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
27. ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
28. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
29. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
30. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
31. AMENDMENTS; BINDING EFFECT. . . . . . . . . . . . . . . . . . . . . . . . . . 24
32. QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
33. GENDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
34. JOINT AND SEVERAL LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 24
35. PERSONAL LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
36. CERTAIN RIGHTS RESERVED BY LANDLORD . . . . . . . . . . . . . . . . . . . . . 25
37. NOTICE TO LENDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
38. CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
39. PLACE OF PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
40. BROKERAGE COMMISSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
41. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
42. RECORDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
43. ACCORD AND SATISFACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
44. TIME OF ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
45. AUTHORITY TO EXECUTE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
46. DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
47. TENANT'S OBLIGATIONS REGARDING HAZARDOUS SUBSTANCES . . . . . . . . . . . . . 28
48. RIGHT TO CONTEST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
49. PARKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4
<PAGE>
50. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
Exhibit A - Outline of Premises
Exhibit B - Rules and Regulations
Exhibit C - Work Letter
Exhibit D - Tenant's Parking Area
Exhibit E - Memorandum of Lease Agreement
Exhibit F - Sign Criteria
Rider 1 - Schedule of Basic Rental
5
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into as of the Lease Date by and
between Landlord and Tenant.
W I T N E S S E T H:
1. DEFINITIONS AND BASIC PROVISIONS
The definitions and basic provisions set forth in the Basic Lease
Information (the "Basic Lease Information") executed by Landlord and Tenant
contemporaneously herewith are incorporated herein by reference for all
purposes and shall be used in conjunction with and limited by the references
thereto in the provisions of this lease.
2. LEASE GRANT; OPTION TO RENEW; SPECIAL TERMINATION PROVISION
Landlord, in consideration of the rent to be paid and the other
covenants and agreements to be performed by Tenant and upon the terms
hereinafter stated, does hereby lease, demise and let unto Tenant the
Premises, as generally outlined on the plan attached hereto as EXHIBIT A,
commencing on the Commencement Date and ending on the last day of the Lease
Term, unless sooner terminated as herein provided. If this lease is executed
before the Premises become vacant, or otherwise available and ready for
occupancy, or if any present tenant or occupant of the Premises fails to
vacate the Premises prior to the Estimated Commencement Date of this lease,
Landlord shall not be deemed to be in default hereunder, and Tenant agrees to
accept possession of the Premises on such date as Landlord is able to tender
the same, which date shall be deemed to be the Commencement Date of this
lease for all purposes, and this lease shall continue for the Lease Term
specified in the Basic Lease Information. However, in the event that
Landlord fails to deliver possession of the Premises to Tenant within 120
days after the Estimated Commencement Date unless such delay is caused by any
of the matters referred to in paragraph 4 of EXHIBIT C to this lease, Tenant
may, as Tenant's sole remedy, terminate this lease if Landlord receives from
Tenant within twenty (20) days after the expiration of such 120 day period
written notice that Tenant is terminating this lease. If Landlord does not
receive from Tenant such written notice of termination within such twenty
(20) day period, then Tenant shall be deemed to have waived Tenant's right to
terminate this lease under this SECTION 2. By occupying the Premises, Tenant
shall be thereafter deemed to have accepted the same as suitable for the
purpose herein intended and to have acknowledged that the same comply fully
with Landlord's obligations under this lease, notwithstanding that certain
"punch list" type items may not have been completed. Within ten (l0) days
after written request of Landlord, Tenant agrees to give Landlord a letter
confirming the Commencement Date and certifying that Tenant has accepted
delivery of the Premises
6
<PAGE>
and that the condition of the Premises complies with Landlord's obligations
hereunder. Tenant hereby waives any implied or express warranties of
habitability, suitability, merchantability, quality, condition or fitness for
a particular purpose with respect to the Premises. In addition, the taking
of possession of the Premises by Tenant shall be conclusive evidence that
Tenant has inspected the Premises and is thoroughly familiar with its
condition, and Tenant hereby accepts the Premises as being in good and
satisfactory condition and suitable for Tenant's intended commercial purpose.
Tenant shall have, and is hereby given, one (1) option to renew and
extend the Lease Term, such option to follow upon the expiration of the
initial Lease Term of this lease, provided that at the time the option to
renew is exercised, this lease shall be in full force and effect and Tenant
shall not be in default hereunder. Such renewal option shall be for a term
of five (5) years. Such option shall be exercised by Tenant's giving written
notice of its intention to renew and extend the term of this lease to
Landlord at least One Hundred Twenty (120) days before the expiration of the
initial Lease Term. If Landlord does not receive Tenant's written notice of
its intention to renew at least One Hundred Twenty (120) days before the
expiration of the initial Lease Term, then Tenant shall be deemed to have
waived Tenant's option to renew. The renewal and extension of this lease
shall be on and under the same covenants, agreements, terms, provisions, and
conditions as are contained herein for the initial Lease Term, except the
Basic Rental (as hereinafter defined) shall be the then-current Market Rental
Rate (as hereinafter defined). The term "Market Rental Rate" shall be that
rate charged for the leasing of space of comparable size and conditions in
comparable buildings in the Fort Worth, Texas real estate market, by further
taking into consideration the following: (i) the location, quality and age of
the Building; (ii) the use, location, size and/or floor level of the space in
question; (iii) the extent of leasehold improvements; (iv) abatements
(including with respect to base rental, operating expenses, real estate
taxes, and parking charges); (v) relocation, moving allowances, space and
planning allowances; (vi) refurbishment and repainting allowances; (vii)
distinction between "gross" and "net" lease and the services to be provided;
(viii) base year and dollar amount for escalation purposes (both operating
expenses and real estate taxes) and inclusion or exclusion of electricity
charges; (ix) credit standing and financial stature of the tenant; (x) term
or length of lease; (xi) whether a broker is representing the tenant; and
(xii) any other relevant term or condition in making such "fair market
value." In the event that Landlord and Tenant are unable to agree on the
"Market Rental Rate" then, at Landlord's or Tenant's option, same shall be
submitted to arbitration with specific methodology which shall be mutually
acceptable to Landlord and Tenant.
Tenant may terminate this lease effective as of the fifth (5th)
anniversary of the Commencement Date by written notice to Landlord delivered
on or before six (6) months before such fifth (5) anniversary of the
Commencement Date. If Tenant elects to terminate this lease, Tenant shall
make a payment in cash ("Cancellation Payment") to Landlord within thirty
(30) days after the date of such termination notice in the
7
<PAGE>
amount of $694,693.41. Such Cancellation Payment is calculated based on the
following components: (i) $403,153.75 for unamortized Finish Work;(ii)
$102,228.19 for unearned leasing commission; and (iii) $189,311.47 for unpaid
rent.] Neither Landlord nor Tenant shall have any obligations to the other
following such termination and payment by Tenant to Landlord of the
Cancellation Payment except for those obligations of Landlord and Tenant
which survive the expiration or termination of this lease as specified in
this lease. In the event Landlord has not received from tenant written
notice of termination of this lease on or before that date which is six (6)
months before the fifth (5th) anniversary of the Commencement Date, Tenant
shall be deemed to have waived Tenant's right to terminate this lease
pursuant to this SECTION 2.
3. RENT
In consideration of this lease, Tenant promises and agrees to pay
Landlord the Basic Rental (subject to adjustment as hereinafter provided)
without demand, deduction or set off, for each month of the Lease Term. The
first such monthly installment of Basic Rental shall be payable by Tenant to
Landlord on the Commencement Date and continuing thereafter on or before the
first day of each succeeding calendar month during the Lease Term. Rent
(herein meaning Basic Rental, as adjusted, Additional Rental, plus any other
monetary sums due from Tenant to Landlord pursuant to the terms of this
lease) for any fractional month at the beginning of the Lease Term shall be
prorated based on one three hundred sixty-fifth (1/365) of the current annual
Basic Rental for each day of the partial month that this lease is in effect,
and shall be due and payable on or before the Commencement Date. In the event
any installment of Rent is not received within ten (l0) days after the due
date thereof (without in any way implying Landlord's consent to such late
payment) Tenant, to the extent permitted by law, agrees to pay, in addition
to said installment of the Rent, a late payment charge equal to seven percent
(7%) of the installment of the Rent, it being understood that said late
payment charge shall constitute liquidated damages (but shall not void the
occurrence of an event of default or eliminate any of Landlord's remedies
therefor) and shall be for the purposes of reimbursing Landlord for the
additional costs and expenses which Landlord presently expects to incur in
connection with the handling and processing of late installment payments of
the Rent; and Tenant and Landlord agree that the damages suffered by Landlord
in the event of any such late payment(s) are not capable of being ascertained
precisely, and that the foregoing charge constitutes a reasonable and good
faith estimate by the parties of the extent of such damages. Notwithstanding
the foregoing, such late charges shall not apply to any sums which may have
been advanced by Landlord to or for the benefit of Tenant pursuant to the
provisions of this lease, it being understood that such advanced sums shall
bear interest, which Tenant hereby agrees to pay to Landlord, at the lesser
of eighteen percent (18%) per annum or the maximum rate of interest permitted
by law to be charged Tenant for the use or forbearance of such money.
4. LANDLORD'S OBLIGATIONS
8
<PAGE>
a. Subject to the limitations hereinafter set forth, while Tenant
is occupying the Premises Landlord agrees to furnish Tenant facilities to
provide (i) water (hot, cold and refrigerated) at those points of supply
provided for general use of tenants of the Building; (ii) heated and
refrigerated air conditioning in season, at such times as Landlord normally
furnishes these services to all tenants of the Building, and at such
temperatures in the Premises as Tenant determines based on Tenant's own
thermostat settings and in such amounts as are considered by Landlord to be
standard,(iii) janitorial service to the Premises on weekdays other than
holidays for Building standard installations (it being understood that
Landlord reserves the right to bill Tenant separately for extra janitorial
service required by reason of non-standard installations) and such window
washing as may from time from time in the Landlord's judgment be reasonably
required; (iv) operatorless passenger elevators for ingress and egress to the
floors on which the Premises are located, in common with other tenants,
provided that Landlord may reasonably limit the number of elevators to be in
operation at times other than during customary business hours for the
Building and on holidays; and (v) replacement of Building standard light
bulbs and fluorescent tubes, provided that Landlord's standard charge for
such bulbs and tubes shall be paid by Tenant as part of the Actual Operating
Expenses. In addition, Landlord agrees to maintain the Common Areas and
other public areas of the Building in reasonably good order and condition,
except for damage occasioned by Tenant, or its employees, agents or invitees.
If Tenant shall desire any of the services specified in this SECTION 4 at
night or on Saturday, Sunday or holidays, such service or services shall be
supplied to Tenant only at the written request of Tenant delivered to
Landlord before 12:00 noon on the business day preceding such requested extra
usage, and Tenant shall pay to Landlord as Additional Rental the amount
charged to Tenant for such service or services immediately upon receipt of a
bill therefor.
b. Landlord, subject to payment by Tenant as set forth below,
shall make available to Tenant facilities to provide all electrical current
required by Tenant for normal use and occupancy of the Premises and further
shall make available electric lighting and current for the Common Areas in
the manner and to the extent deemed by Landlord to be standard. The
electrical service to the Premises shall be separately metered. Landlord
shall have such separate metering installed as part of the Finish Work and
paid for out of the Finish Budget. Tenant will be billed monthly from such
separately metered electricity and reimburse Landlord on demand for all
charges for such separately metered electricity, provided that no such
separate metering shall relieve Tenant from its obligation to pay Tenant's
Proportionate Share of electrical charges or other utility charges as well as
Tenant's Proportionate Share of electrical charges of all electricity and
other utilities used in operating the Building (other than those tenants'
premises which are submetered), the Common Areas, lobbies and other portions
of the Building. If the electrical service to the Premises is ever not
separately metered, then Tenant shall reimburse Landlord on demand for
Tenant's Proportionate Share of all charges for electrical service and other
utilities consumed within the
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Building and all other utility charges for utility services to the Building
and the Common Area, lobbies and other public portions of the Building.
Without Landlord's prior written consent which shall not be unreasonably
withheld, Tenant shall not install any equipment which shall require for its
use other than the normal electrical current or other utility service;
provided, however, that Tenant may utilize electronic data processing
equipment which uses 220 volt power; and Landlord agrees, at Tenant's sole
cost and expense, to provide the electrical facilities for such equipment.
Whenever heat generating machines or equipment (other than general office
machines which use 110 volt electrical power) which affect the temperature
otherwise maintained by the air conditioning system or otherwise overload any
utility are used in the premises by Tenant, Landlord shall have the right to
install supplemental air conditioning units or other supplemental equipment
in the Premises, and the cost thereof, including the cost of installations,
operation, use and maintenance, shall be paid by Tenant to Landlord on
demand. The obligation of the Landlord hereunder to make available such
utilities shall be subject to the rules and regulations of the supplier of
such utilities and of any municipal or other governmental authority
regulating the business of providing such utility service. Landlord shall
not in any wise be liable or responsible to Tenant for any loss or damage or
expense which Tenant may sustain or incur if either the quantity or character
of any utility service is changed or is no longer available or is no longer
suitable for Tenant's requirements. Tenant covenants and agrees that at all
times its use of electric current shall never exceed the capacity of existing
feeders to the Building or the risers or wiring installations. Any riser or
risers or wiring necessary to meet Tenant's excess electrical requirements
will be installed by Landlord at the sole cost and expense of Tenant (if, in
Landlord's reasonable judgment, the same are necessary and will not cause
permanent damage or injury to the Building or the Premises or cause or create
a dangerous or hazardous condition or entail excessive or unreasonable
alterations, repairs, or expense or interfere with or disturb other tenants
or occupants). Tenant may install, with Landlord's prior written approval, a
200 kilowatt generator to provide emergency electric service to the Premises.
Landlord agrees to reasonably cooperate with Tenant in placing the generator
and running conduit and wiring. The cost of such generator, conduit, wiring
and installation shall be paid out of the Finish Allowance (as hereinafter
defined).
c. Failure to any extent to make available, or any
slow-down, stoppage or interruption of, these defined services resulting from
any cause other than Landlord's gross negligence or intentional act or
omission (including, but not limited to, Landlord's compliance with (i) any
published requirements or (ii) any requirements now or hereafter established
by any governmental agency, board or bureau having jurisdiction over the
operation and maintenance of the Building) shall not render Landlord liable
in any respect for damages to either person, property or business nor be
construed as an eviction of Tenant or entitle Tenant to an abatement of rent,
nor relieve Tenant from fulfillment of any covenant or agreement hereof.
Should any equipment or machinery furnished by Landlord break down or for any
cause cease to function properly, Landlord shall use reasonable diligence to
repair same promptly, but Tenant
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shall have no claim for abatement of Rent or damages on account of any
interruptions in service occasioned thereby or resulting therefrom. If any
such stoppage or interruption prevents Tenant from occupying the Premises for
the purposes specified in this lease for a period of five (5) consecutive
days, then the Basic Rental shall be abated for the period beginning on the
sixth (6th) day on which Tenant was prevented from so occupying the Premises
until that day on which Landlord advises Tenant that Tenant may resume
occupancy of the Premises. If such stoppage or interruption prevents Tenant
from occupying the Premises for the purposes specified in this lease for a
period of twenty-one (21) or more consecutive days, then Tenant may terminate
this lease if Tenant gives such notice of termination to Landlord within
thirty (30) days after the day Tenant was prevented from so occupying the
Premises because of such interruption or stoppage.
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d. Notwithstanding any expiration or termination of this
lease prior to the expiration of the stated Lease Term, Tenant's obligations
to pay any and all Additional Rental pursuant to this SECTION 4 or SECTION 5
hereof shall continue and shall cover all periods up to the expiration of the
stated Lease Term. Tenant's obligation to pay any and all Additional Rental
or other sums owing by Tenant to Landlord under this lease shall survive any
expiration or termination of this lease.
e. Landlord shall maintain casualty insurance on the Building at
all times during the Lease Term for the full replacement cost value of the
Building. Such insurance shall be written by insurance companies rated "A" or
better by A.M. Best Company, Inc. The deductible on such insurance shall not
exceed $50,000.00.
f. Landlord shall be required at all times to maintain proper
site drainage for the land on which the Building is located in order to
prevent material water accumulation on any portion of such land. Upon
development of the adjacent sites, Landlord will be required to properly
engineer the site drainage for these sites so that such development does not
adversely effect drainage of the land on which the Building is located.
5. TENANT'S ADDITIONAL RENTAL OBLIGATION
a. Beginning on January 1, 2000 and continuing on January 1,
of each calendar year thereafter, Tenant shall pay to Landlord each calendar
year Additional Rental (herein so called) equal to (i) Tenant's
Proportionate Share of the increases in the Actual Operating Expenses
(defined below) for the Building for the prior calendar year, minus (ii) the
Base Year Expenses multiplied by Tenant's Proportionate Share. Additional
Rental shall be prorated on a daily basis for each partial calendar year in
the Lease Term. Tenant's Proportionate Share shall be the ratio which the
Rentable Area in the Premises (adjusted for office expansions) bears to the
Rentable Area in the Building. In no event shall Tenant be entitled to any
refund, credit or payment if Tenant's Proportionate Share of the Actual
Operating Expenses for the Building for any calendar year is less than the
Base Year Expenses multiplied by the number of square feet of Rentable Area
in the Premises.
b. Actual Operating Expenses shall include all expenses,
costs and disbursements of every kind and nature incurred or paid by Landlord
in connection with the ownership and/or the operation, maintenance, repair
and security of the Building, and/or Landlord's interest therein, including
(without limitation) such expenses as utility costs, wages (for employees
directly related to the Building), landscaping, maintenance and repair costs,
costs of independent contractors, fees (other than legal fees directly
related to leasing activities of Landlord), insurance premiums, real estate
taxes and any and all other governmental or quasi-governmental taxes or
assessments of every kind and character (based on the Building being fully
assessed as a completed building), management fees and owner's association
assessments, (if any). Actual Operating Expenses shall not include the
capitalized cost of permanent improvements (other than those installed to
reduce operating costs or as may be required by law); interest, amortization
or other payments on loans to Landlord (other than that incurred to finance
items which are included in Actual Operating Expenses); all costs reimbursed
to Landlord out of insurance proceeds or from tenants or other sources not
affiliated
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with Landlord; and depreciation of the Building.
c. If the Building is not fully occupied or fully assessed
as a completed Building for tax purposes during any full or fractional year
of the Lease Term (including the year 1999), the actual Operating Expenses
shall be adjusted for such year, for purposes of calculating Tenant's
Proportionate Share of Operating Expenses for such calendar year, to an
amount which Landlord estimates would have been incurred in Landlord's
reasonable judgment had the Building been fully occupied and fully assessed
as a completed Building for tax purposes during such calendar year.
d. Landlord shall have the right to estimate Additional
Rental to accrue hereunder and Tenant shall pay to Landlord the amount of
such estimate monthly with Tenant's Basic Rental payments. If Landlord
estimates Additional Rental in advance, then by each April 1 during the Lease
Term or as soon thereafter as practical, Landlord shall furnish to Tenant a
statement of Landlord's Actual Operating Expenses for the previous calendar
year. If for any calendar year the Additional Rental due from Tenant is less
than the aggregate amount of the estimated payments previously paid by Tenant
with respect to such Additional Rental, then, so long as Tenant is not in
default hereunder, Landlord shall refund to Tenant any such overpayment (or,
at Landlord's option, apply such amount against Rentals due or to become due
hereunder). If for any calendar year the Additional Rental due from Tenant
is greater than the aggregate amount of the estimated payments previously
paid by Tenant with respect to such Additional Rental, Tenant shall pay the
amount of such difference to Landlord within ten (l0) days after demand
therefor by Landlord.
6. CONSTRUCTION OF FINISH WORK IN PREMISES
The construction of improvements in the Premises shall be governed
by EXHIBIT C hereto. If Landlord is delayed in achieving Substantial
Completion (as hereinafter defined) by the Completion Date because of
Landlord's delays and not delays referred to in paragraph 4 of EXHIBIT C to
this lease, the Commencement Date shall be postponed until Substantial
Completion has been achieved and such postponement shall constitute Tenant's
sole remedy and full settlement of all claims that Tenant may have against
Landlord based on the delay.
7. USE
Tenant shall use the Premises only for providing computer and/or
internet services to Tenant's customers. Tenant will not occupy or use the
Premises, or permit any portion of the Premises to be occupied or used for
any business or purpose other than the above-described purposes or for any
use or purpose which is unlawful in part or in whole or deemed to be
disreputable in any manner or extra hazardous on account of fire, nor permit
anything to be done which will in any way increase the rate of insurance on
the Building or its contents; and in the event that there shall be any
increase in rate of insurance on the Building or its contents created by
Tenant's acts or conduct of business, then such acts of Tenant shall be
deemed to be an event of default hereunder and Tenant hereby agrees to pay to
Landlord the amount of such insurance rate increase on demand; provided,
however, that acceptance of such payment shall not constitute a waiver of any
of Landlord's other rights provided herein
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with respect to the occurrence of an event of default. Tenant will conduct
its business and control its agents, employees and invitees in such a manner
as not to create any nuisance, interfere with, annoy or disturb other tenants
or interfere with, annoy or disturb Landlord in the management of the
Building. Tenant will maintain the Premises in a clean, healthful and safe
condition and will comply with all laws, ordinances, orders, rules and
regulations (state, federal, municipal and other agencies or bodies having
any jurisdiction thereof) with reference to the use, condition or occupancy
of the Premises. However, Landlord at it's expense shall comply with all
laws, ordinances, rules and regulations (state, federal, municipal and other
agencies or bodies having any jurisdiction thereof) which govern the Premises
without regard to Tenant's specific use thereof. Tenant will not, without
the prior written consent of Landlord, paint, install lighting, decorations,
drapes, blinds or other window coverings, or install any signs, window or
door lettering or advertising media of any type on or about the Premises or
any part thereof.
8. TENANT'S REPAIRS AND ALTERATIONS
Tenant will not in any manner deface or injure the Building, and
will pay the cost of repairing any damage or injury done to the Building or
any part thereof by Tenant or Tenant's agents, employees or invitees. Tenant
shall throughout the Lease Term take good care of the Premises and keep them
free from waste and nuisance of any kind. Tenant agrees to keep the
Premises, including all fixtures installed by Tenant and any plate glass and
special store fronts, in good condition and make all necessary non-structural
repairs except those caused by fire, casualty or acts of God covered by
Landlord's insurance. The performance by Tenant of its obligations to
maintain and make repairs shall only be conducted under the supervision and
direction of Landlord by contractors and subcontractors approved in writing
by Landlord, it being understood that Tenant shall procure and maintain and
shall cause such contractors and subcontractors engaged by or on behalf of
Tenant to procure and maintain insurance coverage against such risks, in such
amounts and with such companies as Landlord may require in connection with
any such maintenance and repair. If Tenant fails to make such repairs within
fifteen (15) days after the occurrence of the applicable damage or injury
Landlord may at its option make such repairs, and Tenant shall, upon demand
therefor, pay Landlord for the cost thereof. At the end or other termination
of this lease, Tenant shall deliver up the Premises with all improvements
located thereon (except as otherwise herein provided) in good repair and
condition, reasonable wear and tear excepted, and shall deliver to Landlord
all keys to the Premises. Tenant will not make or allow to be made any
alterations or physical additions in or upon the Premises without the prior
written consent of Landlord. All alterations, additions or improvements
(whether temporary or permanent in character) made in or upon the Premises,
either by Landlord or Tenant, shall be Landlord's property on termination of
this lease and shall remain on the Premises without compensation to Tenant.
All furniture, moveable trade fixtures and equipment installed by Tenant may
be removed by Tenant at the termination of this lease if Tenant so elects,
and shall be so removed if required by Landlord, or if not so removed shall,
at the option of Landlord, become the
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property of Landlord. All such installations, removals and restoration by
Tenant shall be accomplished in a good workmanlike manner so as not to damage
the Premises or the primary structure or structural qualities of the Building
or the plumbing, electrical lines or other utilities and central systems of
the Building.
9. ASSIGNMENT AND SUBLETTING
a. Tenant shall not, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld (i) assign or in
any manner transfer this lease or any estate or interest therein, or (ii)
permit any assignment of this lease or any estate or interest therein by
operation of law, or (iii) sublet the Premises or any part thereof, or (iv)
grant any license, concession or other right of occupancy of any portion of
the Premises or (v) permit the use of the Premises by any parties other than
Tenant, its agents and employees; and any such acts without Landlord's prior
written consent shall be void and of no effect. In granting or denying its
consent to a proposed assignment or subletting, Landlord may consider the
financial condition, reputation, type of business and other relevant
characteristics of the proposed assignee or sublessee and Landlord shall not
be deemed to have unreasonably withheld its consent if such characteristics
are reasonably determined to be unsatisfactory to Landlord. Notwithstanding
the foregoing, Landlord agrees that Tenant may assign all, but not less than
all, of Tenant's interest under this lease to an Affiliate (as hereinafter
defined) of Tenant; provided, however, that Tenant shall not be relieved of
any liability hereunder by virtue of such assignment. As used in the
immediately preceding sentence, the term "Affiliate" shall mean a person or
entity directly or indirectly, through one or more intermediaries,
controlling or controlled by or under common control with Tenant; and the
term "control" shall mean (i) with respect to a corporation, the right to
exercise, directly or indirectly, more than 50% of the voting rights
attributable to the shares of the controlled corporation, and (ii) with
respect to the person or entity that is not a corporation, the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of the controlled person or entity. Consent by
Landlord to one or more assignments or sublettings shall not operate as a
waiver of Landlord's rights as to any subsequent assignments and
sublettings. Notwithstanding any assignment or subletting, Tenant and any
guarantor of Tenant's obligations under this lease shall at all times remain
fully responsible and liable for the payment of the Rent herein specified and
for compliance with all of Tenant's other obligations under this lease. If
an assignment of this lease or a subletting of the Premises should occur, the
Landlord, may, at its option, collect directly from such assignee or
sublessee all rents becoming due to Tenant under such assignment or sublease
and apply such rent against any sums due to Landlord by Tenant hereunder, and
Tenant hereby authorizes and directs any such assignee or sublessee to make
such payments of rent directly to Landlord upon receipt of notice from
Landlord. No direct collection by Landlord from any such assignee or
sublessee shall be construed to constitute a novation or a release of Tenant
or any guarantor from the further performance of its obligations hereunder.
Receipt by Landlord of rent from any assignee, sublessee or occupant of the
Premises shall not be deemed a waiver of the covenant in this lease contained
against
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assignment and subletting or a release of Tenant under this lease. The
receipt by Landlord of rent from any such assignee or sublessee shall be a
full and complete release, discharge, and acquittance to such assignee or
sublessee to the extent of any such amount of rent so paid to Landlord.
Tenant shall not mortgage, pledge or otherwise encumber its interest in this
lease or in the Premises.
b. If Tenant requests Landlord's consent to an assignment of
this lease or subletting of all or a part of the Premises, it shall submit to
Landlord, in writing, the name of the proposed assignee or subtenant and the
nature and character of the business of the proposed assignee or subtenant,
the term, use, rental rate and other particulars of the proposed subletting
or assignment, including without limitation, evidence satisfactory to
Landlord that the proposed subtenant or assignee is financially responsible
and will immediately occupy and thereafter use the Premises (or any sublet
portion thereof) for the remainder of the Lease Term (or for the entire term
of the sublease, if shorter). Landlord shall have the option (to be
exercised within thirty (30) days from submission of Tenant's written
request) to (i) approve such subletting or assignment (on such conditions as
Landlord deems appropriate), (ii) disapprove such subletting or assignment
(in which event this lease shall remain in full force and effect), or (iii)
cancel this lease (or the applicable portion thereof as to a partial
subletting) as of the commencement date stated in the above mentioned
subletting or assignment. If Landlord elects to cancel this lease as
provided above, then the term of this lease, and the tenancy and occupancy of
the Premises by Tenant thereunder, shall cease, terminate, expire, and come
to an end with respect to that portion of the Premises so assigned or sublet
as if the cancellation date were the original termination date of this lease,
Tenant shall pay to Landlord all costs or charges which are the
responsibility of Tenant hereunder with respect to that portion of the
Premises so assigned or sublet, and Tenant shall, at its own cost and
expense, discharge in full any outstanding commission obligation of Landlord
with respect to this lease, or any part hereof so canceled. Thereafter
Landlord may lease the Premises to the prospective subtenant or assignee
without liability to Tenant. If Landlord does not thus cancel this lease, the
terms and provisions of SECTION 9(A) hereof will apply.
c. If Landlord consents to any subletting or assignment by
Tenant as hereinabove provided, and subsequently any rents received by Tenant
under any such sublease are in excess of the rent payable by Tenant under
this lease, or any additional consideration is paid to Tenant by the assignee
under any such assignment, then such excess rents under any sublease or such
additional consideration for an assignment shall, upon receipt by Tenant, be
due and payable by Tenant to Landlord as Additional Rental hereunder, less
such reasonable commissions and other reasonable third-party costs incurred
by Tenant and approved by Landlord in connection with such sublease or
assignment. Under no circumstances shall the rent to be paid by any such
sublessee or assignee be less than the Basic Rental and Additional Rental due
under this lease.
d. In the event a bankruptcy case, whether voluntary or
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involuntary, is commenced by or against Tenant or any of its successors or
assigns under this lease, and if any person or entity claiming rights under
this lease in such bankruptcy case (hereinafter, the "Trustee") proposes to
assign this lease or sublease the Premises (or any portion thereof) to any
other person or entity, the Trustee shall, immediately upon receipt of any
offer to accept an assignment of this lease or a sublease of the Premises (or
any portion thereof), give Landlord written notice, and the Trustee shall not
make application to the Court for authority to enter into any such assignment
and/or sublease prior to giving 10 days written notice to Landlord. The
notice to Landlord shall set forth: (1) the name and address of the party to
whom the Trustee proposes to assign this lease or sublease the Premises; (2)
all of the terms and conditions of such party's offer; (3) the terms and
conditions upon which the Trustee intends to cure any existing defaults
hereunder and to compensate Landlord for damages; (4) evidence of such
party's financial ability to cure such defaults and to provide such
compensation; and (5) provide evidence of such party's ability to provide
adequate assurance of the future performance of Tenant's obligations under
this lease. At any time prior to the effective date of such proposed
assignment or sublease, the Landlord shall have the prior right and option to
be exercised by notice to the Trustee, to accept an assignment of this lease
or a sublease of the Premises by any other subtenant or assignee upon the
same terms and conditions or for the same or better consideration as the
offer made by the party to whom the Trustee proposes to assign this lease or
sublet the Premises, less any brokerage commissions payable out of the
consideration to be paid by the person for the assignment or sublet of this
lease. If the Trustee proposes that this lease be assigned or that the
Premises (or any portion thereof) be subleased to any person or entity for
more than the rent provided in this lease, any and all such excess rent or
other consideration payable or to be delivered in connection with such
proposed assignment or sublease, shall be paid or delivered to Landlord as
Landlord's exclusive property. Any and all such excess rent or other
additional consideration delivered to Tenant or the Trustee shall be held in
trust for the Landlord's benefit, and shall not constitute property of Tenant
or the bankruptcy estate.
Any person or entity to whom this lease is assigned or to whom the
Premises (or any portion thereof) are subleased, shall be deemed, without
further act or deed, to assume all of the obligations arising under this
lease and each of the conditions and provisions hereof on or after the date
of such assignment or sublease. Any such assignee or subtenant shall, upon
the request of Landlord, forthwith execute and deliver to Landlord such
instrument(s), in form and substance acceptable to Landlord, confirming such
undertaking. As used herein, the term "adequate assurance" shall include in
addition to the separate requirements of the Bankruptcy Code: (1) the prior
delivery to Landlord of a security deposit in an amount at least equal to
three times the monthly Basic Rental plus any additional amounts payable
pursuant to this Lease; (2) disclosure of the source of rent and other
charges to be paid in consideration for the assignment or sublease under this
lease; (3) delivery of an audited financial statement dated no more than six
months prior to the effective date of such proposed assignment or sublease,
of the party to whom the Trustee proposes that this lease be assigned or the
Premises be subleased, or of a guarantor of such party's obligations under
this
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lease, disclosing a net worth for such party or guarantor at least equal to
the annual rental plus any additional amounts payable pursuant to this lease,
with such guaranty being in form and substance acceptable to Landlord; and
(4) the granting of a first priority security interest in favor of Landlord
in all furniture, fixtures, and other personal property to be used by such
party on the Premises. Notwithstanding the foregoing, nothing contained
herein shall be deemed to be a waiver or extension by Landlord of any other
requirements or rights under the Bankruptcy Code, the bankruptcy rules of
procedure, or other applicable laws, including, without limitation, any
specific provisions regarding shopping center leases. Nothing contained in
this section shall be deemed a waiver of the Landlord's other rights or
remedies under this lease in the event of any default by Tenant or the
Trustee, and Landlord's acceptance of any assignee or subtenant hereunder
shall not constitute a waiver of Landlord's right to exercise any remedy
hereunder for any default by Tenant, or any assignee or subtenant. The
provisions of this section shall apply only in the event of a proceeding
under the Bankruptcy Code and shall not apply to any assignment or sublease
except pursuant to the applicable provisions of the Bankruptcy Code, or any
replacement statutes. The requirements set forth in this section for any
assignment or sublease in a proceeding under the Bankruptcy Code are intended
to define the minimal acceptable requirements for any assumption, assignment
or sublease in a bankruptcy case and shall not constitute a waiver of, or in
any way limit, the Landlord's right to petition any Court of competent
jurisdiction for additional relief and protection beyond that set forth
herein.
e. Landlord shall have the right to transfer, assign and
convey, in whole or in part, the Building and any and all of its rights under
this lease, and in the event Landlord assigns its rights under this lease,
Landlord shall thereby be released from any further obligations hereunder,
and Tenant agrees to look solely to such successor in interest of the
Landlord for performance of such obligations.
10. INDEMNITY
a. Landlord shall not be liable to Tenant for (i) any injury
to person (except to the extent caused by the gross negligence or willful
misconduct of Landlord, or its duly authorized agents or employees) or damage
to property (except to the extent caused by the gross negligence or willful
misconduct of Landlord, or its duly authorized agents or employees) due to
the Building or any part thereof becoming out of repair or by defect in or
failure of pipes or wiring, or by the backing up of drains, or by the
bursting or leaking of pipes, faucets and plumbing fixtures, or by gas,
water, steam, electricity or oil leaking, escaping or flowing into the
Premises, except to the extent caused by its failure to meet its maintenance
and repair obligations set forth in Section 4 of this Lease, or (ii) any
loss, damage, or injury that may be occasioned by or through the acts or
omissions of other tenants in the Building or of any other persons
whatsoever, or (iii) any loss or damage to any property or person occasioned
by theft, fire, act of God, public enemy, injunction, riot, insurrection,
war, court order, requisition or order of governmental authority or any other
matter beyond the reasonable control of Landlord. Tenant agrees that all
personal property upon the Premises shall be at the
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risk of Tenant only, and that Landlord shall not be liable for any damage
thereto or theft thereof.
b. Tenant hereby indemnifies, defends and holds and saves
Landlord whole and harmless of, from and against (i) all fines, suits,
losses, costs, expenses (including, without limitation, reasonable attorneys'
fees), liabilities, claims, demands, actions and judgments of every kind and
character by reason of any breach, violation or non-performance of any term,
provision, covenant, agreement or condition on the part of Tenant hereunder,
(ii) all fines, suits, claims, demands, actions, damages, losses, costs,
expenses (including, without limitation, reasonable attorneys' fees),
liabilities, and judgments suffered by, recovered from or asserted against
Landlord on account of injury or damage to person or property to the extent
that any such damage or injury may be incident to, arise out of, or be
caused, either proximately or remotely, wholly or in part, by any act,
omission, negligence or misconduct on the part of Tenant or any of its
agents, servants, employees, contractors, or invitees or of any other person
entering upon the Premises under or with the express or implied invitation or
permission of Tenant or when any such injury or damage is the result of the
violation by Tenant, or any of its agents, servants, employees, contractors,
or invitees of any law, ordinance or governmental order of any kind or of any
of the rules and regulations included in this lease (as such rules and
regulations may hereafter at any time and from time to time be amended or
supplemented), or when any such injury or damage may in any other way arise
from or out of the occupancy or use by Tenant, its agents, servants,
employees, contractors, or invitees of the Premises, and (iii) all fines,
suits, losses, costs, expenses (including, without limitation, reasonable
attorneys' fees), liabilities, claims, demands, actions, damages and
judgments suffered by, recovered from or asserted against Landlord by
Tenant's employees, agents, servants, contractors, or invitees. Such
indemnification of Landlord by Tenant shall be effective except to the extent
such damage to property or injury to person results from the gross negligence
or willful misconduct of Landlord or any of its duly authorized agents or
employees.
c. Tenant covenants and agrees that in case Landlord shall
be made a party to any litigation commenced by or against Tenant with respect
to which Tenant has indemnified Landlord hereunder or relating to this lease
or to the Premises, then Tenant shall and will pay all costs and expenses,
including reasonable attorneys' fees and court costs, incurred by or imposed
upon Landlord by virtue of any such litigation; and the amount of all such
costs and expenses, including attorneys' fees and court costs, shall be
Additional Rental payable by Tenant to Landlord upon demand. However, under
no circumstances shall Tenant be obligated to indemnify Landlord for damages,
losses, costs, expenses (including, without limitation, reasonable attorneys'
fees), liabilities and judgments suffered by, recovered from or asserted
against Landlord caused by Landlord's gross negligence or intentional act or
omission. Landlord warrants to protect, indemnify, and hold Tenant harmless
from and against any and all claims, damages, liabilities, or expenses
arising solely out of or from (i) any breach or default in the performance of
any obligation of Landlord under this lease and (ii) any
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gross negligence of Landlord, it's agents, employees or contractors.
11. SUBORDINATION
This lease and all rights of Tenant hereunder are subject and
subordinate to any deeds of trust, mortgages or other instruments of security
that now or hereafter cover all or any part of the Building, the Land or any
interest of Landlord therein, and to any and all advances made on the
security thereof, and to any and all increases, renewals, modifications,
consolidations, replacements and extensions of any of such deeds of trust,
mortgages or instruments of security. This provision is hereby declared by
Landlord and Tenant to be self-operative and no further instrument shall be
required to effect such subordination of this lease. Tenant shall, however,
upon demand at any time or times execute, acknowledge and deliver to Landlord
any and all instruments and certificates that in the reasonable judgment of
Landlord may be necessary or proper to confirm or evidence such
subordination. This lease and all rights of Tenant hereunder are further
subject and subordinate to (i) all ground or primary leases in existence at
the date hereof and to any and all supplements, modifications and extensions
thereof heretofore or hereafter made, (ii) all applicable ordinances, laws,
and regulations relating to easements, franchises and other interests or
rights upon, across or appurtenant to the Building or the Land, (iii) all
utility easements and agreements, and (iv) all restrictive covenants
applicable to the Land. Notwithstanding the generality of the foregoing
provisions of this SECTION 11. Tenant agrees that the holders of any such
mortgages, deeds of trust or other security instruments shall have the right
at any time to subordinate any such deeds of trust, mortgages or other
instruments of security to this lease on such terms and subject to such
conditions as such holders may deem appropriate in their discretion. Tenant
further covenants and agrees at any time before or after the institution of
any proceedings for the foreclosure of any such deeds of trust, mortgages or
other instruments of security, or sale of the Building and/or Land, or any
interest therein, pursuant to any such deeds of trust, mortgages or other
instruments of security, to attorn to the purchaser at any such sale or
foreclosure and to recognize such purchaser as Landlord under this lease.
The agreement of Tenant to attorn contained in the immediately preceding
sentence shall survive any such foreclosure sale or trustee's sale. Tenant
shall upon demand at any time or times, before or after any such foreclosure
sale or trustee's sale, execute, acknowledge and deliver to the holder of any
deed of trust, mortgage or other instrument of security which covers all or
any portion of the Building or the Land any and all instruments and
certificates that in the judgment of such holder may be necessary or proper
to confirm or evidence such attornment or agreement to attorn.
12. RULES AND REGULATIONS
Tenant and Tenant's agents, employees and invitees will comply
fully with all requirements of the rules and regulations of the Building and
related facilities which are attached hereto as EXHIBIT B, and made a part
hereof as though fully set out herein. Landlord shall at all times have the
right to modify or amend such rules and regulations
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or to promulgate other rules and regulations in such manner as Landlord may
deem advisable for the safety, care, or cleanliness of the Building and
related facilities or the Premises, and for the preservation of good order
therein, all of which modifications, amendments and supplements shall be
carried out and observed by Tenant. Tenant shall further be responsible for
the compliance with such rules and regulations, as so amended, modified or
supplemented, by the employees, servants, agents, visitors and invitees of
Tenant.
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13. INSPECTION
Landlord or its officers, agents, and representatives shall have
the right to enter into and upon any and all parts of Premises at all
reasonable hours (or, in any emergency, at any hour and without the necessity
of any prior notice) to (i) inspect same or clean or make repairs or
alterations or additions as Landlord may deem necessary (but without any
obligation to do so, except as expressly provided for herein) (however, if
any such cleaning, repairs or alterations would unreasonably disrupt Tenant's
business within the Premises, Landlord shall first orally notify Tenant prior
to performing such work within the Premises) or (ii) show the Premises to
prospective tenants, purchasers or lenders (after giving Tenant prior oral
notice); and Tenant shall not be entitled to any abatement or reduction of
rent by reason thereof, nor shall such be deemed to be an actual or
constructive eviction.
14. CONDEMNATION
If all or any portion of the Building or the Premises should be
taken for any public or quasi-public use under any governmental law,
ordinance or regulation or by right of eminent domain or should be sold to
the condemning authority in lieu of condemnation, Landlord (whether or not
the Premises are affected thereby) may terminate this lease by giving written
notice thereof to Tenant within sixty (60) days after the date of such taking
or sale, in which event this lease shall terminate as of the date when
physical possession of such portion of the Building or Premises is taken by
the condemning authority. If upon any such taking or sale this lease shall
not be thus terminated by Landlord, the Basic Rental and Additional Rental
payable hereunder shall be diminished by an amount representing that part of
such Basic Rental and Additional Rental as shall properly be allocable to the
portion of the Premises, if any, which was so taken or sold and Landlord
shall, at Landlord's sole expense, restore and reconstruct the remaining
portions of the Building and the Premises to substantially their former
condition, to the extent that the same, in Landlord's judgment, may be
commercially feasible, but such work shall not exceed the scope of the work
done by Landlord in originally constructing the Building and installing items
in the Premises to be constructed and installed by Landlord in the Premises
pursuant to the provisions of the work letter agreement attached as EXHIBIT C
(to the extent of the items provided within the Finish Allowance but not in
excess thereof); provided, however, Landlord shall not in any event be
required to spend for such work an amount in excess of the amount received by
Landlord as compensation or damages (over and above amounts paid to the
mortgagee of the property taken) for the part of the Building or the Premises
so taken. Landlord shall be entitled to receive all of the compensation
awarded upon a taking of any part or all of the Building or the Premises
including any award for the value of any unexpired Lease Term and for
leasehold improvements to the Premises. Nothing herein shall be construed,
however, to preclude Tenant from prosecuting any claim directly against the
condemning authority for loss of business, loss of good will, moving
expenses, damage to, and cost of removal of, trade fixtures, furniture and
other
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personal property belonging to Tenant; provided, Tenant shall make no claim
which shall diminish or adversely affect any award claimed or received by
Landlord.
15. FIRE OR OTHER CASUALTY
In the event that the Building should be totally destroyed by fire,
tornado or other casualty or in the event the Premises or the Building should
be so damaged that rebuilding or repairs cannot reasonably be completed
within one hundred twenty (120) days after the date of such damage, Landlord
or Tenant may at its option terminate this lease, in which event the Basic
Rental and Additional Rental shall be abated during the unexpired portion of
this lease effective as of the date of such damage. In order for Tenant to
terminate the lease as provided in the immediately preceding sentence, Tenant
must give written notice to Landlord of such termination within twenty (20)
days after the occurrence of such damage. If Landlord has not received from
Tenant written notice terminating this lease within such twenty (20) day
period, Tenant shall be deemed to have waived Tenant's right to terminate
this Lease resulting from such damage under this SECTION 15. In the event
the Building or the Premises should be damaged by fire, tornado or other
casualty covered by Landlord's insurance, but only to such extent that
rebuilding or repairs can be completed within one hundred twenty (120) days
after the date of such damage, or if the damage should be more serious but
neither Landlord nor Tenant elects to terminate this lease; then in either
such event Landlord shall within ninety (90) days after the date of such
damage commence to rebuild or repair the Building and/or the Premises and
shall proceed with reasonable diligence to restore the Building and/or the
Premises to substantially the same condition in which it was immediately
prior to the happening of the casualty, except that (i) Landlord shall not be
required to rebuild, repair or replace any part of the furniture, equipment,
fixtures and other improvements which may have been placed by Tenant or other
tenants within the Building or the Premises, and (ii) Landlord shall not be
required to rebuild, repair or replace any portion of the Premises and the
improvements thereto which are in excess of the Original Condition (as
defined in EXHIBIT C hereto), except to the extent Tenant pays to Landlord
insurance proceeds or other sums which are required to complete such
rebuilding, repair or replacement. Further, in no event shall Landlord have
any obligation to restore the Premises to any condition in excess of the
improvements that can be replaced within the Finish Budget. Landlord shall
allow Tenant a fair diminution of rent during the time the Premises cannot,
in Landlord's reasonable opinion, be used or occupied as a result of the
applicable casualty. In the event any mortgagee under a deed or trust,
security agreement or mortgage on the Building should require that the
insurance proceeds be used to retire the secured debt, Landlord shall have no
obligation to rebuild and this lease shall terminate upon notice to Tenant.
Landlord shall have no liability to Tenant for inconvenience, loss of
business, or annoyance arising from any repair of any portion of the Premises
or the Building. If Landlord is required by this lease or by any mortgagee
or lessor of Landlord to repair or if Landlord undertakes to repair, Tenant
shall pay to Landlord that amount of Tenant's insurance proceeds which
insures such damage as a contribution towards such repair, and Landlord shall
use reasonable efforts to have such repairs made promptly and in a manner
which will not
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unnecessarily interfere with Tenant's occupancy. Except as herein provided,
any insurance which may be carried by Landlord or Tenant against loss or
damage to the Building or to the Premises shall be for the sole benefit of
the party carrying such insurance and under its sole control.
16. HOLDING OVER
Should Tenant, or any of its successors in interest, hold over the
Premises, or any part thereof, after the expiration of the Lease Term, unless
otherwise agreed in writing by Landlord, such holding over shall constitute
and be construed as a tenancy at will only, at a daily rental equal to 150%
of Basic Rental. The inclusion of the preceding sentence shall not be
construed as Landlord's consent for Tenant to hold over.
17. TAXES
Tenant shall be liable for all taxes levied or assessed against
personal property, furniture or fixtures placed by Tenant in the Premises.
If any such taxes for which Tenant is liable are levied or assessed against
Landlord, or if the assessed value of Landlord's property is increased by
inclusion of personal property, furniture or fixtures placed by Tenant in the
Premises, and Landlord elects to pay the taxes based on such increase, Tenant
shall pay to Landlord upon demand that part of such taxes for which Tenant is
liable hereunder.
18. EVENTS OF DEFAULT
The following events shall be deemed to be events of default by
Tenant under this lease:
a. Tenant shall fail to pay when due any Rent or other sums
payable by Tenant hereunder (or under any other leases now or hereafter
executed by Tenant in connection with space in the Building) and such failure
continues for a period of ten (10) days after written notice to Tenant of
such failure; provided, however, that if two (2) such failures shall occur in
any period of twelve (12) consecutive calendar months, Tenant shall not be
entitled to any notice of, or period to cure any subsequent failure; and any
such subsequent failure shall immediately constitute an event of default
hereunder.
b. Tenant shall violate or fail to comply with the
provisions of SECTION 9(A) hereof.
c. Tenant shall fail to comply with or observe any other
term, covenant or provision of this lease (or any other, lease now or
hereafter executed by Tenant in connection with space in the Building) and
such failure shall continue for thirty (30) days after written notice to
Tenant of such failure; provided, however, that in the event such failure
cannot reasonably be corrected within such thirty (30) day period but
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Tenant commences to cure such failure within such thirty (30) day period and
diligently pursues such correction to completion, an event of default shall
not be deemed to have occurred.
d. Tenant shall desert or vacate any portion of the Premises
and commits an event of default under SECTION 18A, above.
e. Tenant or any guarantor of Tenant's obligations under
this lease ("Guarantor") shall file a petition under any section or chapter
of the Federal Bankruptcy Code or any successor statute or any present or
future comparable state law (herein collectively the "Bankruptcy Code"); or
Tenant or any Guarantor shall have entered against it an order for relief in
any proceedings filed against Tenant or any Guarantor under any section or
chapter of the Bankruptcy Code; or a petition proposing the entry of an order
for relief as against Tenant or any Guarantor under any section or chapter of
the Bankruptcy Code shall be filed in any court and such petition shall not
be discharged or denied within ninety (90) days after the filing thereof.
f. Tenant or any Guarantor shall become insolvent, shall
make a transfer in fraud of creditors, shall make an assignment for the
benefit of creditors, shall generally not pay its debts as they become due,
or shall admit in writing its inability to pay its debts as they become due.
g. A receiver or trustee shall be appointed for all or
substantially all of the assets of Tenant or any Guarantor, or of the
Premises, or any of Tenant's property located thereon in any proceeding
brought by Tenant or any Guarantor, or any such receiver or trustee shall be
appointed in any proceeding brought against Tenant or any Guarantor and shall
not be discharged within ninety (90) days after such appointment, or Tenant
or such Guarantor shall consent to or acquiesce in such appointment.
19. REMEDIES
Upon the occurrence of any event of default specified in this
lease, in addition to any other remedies available at law or in equity,
Landlord shall have the option to pursue any one or more of the following
remedies without any notice or demand whatsoever:
a. Terminate this lease in which event Tenant shall
immediately surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, and in compliance with applicable law,
enter upon and take possession and expel or remove Tenant and any other
person who may be occupying said Premises or any part thereof, by force if
necessary, without being liable for prosecution or any claim for damages
therefor; and Tenant agrees to pay to Landlord on demand the amount of all
loss and damage which Landlord may suffer by reason of
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such termination, including without limitation, damages in an amount equal to
the total of (1) the costs of recovering the Premises and all other expenses
incurred by Landlord in connection with Tenant's default; (2) the unpaid Rent
earned as of the date of termination, plus interest thereon at the rate which
is the lesser of eighteen percent (18%) per annum or the highest lawful rate;
(3) the positive excess of total Rent which Landlord would have received
under this lease for the remainder of the Lease Term, but discounted to the
then present value at a rate of eight percent (8%) per annum, over the fair
market rental value on a net basis of the balance of the Lease Term as of the
time of such default discounted to the then present value at a rate of eight
percent (8%) per annum; and (4) all other sums of money and damages owing by
Tenant to Landlord.
b. In compliance with applicable law, enter upon and take
possession of the Premises, without terminating this lease, and expel or
remove Tenant and any other person who may be occupying the Premises or any
part thereof, by force if necessary, without being liable for prosecution or
any claim for damages therefor, and if Landlord so elects, relet the Premises
on such terms as Landlord shall deem advisable and receive the rent therefor;
and Tenant agrees to pay to Landlord on demand any deficiency that may arise
by reason of such reletting for the remainder of the Lease Term, it being
understood and agreed, however, that in no event shall Tenant be entitled to
any rents received from such tenant or tenants which are in excess of the
Rent payable by Tenant hereunder.
c. In compliance with applicable law, enter upon the
Premises by force if necessary, without terminating this lease, and without
being liable for prosecution or any claim for damages therefor, and do
whatever Tenant is obligated to do under the terms of this lease; and Tenant
agrees to reimburse Landlord on demand for any expenses which Landlord may
incur in thus effecting compliance with Tenant's obligations under this
lease, and Tenant further agrees that Landlord shall not be liable for any
damages resulting to the Tenant from such action.
No re-entry or taking possession of the Premises by Landlord shall
be construed as an election on its part to terminate this lease, unless a
written notice of such intention be given to Tenant. Notwithstanding any
such reletting or re-entry or taking possession, Landlord may at any time
thereafter elect to terminate this lease for a previous default. Pursuit of
any of the foregoing remedies shall not preclude pursuit of any of the other
remedies herein provided or any other remedies provided by law or in equity,
nor shall pursuit of any remedy herein provided constitute a forfeiture or
waiver of any rent due to Landlord hereunder or of any damages accruing to
Landlord by reason of the violation of any of the terms, provisions and
covenants herein contained. Landlord's acceptance of rent following an event
of default hereunder shall not be construed as Landlord's waiver of such
event of default. No waiver by Landlord of any violation or breach of any of
the terms, provisions, and covenants herein contained shall be deemed to
constitute, or be construed as, a waiver of any other violation or default.
The loss or damage that Landlord may suffer by reason of
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termination of this lease or the deficiency from any reletting as provided
for above shall include, without limitation, the expense of repossession
(including attorneys' fees), any repairs or remodeling undertaken by Landlord
following possession, and any brokerage fee incurred in connection with any
such reletting. Should Landlord at any time terminate this lease for any
default, in addition to any other remedy Landlord may have, Landlord may
recover from Tenant all damages Landlord may incur by reason of such default,
including the cost of recovering the Premises and the loss of rental for the
remainder of the Lease Term.
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20. SURRENDER OF PREMISES
No act or thing done by Landlord or its agents during the term
hereby granted shall be deemed an acceptance of a surrender of the Premises,
and no agreement to accept a surrender of the Premises shall be valid unless
the same be made in writing and signed by Landlord.
21. ATTORNEYS' FEES
In case it should be necessary or proper for Landlord to bring any
action under this lease or to consult or place said lease, or any amount
payable by Tenant hereunder, with an attorney concerning or for the
enforcement of any of Landlord's rights hereunder, then Tenant agrees in each
and any such case to reimburse Landlord on demand for Landlord's reasonable
attorneys' fees.
22. LANDLORD'S LIEN
Landlord shall have, at all times, the statutory lien to secure
payment of all Rent and other sums of money becoming due hereunder from
Tenant, and to secure payment of any damages or loss which Landlord may
suffer by reason of the breach by Tenant of any covenant, agreement or
condition contained herein, upon all goods, wares, equipment, fixtures,
furniture, improvements and other personal property of Tenant presently or
which may hereafter be situated on the Premises, and all proceeds therefrom.
Landlord may, in Landlord's sole discretion, and on a case by case basis,
subordinate such lien to the security interests granted by Tenant in
connection with Tenant's purchase of equipment to be located on the Premises.
23. MECHANICS' LIENS
Tenant will not permit any mechanic's or materialman's lien or
liens to be placed upon the Premises or the Building or improvements thereon
during the Lease Term caused by or resulting from any work performed,
materials furnished or obligation incurred by or at the request of Tenant,
and in the case of the filing of any such lien, Tenant will promptly pay same
and cause such lien to be discharged or obtain a bond in an amount, and
issued by a surety, acceptable to Landlord to bond any such lien. If default
in payment thereof shall continue for twenty (20) days after written notice
thereof from Landlord to Tenant, Landlord shall have the right and privilege
at Landlord's option of paying the same or any portion thereof without
inquiry as to the validity thereof, and any amounts so paid, including
expenses and interest, shall be so much Additional Rental hereunder due from
Tenant to Landlord and shall be repaid to Landlord immediately on rendition
of a bill therefor.
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24. NO SUBROGATION; LIABILITY INSURANCE
a. Each party hereto hereby waives any and every claim which
arises or may arise in its favor and against the other party hereto, or
anyone claiming through or under them, by way of subrogation or otherwise,
during the Lease Term or any extension or renewal hereof for any and all loss
of, or damage to, any of its property (whether or not such loss or damage is
caused by the fault or negligence of the other party or anyone for whom such
other party may be responsible), which loss or damage is covered by valid and
collectible fire and extended coverage insurance policies, to the extent that
such loss or damage is recovered under such insurance policies. Such waivers
shall be in addition to, and not in limitation or derogation of, any other
waiver or release contained in this lease with respect to any loss or damage
to property of the parties hereto. Inasmuch as the above mutual waivers will
preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise) to an insurance company (or any other person), each party hereto
hereby agrees immediately to give to each insurance company which has issued
to it policies of fire and extended coverage insurance written notice of the
terms of such mutual waivers, and to have such insurance policies properly
endorsed, if necessary, and only to the extent such endorsement is available
on a commercially reasonable basis, to prevent the invalidation of such
insurance coverages by reason of such waivers.
b. Tenant shall procure and maintain throughout the Lease
Term the following insurance: (1) All Risk insurance (excluding flood,
earthquake and collapse) insuring all leasehold improvements in the Premises,
Tenant's interest in the Premises and all property located in the Premises,
including furniture, equipment, fittings, installations, fixtures, supplies
and any other personal property, leasehold improvements and alterations, in
an amount equal to the full replacement value, it being understood that no
lack or inadequacy of insurance by Tenant shall in any event make Landlord
subject to any claim by virtue of any theft of or loss or damage to any
uninsured or inadequately insured property; (2) Business Interruption
insurance in an amount that will reimburse the Tenant for direct or indirect
loss of earnings attributable to all perils insured against under clause (l)
above or attributable to the prevention of access to the Premises by civil
authority; and sufficient to reimburse the Tenant for Rent in the event of a
casualty to, or temporary taking of, the Building or the Premises; (3)
Comprehensive general public liability insurance including personal injury,
bodily injury, broad form property damage, operations hazard, owner's
protective coverage, contractual liability, with a cross liability clause and
a severability of interests clause to cover Tenant's indemnities set forth
herein, and products and completed operations liability, in limits not less
than $5,000,000.00 inclusive per occurrence or such higher limits as Landlord
may require from time to time during the Term; (4) Worker's Compensation and
Employer's Liability insurance, with a waiver of subrogation endorsement, in
form and amount as required by applicable law; (5) Builder's Risk insurance
on an "All Risk" basis (including flood, earthquake and collapse) on a
completed value (non-reporting) form for full replacement value covering all
work incorporated in the Building and all materials and equipment in or about
the Premises
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during the course of construction of work performed by Tenant pursuant to
EXHIBIT C or any alterations by Tenant until completion thereof; (6) Tenant's
"All Risk" Legal Liability insurance for the replacement cost value of the
Premises; and (7) Any other form or forms of insurance or any changes or
endorsement to the insurance required herein as Landlord, or any mortgagee or
lessor of Landlord may require, from time to time, in form or in amount.
Tenant shall furnish full and complete copies of such insurance
policies and such other evidence satisfactory to Landlord of the maintenance
of all insurance coverage required hereunder, and Tenant shall obtain and
deliver to Landlord a written obligation on the part of each insurance
company to notify Landlord at least thirty (30) days prior to cancellation or
material change of any such insurance. All such insurance shall be written
by insurance companies rated "A" or better by A.M. Best Company Inc. and
otherwise acceptable to Landlord.
25. TENANT'S NEED FOR LARGER SPACE; RIGHT OF FIRST REFUSAL.
If Tenant determines that Tenant needs more space for its business than
is contained within the Premises, Tenant may so notify Landlord and request
that Landlord attempt to find additional space within the Building to which
Tenant may relocate. Landlord agrees to use its best efforts to locate such
other space within the Building or in other buildings owned by Landlord
within the Mercantile Business Park which might be suitable for Tenant's
purposes. Landlord shall have no obligation to remove any existing tenant
from its space in order to make such space available for Tenant or to
construct any new buildings within the Mercantile Business Park for Tenant.
Also, Landlord's failure to find such other space for Tenant shall not
constitute a default by Landlord under this lease nor shall Tenant be
entitled to exercise any rights to terminate this lease or pursue any other
remedies against Landlord.
Landlord hereby grants to Tenant a right of first refusal ("Right of
First Refusal") to lease any space on the first floor of the Building (other
than the Premises) which becomes available during the Lease Term and any
renewal of the Lease Term which properly goes into effect. Landlord agrees
to give written notice ("Landlord's Notice") to Tenant if any such space
becomes available and Tenant shall have a period of three (3) days after
receipt of Landlord's Notice in which to notify Landlord that Tenant desires
to lease such additional space. If Landlord has not received from Tenant
Tenant's notice that Tenant desires to lease such space covered by the
Landlord's Notice within three (3) days after Tenant's receipt of Landlord's
Notice, Tenant shall be deemed to have waived Tenant's Right of First Refusal
for the space covered by the Landlord's Notice until such time in the future,
if ever, that such space again becomes available. If Tenant notifies Landlord
within such three (3) day period that Tenant desires to lease such space
covered by the Landlord's Notice, Landlord and Tenant shall promptly enter
into an appropriate amendment to this lease adding such space to the Premises
and otherwise amending this lease as necessary. Landlord shall not be
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obligated to give the Landlord's Notice to Tenant if Tenant is in default
under this lease at the time any such space becomes available.
26. CHANGE OF BUILDING NAME
Landlord reserves the right at any time to change the name by which
the Building is designated.
27. ESTOPPEL CERTIFICATES
Tenant agrees to furnish from time to time when requested by
Landlord, the holder of any deed of trust or mortgage or the lessor under any
ground lease covering all or any part of the Building or the improvements
therein or the Premises or any interest of Landlord therein, a certificate
signed by Tenant confirming and containing such factual certifications and
representations deemed appropriate by Landlord, the holder of any deed of
trust or mortgage or the lessor under any ground lease covering all or any
part of the Building or the improvements therein or the Premises or any
interest of Landlord therein, and Tenant shall, within ten (10) days
following receipt of said proposed certificate from Landlord, return a fully
executed copy of said certificate to Landlord. In the event Tenant shall
fail to return a fully executed copy of such certificate to Landlord within
the foregoing ten-day period, then Tenant shall be deemed to have approved
and confirmed all of the terms, certifications and representations contained
in such certificate.
28. NOTICES
Each provision of this lease, or of any applicable governmental
laws, ordinances, regulations, and other requirements with reference to the
sending, mailing or delivery of any notice, or with reference to the making
of any payment by Tenant to Landlord, shall be deemed to be complied with
when and if the following steps are taken:
a. All Rent and other payments required to be made by Tenant
to Landlord hereunder shall be payable to Landlord in Tarrant County, Texas,
at the address set forth in the Basic Lease Information or at such other
address as Landlord may specify from time to time by at least ten (10) days
prior written notice delivered in accordance herewith.
b. Any notice or document required to be delivered hereunder
shall be deemed to be delivered if actually received or, if sooner and
whether or not actually received, upon deposit in the United States mail,
postage prepaid, certified or registered mail, with return receipt requested,
addressed to the intended recipient at the appropriate address set forth in
the Basic Lease Information or at such other address as the applicable party
has specified by at least ten (l0) days prior written notice
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delivered to the other party hereto in accordance herewith.
29. FORCE MAJEURE
Whenever a period of time is herein prescribed for action to be
taken by Landlord, Landlord shall not be liable or responsible for, and there
shall be excluded from the computation for any such period of time, any
delays due to strikes, riots, acts of God, shortages of labor or materials,
war, governmental laws, regulations or restrictions, delays caused by Tenant
or Tenant's agents, servants, employees or contractors, or any other causes
of any kind whatsoever which are beyond the reasonable control of Landlord.
30. SEVERABILITY
If any clause or provision of this lease is illegal, invalid or
unenforceable under present or future laws effective during the Lease Term,
then and in that event, it is the intention of the parties hereto that the
remainder of this lease shall not be affected thereby and it is also the
intention of the parties to this lease that in lieu of each clause or
provision of this lease that is illegal, invalid or unenforceable, there be
automatically added as a part of this lease a clause or provision as similar
to such illegal invalid or unenforceable clause or provision as may be
possible and be legal, valid and enforceable.
31. AMENDMENTS; BINDING EFFECT
This lease may not be altered, changed or amended, except by
instrument in writing signed by both parties hereto. No provision of this
lease shall be deemed to have been waived by Landlord unless such waiver be
in writing signed by Landlord and addressed to Tenant, nor shall any custom
or practice which may evolve between the parties in the administration of the
terms hereof be construed to waive or lessen the right of Landlord to insist
upon the performance by Tenant in strict accordance with the terms hereof.
The terms and conditions contained in this lease shall apply to, inure to the
benefit of, and be binding upon the parties hereto, and upon their respective
successors in interest, legal representatives and permitted assigns, except
as otherwise herein expressly provided.
32. QUIET ENJOYMENT
Provided Tenant has performed all of the terms and conditions of
this lease, including the payment of Rent, to be performed by Tenant, Tenant
shall peaceably and quietly hold and enjoy the Premises for the Lease Term,
without hindrance from Landlord, subject to the terms and conditions of this
lease.
33. GENDER
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Words of any gender used in this lease shall be held and construed
to include any other gender, and words in the singular number shall be held
to include the plural, unless the context otherwise requires.
34. JOINT AND SEVERAL LIABILITY
If there be more than one Tenant, the obligations hereunder imposed
upon Tenant shall be joint and several. If there be a guarantor of Tenant's
obligations hereunder, the obligations hereunder imposed upon Tenant shall be
the joint and several obligations of Tenant and such guarantor and Landlord
need not first proceed against Tenant before proceeding against such
guarantor nor shall any such guarantor be released from its guaranty for any
reason whatsoever, including without limitation, in case of any amendments
hereto, waivers hereof or failure to give such guarantor any notices
hereunder.
35. PERSONAL LIABILITY
Notwithstanding anything to the contrary contained in this lease,
Tenant agrees (i) that Tenant will look solely to the estate and interest of
Landlord in the Building and the Land for collection of any judgment or other
judicial process requiring payment of money by Landlord for any default or
breach by Landlord under this lease, and (ii) that except for Landlord's
interest in the Building and the Land, neither Landlord nor its officers,
directors, shareholders or other principals shall have any personal liability
for the performance of any of Landlord's covenants, agreements or
undertakings hereunder.
36. CERTAIN RIGHTS RESERVED BY LANDLORD
Landlord shall have the following rights, exercisable without
notice and without liability to Tenant for damage or injury to property,
persons or business and without constituting an eviction, constructive or
actual, or a disturbance of Tenant's use or possession of the Premises or
giving rise to any claim for setoff or abatement of rent:
a. To decorate and to make repairs, alterations, additions,
changes or improvements, whether structural or otherwise, in and about the
Building, or any part thereof, and for such purposes to enter upon the
Premises and, during the continuance of any such work, to temporarily close
doors, entryways, public space and corridors in the Building, to interrupt or
temporarily suspend Building services and facilities and to change the
arrangement and location of entrances or passageways, doors and doorways,
corridors, elevators, stairs, toilets, or other public parts of the Building,
all without abatement of rent or affecting any of Tenant's obligations
hereunder, so long as the Premises are reasonably accessible.
b. To have and retain a paramount title to the Premises free
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and clear of any act of Tenant purporting to burden or encumber them.
c. To grant to anyone the exclusive right to conduct any
business or render any service in or to the Building, provided such exclusive
right shall not operate to exclude Tenant from the use expressly permitted
herein.
d. To prohibit the placing of vending or dispensing machines
of any kind in or about the Premises without the prior written permission of
Landlord.
e. To have access for Landlord and other tenants of the
Building to any mail chutes located on the Premises according to the rules of
the United States Postal Service.
f. To take all such reasonable measures as Landlord may deem
advisable for the security of the Building and its occupants, including
without limitation, the search of all persons entering or leaving the
Building, the evacuation of the Building for cause, suspected cause, or for
drill purposes, the temporary denial of access to the Building, and the
closing of the Building after normal business hours and on Saturdays, Sundays
and holidays, subject, however, to Tenant's right to admittance when the
Building is closed after normal business hours under such reasonable
regulations as Landlord may prescribe from time to time which may include by
way of example but not of limitation, that persons entering or leaving the
Building whether or not during normal business hours, identify themselves to
a security officer by registration or otherwise and that such persons
establish their right to enter or leave the building.
37. NOTICE TO LENDER
If the Premises or the Building or any part thereof are at any time
subject to a first mortgage or a first deed of trust or other similar
instrument and this lease or all or any portion of the Rent are assigned to a
mortgagee, trustee or beneficiary, as applicable, and the Tenant is given
written notice thereof, including the address of such assignee, then the
Tenant shall not terminate this lease or abate rentals for any default on the
part of the Landlord without first giving written notice by certified or
registered mail, return receipt requested, to such assignee, specifying the
default in reasonable detail, and affording such assignee thirty (30) days
within which to make performance, at its election, for and on behalf of the
Landlord.
38. CAPTIONS
The captions contained in this lease are for convenience of
reference only and in no way limit or enlarge the terms and conditions of
this lease.
39. PLACE OF PERFORMANCE
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ALL OBLIGATIONS OF LANDLORD AND TENANT UNDER THE TERMS OF THIS
LEASE SHALL BE PAYABLE AND PERFORMABLE IN TARRANT COUNTY, TEXAS.
40. BROKERAGE COMMISSION
Landlord and Tenant warrant to each other that, except for any
brokerage commission payable by Landlord to Stoneleigh, Huff, Brous and
McDowell by separate written commission agreement, such party has had no
dealings with any broker or agent in connection with the negotiation or
execution of this lease and each party agrees to indemnify the other and hold
the other harmless from and against any and all claims, loss, cost or expense
(including attorneys' fees and expenses) or other commissions or other
compensation and charges claimed by any broker or agent.
41. GOVERNING LAW
THE LAWS OF THE STATE OF TEXAS SHALL GOVERN THE INTERPRETATION,
VALIDITY, PERFORMANCE AND ENFORCEMENT OF THIS LEASE.
42. RECORDING
Tenant agrees that this lease shall not be filed of record in the
Office of the County Clerk of the county in which the Premises or any portion
thereof is situated without Landlord's prior written consent. In lieu of
recording this lease, Landlord and Tenant shall execute and record a
Memorandum of Lease substantially in the form attached hereto as EXHIBIT E,
and made a part hereof.
43. ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of a lesser amount than
any payment of Rent or Additional Rental herein stipulated shall be deemed to
be other than on account of the earliest stipulated rent or Additional Rental
then due and payable, nor shall any endorsement or statement on any check or
any letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice
to Landlord's right to recover the balance of such rent or pursue any other
remedy provided in this lease, at law or in equity.
44. TIME OF ESSENCE
Time is of the essence of this lease.
45. AUTHORITY TO EXECUTE
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Landlord and Tenant represent and warrant to each other that each
is fully authorized to enter into this lease without the joinder of any other
person or entity, and the person executing this lease on behalf of such party
has full authority to do so and that any and all corporate, partnership,
joint venture or limited liability company action required has been taken.
46. DISCLAIMER
EXCEPT FOR LANDLORD'S OBLIGATIONS SPECIFIED IN THIS LEASE, LANDLORD
HEREBY SPECIFICALLY DISCLAIMS ANY WARRANTY, GUARANTY OR REPRESENTATION, ORAL
OR WRITTEN, PAST, PRESENT OR FUTURE OF, AS TO OR CONCERNING (I) THE NATURE
AND CONDITION OF THE PREMISES OR THE BUILDING, INCLUDING, BUT NOT BY WAY OF
LIMITATION, THE WATER, SOIL, THE PRESENCE OR NONPRESENCE OF HAZARDOUS OR
TOXIC SUBSTANCES IN, ON, ABOUT OR EMANATING FROM THE PREMISES OR THE
BUILDING, GEOLOGY, AND THE SUITABILITY THEREOF AND OF THE PREMISES OR THE
BUILDING FOR ANY AND ALL ACTIVITIES AND USES WHICH TENANT SHALL BE PERMITTED
TO CONDUCT THEREON UNDER THIS LEASE, (II) THE MANNER, CONSTRUCTION, CONDITION
AND STATE OF REPAIR OR LACK OF REPAIR OF ANY OF THE PREMISES OR THE BUILDING,
AND (III) THE COMPLIANCE OF THE PREMISES OR THE BUILDING OR ITS OPERATIONS
WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY GOVERNMENT OR OTHER
BODY. SUBJECT TO LANDLORD'S OBLIGATIONS SPECIFIED IN THIS LEASE, THE LEASE
OF THE PREMISES AS PROVIDED FOR IN THIS LEASE IS MADE ON AN "AS IS" BASIS,
AND TENANT EXPRESSLY ACKNOWLEDGES THAT, IN CONSIDERATION OF THE AGREEMENTS OF
THE LANDLORD HEREIN, LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR
IMPLIED, OR ARISING BY OPERATION OF LAW, INCLUDING, BUT IN NO WAY LIMITED TO,
ANY WARRANTY OF CONDITION, HABITABILITY, MERCHANTABILITY, OR FITNESS FOR A
PARTICULAR PURPOSE OF THE PREMISES OR THE BUILDING. THE PROVISIONS OF THIS
SECTION 46 SHALL SURVIVE THE TERMINATION OR EXPIRATION OF THIS LEASE.
47. TENANT'S OBLIGATIONS REGARDING HAZARDOUS SUBSTANCES
(a) DEFINITION OF HAZARDOUS SUBSTANCES. As used in this lease, the
terms "Hazardous Substance" or "Hazardous Substances" mean any substance,
material or waste (regardless whether liquid, solid, gaseous, or combinations
thereof, and regardless of the amount thereof) which is, or may be, or may
become defined as, hazardous, toxic or in any way (and to any extent) harmful to
human health or safety, to property, to wildlife or to air, soil, water or the
environment in general. Such terms include, but are not limited to, any
substance, material, or waste which is now or may be in the future listed in the
United States Department of Transportation Hazardous Materials Table (49 CFR
172.101) or by the Environmental Protection Agency as a hazardous substance (40
CFR Part 302), and amendments thereto, or any substance,
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material or waste which is now regulated or may become regulated in the
future under any local, state or federal law, ordinance, regulation or order;
and such terms shall also include, without limitation, any material, waste or
substance which is (A) petroleum or a by-product of petroleum, including
fuels, (B) asbestos, (C) polychlorinated biphenyl, (D) now or in the future
designated as a "hazardous substance" pursuant to Section 311 of the Clean
Water Act, 33 U.S.C. 1251, ET SEQ. (33 U.S.C. 1321) or listed pursuant to
Section 307 of the Clean Water Act (33 U.S.C. 1317), (E) now or in the future
defined or listed as "hazardous waste" pursuant to Section 1004 of the
Resource Conservation and Recovery Act, 42 U.S.C. 6901, ET SEQ. (42 U.S.C.
6903), (F) now or in the future defined as a "hazardous substance" pursuant
to Section 101 of the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. 9601, ET SEQ. (42 U.S.C. 9601), (G) now or in the
future designated or defined as a "solid waste," a "hazardous waste" or a
"hazardous substance" under the Texas Revised Civil Statutes Annotated
Article 4477-7, as amended by S.B. 1502, 71st Legislature of the State of
Texas and as partially codified as Chap. 361, Texas Health and Safety Code,
(H) now or in the future designated or defined as an "imminently hazardous
chemical substance or chemical substance mixture" under the Toxic Substances
Control Act (15 U.S.C. 2601 ET SEQ.), or (I) now or in the future regulated,
designated or defined as actually or potentially hazardous, toxic or harmful
under any other or similar environmental protection law, ordinance,
regulation or order, or amendment or codification thereof.
(b) COMPLIANCE WITH LAWS. Tenant shall at all times and in all
respects comply with all current and future local, state, and federal laws,
ordinances, regulations, and orders (including, without limitation, those
described in Paragraph (a)) (collectively, "Hazardous Substances Laws"), and
with all permits and license requirements thereunder relating to industrial
and human safety or hygiene, to environmental protection, or to the use,
analysis, generation, manufacture, storage, release, disposal, transportation
or reporting of any Hazardous Substances.
(c) HAZARDOUS SUBSTANCES HANDLING, REMOVAL AND DISPOSAL. Tenant
shall at its own expense procure, maintain in effect, and comply with all
terms and conditions of any and all permits, licenses, and other approvals
required by any local, state or federal agency or political subdivision for
Tenant's use of the Premises, including, without limitation, all necessary
permits, licenses and approvals for any use, handling, removal or disposal of
Hazardous substances and any discharge of appropriately treated materials or
wastes into or through any sanitary sewer serving the Premises (which in any
event shall be permitted only if Tenant gives thirty (30) days prior written
notice of such proposed discharge to Landlord together with true copies of
each such regulatory permit, license and approval of the same, and only if
such discharge may be done without injury to any person or injury to or
contamination of any property including any property of a third party or the
Premises). Except as discharged into a sanitary sewer in strict accordance
and compliance with all applicable Hazardous Substances Laws and without
injury to any person or contamination of any property, including the
Premises, Tenant shall cause any and all Hazardous Substances located in, at
or upon the Premises, to be removed and transported solely by persons duly
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licensed and permitted by all necessary regulatory authorities to remove and
transport the same, and such Hazardous Substances shall be transported only
to duly licensed and permitted facilities for final disposal of such
Hazardous Substances. Tenant shall in all respects handle, treat, deal with,
and manage any and all Hazardous Substances, in, on, under, or about the
Premises in total compliance with all applicable Hazardous Substance Laws and
prudent practices regarding management of such Hazardous Substances. Upon
expiration or earlier termination of the term of the lease, Tenant shall
cause all Hazardous Substances to be removed from the Premises (including,
but not limited to, any Hazardous Substances stored in any above ground or
underground storage tank, barrel, or drum) and to be transported for use,
storage, or disposal elsewhere strictly in accordance with the foregoing and
in strict compliance with all applicable Hazardous Substance Laws. Tenant's
obligation to remove all Hazardous Substances shall include, but is not
limited to, an obligation to remedy (in the manner and with the approvals as
provided in Paragraph (e)) all damages caused by Tenant, Tenant's agents,
invitees, employees, contractors or representatives to the Premises in any
way connected with such Hazardous Substances or the removal thereof, and to
return the Premises to the Landlord in the same condition as existed at the
time of Tenant's occupancy thereof.
(d) NOTICES CONCERNING HAZARDOUS SUBSTANCES. If at anytime Tenant
shall become aware, or shall have any cause to believe, that a substantial or
unusual spill, leak, discharge, release or threatened release of any
Hazardous Substance has occurred which is or may be in violation of any
Hazardous Substance Laws or of this lease or that any Hazardous Substance has
come to be located at, in, on or under the Premises in a manner which is or
may be in violation of Hazardous Substances Law or this lease, Tenant shall
immediately give oral notice thereof to Landlord followed within three (3)
days by detailed written notice. In addition, Tenant shall immediately
notify Landlord in the same manner of (A) any enforcement, cleanup, removal,
or other governmental or regulatory action, or private citizen action,
instituted or threatened against Tenant and/or the Premises pursuant to any
Hazardous Substances Laws, (B) any claim (regardless whether under any
Hazardous Substances Laws or at common law) made or threatened by any person
against Tenant or the Premises or relating to damage, contribution, cost
recovery, compensation, loss, or injury resulting from or claimed to result
from any Hazardous Substances brought upon the Premises by Tenant and/or
Tenant's employees, invitees, contractors or invitees, and (C) any reports
made by any person (including Tenant), of which Tenant has knowledge, to any
local, state, or federal governmental agency or political subdivision arising
out of or in connection with any Hazardous Substances in or removed from the
Premises, including any third party complaints, notices, warnings, or
asserted violations in connection therewith. Tenant shall also supply to
Landlord as promptly as possible, and in any event within three (3) days
after Tenant first receives or sends the same, copies of all claims, reports,
complaints, notices, warnings, or asserted violations relating in any way to
the Premises or Tenant's use thereof. Regardless of any actual or suspected
violations of Hazardous Substances Laws or of any provisions of this lease
concerning Hazardous Substances, Tenant shall promptly deliver to Landlord
copies of all Tenant's
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records pertaining to Hazardous Substances, including, without limitation,
permits, licenses, and reports and all hazardous waste manifests reflecting
the legal and proper removal, storage, transportation, and disposal of all
Hazardous Substances removed from the Premises.
(e) RESPONSES TO CLAIM CONCERNING HAZARDOUS SUBSTANCES. Tenant
shall not enter into any agreement, consent, decree, or compromise in respect
to any claims relating to any Hazardous Substances in, on or about the
Premises nor enter into any agreement, consent decree, or compromise in
respect to any claims relating to any Hazardous Substances in any way
connected with the Premises without first notifying Landlord of Tenant's
intention to do so and affording Landlord ample opportunity to appear,
intervene, or otherwise appropriately assert and protect Landlord's interest
with respect thereto. In no event shall Tenant have any authority to bind or
commit Landlord or its property to any agreement, consent decree or
compromise. If the presence of any Hazardous Substances in, on, under or
about the Premises which results directly or indirectly in violation of any
Hazardous Substances Law or in any pollution or contamination of, or any harm
to, the Premises or if any federal, state or local agency or subdivision
requires any cleanup, remedial, removal or restoration work at the Premises
with respect to Hazardous Substances caused by Tenant or Tenant's agents,
invitees, employees, representatives or contractors, Tenant shall promptly
and at its sole cost and expense take all actions as are necessary to return
the Premises to the condition existing prior to the introduction of any such
Hazardous Substances caused by Tenant or Tenant's agents, invitees,
employees, representatives or contractors; PROVIDED THAT Landlord's written
approval of such actions shall first be obtained and such approval shall not
be unreasonably withheld so long as such actions would not potentially have
any material adverse long-term or short-term consequences to the Premises.
This obligation of Tenant is continuing and shall survive the termination or
expiration of this lease and any transfer, assignment, assumption or
subletting of this lease and any transfer, assignment, assumption or
subletting of the lease to or by another person, and in no way limits
Tenant's liabilities or other obligations under this lease.
(f) INDEMNIFICATION OF LANDLORD. Tenant shall indemnify, defend
(by counsel reasonably acceptable to Landlord), protect, and hold harmless
Landlord, and Landlord's property, and each of Landlord's partners, joint
venturers, directors, officers, employees, agents, attorneys, successors, and
assigns from and against any and all claims, liabilities, penalties, fines,
judgments, liens, forfeitures, damages (including indirect or consequential
damages) and losses (including, without limitation, diminution in the value
of the property of a third party or of the Premises, and damages for the loss
or restriction on use of rentable or usable space or of any amenity of the
Premises), costs, and expenses (including attorneys' fees, engineering fees,
consultant fees, and expert fees) for or with respect to the death of or
injury to any person whomsoever (including attorneys' fees, engineering fees,
consultant fees, and expert fees) for or with respect to the death of or
injury to any person whomsoever (including third parties), or injury or
damage to or contamination of any property whatsoever (including soil and
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ground water and property of third parties) arising from or caused in whole
or in part, directly or indirectly, by (1) the presence of any Hazardous
Substances in, on, under or about the Premises or any discharge, threatened
release, or releases of any Hazardous Substances at, in or from the Premises
caused by Tenant or Tenant's agents, invitees, employees, representatives, or
contractors, or Tenant's use, analysis, storage, transportation, disposal,
release, threatened release, discharge or generation of any Hazardous
Substances to, in, on, under, about or from the Premises, or (2) Tenant's
failure to comply with any Hazardous Substances Law, or (3) Tenant's failure
to comply with or Tenant's breach of any of Tenant's covenants regarding
Hazardous Substances contained in this lease. Tenant's obligations hereunder
shall include, without limitation, and without regard to whether the same
were foreseeable or unforeseeable, any and all costs incurred in connection
with any investigation of site conditions, and any and all costs of any
required or necessary repair, cleanup, detoxification, or decontamination of
the Premises and the soil and ground water on or under same, and the
preparation and implementation of any closure, remedial action, or other
required plans in connection therewith. Tenant's obligations hereunder are
continuing and shall survive the expiration or earlier termination of the
term of the lease, and any transfer, assignment, assumption or subletting of
the lease to or by another person. For purposes of the indemnity provisions
hereof, any acts, omissions or conduct of Tenant, or by employees, agents,
assignees, contractors, or subcontractors of Tenant or others acting for, at
the request of, or on behalf of Tenant (regardless whether they are
authorized, unauthorized, negligent, intentional, willful or unlawful), shall
be strictly attributable to Tenant.
Landlord hereby warrants and represents that to the best of
Landlord's actual, current knowledge, no waste materials, no hazardous
materials, including asbestos, and no hazardous substances have been disposed
of or placed on the Premises except for minor spills incidental to normal
operations. Landlord further warrants and represents that to the best of
Landlord's actual, current knowledge, all underground tanks on the Premises
were properly registered with the appropriate governmental agency and that
such tanks are not leaking. Landlord hereby agrees to indemnify, defend and
hold harmless Tenant from and against any and all liability, loss or expense
caused by a breach of Landlord's warranty and representation made by Landlord
in this paragraph. The provisions of this paragraph shall survive
termination or expiration of this lease.
(g) WITHHOLDING CONSENT TO PROPOSED TRANSFEREES. Without limiting
any other provision of this lease pertaining to Tenant's assignment,
subletting or transfer of this lease or Tenant's interest therein, Tenant
acknowledges and agrees that it shall not be unreasonable for Landlord to
withhold its consent to any proposed assignment, subletting or transfer of
this lease or of Tenant's interest in this lease if the anticipated use of
the Premises by the proposed assignee, subtenant or transferee (collectively,
a "Transferee") involves the generation, storage, use, treatment or disposal
of any Hazardous Substances. No permitted assignment, transfer, assumption
or subletting of this lease shall operate to relieve or discharge Tenant of
or from any of
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Tenant's covenants or obligations with respect to Hazardous Substances.
(h) ENVIRONMENTAL MONITORING, INSPECTION, ASSESSMENT AND TESTING.
Landlord shall have the right to inspect Tenant's records and the Premises
following 24 hours advance written notice to Tenant, any time, and at
different times, to determine Tenant's compliance with all Hazardous
Substances Laws and with Tenant's covenants with respect to Hazardous
Substances. Such inspections may include, without limitation, an inspection
of all of Tenant's records, licenses and permits pertaining in any way to
Hazardous Substances; inspection and assessment of the Premises by a
professional engineer or consultant of Landlord's choosing; the gathering of
samples of substances, discharges, air, soil, and water; and drilling of any
holes in the Premises and conducting any other invasive test or sampling
which may be necessary to gather information or data. In the event any
violation of any Hazardous Substances Laws or any breach of any of Tenant's
covenants with respect to Hazardous Substances is disclosed or revealed by
any such inspection, Tenant shall pay all costs and expenses (including all
costs of inspection) to remedy the same to the standards required by all
applicable laws, rules and regulations and Landlord shall have the right to
terminate this lease upon thirty (30) days notice to Tenant.
(i) CONFLICTING PROVISIONS AND CUMULATIVE EFFECT. Nothing herein
limits any common law right or remedy of the Landlord or any common law duty
or obligation of the Tenant with respect to the subject matter hereof.
Nothing herein limits any right or remedy of the Landlord under any other
term or provision of the lease or any duty or obligation of the Tenant under
any other term or provision of the lease. However, in the event of any
conflict between the terms and provisions of this SECTION 47 and the other
terms and provisions of the lease, with respect to the manufacture,
generation, analysis, storage, handling, use, treatment, reporting, release,
removal, transportation or disposal of Hazardous Substances or with respect
to the rights, remedies, duties and obligations in connection therewith, such
conflict shall be resolved in favor of this SECTION 47, which shall control
such subject. The terms, covenants, obligations, provisions and agreements
contained in this SECTION 47 shall survive the termination or expiration of
this lease.
48. RIGHT TO CONTEST
Tenant will have the right to contest by appropriate proceedings
diligently conducted in good faith in the name of Tenant, or with the prior
written consent of Landlord, in the name of Landlord, or both, without cost
or expense to Landlord, the validity or application of any law, ordinance,
order, rule, or regulation or legal requirement of any nature affecting this
lease. Tenant may delay compliance with any such law, ordinance, order, rule,
regulation pending the outcome of any contest proceedings, even if a lien,
charge, or liability may be incurred by reason of such delay, so long as (a)
such contest or delay does not subject Landlord to civil or criminal
liability, (b) Tenant furnishes to Landlord security, reasonably satisfactory
to Landlord, against any loss or injury by reason of any contest or delay,
(c) such contest does not impair any pending sale or financing of the
Premises by Tenant, and (d) such contest,
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lien or charge does not put Landlord in default of any loan Landlord may have
which is secured by the Premises. Landlord will not be required to join any
proceedings referred to in this SECTION 48 unless the provision of any
applicable law, rule, or regulation at the time in effect requires that such
proceedings be brought by or in the name of Landlord. In that event,
Landlord will join the proceedings or permit them to be brought in its name
if Tenant pays all related expenses (including Landlord's reasonable
attorneys' fees).
49. PARKING
During the term of this lease, Landlord shall make available to
Tenant at no additional cost to Tenant, on the Parking Area depicted on
EXHIBIT D attached hereto: 112 unreserved parking spaces and 5 covered,
reserved parking spaces.
50. MISCELLANEOUS
a. Any approval by Landlord or Landlord's architects and/or
engineers of any of Tenant's drawings, plans and specifications which are
prepared in connection with any construction of improvements in the Premises
shall not in any way be construed or operate to bind Landlord or to
constitute a representation or warranty of Landlord as to the adequacy or
sufficiency of such drawings, plans and specifications, or the improvements
to which they relate, for any use, purpose, or condition, but such approval
shall merely be the consent of Landlord as may be required hereunder in
connection with Tenant's construction of improvements in the Premises in
accordance with such drawings, plans and specifications.
b. Each and every covenant and agreement contained in this
lease is, and shall be construed to be, a separate and independent covenant
and agreement.
c. There shall be no merger of this lease or of the
leasehold estate hereby created with the fee estate in the Premises or any
part thereof by reason of the fact that the same person may acquire or hold,
directly or indirectly this lease or the leasehold estate hereby created or
any interest in this lease or in such leasehold estate as well as the fee
estate in the leasehold premises or any interest in such fee estate.
d. Neither Landlord nor Landlord's agents or brokers have made any
representations or promises with respect to the Premises, the Building or the
Land except as herein expressly set forth and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as
expressly set forth in the provisions of this lease.
e. The submission of this lease to Tenant shall not be construed
as an offer, nor shall Tenant have any rights with respect thereto unless and
until Landlord
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shall, or shall cause its managing agent to, execute a copy of this lease and
deliver the same to Tenant.
51. EXHIBITS AND ATTACHMENTS
All exhibits, attachments, riders and addenda referred to in this
lease and the exhibits listed hereinbelow are incorporated into this lease
and made a part hereof for all intents and purposes.
Exhibit A - Outline of Premises
Exhibit B - Rules and Regulations
Exhibit C - Work Letter Agreement
Exhibit D - Tenant's Parking Area
Exhibit E - Memorandum of Lease Agreement
Exhibit F - Sign Criteria
Rider 1 - Schedule of Basic Rental
DATED as of the Lease Date.
LANDLORD: TENANT:
MERCANTILE PARTNERS, L.P., FLASHNET COMMUNICATIONS, INC.,
a Texas limited partnership a Texas corporation
By: Mercantile Corporation By: /s/ M. Scott Leslie
of Fort Worth, a Texas Printed Name: M. Scott Leslie
corporation, General Title: President
Partner
By: /s/ Richard Griffin
---------------------------
Printed Name: Richard Griffin
-----------------
Title: Vice President
------------------------
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EXHIBIT A
OUTLINE OF PREMISES
44
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EXHIBIT B
RULES AND REGULATIONS
1. The Building has protective and security systems installed. Landlord
has a fire control and evacuation plan as approved by the relevant
public authorities. Tenant will furnish certain key people for
training in life safety emergencies. Landlord shall not, however, be
deemed a guarantor of the safety of persons or property in any
instance.
2. The main lobby doors will be open from [8:00] a.m. to [6:30] p. m.
Monday through Friday, and closed Saturdays, Sundays and Holidays. To
obtain after-hours admittance, Tenant and its agents and employees
must identify themselves and show need to enter the Building and
comply with such other procedures as Landlord may establish from time
to time.
3. The HVAC system will be operational from [7:30] a.m. to [6:00] p.m.
Monday through Friday. In the event HVAC is required beyond these
hours, Tenant may request additional HVAC to be billed direct to
Tenant. Electric heaters are not allowed in the Building.
4. The movement of Tenant's furniture, equipment, and supplies, into,
within, or out of the Building, shall be restricted to time, method,
and routing, as determined by Landlord. Tenant shall assume all
liability and risk to people, property equipment and Building, in such
movement. Landlord shall have the right to charge for after-hours
operation.
5. All deliveries, of any nature, will be routed through the location or
locations established by Landlord from time to time, subject to
procedures established from time to time by Landlord. No deliveries
will be allowed through or around the main lobby area. Likewise,
dollies and freight will not be allowed on the passenger elevators.
6. There shall not be used any hand truck, flatbed, or dolly, except for
those equipped with rubber tires, and in good repair.
7. The movement of heavy equipment will be required to be moved on steel,
plywood or hardboard of sufficient thickness to prevent any damage.
8. Should Tenant desire to place in the Building any heavy equipment,
including but not limited to, large or large concentration or heavy
files, safes, electronic data processing equipment or other unusually
heavy
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equipment, approval must be obtained from Landlord. Standard
office floor loading is 70 PSF with 125 PSF in certain areas of the
core.
9. Business machines and mechanical equipment shall be placed so as not
to cause vibration noise and annoyance. Correction of said cause will
be at Tenant's expense.
10. No additional locks or bolts of any kind shall be placed on any
doors, nor shall any changes be made in the existing locks or
mechanisms thereof, without the prior written approval of Landlord,
which approval shall not be unreasonably withheld. Two keys to each
lock will be furnished. Additional keys may be obtained, at Tenant's
expense, from Landlord. Landlord may at all times keep
a passkey to Premises.
11. No Tenant shall mark, paint, drill, drive nails, or screw into or in
any way deface any part of the Building of which the Premises form a
part without the consent of Landlord.
12. All contractors and technicians rendering any service on or to the
Premises shall be referred to Landlord for approval and supervision.
This provision shall apply to all work including, but not limited to,
installation or changing communications equipment, electrical devices
and attachments, decorating, remodeling, or any other cosmetic change
to the Premises. Normal service calls and routine maintenance and
repairs to Tenant's equipment is excluded from this paragraph.
13. Tenant shall notify Landlord of all accidents to or defects in HVAC
equipment, plumbing, electrical, elevator, or any other part of the
Premises or the Building.
14. The plumbing facilities shall not be used for any other purpose than
that for which they were intended, and no foreign substance of any
kind shall be placed therein. All damages resulting from any misuse of
the fixtures shall be borne by the Tenant who or whose servants,
employees or agents shall have caused the same.
15. Tenant shall permit Landlord, or its agent, to enter the Premises to
make inspections, repairs, alterations or additions in or to the
Premises or the Building, and at any time in event of emergency,
permit Landlord to perform any acts related to safety protection,
preservation, reletting, or improvement of the Premises or the
Building.
16. Tenant shall, before leaving the Premises unattended, close and lock
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outside doors, turn off lights, coffee pots, and other office
equipment. Damage resulting from failure to do so shall be paid for
by Tenant.
17. The sidewalks, entrances, passages, curbs, elevators, vestibules,
stairways, corridors, and halls shall not be obstructed or encumbered
in any way by any tenant or its agents at any time. In no event shall
Tenant or its agents dispose of, or store for any period of time, any
item in the public areas of the Building or the Premises.
18. A mail pickup point is established for mail bags and gondolas.
Gondolas will not be allowed in, on or around the main lobby area or
the passenger elevators. Mail bags and gondolas shall not be left in
lobbies, halls, corridors, driveways or any other areas. They must
come and go via the freight elevators and to the established pickup
point on the truck terminal dock, whether they are empty or full of
mail.
19. No sign, door plaques, advertisement, notice or other lettering shall
be exhibited, inscribed, painted or affixed on any part of the
exterior of the Premises Landlord will provide a standard letter type
finish which will be in accordance with Building Standard graphics.
Any variation of Building Standard must be submitted by drawing and
description for Landlord's written approval. In the event of
violation of the foregoing by any Tenant or its agents, Landlord may
remove same without any liability and shall bill the expense incurred
by such removal to the Tenant.
20. All materials including wall coverings and ceiling materials must
meet the requirements of applicable codes. Submission for approval of
all materials with complete plans and specifications including the
necessary data and certification is required to verify that applicable
codes have been met.
2l. Landlord will provide and maintain an alphabetical directory board in
the ground floor lobby and, at Landlord's discretion, will allot
appropriate name strip designations in writing.
22. Landlord reserves the right to install, maintain, or change a sign or
signs on the interior, exterior, or roof of the Premises except for
Tenant's signs which Landlord has previously approved in writing.
23. Landlord will not be responsible for lost or stolen personal
property, equipment, money or any article taken from the Premises,
regardless of how or when loss occurs.
24. No live animals or birds shall be brought into or kept in or about the
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Premises.
25. No canvassing, soliciting, or peddling will be allowed on the Premises
at any time.
26. The Premises shall not be used for lodging, sleeping, immoral or
illegal purposes.
27. No space on the Premises shall be used for the manufacturing or sale
of liquor, narcotics, or drugs in any form.
28. No showcase or other article shall be affixed to and part of the
Premises. Parcels, bottles, or any other articles shall not be placed
on the windowsills.
29. Tenant shall surrender and return promptly, to the Landlord, the
Premises, all keys, equipment, and fixtures in as good condition as
when Tenant originally took possession, ordinary wear and tear, or
other casualty not caused by Tenant's negligence, excepted.
30. Tenant shall not, without the prior written consent of Landlord,
serve, or allow to be served or consumed by Tenant or Tenant's agents,
employees, or invitees, any alcoholic beverages in the Common Areas or
any other portion of the Building. Landlord expressly reserves the
right to prohibit the service or consumption of alcoholic beverages in
the Common Areas or other portions of the Building, notwithstanding
Landlord's prior consent to such service or consumption.
31. Smoking of all tobacco products is prohibited within any and all parts
of the Building.
32. The foregoing rules and regulations are prescribed by Landlord in
order to provide and maintain, to the best of Landlord's ability,
orderly, clean, and desirable premises. Any difference of any of the
rules and regulations must be approved in writing, by the Landlord,
prior to any change. It is Landlord's desire to maintain the highest
standard of dignity and good taste. Any action or condition not
meeting this high standard should be reported directly to Landlord.
Your cooperation will be mutually beneficial and sincerely
appreciated.
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EXHIBIT C
WORK LETTER AGREEMENT
Landlord and Tenant mutually agree as follows:
l. FINAL PLANS. On or before March 15, 1999 ("Plan Approval Date"),
Landlord and Tenant shall use their best efforts to agree on the plans and
specifications for the construction of the Finish Work (as hereinafter
defined). If such plans and specifications have not been approved in writing
by Landlord and Tenant on or before the Plan Approval Date, either Landlord
or Tenant may terminate this lease by written notice to the other given on or
before March 20, 1999. The term "Final Plans" shall mean those plans and
specifications approved in writing by Landlord and Tenant.
2. CONSTRUCTION OF IMPROVEMENTS. Subject to paragraph 4 of this
EXHIBIT C provided that Tenant has not committed an event of default,
Landlord agrees to cause the improvements ("Finish Work") to the Premises to
be constructed pursuant to and in substantial accordance with the Final Plans
on or before the Completion Date (as hereinafter defined). Landlord shall
not be obligated to make any improvements to the Building and/or Premises
other than those specified in the Final Plans. Landlord agrees to spend up
to, but not in excess of, $21.00 per square foot of Rentable Area in the
Premises for the construction of such Finish Work in the Premises. Such
amount is referred to in this lease as the "Finish Budget" or "Finish
Allowance." The Finish Budget shall be the maximum amount that Landlord shall
be obligated to spend for the Finish Work. In the event that the cost of the
Finish Work exceeds the Finish Budget, Tenant shall be solely responsible for
the payment of such excess. If the cost of the Finish Work is less than the
Finish Budget by an amount less than $50,000.00, then Landlord shall pay to
Tenant the amount that such cost was less than the Finish Budget. In the
event that the cost of the Finish Work is less than the Finish Budget by an
amount equal to or greater than $50,000.00, then Landlord will reduce the
Basic Rental by such amount amortized over the Lease Term. If the Finish
Work is constructed substantially in accordance with the Final Plans, Tenant
agrees to accept the Finish Work at such time as the Landlord's architect
issues a written statement that the Finish Work has been completed
substantially in accordance with the Final Plans, except for minor touch-up
and finishing jobs which remain to be completed (which means items remaining
to be done which do not materially interfere with Tenant's use of the
Premises). The term "Substantial Completion", "Substantially Completed" or
"Substantially Complete" shall mean that the Finish Work has been completed
substantially in accordance with the Final Plans, except for minor touch-up
and finishing jobs which remain to be completed and which do not materially
interfere with Tenant's use of the Premises. Subject to those matters
referred to in paragraph 4 of this EXHIBIT C, Landlord agrees to achieve
Substantial Completion on or before June 30, 1999
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("Completion Date"). The date that Landlord's architect issues such written
statement shall be deemed to be the date Substantial Completion was achieved.
When such architect's statement has been issued, Tenant agrees to accept
possession thereof (in writing, requested by Landlord) and to proceed with
due diligence to install Tenant's furniture, fixtures and equipment.
Landlord agrees to proceed with due diligence to complete such touch-up and
finishing items after Substantial Completion. All of the Finish Work shall
be performed by contractors reasonably approved, selected and employed by
Landlord. Tenant agrees to use, and the Final Plans shall specify, Building
Standard (as hereinafter defined) (a) light fixtures, (b) doors, (c) ceiling
tiles, and (d) hardware throughout the Premises. Whenever the term "Building
Standard" is used in this Work Letter Agreement or the lease of which this
Work Letter Agreement comprises a part, it shall mean the exclusive type,
brand, quality and/or quantity of materials Landlord designates from time to
time to be the quality or quantity to be used in the Building.
3. ORIGINAL CONDITION. Tenant acknowledges that Tenant has
inspected the Premises. The Premises, in existing condition, are hereinafter
referred to as being in "Original Condition."
4. DELAYS. It is agreed that, notwithstanding anything to the
contrary contained in this lease, if Landlord shall be delayed in achieving
Substantial Completion as a result of:
(a) Landlord's and Tenant's failure to agree on the Final Plans on
or before the Plan Approval Date; or
(b) Tenant's request for materials, finishes or installations
other than Landlord's Building Standard; or
(c) Tenant's changes in or modifications to the Final Plans; or
(d) Tenant's failure to timely select paint, carpet, wall
coverings, etc.; or
(e) Any other delay caused by Tenant or Tenant's agents, servants,
contractors or employees; or
(f) Any matters referred to in SECTION 29 of this lease;
the Completion Date shall be automatically extended by the number
of days of such delays and the Commencement Date shall not be postponed.
5. ENTRY BY TENANT'S AGENTS. Landlord will permit Tenant and its
agents to
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enter the Premises prior to the date specified for the commencement of
Tenant's occupancy under the lease, in order that Tenant may perform through
its own contractors (to be first approved in writing by Landlord which
approval shall not be unreasonably withheld) such other work and decorations
as Landlord may approve at the same time that Landlord's contractors are
working in the Premises. The foregoing license to enter prior to the
commencement of the Lease Term, however, is conditioned upon Tenant's workmen
and mechanics working in harmony and not interfering with the labor employed
by Landlord, Landlord's mechanics or contractors or by any other tenant or
their contractors. Such license is further conditioned upon workers'
compensation and public liability insurance for bodily injury and property
damage, all in amounts and with companies and on forms satisfactory to
Landlord, being provided and at all times maintained by Tenant's contractors
engaged in the performance of the work, and upon delivery of certificates of
such insurance to Landlord prior to proceeding with the work. If at any time
such entry shall cause disharmony or interference therewith, such license may
be withdrawn by Landlord upon forty-eight (48) hours written notice to
Tenant. Such entry shall be deemed to be under and subject to all of the
terms, covenants, provisions and conditions of the lease except the covenant
to pay rent. Landlord shall not be liable in any way for any injury, loss or
damage which may occur to any of Tenant's decorations or installations so
made prior to commencement of the Lease Term, the same being placed in the
Premises solely at Tenant's risk, and Tenant agrees to indemnify and hold
Landlord harmless from any and all claims, demands, actions, damages, fines,
suits, losses, liabilities, expenses (including, without limitation,
reasonable attorneys' fees) and judgments arising out of or relating to
activities of Tenant's contractors, workmen or mechanics.
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RIDER 1
SCHEDULE OF BASIC RENTAL
The Basic Rental for the first (1st) through the fifth (5th) years of
the Lease Term shall be $439,153.75 per year ($14.23 per square foot of
Rentable Area); and for the sixth (6th) through the tenth (10th) years of
the Lease Term shall be $454,347.52 per year ($14.72 per square foot of
Rentable Area).
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EXHIBIT E
MEMORANDUM OF LEASE AGREEMENT
THE STATE OF TEXAS )(
)(
COUNTY OF TARRANT )(
This Memorandum of Lease Agreement (this "Memorandum") is made and
entered into to be effective for all purposes as of ______________, 1999, by
and between MERCANTILE PARTNERS, L.P., a Texas limited partnership
("Landlord"), and FLASHNET COMMUNICATIONS, INC., a Texas corporation
("Tenant"), as follows:
1. Landlord and Tenant have executed that certain Lease Agreement
(the "Lease") dated ____________, 1999, whereby Landlord has leased to Tenant
the property described in EXHIBIT "A", attached hereto and made a part hereof
(the "Property").
2. The Lease sets forth the above names of Landlord and Tenant.
3. Landlord's address is 2650 Meacham Blvd., Fort Worth, Texas
76137-4203, Attention: Richard A. Griffin.
4. Tenant's address is 3001 Meacham Blvd., Suite 100, Fort Worth,
Texas 76137, Attention: Bob Carpenter.
5. The initial term of the Lease is for a period beginning on
July 1, 1999, and continuing thereafter to and including June 30, 2009,
unless sooner terminated.
6. In addition to those terms referred to above, the Lease
contains numerous other terms, covenants, and conditions which affect the
Property, and notice is hereby given that reference should be had to the
Lease directly with respect to the details of such terms, covenants, and
conditions. Copies of the Lease are maintained at the offices of Landlord
and of Tenant as set forth above.
7. This Memorandum does not alter, amend, modify, or change the
Lease or the exhibits or schedules thereto in any respect. This Memorandum
is executed by the parties solely for the purpose of recordation in the Real
Property Records of Tarrant County, Texas, and it is the intent of the
parties that it shall be so
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recorded and shall give notice of and confirm the Lease and exhibits and
schedules thereto and all of its terms to the same extent as if all of the
provisions of the Lease and exhibits and schedules thereto were fully set
forth herein. The Lease and exhibits and schedules thereto are hereby
incorporated by reference in this Memorandum, and the parties hereby ratify
and confirm the Lease as if the Lease were being re-executed by them and
recorded. In the event of any conflict between the provisions of this
Memorandum and the Lease, the provisions of the Lease shall control.
Landlord and Tenant have executed this Memorandum to be effective
as of the date first above written.
LANDLORD:
MERCANTILE PARTNERS, L.P.,
a Texas limited partnership
By: Mercantile Corporation of Fort
Worth, a Texas corporation,
General Partner
By:
Printed Name:
Title:
TENANT:
FLASHNET COMMUNICATIONS, INC.
By:
Printed Name:
Title:
54
<PAGE>
THE STATE OF TEXAS )(
)(
COUNTY OF TARRANT )(
The foregoing instrument was acknowledged before me on the ____ day
of __________________ , 1999, by __________________, __________________ of
Mercantile Corporation of Fort Worth, a Texas corporation, General Partner of
MERCANTILE PARTNERS, L.P., a Texas limited partnership, on behalf of said
partnership.
Notary Public, in and for
the State of
My Commission Expires: Printed Name of Notary:
_____________________
THE STATE OF _________ )(
)(
COUNTY OF ____________ )(
The foregoing instrument was acknowledged before me on the ____ day
of ______________, 1999, by ________________________, _______________ of
FLASHNET COMMUNICATIONS, INC., a Texas corporation, on behalf of said
corporation.
Notary Public, in and for
the State of
My Commission Expires: Printed Name of Notary:
_______________________
55
<PAGE>
SUBLEASE AGREEMENT
1. PARTIES.
This Sublease, dated MARCH 1, 1999 is made between AST Research, Inc.
("Sublessor"), and Flashnet ("Sublessee").
2. MASTER LEASE.
Sublessor is the lessee under a written lease dated January 21, 1982, wherein
Northbrook Business Center ("Lessor") leased to Sublessor the real property
located at 1001 N.E. Loop 820 in the City of Fort Worth, County of Tarrant,
State of Texas described as Buildings 4, 5, 5A and 6 ("Master Premises"). Said
lease has been amended by the following amendments: Assignment of Lease and
Assumption Agreement, said lease and amendment are herein collectively referred
to as the "Mater Lease" and are attached hereto as Exhibit "A".
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set forth in
this Sublease the following portion of the premises ("Premises"): 37,295 square
feet, including the 4,200 square foot breakroom/ cafeteria and the adjacent
rooms and pro-rata share of the restrooms, as is, as shown on plan exhibit B, in
Buildings 5 & 6.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease has not
been amended or modified except as expressly set forth herein, that Sublessor is
not now, and as of the commencement of the Term hereof will not be, in default
or breach of any provisions of the Master Lease, and the Sublessor has no
knowledge of any claim by Lessor that Sublessor is in default or breach of any
of the provisions of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on March 1, 1999 ("Commencement Date"),
or when Lessor consents to this Sublease, whichever shall last occur, and end on
July 31, 2002 ("Termination Date"), unless otherwise sooner terminated in
accordance with the provisions of this Sublease. Possession of the Premises
("Possession") shall be delivered to Sublessee on the commencement of the Term.
If for any reason Sublessor does not deliver Possession to Sublessee on the
commencement of the Term, Sublessor shall not be subject to any liability of
such failure, the Termination Date shall not be extended by the delay, and the
validity of this Sublease shall not be impaired, but rent shall abate until
delivery of Possession. If Sublessor permits Sublessee to take Possession
prior to the commencement of the Term, such early Possession shall not advance
the Termination Date and shall be subject to the provisions of this Sublease.
<PAGE>
6. RENT.
1.1 MINIMUM RENT. Sublessee shall pay to Sublessor as minimum rent,
without deduction, setoff, notice or demand at ACCOUNTS RECEIVABLE 16225
ALTON PARKWAY FLOOR 1 P.O. BOX 57005, IRVINE, CA. 92619-7005 or at such
other place as Sublessor shall designate from time to time by notice to
Sublessee, the sum of Thirteen Thousand Nine Hundred Eighty Five Dollars
and Sixty-Three Cents ($13,985.63) as rent per month ($4.50 per annual sq.
ft. If the Term begins or ends on a day other than the first or last day
of a month, the rent for the partial months shall be prorated on a per diem
basis.
6.2 OPERATING COSTS. During the term hereof, Subtenant shall pay to
Sublandlord its pro rata portion of all of the following costs incurred
with respect to the Master Lease Premises (all of such costs shall
hereinafter be referred to as "Additional Rent") in accordance with the
terms set forth herein: (i) Utilities, (ii) Common area Maintenance,
Cleaning paid monthly. Insurance, Real and Personal Property Taxes, shall
be calculated on a base year of 1999. Additional Rent shall be estimated
(based upon past costs and apparent trends, if any) at the Commencement
Date and again on each February 15 during the term hereof and shall be
communicated to Subtenant in writing. Upon request, Sublandlord shall
provide supporting documentation regarding the estimated Additional Rent to
Subtenant. Upon receipt of such estimate and, if requested, supporting
documentation, Subtenant shall pay to Sublandlord such estimated Additional
Rent, in monthly installments along with the primary rent. On each
February 15 during the term hereof and within forty-five (45) days after
the expiration or sooner termination hereof, Sublandlord shall account for
all such Additional Rent for the previous calendar year or portion thereof
and promptly provide a reasonable itemization of such accounting to
Subtenant. Within thirty (30) days after Subtenant's receipt of such
itemization, a correcting payment shall be made between the parties to
reconcile the estimated Additional Rent paid during the previous period to
the actual Additional Rent incurred under the Master Lease with respect to
the Premises.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease a sum
equal to one months rent of, Thirteen Thousand Nine Hundred Eighty Five Dollars
and Sixty-Three Cents ($13,985.63) as security for Sublessee's faithful
performance of Sublessee's obligations hereunder ("Security Deposit"). If
Sublessee fails to pay rent or other charges when due under this Sublease, or
fails to perform any of its other obligations hereunder. Sublessor may use or
apply all or any portion of the Security Deposit for the payment of any rent or
other amount then due hereunder and unpaid, for the payment of any other sum for
which Sublessor may become obligated by reason of Sublessee's default or breach,
or for any loss or damage sustained by Sublessor as a result of Sublessee's
default or breach. If Sublessor so uses any portion of the Security Deposit,
Sublessee shall,
<PAGE>
within ten (10) days after written demand by Sublessor restore the Security
Deposit to the full amount originally deposited, and Sublessee's failure to
do so shall constitute a default under this Sublease, Sublessor shall not be
required to keep the Security Deposit separate from its general accounts, and
shall have no obligation or liability for payment of interest on the Security
Deposit. In the event Sublessor assigns its interest in this Sublease,
Sublessor shall deliver to its assignee so much of the Security Deposit as is
then held by Sublessor. Within ten (10) days after the Term has expired, or
Sublessee has vacated the Premises, or any final adjustment pursuant to
Subsection 6.2 hereof has been made, whichever shall last occur, and provided
Sublessee is not then in default of any of its obligations hereunder, the
Security Deposit, or so much thereof as had not theretofore been applied by
Sublessor, shall be returned to Sublessee or to the last assignee, if any, of
Sublessee's interest hereunder.
8. USE OF PREMISES.
8.1 The Premises shall be used and occupied only for the purposes of the
Basic Lease Provisions, all in accordance with applicable laws and
restrictions and pursuant to approvals to be obtained by Subtenant from all
relevant and required governmental agencies and authorities. Subtenant
shall not do or permit anything to done in or about the Premises which will
in any way interfere with the rights of other occupants of the Building or
the Project, or use or allow the Premises to be used for any unlawful
purpose, nor shall Subtenant permit any nuisance or commit any waste in the
Premises or the Project. Subtenant shall comply at its expense with all
present and future laws, ordinances, restrictions, regulation, orders,
rules and requirements of all governmental authorities that pertain to
Subtenant or its use of the Premises.
8.2 Subtenant shall be entitled to 240 vehicle parking spaces. Spaces
shall be unreserved and unassigned, on those portions of the Common Areas
designated by Sublandlord for parking. Parking within the Common Areas
shall be limited to striped parking stalls. Sublandlord shall have the
right to establish, and from time to time amend, and regulate parking as
that Sublandlord may deem necessary for operation and maintenance of
parking in the Common Areas. Any person using the parking area shall
observe all directional signs and arrows and any posted speed limits.
8.3 Subtenant shall be entitled to the use of modular furniture currently
in places within the sublease area at the time of the sublease, and all
furniture inventories shown on exhibit "C". Uses and maintenance of said
furniture shall be at subtenants sole expense. Subtenant shall be
responsible for any damages above normal wear and tear. Subtenant shall
have the option to buy the furniture at any time at fair market value.
9. ALTERATIONS. Subtenant shall make no alterations, additions or
improvements to the Premises without the prior consent of Sublandlord and
Landlord, which consent may be given or withheld in each of Sublandlord's and
Landlord's sole discretion, provided, however, that Sublandlord hereby
approves Subtenant's installation at its sole expense of the alterations.
Notwithstanding the foregoing, Sublandlord shall not unreasonably withhold
its consent to any alterations, additions, or improvements to the Premises.
<PAGE>
10. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any part of
the Premises without the prior written consent of Sublessor and the consent of
Lessor, as required under the term of the Master Lease.
11. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are incorporated into
and made a part of this Sublease as if Sublessor were the lessor thereunder,
Sublessee the lessee thereunder, and the Premises the Master Premises.
Sublessee assumes and agrees to perform the lessee's obligations under the
Master Lease during the Term to the extent that such obligations are applicable
to the Premises, except that the obligation to pay rent to Lessor under the
Master Lease shall be considered performed by Sublessee to the extent and in the
amount rent is paid to Sublessor in accordance with Section 6 of this Sublease.
Sublessee shall not commit or suffer any act or omission that will violate any
of the provisions of the Master Lease. Sublessor shall exercise due diligence
in attempting to cause Lessor to perform its obligations under the Master Lease
for the benefit of Sublessee. If the Master Lease terminates, at Lessor option,
this Sublease shall terminate and the parties shall be relieved of any further
liability or obligation under this Sublease, provided however, that if the
Master Lease terminates as a result of a default or breach by Sublessor or
Sublessee under this Sublease and / or the Master Lease, then the defaulting
party shall be liable to the nondefaulting party for the damages suffered as a
result of such termination. If Sublessor should default on master leases,
Sublessee shall continue under the terms stated herewithin. Notwithstanding the
foregoing, if the Master Lease gives Sublessor any right to terminate the Master
Lease in the event of the partial or total damage, destruction, or condemnation
of the Master Premises or the building or project of which the Master Premises
are a part, the exercise of such right by Sublessor shall not constitute a
default or breach hereunder.
12. ATTORNEY'S FEES.
If Sublessor, or Sublessee, shall commence an action against the other arising
out of or in connection with this Sublease, the prevailing party shall be
entitle to recover its costs of suit and reasonable attorney's fees.
13. AGENCY DISCLOSURE:
Sublessor and Sublessee each warrant that they have dealt with no other real
estate broker in connection with this transaction except : CB RICHARD ELLIS,
INC. who represents AST Research and Stoneleigh, Huff, Brous, Mcdowell, who
represents Flashnet.
14. COMMISSION.
Upon receipt of first months rent, Sublessor shall pay Broker a real estate
brokerage commission of 6% of gross rental proceeds of the primary term of
sublease, in accordance with Sublessor's contract, if any, with Broker for
services rendered in effecting this Sublease.
<PAGE>
15. NOTICES.
All notices and demands, which may or are to be required or permitted to be
given by either party on the other hereunder, shall be in writing. All notices
and demands by the Sublessor to Sublessee shall be sent by United States Mail,
postage prepaid, addressed to the Sublessee at the Premises, and to the address
hereinbelow, or to such other place as Sublessee may from time to time designate
in a notice to the Sublessor. All notices and demands by the Sublessee to
Sublessee shall be sent by United States Mail, postage prepaid, addressed to the
Sublessor at the address set forth herein, and to such other person or place as
the Sublessor may from time to time designate in a notice to the Sublessee.
If to Sublandlord:
AST Research, Inc.
2400 Western Center Blvd.
PO Box 961006
Fort Worth, TX 76161-0006
16225 Alton Parkway
PO Box 57005
Irvine, CA 92619-7005
Attn: General Counsel
If to Subtenant:
Flashnet Communications
1001 N.E. Loop 820
Fort Worth, TX 76131
Attn: Bob Carpenter
If to Landlord:
Northbrook Business Center
306 W 7th Street, Suite 506
Fort Worth, TX 76102-4984
With a copy to: J. Walker Holland, Esq.
Tracy & Holland, L.L.P.
306 W 7th Street, Suite 500
Fort Worth, TX 76102-4984
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-69217 of FlashNet Communications, Inc. of our report dated February 23,
1999 (___________, 1999 as to the last paragraph in Note 12) (which includes
an explanatory paragraph relating to the Company's change in method of
accounting for revenue recognition) appearing in the Prospectus, which is part
of this Registration Statement and to the reference to us under the headings
"Selected Consolidated Financial Data" and "Experts" in such Prospectus.
Fort Worth, Texas
______________, 1999
--------------------
The accompanying financial statements reflect the 3.4 for 1 split of common
stock, which is to be effected at the moment immediately preceding consummation
of the Company's initial public offering. The above consent is in the form
which will be signed by Deloitte & Touche LLP upon consummation of such split,
which is described in the last paragraph in Note 12 of Notes to Consolidated
Financial Statements, and assuming that, from December 31, 1998 to the date of
such split, no other events shall have occurred, other than those described in
Note 12 of Notes to Consolidated Financial Statements, that would affect the
accompanying financial statements and notes thereto.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Fort Worth, Texas
February 23, 1999
<PAGE>
February 23, 1999
FlashNet Communications, Inc.
1812 North Forest Park Boulevard
Fort Worth, Texas 76102
Ladies and Gentlemen:
Reference is hereby made to the Registration Statement on Form S-1,
Registration No. 333-69217, as amended through February 24, 1999 (the
"Registration Statement") and filed with the Securities and Exchange
Commission, relating to the issuance and sale of up to 3,450,000 shares of
Common Stock, no par value, of FlashNet Communications, Inc., a Texas
corporation. We hereby consent to the use of our name in the Registration
Statement under the caption "Legal Matters" in the related Prospectus. We
acknowledge that this consent will be filed as an exhibit to the Registration
Statement.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
-----------------------------------
BROBECK, PHLEGER & HARRISON LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AT DECEMBER 31, 1997 AND 1998 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,038,325 1,569,719
<SECURITIES> 0 0
<RECEIVABLES> 419,339 529,538
<ALLOWANCES> 28,091 35,068
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,720,206 2,441,520
<PP&E> 12,373,194 10,936,351
<DEPRECIATION> 5,551,785 2,539,928
<TOTAL-ASSETS> 9,733,036 10,999,993
<CURRENT-LIABILITIES> 25,476,795 19,276,554
<BONDS> 0 0
7,910,660 0
0 0
<COMMON> 3,443,506 701,910
<OTHER-SE> (27,150,254) (14,137,863)
<TOTAL-LIABILITY-AND-EQUITY> 9,733,036 10,999,993
<SALES> 26,891,580 17,536,777
<TOTAL-REVENUES> 26,891,580 17,536,777
<CGS> 0 0
<TOTAL-COSTS> 12,145,442 9,013,487
<OTHER-EXPENSES> 22,554,876 19,497,180
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,348,715 925,416
<INCOME-PRETAX> (10,264,949) (11,688,156)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (10,264,949) (11,688,156)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,264,949) (11,688,156)
<EPS-PRIMARY> (2.36) (2.15)
<EPS-DILUTED> (2.36) (2.15)
</TABLE>
