<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999
REGISTRATION NO. 333 -69217
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
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. / /
------------------------------
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 JANUARY 29, 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]
SHARES
COMMON STOCK
FlashNet Communications, Inc. is offering [ ] shares of its 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 $ and $ 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 the Company...................................................... $ $
</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 [ ] 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 and Operating Data.......................................................... 5
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 17
Dividend Policy............................................................................................ 17
Capitalization............................................................................................. 18
Dilution................................................................................................... 19
Selected Consolidated Financial and Operating Data......................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23
Business................................................................................................... 35
Management................................................................................................. 52
Certain Transactions....................................................................................... 57
Principal Shareholders..................................................................................... 59
Description of Capital Stock............................................................................... 61
Shares Eligible for Future Sale............................................................................ 64
Underwriting............................................................................................... 66
Legal Matters.............................................................................................. 68
Experts.................................................................................................... 68
Available Information...................................................................................... 68
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) THAT ALL OUTSTANDING SHARES OF OUR SERIES A CONVERTIBLE PREFERRED
STOCK WILL BE CONVERTED INTO 1,364,085 SHARES OF OUR COMMON STOCK UPON THE
COMPLETION OF THIS OFFERING; (B) NO EXERCISE OR CONVERSION OF STOCK OPTIONS,
WARRANTS OR CONVERTIBLE NOTES AFTER SEPTEMBER 30, 1998; AND (C) THAT THE
UNDERWRITERS DO NOT ELECT TO EXERCISE THEIR OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."
FLASHNET
FlashNet is a nationwide provider of consumer Internet access and business
services. Our Internet access services are provided through a national network
with 621 "points of presence" in 450 cities, covering approximately 70% of the
U.S. population. Points of presence are local telephone numbers through which
our subscribers can access the Internet. Our business services consist of high
speed Internet access services and other services that enable customers to
outsource their Internet and elec-
tronic commerce activities. We have entered into strategic network arrangements
with PSINet and Level 3 Communications. To date, we have approximately 170,000
customers, including approximately 2,900 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 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 contract 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 the Company................. shares
Common Stock to be outstanding after the Offering... 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 AND OPERATING DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25, NINE MONTHS
1995 ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, SEPTEMBER
THROUGH 30,
DECEMBER 31, ------------------------ -----------
1995 1996 1997 1997
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues....................................................... $ 34 $ 4,534 $ 18,325 $ 13,165
Total expenses....................................................... 141 9,564 28,511 21,400
-------------- ----------- ----------- -----------
Loss from operations................................................. (107) (5,030) (10,186) (8,234)
Net loss............................................................. (107) (5,175) (10,900) (8,784)
Deemed dividends on redeemable preferred stock....................... -- -- -- --
Net loss attributable to common shareholders......................... (107) (5,175) (10,900) (8,784)
Basic and diluted net loss per share................................. (0.10) (3.34) (6.80) (5.49)
Pro forma basic and diluted net loss per share.......................
Shares used in computing net loss per share.......................... 1,037,375 1,548,938 1,602,584 1,598,761
Shares used in computing pro forma net loss per share................
OTHER DATA (AS OF THE END OF THE PERIOD):
Subscribers.......................................................... 200 47,361 152,022 132,893
Independent sales representatives in our network marketing program... -- -- 1,885 1,472
<CAPTION>
SEPTEMBER
30, 1998
-----------
ACTUAL
-----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 3,301
Total assets......................................................... 11,677
Working capital...................................................... (18,433)
Total debt........................................................... 6,866
Redeemable preferred stock........................................... 10,445
Total shareholders' equity (deficit)................................. (22,176)
<CAPTION>
1998
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues....................................................... $ 18,101
Total expenses....................................................... 24,046
-----------
Loss from operations................................................. (5,945)
Net loss............................................................. (7,876)
Deemed dividends on redeemable preferred stock....................... (2,633)
Net loss attributable to common shareholders......................... (10,509)
Basic and diluted net loss per share................................. (6.50)
Pro forma basic and diluted net loss per share....................... (3.81)
Shares used in computing net loss per share.......................... 1,616,635
Shares used in computing pro forma net loss per share................ 2,066,975
OTHER DATA (AS OF THE END OF THE PERIOD):
Subscribers.......................................................... 165,614
Independent sales representatives in our network marketing program... 4,189
PRO FORMA,
AS ADJUSTED
-----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $
Total assets.........................................................
Working capital......................................................
Total debt...........................................................
Redeemable preferred stock...........................................
Total shareholders' equity (deficit).................................
</TABLE>
- ------------------------------
(1) This number includes 1,364,085 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:
- 19,430 shares of common stock issuable to holders of our convertible notes
upon the conversion of such notes;
- 502,905 shares of common stock issuable to our warrant holders when they
exercise their warrants for $0.01 per share;
- 229,880 shares of common stock issuable to our stock option holders upon
the exercise of outstanding stock options at a weighted average exercise
price of $19.45 per share; and
- shares issuable to Goldman Sachs & Co. upon exercise of an option to
purchase up to shares of common stock at the initial public offering
price, expiring 180 days after the date of this offering.
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, $5.2 million for the
year ended December 31, 1996, $10.9 million for the year ended December 31, 1997
and $7.9 million for the nine-month period ended September 30, 1998. As of
September 30, 1998, we had an accumulated deficit of approximately $26.7 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 $22.2 million at September 30, 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 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. General
economic conditions may not be favorable for our business in the future.
OUR BUSINESS IS INTENSELY COMPETITIVE
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, implementation of marketing
efforts in new locations and 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.
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.
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.
ADDITIONAL CAPITAL IS 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>
WE DEPEND ON THIRD-PARTY SUPPLIERS AND TELECOMMUNICATIONS CARRIERS
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
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.
WE FACE RISKS ASSOCIATED WITH CAPACITY CONSTRAINTS
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.
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
9
<PAGE>
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.
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
10
<PAGE>
that additional corporate customers will purchase our business services
offerings or that we will successfully meet customer needs or expectations.
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 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 CORPORATE SALES PROGRAM DEPENDS ON 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 nine months ended September 30, 1998, approximately 22% of our new
subscribers were obtained through our network marketing program. We believe that
significant turnover among independent representatives is typical of network
marketing
11
<PAGE>
programs. Therefore, in order to maintain or increase the overall number of our
independent representatives, 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 could be found not to be in compliance 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. Any challenge to our filed tariffs or our
subsidiary's competitive local exchange carrier status by third parties could
cause us to incur substantial legal and administrative expenses. 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
12
<PAGE>
Competitive Local Exchange Carrier Subsidiary" for a more detailed discussion of
the regulations to which our competitive local exchange carrier subsidiary will
be subject.
WE FACE A POTENTIAL CASH SHORTFALL IF OUR GROWTH RATE SLOWS
The majority of our sales are to customers who prepay for one year of
service. We apply all of the proceeds from these prepayments to acquire more
equipment, purchase advertising, meet current obligations and fund operating
deficits. We do not set aside proceeds as capital reserves to reimburse
subscribers who may decide to discontinue their service before their prepaid
term expires. As a result, our financial condition, including our operating
results, cash flow and liquidity, is dependent upon an increasing number of new
customers in the current year and beyond. In 1997 and 1998, we had to raise
capital through third-party sources due in part to a decline in our rate of new
subscriber growth. Any continued or future decline in the rate of growth of new
subscribers, or any unanticipated increase in the rate of subscriber
reimbursements, could force us to raise additional capital to support our
operations by selling equity securities or incurring additional debt.
WE DEPEND ON THE PROTECTION OF OUR PROPRIETARY RIGHTS
We rely on a combination of copyright, trademark and trade secret laws to
protect our proprietary rights. We cannot be certain that the steps we have
taken will be adequate to prevent the misappropriation of our technology or that
third parties, including competitors, will not independently develop
technologies that are substantially equivalent or superior to our proprietary
technology.
We have obtained from various software manufacturers either licenses or
permissions to use the software that we bundle in our client-side software
product for subscribers and for the software used internally in our Internet
services. Although we believe that these products do not infringe on the
proprietary rights of any third parties, third parties could assert infringement
claims against us in the future. The defense of any such claims would require us
to incur substantial costs and would divert management's attention and resources
to defend against any claims relating to proprietary rights, which could
materially and adversely affect our financial condition and operations. Parties
making such claims could secure a judgment awarding them substantial damages, as
well as injunctive or equitable relief that could effectively block our ability
to sell our services. Any such outcome could have a material adverse effect on
our business, financial condition and operating results. If a claim relating to
proprietary technology or information is asserted against us, we may seek
licenses to use such intellectual property. We cannot be certain, however, that
licenses could be obtained by us on acceptable terms, if at all.
WE 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
13
<PAGE>
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.
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 or 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 (the "Securities Act").
Additionally, certain of such 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, 2,078,951 shares of our common
stock, representing approximately % of the voting power after this offering
( % 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.
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 shares of
common stock offered by us are estimated to be $ ($ 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 $ 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:
- Primarily for expansion of our sales and marketing operations;
and, to a lesser extent, for:
- Expansion of our network infrastructure;
- Development of our business services offerings;
- Repayment of $6.5 million in principal amount of a Secured Promissory Note
issued to Ascend Communications, Inc.;
- Repayment of $5.0 million in principal amount of a Term Note issued to
Goldman Sachs Credit Partners L.P.;
- Potential acquisitions; and
- Working capital and general corporate purposes.
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 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 the Board of Directors.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 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 1,364,085 shares of common stock upon 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 $ 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:
- 20,130 shares of common stock issuable upon conversion of convertible
notes;
- 502,905 shares of common stock issuable upon the exercise of warrants at
an exercise price of $0.01 per share; and
- 65,625 shares of common stock issuable upon the exercise of stock options
outstanding as of September 30, 1998 at a weighted average exercise price
of $7.78 per share.
As of the date of this prospectus, stock options exercisable for 229,880
shares of common stock are outstanding at a weighted average exercise price
of $19.45 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 million worth of our common stock at the initial
public offering price, expiring 180 days after consummation of this
offering.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------
PRO FORMA, AS
ACTUAL ADJUSTED
------------ ----------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Short-term debt (convertible notes payable, note payable and current
portion of capital lease obligations)............................. $ 6,644 $
------------ --------
------------ --------
Capital lease obligations, net of current portion................... $ 223 $
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.......................................................... 10,445 --
Shareholders' equity (deficit):
Preferred Stock, $1.00 par value, 2,000,000 shares authorized, none
issued or outstanding actual and pro forma, as adjusted........... -- --
Common Stock, no par value, 5,000,000 shares authorized, 1,626,138
shares issued and outstanding actual and shares issued
and outstanding pro forma, as adjusted............................ 811
Warrants to purchase common stock................................... 3,705
Accumulated deficit................................................. (26,691)
------------ --------
Total shareholders' equity (deficit).............................. (22,175)
------------ --------
Total capitalization............................................ $ (11,507) $
------------ --------
------------ --------
</TABLE>
18
<PAGE>
DILUTION
The pro forma deficit in net tangible book value of FlashNet at September
30, 1998 was approximately $11.7 million, or $3.92 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 mandatory conversion of all shares of Series A Convertible Preferred
Stock. After giving effect to our sale of shares of common stock in this
offering (at an assumed initial public offering price of $ 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
September 30, 1998 would have been approximately $ million, or $ per share.
This represents an immediate increase in pro forma net tangible book value of
$ per share to our existing shareholders and an immediate dilution of $
per share to new investors purchasing shares of common stock in this offering.
The following tables:
- Include 1,364,085 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 September 30, 1998.
As of September 30, 1998, there were outstanding:
- Notes convertible into 20,130 shares of common stock;
- Warrants exercisable for 502,905 shares of common stock at an exercise
price of $0.01 per share; and
- Stock options exercisable for 65,625 shares of common stock at a weighted
average exercise price of $7.78 per share.
As of the date of this prospectus, stock options exercisable for 229,880 shares
of common stock are outstanding at a weighted average exercise price of $19.45
per share. To the extent that convertible notes are converted, or any
outstanding warrants or options are exercised, new investors will experience
further dilution. See "Management--1997 Stock Incentive Plan" and Note 6 of
Notes to Consolidated Financial Statements. In addition, if our stock price
increases above $ per share, new investors will experience dilution in the
appreciated value of their shares to the extent Goldman Sachs & Co. elects to
exercise its right to purchase up to $5 million worth of common stock at the
initial public offering price at any time during 180 days after consummation of
this offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
---------
Pro forma deficit in net tangible book value per share at
September 30, 1998............................................. $ 3.92
---------
Increase per share attributable to new investors.................
---------
Pro forma net tangible book value per share after this offering....
---------
Dilution per share to new investors................................ $
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
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,
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<PAGE>
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............................ 2,990,223 % $ 8,622,998 % $ 2.88
New investors(1).................................
---------- --------- ------------- ---------
Total........................................ 100.0% $ 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
shares, or % of the total shares of common stock outstanding after this
offering.
20
<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 for the period ended December 31,
1995 and the years ended December 31, 1996 and 1997, and the balance sheet data
at December 31, 1996 and 1997 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 data for the nine months ended September
30, 1997 and 1998 and the balance sheet data at September 30, 1998 have been
derived from unaudited interim consolidated financial statements included
elsewhere in this prospectus. The unaudited interim consolidated financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of our management, are necessary for a fair
presentation of the results for the interim periods presented. Results for the
nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the full year.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER
25, 1995
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------ --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Consumer access services................... $ 19 $ 2,360 $ 11,938 $ 8,208 $ 15,724
Business services.......................... -- 55 570 349 1,180
Set-up fees and other...................... 15 2,119 5,817 4,608 1,197
------------ --------- --------- --------- ---------
Total revenues........................... 34 4,534 18,325 13,165 18,101
Operating costs and expenses:
Cost of recurring revenues................. 28 2,348 8,214 5,610 8,683
Cost of other revenues..................... 4 473 799 646 320
Sales and marketing........................ 32 4,329 10,300 8,608 5,185
General and administrative................. 74 1,039 3,453 2,453 3,529
Operations and customer support............ -- 830 3,683 2,596 4,042
Depreciation and amortization.............. 3 545 2,061 1,485 2,286
------------ --------- --------- --------- ---------
Total expenses........................... 141 9,564 28,511 21,399 24,046
------------ --------- --------- --------- ---------
Loss from operations....................... (107) (5,030) (10,186) (8,234) (5,945)
Interest expense (net)..................... -- (144) (714) (550) (1,931)
------------ --------- --------- --------- ---------
Net loss................................... (107) (5,174) (10,900) (8,784) (7,876)
Deemed dividends on redeemable preferred
stock.................................... -- -- -- -- (2,633)
------------ --------- --------- --------- ---------
Net loss attributable to common
shareholders............................. $ (107) $ (5,174) $ (10,900) $ (8,784) $ (10,509)
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Basic and diluted net loss per share (1)... $ (0.10) $ (3.34) $ (6.80) $ (5.49) $ (6.50)
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Pro forma basic and diluted net loss per
share.................................... $ (3.81)
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Shares used in computing basic and diluted
loss per share (1)....................... 1,037,375 1,548,938 1,602,584 1,598,761 1,616,635
Shares used in computing basic and diluted
loss per share (1)....................... 2,066,975
</TABLE>
- --------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for the
determination of shares used in computing basic and diluted net loss per
share.
21
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
--------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 25 $ 137 $ 1,570 $ 3,301
Total assets............................... 175 5,887 11,000 11,677
Working capital............................ (41) (6,234) (15,168) (18,433)
Total debt................................. -- 4,672 6,766 6,866
Redeemable preferred stock................. -- -- -- 10,445
Total shareholders' equity (deficit)....... 51 (4,395) (11,768) (22,176)
PERIOD FROM
SEPTEMBER
25, 1995
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------ --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
OTHER DATA:
EBITDA (1)................................. $ (104) $ (4,485) $ (8,125) $ (6,749) $ (3,659)
Cash flow provided (used) by:
Operating activities..................... (38) 412 1,342 1,447 (4,278)
Investing activities..................... (82) (1,038) (4,461) (492) (652)
Financing activities..................... 145 739 4,551 (1,092) 6,662
Subscribers (2)............................ 200 47,361 152,022 132,893 165,614
Independent sales representatives in our
network marketing program (2)............ -- -- 1,885 1,472 4,189
</TABLE>
- --------------------------
(1) EBITDA consists of net loss before provisions for interest expense, income
taxes, depreciation and amortization. EBITDA is not intended to represent
cash flows from operations in accordance with GAAP 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; however, EBITDA as presented herein is not a measurement under
GAAP and may not be comparable to similarly titled measures reported by
other companies.
(2) Determined as of the end of the period.
22
<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 THE 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 170,000 users, including approximately 2,900
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.
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.
Revenues from prepaid accounts are recognized in the period in which service is
provided to the subscriber. Accordingly, amounts received upon the sale or
renewal of a prepaid subscription initially are recorded as a deferred revenue
liability and are amortized monthly over the life of the subscription. Consumer
access services revenues from monthly subscriptions are recognized in the period
in which the service is provided. We offer prepaid and monthly subscribers a
full money-back guarantee upon cancellation of their service if made within 30
days of initiating service. 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."
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
23
<PAGE>
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, and are recognized as revenues in the initial month of service.
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 recognized as revenue in the
month of initial sign-up or renewal, as the case may be. Advertising revenues
are recognized as advertising services are provided.
During the nine months ended September 30, 1998, the monthly rate at which
we experienced customer cancellations and nonrenewals of subscriptions for
access services, which is referred to in the industry as the churn rate,
averaged 3.8%. 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 the nine months ended
September 30, 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 upgrade and expand our network's structure and
system components to ensure high levels of customer satisfaction.
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 the nine months
ended September 30, 1998 were $4.3 million, $10.3 million and $5.2 million,
respectively. A key component of our strategy is to increase our customer base,
both for our consumer access services and business services, by expanding our
sales and marketing efforts within three primary channels:
- Direct response marketing through media campaigns and mass marketing;
- Our "FlashNet Opportunity" network marketing program; and
- Direct corporate sales through a geographically dispersed sales force.
All three strategies are designed to build brand name recognition and generate
high levels of new customers while minimizing our customer acquisition costs and
churn rate. See "Business--Sales and Marketing."
In our efforts to continue delivering to customers fast and reliable, high
quality Internet access services and reduce network costs on a per-subscriber
basis, we continually monitor and evaluate network performance and utilization.
Through this process, we proactively effect modifications to our network design,
thereby enhancing our ability to address new markets and improving the
efficiency and 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.
24
<PAGE>
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 September 30, 1998, we had an
accumulated deficit of $26.7 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, 1997 and December 31, 1996 and the period from September 25, 1995
(Inception) to December 31, 1995 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 discussion of our results
of operations for the nine months ended September 30, 1997 and 1998 is based
upon data derived from the statement of operations data contained in our
unaudited Consolidated Financial Statements appearing elsewhere in this
prospectus. The following table sets forth this data as a percentage of total
revenues:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25, NINE MONTHS ENDED
1995 (INCEPTION) YEAR ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------ ------------------------
1995 1996 1997 1997 1998
------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Consumer access services............................... 56% 52% 65% 61% 84%
Business services...................................... -- 1 3 3 6
Set-up fees and other.................................. 44 47 32 36 10
--- --- --- --- ---
Total revenues..................................... 100 100 100 100 100
--- --- --- --- ---
Operating costs and expenses:
Cost of recurring revenues............................. 82 52 45 44 48
Cost of other revenues................................. 12 10 4 5 2
Sales and marketing.................................... 94 96 56 68 29
General and administrative............................. 221 23 19 19 19
Operations and customer support........................ -- 18 20 20 22
Depreciation and amortization.......................... 9 12 11 12 13
--- --- --- --- ---
Total expenses..................................... 418 211 155 168 133
--- --- --- --- ---
Loss from operations....................................... 318 111 55 68 33
Interest expense (net)..................................... -- 4 4 4 11
--- --- --- --- ---
Net loss................................................... 318% 115% 59% 72% 44%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES.
Our total revenues increased $4.9 million, or 37%, to $18.1 million for the
nine months ended September 30, 1998 from $13.2 million for the nine months
ended September 30, 1997. Of this increase, $8.2 million was attributable to
increased subscriptions and renewals, as reflected by the increase in consumer
access services revenues, and approximately $576,000 was attributable to
increased sales of business services. These increases were offset by a $3.4
million decrease in subscriber set-up fees and other revenues, resulting
primarily from the elimination of set-up fees applicable to annual
25
<PAGE>
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 17,688 new subscriber acquisitions in the
nine months ended September 30, 1998 as compared to 2,874 new subscriber
acquisitions for the corresponding period in 1997. Consumer access services
revenues increased 92% in the nine months ended September 30, 1998 over the nine
months ended September 30, 1997, primarily as a result of increases in the
subscriber base and in average revenues per subscriber due to the price increase
in the fourth quarter of 1997. Business services revenues increased 238% in the
nine months ended September 30, 1998 from the nine months ended September 30,
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 74% in the nine months ended September
30, 1998 from the nine months ended September 30, 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 the last three quarters of
1997.
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 points 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 $3.1 million, or 55%, to $8.7 million for the nine months ended
September 30, 1998 from $5.6 million for the nine months ended September 30,
1997. Of this increase, $2.5 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 increased to 48% for
the nine months ended September 30, 1998 from 44% for the nine months ended
September 30, 1997 primarily due to the factors stated above and due to the
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 51% for the nine months ended September 30, 1998 from 66%
for the nine months ended September 30, 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 consist 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 $326,000, or 50%, to $320,000 for the
nine months ended September 30, 1998 from $646,000 for the nine months ended
September 30, 1997. As a percentage of total revenues, cost of other revenues
decreased to 2% for the nine months ended September 30, 1998 from 5% for the
nine months ended September 30, 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 $252,000 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 $3.4 million, or 40%, to $5.2 million for the nine months ended
September 30, 1998 from $8.6 million for the nine months ended September 30,
1997. As a percentage of total revenues, sales and marketing expenses decreased
to 29% for the nine months ended September 30, 1998 from 68% for the nine months
ended September 30, 1997. This decrease,
26
<PAGE>
both in absolute dollars and as a percentage of total revenues, was attributable
to a $4.3 million decline in media expenses offset by a $898,000 increase in
expenses associated with our network marketing program. Our reduction in media
expenditures in the fourth quarter of 1997 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 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 $1.1
million, or 46%, to $3.5 million for the nine months ended September 30, 1998
from $2.4 million for the nine months ended September 30, 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 expense remained relatively constant at 19%. 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 $1.4
million, or 54%, to $4.0 million for the nine months ended September 30, 1998
from $2.6 million for the nine months ended September 30, 1997. This increase
was primarily due to the addition of new customer care and technical personnel
to support a larger subscriber base. As a percentage of total revenues,
operations and customer support expenses increased to 22% for the nine months
ended September 30, 1998 from 20% for the nine months ended September 30, 1997
primarily as a result of the decline in set-up fees and other revenues in 1998.
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 $798,000, or 54%, to $2.3 million for the nine months ended September
30, 1998 from $1.5 million for the nine months ended September 30, 1997. As a
percentage of total revenues, depreciation and amortization expense increased
slightly to 13% for the nine months ended September 30, 1998 from 12% for the
nine months ended September 30, 1997. Both increases primarily resulted from
additional purchases of capital equipment and software that were needed to
support our expanding network.
INTEREST EXPENSE (NET).
Interest expense (net) increased $1.4 million to $1.9 million for the nine
months ended September 30, 1998 from $550,000 for the nine months ended
September 30, 1997. This increase was primarily attributable to 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 $908,000 to $7.9 million for the nine months ended
September 30, 1998 from $8.8 million for the nine months ended September 30,
1997. As a percentage of total revenues, net loss
27
<PAGE>
decreased to 44% for the nine months ended September 30, 1998 from 72% for the
nine months ended September 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES.
Revenues increased $13.8 million, or 307%, to $18.3 million in 1997 from
$4.5 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 $516,000
resulted from an increase in business services revenues. Consumer access
services revenues increased 406% 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 174% 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 257%, 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 45% in 1997 from 52% 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 4% in 1997 from 10% 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 140%, 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 56% in
1997 from 96% 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 240%, 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 19% in 1997 from 23% in 1996. This
percentage decrease was attributable to our ability to leverage our existing
infrastructure to support our revenue growth.
28
<PAGE>
OPERATIONS AND CUSTOMER SUPPORT EXPENSES.
Operations and customer support expenses increased $2.9 million, or 344%, to
$3.7 million in 1997 from $830,000 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 increased to 20% in 1997 from 18% in 1996. This
percentage increase was primarily attributable to enhanced levels of customer
service and support provided by us to subscribers beginning in 1997.
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 11% in 1997 from 12% in 1996 due to network
and equipment efficiencies attained through a significantly larger subscriber
base.
INTEREST EXPENSE (NET).
Interest expense (net) increased $569,000, or 395%, 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 $5.7 million, or 111%, to $10.9 million in 1997 from $5.2
million in 1996. As a percentage of total revenues, net loss decreased to 59% in
1997 from 115% in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO PERIOD FROM SEPTEMBER 25, 1995
(INCEPTION) TO DECEMBER 31, 1995
Revenues increased to $4.5 million in 1996 from $34,500 in the period from
September 25, 1995 (Inception) to December 31, 1995 (the "1995 Period").
Revenues for the 1995 Period were relatively negligible due to our start-up
stage of development. Revenues in 1996 reflected the further development and
expansion of our business in the Dallas/Fort Worth area. Costs of revenues for
1996 as compared to the 1995 Period increased significantly due to the
development of our business in 1996, with our subscriber base increasing to
47,361 subscribers at December 31, 1996 from 200 at December 31, 1995.
Similarly, our expenses were relatively negligible in the 1995 Period due to the
lack of meaningful operations during our start-up phase. Our net loss from
operations in 1996 was $5.2 million as compared to a net loss in the 1995 Period
of $107,000, reflecting the significant costs and expenses incurred in 1996,
particularly in sales and marketing, to establish and expand our regional
Internet service provider operations and network infrastructure in the
Dallas/Fort Worth area in advance of access services revenues from subscribers.
29
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating results
for the fiscal year ended December 31, 1997 and the first three quarters of the
fiscal year ended December 31, 1998. 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.......... $ 1,945 $ 3,059 $ 3,204 $ 3,730 $ 4,726 $ 5,117 $ 5,881
Business services................. 65 116 168 222 359 363 458
Set-up fees and other............. 1,235 1,477 1,896 1,208 226 281 690
----------- --------- --------- --------- ----------- --------- ---------
Total revenues.................. 3,245 4,652 5,268 5,160 5,311 5,761 7,029
----------- --------- --------- --------- ----------- --------- ---------
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................ (2,523) (2,443) (3,267) (1,952) (1,200) (2,395) (2,349)
Interest expense (net).............. (172) (190) (188) (164) (643) (647) (641)
----------- --------- --------- --------- ----------- --------- ---------
Net loss............................ (2,695) (2,633) (3,455) (2,116) (1,843) (3,042) (2,990)
Deemed dividends on redeemable
preferred stock................... -- -- -- -- -- -- (2,633)
----------- --------- --------- --------- ----------- --------- ---------
Net loss attributable to common
shareholders...................... $ (2,695) $ (2,633) $ (3,455) $ (2,116) $ (1,843) $ (3,042) $ (5,623)
----------- --------- --------- --------- ----------- --------- ---------
----------- --------- --------- --------- ----------- --------- ---------
</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 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 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
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periods. We plan to spend a significant portion of the proceeds from this
offering to expand our sales and marketing activities during 1999.
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 and operating results, cash flows and liquidity would be
adversely affected. 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 $4.3 million during the nine months
ended September 30, 1998 primarily was attributable to a $7.9 million net loss
and a $1.9 million decline in accounts payable, partially offset by $2.3 million
in depreciation expenses and $1.4 million in non-cash interest expense. Cash
used in investing activities during the nine months ended September 30, 1998 was
$652,000, 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 the nine months ended September 30, 1998 was $6.7
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 the year ended December 31,
1997, which was the result of a $4.8 million increase in accounts payable, a
$5.6 million increase in deferred revenue and $2.0 million in depreciation
expenses, offset by a net loss of $10.9 million. Cash used in investing
activities was $4.5 million for the year ended December 31, 1997, which
primarily related to the purchase of network equipment. Cash provided from
financing activities was $4.6 million for the year ended December 31, 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 September
30, 1998, we had approximately $3.3 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 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
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require additional equity or debt financing, which may result in dilution to
investors in this offering. See "Risk Factors-- Additional Capital is 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 $10.00 of principal converted. At September
30, 1998, the aggregate principal outstanding under the convertible notes was
$201,333 with $297,000 in outstanding principal having been converted into
29,700 shares of common stock prior to September 1998. In connection with the
convertible notes financing, we issued to the purchasers of such notes warrants
to purchase 52,070 shares of common stock at an exercise price of $0.01 per
share. These warrants will expire if not exercised by July 31, 1999. As of
September 30, 1998, 2,050 shares of common stock had been issued pursuant to
warrant exercises, and warrants to purchase 50,020 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 400,000 shares of common stock at an exercise price of $0.01
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. In May 1998, we completed the sale of 749,587 shares of
its 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 1,364,085 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 million term loan. The term 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 a lien securing the $6.5
million promissory note payable by us to Ascend Communications, Inc. 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 to be made on
August 15, 1999. Thereafter interest payments are to be made monthly until the
maturity
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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
any 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
investment option.
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. There
can be no assurance, however, that Year 2000 issues will not result in
degradation of the performance of our network or other systems, or complete
system failure. 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 our major
telecommunications, information systems and software vendors concerning their
Year 2000 compliance and plan to obtain written responses from them indicating
their Year 2000 compliance 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 do
not indicate that these third parties expect, at this time, to be non-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 1998 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
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<PAGE>
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 the impact on our
financial statements of adopting SFAS 130 is not material 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.
34
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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 170,000 customers, including approximately 2,900 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 number
of national Internet service providers with their associated economies of scale,
the Internet service provider industry is expected to undergo substantial
35
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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;
- End-to-end electronic commerce solutions to sell goods and services on the
Web in a secure transaction environment; and
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.
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.
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According to International Data Corporation, the market for 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 provide 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 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
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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 aggressively increase 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 rapidly penetrate 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 September 30, 1998, our sales and
marketing expenses were $15.5 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 "super points of presence" to provide near 100% ubiquitous network
coverage throughout broad geographic regions, including over multiple existing
points of presence and areas that are not reached by traditional 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;
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- 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 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."
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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, 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 business-critical Web and bandwidth usage;
24-hours-a-day, seven-days-a-week sites or electronic Set-up fees apply
monitoring, uninterrupted power commerce programs
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 customer 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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<PAGE>
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, voicemail 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 170,000 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 midwest regions 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 2,900 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 September 30, 1998, the FlashNet
Opportunity included 4,189 independent representatives and has been responsible
for acquisitions of 24,877 new subscribers since its inception.
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;
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<PAGE>
- 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 September 30, 1998, the
Corporate Sales Department consisted of one general sales manager, one regional
sales manager and seven 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 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.
44
<PAGE>
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
Our network and related systems are designed to provide fast and reliable,
high-quality access services, while minimizing the capital investment needed for
infrastructure. The network's structure and design frequently are re-evaluated
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 anything from high speed access through the
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
performance, provide access demanded by the market and 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 physical
points of presence which collectively cover 211 local access 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 local access 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 all network traffic, quality of services and security, 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 within the network
operations center, including Sun Microsystems servers, high speed local area
network systems, redundant Internet connectivity, high speed and high capacity
storage arrays and other mission-critical systems built for high availability.
We maintain an uninterruptible power supply, surge protection and power
conditioning. An automatic on-site diesel generator provides power for prolonged
power outages. We staff the network operations center on a 24-hour-a-day,
seven-days-a-week basis and 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.
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<PAGE>
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 network
is less than 50,000 subscribers. See "Risk Factors--Our Quarterly Financial
Results are Subject to Significant Fluctuations."
WEBSURFER. We recently entered into an agreement with WebSurfer, Inc., a
Canadian company, to provide basic Internet access services to purchasers of a
television set-top device that is manufactured and sold by WebSurfer. WebSurfer
intends to sell its device in the United States through large retail outlets,
and we will provide the Internet connectivity for the purchaser of the device.
WebSurfer typically sells its device with one or more months of Internet service
included for no additional charge.
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<PAGE>
As new accounts are established through our relationship with WebSurfer, we will
receive from WebSurfer an initial payment, and thereafter, payments directly
from the subscriber. We retain responsibility for both billing and technical
support following account set up. Under a separate agreement with WebSurfer, we
are authorized to sell the television set-top device directly to our customers.
We will earn a commission for any sales of the device that we complete, as well
as receive subscription payments for Internet access services from the device
purchaser.
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, there can be no assurance 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 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;
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- 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, existing competitors are expected to further
increase 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--Our
Business is Intensely Competitive."
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 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
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<PAGE>
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. There can
be no assurance 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.
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 its
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subsidiary may receive certification as a competitive local exchange carrier,
will seek to regulate its 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 competitive local exchange carrier
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 its 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 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. There can be no assurance 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 there can be no assurance 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 September 30, 1998, we had 225 employees, including 46 in sales and
marketing, 88 in customer care and technical services and 91 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
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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
February and September 1999. 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 for each of our other
physical points of presence 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. Nonetheless, due to our
anticipated growth, we intend to relocate our network operations center and
ancillary operations to a larger facility in Fort Worth, Texas by the summer of
1999.
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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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and certain key employees, and their ages
as of September 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Albert Lee Thurburn.............................. 44 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)......................... 36 Director
James A. Ryffel(1)............................... 38 Director
Kevin A. Stadtler(1)(2).......................... 30 Director
KEY EMPLOYEES
Theresa G. Frey.................................. 33 President, FlashNet Marketing, Inc.
M. Edward Mayhugh................................ 40 Director of Network Services
R. Todd Wallace.................................. 31 Director of Information Services
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 Communications Corp., a competitive local exchange carrier. From February
1995 to June 1996,
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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 of 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.
JAMES A. RYFFEL has served as one of our directors since February 1996. Mr.
Ryffel is currently with Woodcrest Enterprises, Inc., a manager of investment
partnerships, where he has served as Managing General Partner since 1982. He has
also been involved in producing oil wells in the Texas counties of Clay and
Bastrop/Lee as a partner with Beeson Energy and Noble Producing Company since
1982. Mr. Ryffel received a B.A. in Real Estate/Finance and an M.B.A. from Texas
Christian 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., one of
our wholly-owned subsidiaries 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
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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.
M. EDWARD MAYHUGH has served as our Director of Network Services since May
1998. From March 1993 to April 1998, Mr. Mayhugh was Senior Manager of
Intelligent Services at MCI, now known as MCIWorldCom. From January 1988 to July
1992, Mr. Mayhugh was a Senior Manager at Northern Telecom, Inc., a
telecommunications company. Mr. Mayhugh received a B.S. in Accounting/ Computer
Science from Brigham Young University.
R. TODD WALLACE has served as our Director of Information Services since May
1998. 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 six directors. Within 90 days following completion of this
offering, we intend to add an additional non-employee director. The terms of
office of the Board of Directors will be divided into three classes:
- Class A, whose term will expire at the annual meeting of shareholders to
be held in 1999;
- Class B, whose term will expire at the annual meeting of shareholders to
be held in 2000; and
- Class C, whose term will expire at the annual meeting of shareholders to
be held in 2001.
The Class A directors will be Mr. Kleinheinz and Mr. Ryffel. The Class B
directors will be Mr. Stadtler and the non-employee director to be elected
subsequent to this offering. The Class C directors will be Mr. Francis, Mr.
Leslie and Mr. Thurburn. At each annual meeting of shareholders after the
initial classification, the 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 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 three 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 4,700 shares of common stock at an exercise
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<PAGE>
price of $30.00 per share. In January 1999, Mr. Stadtler was also granted an
option to purchase 4,700 shares of common stock at an exercise price of $30.00
per share.
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
The following Summary Compensation Table sets forth the compensation that
our Chief Executive Officer and President earned for services rendered in all
capacities to us and our subsidiaries during the year ended December 31, 1997.
No other individual currently employed by us received salary and bonus in excess
of $100,000 during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------
NAME AND PRINCIPAL POSITIONS YEAR SALARY(1) BONUS
- ------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Albert Lee Thurburn ................................................................ 1997 $ 88,000 $ 15,000
Chief Executive Officer and
Chairman of the Board of
Directors
Michael Scott Leslie ............................................................... 1997 $ 88,000 $ 15,000
President and Chief Operating
Officer
</TABLE>
- ------------------------------
(1) Salary includes amounts deferred under the Company's 401(k) plan.
We did not grant any stock option or stock appreciation rights to the
individuals named above during 1997 or any prior period. We granted both Mr.
Leslie and Mr. Thurburn an option to purchase 37,645 shares of common stock at
an exercise price of $30.00 per share in December 1998. In addition, we granted:
(a) Mr. Jent an option to purchase 37,645 shares of common stock at an exercise
price of $12.00 per share in November 1998; and (b) Mr. Wiseman an option to
purchase 37,645 shares of common stock at an exercise price of $20.00 per share
in January 1999.
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 September 30, 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 a $1.00 per new customer bonus and a 0.25% residual
commission for each new customer signing up through the program. Finally, she
will receive a productivity bonus of up to $50,000 in the event the total number
of our customers signing up through the FlashNet Opportunity program equals or
exceeds 50,000 by the end of 1998.
1997 STOCK INCENTIVE PLAN
The Board of Directors adopted the 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
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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 390,362 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 225,330 shares,
at a weighted average exercise price of $19.74 per share, were outstanding, and
165,032 shares remained available for future grant. We also granted options to
purchase 55,700 shares to employees prior to the adoption of the 1997 Stock
Incentive Plan. Options for 4,550 of such shares, at an exercise price of $5.00
per share, remain outstanding and options for 51,150 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board's Compensation Committee consists of Mr. Kleinheinz, Mr. Ryffel
and Mr. Stadtler. To date, no member of the Compensation Committee has served as
an officer or employee of our company or any of our subsidiaries. No member of
the Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or its Compensation Committee.
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CERTAIN TRANSACTIONS
CONVERTIBLE NOTES
From July 1996 through December 1996, we sold a total of $635,000 in
principal amount of 12% convertible notes and warrants to purchase a total of
52,070 shares of common stock at an exercise price of $0.01 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 3,400 shares of common stock, Mr.
Thurburn converted a total of $4,000 of his note into 400 shares of common stock
and Mr. Leslie converted a total of $18,000 of his note into 1,800 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 400,000 shares
of common stock, at an exercise price of $0.01 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 1,364,085 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 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, L.P. Mr.
Stadtler, who became one of our directors in August 1998, is the Vice President
of ATTI. See
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"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 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 twelve months of employment; and
- $100,000 if such termination or resignation occurs after twelve months of
employment and before twenty-four months of employment.
The second of the two severance provisions expires on January 25, 2001.
Mr. Thurburn and Mr. Leslie are parties to noncompetition agreements with
us, restricting them from engaging in certain competitive activities during
their employment and for a one-year period following termination of their
employment. If we terminate either officer's employment without cause or if
either of the officers resigns for "good reason," then in order for the affected
officer's noncompetition agreement to remain in effect, we are required to make
a lump sum cash payment to the terminated officer. Generally, "good reason" is
defined as a material change in the nature or scope of the officer's duties that
is, taken as a whole, inconsistent with the position held by the officer on the
date he signed his agreement. In the case of Mr. Thurburn, good reason will not
exist solely by virtue of Mr. Thurburn being relieved of the title and duty of
only one of the offices of Chairman of the Board or Chief Executive Officer. The
amount of the lump sum payment is the greater of:
- The officer's actual aggregate salary and bonus received during the 12
months preceding termination or resignation, as applicable; or
- The sum of the officer's annualized salary in effect immediately preceding
termination or resignation and the cash bonus for the then-current fiscal
year earned by the officer through the date of termination or resignation.
FUTURE TRANSACTIONS
All future transactions, including loans between us and our officers,
directors, principal shareholders and their affiliates, are required by the
Board to be approved by a majority of the Board, including a majority of the
independent and disinterested outside directors on the Board, and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of the date of this prospectus, on a pro forma
basis to reflect the automatic conversion upon completion of this offering of
the outstanding shares of the Series A Convertible Preferred Stock into
1,364,085 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 are 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 OFFERING
------------------------ SHARES ------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Ascend Communications, Inc.(1)........................ 400,000 11.8% --
Applied Telecommunications Technologies, Inc.(2)...... 164,745 5.5 --
Fourteen Hill Capital, LP(3).......................... 329,490 11.0 --
ISP Investors, L.P.(4)................................ 490,116 16.4 --
Thomas K. Reed, Jr.(5)................................ 190,000 6.4 --
James B. Francis, Jr.(6).............................. -- -- --
Andrew N. Jent........................................ -- -- --
Russell A. Wiseman.................................... * *
John B. Kleinheinz(7)................................. 699,216 23.3 --
Michael Scott Leslie(8)............................... 234,800 7.8 --
James A. Ryffel(9).................................... 250,000 8.4 --
Kevin A. Stadtler(10)................................. 164,745 5.5 --
Albert Lee Thurburn(11)............................... 219,660 7.3 --
All directors and executive officers as a group (8
persons)(12)......................................... 1,568,421 52.3 --
</TABLE>
- ------------------------------
* 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 offering price per share in this offering. The percentage of
the total outstanding shares represented by Mr. Wiseman's shares is less
than 1%.
59
<PAGE>
(1) Includes a warrant immediately exercisable for 400,000 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 traded on the Nasdaq National Market.
(2) The address for Applied Telecommunications Technologies, Inc. is 20 William
Street, Wellesley, Massachusetts 02481. Applied Telecommunications
Technologies, Inc. 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, L.P. is
controlled by Point West Capital Corporation, a publicly held corporation
traded on the Nasdaq National 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
of Fort Worth, Texas. John 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. Francis is 2911 Turtle Creek, Suite 925, Dallas, Texas
75219.
(7) Includes 1,600 shares of common stock issuable upon conversion of a note,
4,100 shares of common stock issuable on exercise of a warrant and 490,116
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.
(8) Includes 700 shares of common stock issuable upon conversion of a note and
2,050 shares of common stock issuable upon exercise of a warrant.
(9) The address for Mr. Ryffel is 3113 South University Drive #600, Fort Worth,
Texas 76109.
(10) Includes 164,745 shares held by ATTI. Mr. Stadtler, a director of the
Company, 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 100 shares of common stock issuable upon conversion of a note and
410 shares of common stock issuable upon exercise of a warrant.
(12) Includes 2,400 shares of common stock issuable on conversion of notes,
6,560 shares of common stock issuable upon exercise of warrants, 490,116
shares held by ISP Investors, L.P. and 164,745 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:
- 1,626,838 shares of common stock, held of record by 41 shareholders;
- Options to purchase an aggregate of 229,880 shares of common stock at a
weighted average exercise price of $19.45 per share;
- Warrants to purchase 502,905 shares of common stock at an exercise price
of $.01 per share;
- $194,333 in principal amount of notes convertible into 19,433 shares of
common stock;
- 1,364,085 shares of Series A Convertible Preferred Stock which will be
automatically converted into 1,364,085 shares of common stock upon
completion of this offering; and
- An option to acquire up to $5 million worth of common stock at the initial
public offering price, expiring 180 days after 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 shares of common stock outstanding after giving
effect to the sale of the shares of common stock to the public offered 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 our change in
control without further action by the 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.
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
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<PAGE>
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 two or three 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. Subsequent to 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 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
62
<PAGE>
- 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 its 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..
63
<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 shares
of common stock ( 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
shares offered hereby ( 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 2,990,923 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, 2,455,135 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 531,288 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 4,500 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 229,880 shares of common stock. Pursuant
to lock-up provisions contained in the stock option agreements or separate
lock-up agreements, 31,383 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 198,497 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 522,335 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, 402,400 of such shares will become eligible for sale
subject to the volume limitations, manner of sale and notice requirements of
Rule 144 and 13,064 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 3,966 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 102,905 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, 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 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 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 thereof, at least one year 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 shares immediately after this offering, or approximately
shares if the Underwriters' over-allotment option is exercised in
full; or
64
<PAGE>
- 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 thereof, 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 under the Securities Act covering the shares of common
stock reserved for issuance under the 1997 Stock Incentive Plan. See
"Management--1997 Stock Incentive Plan." Such registration statement 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 1,865,985 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 such shares 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 (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>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
BancBoston Robertson Stephens Inc..........................................
J.C. Bradford & Co.........................................................
EVEREN Securities, Inc.....................................................
------
Total....................................................................
------
------
</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 additional shares of common stock at the same price per
share as we will receive for the 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
shares offered hereby. If purchased, such additional shares will be sold
by the Underwriters on the same terms as those on which the shares are
being sold. We will be obligated, pursuant to the option, to sell shares to the
extent the option is exercised. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of the shares of
common stock offered hereby. If such option is exercised in full, the total
Public Offering Price, Underwriting Discounts and Commissions and Proceeds to us
will be $ , $ and $ , respectively.
INDEMNITY. The Underwriting Agreement contains covenants of indemnity among
the Underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
LOCK-UP AGREEMENTS. With the exception of holders of 54,747 shares of
outstanding common stock, holders of options and warrants to purchase 62,725
shares of common stock and holders of convertible notes convertible into 3,966
shares of common stock, each of our executive officers, directors,
director-nominees, 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
66
<PAGE>
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 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 FlashNet's 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 the sale of shares in this
offering, the issuance of common stock upon the exercise or conversion of
outstanding options, warrants or convertible securities and our issuance
of incentive awards under the 1997 Stock Incentive 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 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 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
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<PAGE>
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 Brobeck, Phleger & Harrison LLP, Austin, Texas and by Cantey & Hanger,
L.L.P., Fort Worth, 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, 1996 and 1997 and
for the period from September 25, 1995, the date of inception, to December 31,
1995, and the years ended December 31, 1996 and 1997 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.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited)............ F-3
Consolidated Statements of Operations for the Period from September 25, 1995 (Inception) through December
31, 1995, the Years Ended December 31, 1996 and 1997 and the Nine Months Ended September 30, 1997
(unaudited) and 1998 (unaudited)......................................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Period from September 25, 1995
(Inception) through December 31, 1995, the Years Ended December 31, 1996 and 1997 and the Nine Months
Ended September 30, 1998 (unaudited)..................................................................... F-5
Consolidated Statements of Cash Flows for the Period from September 25, 1995 (Inception) through December
31, 1995, the Years Ended December 31, 1996 and 1997 and the Nine Months Ended September 30, 1997
(unaudited) and 1998 (unaudited)......................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
FlashNet Communications, Inc.
We have audited the accompanying consolidated balance sheets of FlashNet
Communications, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the period from September 25, 1995, the date of inception, through
December 31, 1995 and the years ended December 31, 1996 and 1997. These
financial statements are the responsibility of FlashNet'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 FlashNet and subsidiaries at
December 31, 1996 and 1997, and the results of their operations and their cash
flows for the period from September 25, 1995, the date of inception, through
December 31, 1995 and the years ended December 31, 1996 and 1997 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
FlashNet and subsidiaries will continue as a going concern. As discussed in Note
1 to the financial statements, FlashNet and subsidiaries have experienced
operating losses since their inception and FlashNet and subsidiaries'
liabilities exceeded their assets by $11,768,471 at December 31, 1997. These
matters raise substantial doubt about FlashNet and its subsidiaries' ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Fort Worth, Texas
March 16, 1998
F-2
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, DEFICIT AT
----------------------- SEPTEMBER 30, SEPTEMBER 30, 1998
1996 1997 1998 (NOTE 6)
---------- ----------- ------------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 137,413 $ 1,569,719 $ 3,301,484
Accounts receivable, net of allowance for uncollectible
accounts of $28,414, $35,068 and $42,536 in 1996,
1997 and 1998, respectively.......................... 311,157 494,470 622,290
Prepaid expenses and other current assets.............. 177,038 377,331 828,316
---------- ----------- -------------
Total current assets................................. 625,608 2,441,520 4,752,090
PROPERTY AND EQUIPMENT, net.............................. 5,128,559 8,396,423 6,800,226
SOFTWARE LICENSES, net of accumulated amortization of
$6,250, $25,000 and $56,307 in 1996, 1997 and 1998,
respectively........................................... 65,450 46,700 16,451
OTHER ASSETS............................................. 67,720 115,350 108,618
---------- ----------- -------------
TOTAL.................................................... $5,887,337 $10,999,993 $11,677,385
---------- ----------- -------------
---------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations........... $1,120,421 $ 1,446,273 $ 2,056,183
Current portion of convertible notes payable........... 128,242 160,566 173,489
Note payable........................................... 4,414,077
Trade accounts payable................................. 2,024,590 6,634,393 4,243,328
Accrued payroll and related expenses................... 124,662 169,740 402,112
Other accrued expenses................................. 147,845 319,996 545,745
Deferred revenue....................................... 3,313,591 8,878,104 11,350,641
---------- ----------- -------------
Total current liabilities............................ 6,859,351 17,609,072 23,185,575
CAPITAL LEASE OBLIGATIONS, net of current portion........ 3,067,054 1,806,089 222,524
CONVERTIBLE NOTES PAYABLE, net of current portion........ 356,201 185,303 --
NOTE PAYABLE............................................. -- 3,168,000 --
---------- ----------- -------------
Total liabilities.................................... 10,282,606 22,768,464 23,408,099
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SERIES A PREFERRED STOCK, $1.00 par value;
1,375,000 shares authorized, 1,364,085 issued and
outstanding as of September 30, 1998................... -- -- 10,444,860 $ --
SHAREHOLDERS' DEFICIT:
Common stock, no par value, 5,000,000 shares
authorized, 1,594,388, 1,613,888 and 1,626,138 issued
and outstanding at December 31, 1996 and 1997 and as
of September 30, 1998, respectively.................. 462,500 701,910 810,822 11,255,682
Warrants to purchase common stock...................... 424,000 3,711,590 3,704,699 3,704,699
Accumulated deficit.................................... (5,281,769) (16,181,971) (26,691,095) (26,691,095)
---------- ----------- ------------- -------------------
Total shareholders' deficit.......................... (4,395,269) (11,768,471) (22,175,574) $ (11,730,714)
---------- ----------- ------------- -------------------
-------------------
TOTAL.................................................... $5,887,337 $10,999,993 $11,677,385
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25, 1995 YEARS ENDED DECEMBER NINE MONTHS ENDED
(INCEPTION) 31, SEPTEMBER 30,
THROUGH DECEMBER ----------------------- ------------------------
31, 1995 1996 1997 1997 1998
------------------ ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Consumer access services.............. $ 19,411 $2,359,788 $11,937,998 $8,208,189 $15,724,000
Business services..................... -- 54,682 570,349 348,635 1,180,145
Set-up fees and other................. 15,065 2,119,494 5,816,384 4,608,544 1,196,706
------------------ ---------- ----------- ----------- -----------
Total............................... 34,476 4,533,964 18,324,731 13,165,368 18,100,851
------------------ ---------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of recurring revenues............ 28,426 2,348,287 8,214,601 5,610,724 8,683,480
Cost of other revenues................ 3,708 472,916 798,886 645,959 319,906
Sales and marketing................... 31,718 4,328,891 10,299,651 8,608,007 5,185,918
General and administrative............ 74,663 1,039,010 3,453,311 2,453,407 3,529,019
Operations and customer support....... -- 830,346 3,683,207 2,596,406 4,041,830
Depreciation and amortization......... 2,811 544,959 2,061,011 1,485,068 2,285,617
------------------ ---------- ----------- ----------- -----------
Total............................... 141,326 9,564,409 28,510,667 21,399,571 24,045,770
------------------ ---------- ----------- ----------- -----------
LOSS FROM OPERATIONS.................... (106,850) (5,030,445) (10,185,936) (8,234,203) (5,944,919)
INTEREST EXPENSE........................ -- (148,815) (735,362) (565,445) (1,984,988)
INTEREST AND OTHER INCOME............... -- 4,341 21,096 15,619 53,467
------------------ ---------- ----------- ----------- -----------
NET LOSS................................ (106,850) (5,174,919) (10,900,202) (8,784,029) (7,876,440)
DEEMED DIVIDENDS ON REDEEMABLE PREFERRED
STOCK................................. -- -- -- -- (2,632,684)
------------------ ---------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS.......................... $ (106,850) $(5,174,919) $(10,900,202) ($8,784,029) $(10,509,124)
------------------ ---------- ----------- ----------- -----------
------------------ ---------- ----------- ----------- -----------
NET LOSS PER SHARE:
Basic and diluted..................... $ (0.10) $ (3.34) $ (6.80) $ (5.49) $ (6.50)
------------------ ---------- ----------- ----------- -----------
------------------ ---------- ----------- ----------- -----------
Pro forma............................. $ (3.81)
-----------
-----------
SHARES USED IN COMPUTATION:
Basic and diluted..................... 1,037,375 1,548,938 1,602,584 1,598,761 1,616,635
------------------ ---------- ----------- ----------- -----------
------------------ ---------- ----------- ----------- -----------
Pro forma............................. 2,066,975
-----------
-----------
</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>
INCEPTION, SEPTEMBER 25, 1995
Issuance of common stock..................... 1,037,375 $ 157,500 $ -- $ -- $ 157,500
Net loss..................................... -- -- -- (106,850) (106,850)
--------- --------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1995..................... 1,037,375 157,500 -- (106,850) 50,650
Issuance of common stock..................... 557,013 305,000 -- -- 305,000
Issuance of warrants......................... -- -- 424,000 -- 424,000
Net loss..................................... -- -- -- (5,174,919) (5,174,919)
--------- --------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1996..................... 1,594,388 462,500 424,000 (5,281,769) (4,395,269)
Conversion of notes payable.................. 19,500 195,000 -- -- 195,000
Warrants retired............................. -- 44,410 (44,410) -- --
Issuance of warrants......................... -- -- 3,332,000 -- 3,332,000
Net loss..................................... -- -- -- (10,900,202) (10,900,202)
--------- --------- ----------- ------------- -------------
BALANCE, DECEMBER 31, 1997..................... 1,613,888 701,910 3,711,590 (16,181,971) (11,768,471)
Conversion of notes payable (unaudited)...... 10,200 102,000 -- -- 102,000
Exercise of warrants (unaudited)............. 2,050 6,912 (6,891) -- 21
Dividends related to issuance of redeemable
preferred stock (unaudited)................ -- -- -- (2,632,684) (2,632,684)
Net loss (unaudited)......................... -- -- -- (7,876,440) (7,876,440)
--------- --------- ----------- ------------- -------------
BALANCE, SEPTEMBER 30, 1998 (unaudited)........ 1,626,138 $ 810,822 $3,704,699 $ (26,691,095) $ (22,175,574)
--------- --------- ----------- ------------- -------------
--------- --------- ----------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 25, 1995 YEARS ENDED DECEMBER NINE MONTHS ENDED
(INCEPTION) 31, SEPTEMBER 30,
THROUGH DECEMBER ----------------------- -----------------------
31, 1995 1996 1997 1997 1998
------------------ ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................... $ (106,850) $(5,174,919) $(10,900,202) ($8,784,029) $(7,876,440)
Adjustments to reconcile net loss to
net cash provided (used) in operating
activities:
Depreciation......................... 2,186 536,209 2,039,761 1,462,615 2,247,577
Amortization of debt discount........ -- 43,311 211,150 167,074 1,352,740
Amortization of software licenses.... -- 6,250 18,750 18,750 30,249
Amortization of organizational
costs.............................. 625 2,500 5,946 3,703 6,733
Provision for allowance for
uncollectible accounts............. -- 28,414 6,654 -- 7,469
Gain on sale of equipment............ -- -- 11,905 9,801 --
Changes in assets and liabilities:
Increase in accounts receivable.... (53,059) (286,512) (189,967) (38,337) (135,288)
Increase in prepaid expenses and
other current assets............. (5,396) (171,642) (200,293) (320,040) (450,995)
Increase in other assets........... -- (58,345) (53,576) (38,022) --
Increase (decrease) in accounts
payable and accrued
liabilities...................... 40,924 2,256,173 4,827,031 4,948,104 (1,932,947)
Increase in deferred revenue....... 83,099 3,230,492 5,564,513 4,017,141 2,472,537
---------- ---------- ----------- ----------- ----------
Net cash provided (used) by
operating activities........... (38,471) 411,931 1,341,672 1,446,760 (4,278,355)
---------- ---------- ----------- ----------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment,
net.................................. (81,673) (966,845) (4,663,538) (577,040) (651,380)
Purchases of software licenses......... -- (71,700) -- -- (798)
Proceeds from sale of equipment........ -- -- 202,594 85,002 --
---------- ---------- ----------- ----------- ----------
Net cash used in investing
activities..................... (81,673) (1,038,545) (4,460,944) (492,038) (652,178)
---------- ---------- ----------- ----------- ----------
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) (1,065,135) (1,079,519)
Principal payments under convertible
notes payable........................ -- -- (27,000) (27,000) (172,380)
Proceeds from issuance of common
stock................................ 145,000 305,000 102,021
Proceeds from issuance of preferred
stock................................ -- -- -- -- 7,812,176
---------- ---------- ----------- ----------- ----------
Net cash provided by financing
activities..................... 145,000 739,171 4,551,578 (1,092,135) 6,662,298
---------- ---------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 24,856 112,557 1,432,306 (137,413) 1,731,765
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................. -- 24,856 137,413 137,413 1,569,719
---------- ---------- ----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................. $ 24,856 $ 137,413 $ 1,569,719 $ -- $3,301,484
---------- ---------- ----------- ----------- ----------
---------- ---------- ----------- ----------- ----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest................. $ -- $ 88,342 $ 512,377 $ 270,632 $ 493,556
Equipment acquired under capital leases
and through issuance of warrants..... -- 4,618,435 858,587 858,587 --
Additional common stock issued upon
conversion of long-term debt......... -- -- 195,000 195,000 102,000
Deemed dividends on redeemable
preferred stock...................... -- -- -- -- 2,632,684
Stock issued for services.............. 13,000 -- -- -- --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED 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's operations are subject to certain risks and uncertainties
including, among others: (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. There can be no assurance that
the Company will be successful in achieving or sustaining profitability and
positive cash flow in the future.
GOING CONCERN BASIS
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company has experienced operating losses since its inception and its
liabilities and redeemable preferred stock exceeded its assets by $22,175,574 at
September 30, 1998. These factors raised substantial doubt at December 31, 1997
as to the Company's ability to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing, as may be required and, ultimately, to attain
profitable operations. Management is of the opinion that the Company will meet
its obligations and sustain operations in 1998 and beyond by increasing its
customer base, improving operations, controlling costs and obtaining additional
financing to support its planned expenditures and operations. The financial
statements do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
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.
F-7
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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 evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires recognition of 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 and amortized over the period in
which service is provided. One-time nonrefundable subscriber set-up fees and
initial distributor sign-up fees are recognized as earned. Additional fees
earned by the Company upon early cancellation by a subscriber are recognized
upon cancellation. Consulting and advertising revenues are recognized as
services are provided.
F-8
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
COST OF REVENUES
Cost of recurring revenue consist primarily of the monthly costs of
telecommunications facilities necessary to provide subscriber services and are
recognized as incurred. Costs of other revenues includes diskettes, other media,
user guides and packaging and delivery costs associated with the materials
provided to new subscribers and distributors and are recognized as incurred. New
customer bonuses paid to distributors and continuing residual commission
expenses are recognized as incurred.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising expense
for the period from September 25, 1995 (Inception) through December 31, 1995,
the years ended December 31, 1996 and 1997 and the nine months ended September
30, 1998 were $21,244, $3,725,080, $7,477,729 and $3,598,885 (unaudited),
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 elected at inception 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 status effective January 1,
1997.
Deferred income taxes are provided in 1997 and 1998 under the liability
method for temporary differences between revenue and expenses recognized for tax
return and financial reporting purposes.
NET LOSS PER SHARE
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. Pro forma 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.
F-9
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 the
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. The Company
has determined that comprehensive income is the same as net income, and has made
the disclosures under SFAS Nos. 129 and 131. 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 does
not expect the adoption of SFAS No. 133 to have a material impact on its
financial statements.
RECLASSIFICATION
Certain reclassifications have been made to prior period amounts to conform
with the 1998 presentation.
INTERIM FINANCIAL STATEMENTS
The interim financial data for September 30, 1997 and 1998 is unaudited. In
the opinion of the Company, the interim financial data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods. The results of operations for the nine
months ended September 30, 1997 and 1998 should not be regarded as necessarily
indicative of the results of operations for any future period.
F-10
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
Data communications equipment.............................. $ 5,308,348 $ 10,198,002 $ 10,445,993
Office and other equipment................................. 296,331 644,585 973,483
Purchased software......................................... 62,274 93,764 168,254
------------ ------------- -------------
5,666,953 10,936,351 11,587,730
Less accumulated depreciation.............................. (538,394) (2,539,928) (4,787,504)
------------ ------------- -------------
$ 5,128,559 $ 8,396,423 $ 6,800,226
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
Property and equipment includes $4,618,435, $4,726,491 and $4,726,491
(unaudited) of data communications equipment under capital leases at December
31, 1996, 1997 and September 30, 1998, respectively. Depreciation expense
charged to operations was $2,186, $536,209, $2,039,761 and $2,247,576
(unaudited) in the period from September 25, 1995 (Inception) through December
31, 1995, the years ended December 31, 1996 and 1997 and the nine months ended
September 30, 1998, respectively, and included $0, $249,347, $1,395,697 and
$1,226,573 (unaudited), respectively, pertaining to property under capital
leases.
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 repayable 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 September 30, 1998 are
as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
1998................................................................................. $ 601,045
1999................................................................................. 1,879,597
2000................................................................................. 53,062
------------
Total minimum lease payments......................................................... 2,533,704
Less amounts representing interest and approximately $55,000 of unamortized value
attributed to warrants (see Note 6)................................................ 254,997
------------
Present value of future minimum lease payments....................................... 2,278,707
Less current portion................................................................. 2,056,183
------------
$ 222,524
------------
------------
</TABLE>
4. CONVERTIBLE NOTES PAYABLE
During 1996, the Company issued units of convertible notes payable totaling
$635,000 and stock warrants exercisable at $0.01 per share for 52,070 shares of
common stock, which were assigned a value of $175,000 (see Note 6). The
remaining principal balance of the notes is due in July 1999 and bears
F-11
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE NOTES PAYABLE (CONTINUED)
12% annual interest, payable quarterly. At December 31, 1996 and 1997 and
September 30, 1998, the notes payable are presented net of approximately
$151,000, $67,000 and $28,000 (unaudited) 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 $10 per share into an aggregate
of 20,130 (unaudited) shares of the Company's common stock at July 31, 1999.
5. NOTE PAYABLE
In December 1997, the Company entered into an agreement with a vendor to
borrow $6,500,000. Warrants initially exercisable at $0.01 per share for 400,000
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 on the earliest of December 28, 1999, an
initial public offering by the Company providing gross proceeds in excess of $12
million or change of control. Interest accrues at 6.0% per annum and is payable
monthly. At December 31, 1997 and September 30, 1998 (unaudited), the principal
balance outstanding is $6,500,000 and is presented net of approximately
$3,332,000 and $2,086,000 (unaudited), 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 September 30, 1998 the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<CAPTION>
SHARES
-----------
(UNAUDITED)
<S> <C>
Convertible notes payable.................................................................. 20,130
Convertible preferred stock................................................................ 1,364,085
Warrants................................................................................... 502,905
Stock options.............................................................................. 244,757
-----------
2,131,877
-----------
-----------
</TABLE>
REDEEMABLE CONVERTIBLE PREFERRED STOCK (UNAUDITED)
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 of the Company for $8,280,000 and
incurred stock issuance costs of $467,824. 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 one share, 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 September 30, 1998,
the pro
F-12
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
forma number of, and stated value of common stock shares outstanding would be
2,990,223 and $11,255,682 (unaudited), 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 other capital stock of the Company. The
holders of the Company's Series A Convertible Preferred Stock have a liquidation
preference equal to their initial investment. Any assets remaining after the
preferred liquidation preference will be distributed to the holders of common
stock.
WARRANTS
During 1996, the Company entered into an agreement to issue warrants to
purchase shares of common stock at $0.01 per share in connection with a lease
line for equipment. The 52,885 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 $0.01 per share through July 1999 for 50,020 shares. Warrants issued with the
Company's note payable are exercisable at $0.01 per share for 400,000 shares
through the later 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 239,857 shares. As
of September 30, 1998, options to purchase 62,997 shares of common stock
remained available for grant under the Plan. Options vest over periods ranging
from 0 to 5 years. At September 30, 1998, options granted prior to the adoption
of the Plan to purchase 4,900 shares were
F-13
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
outstanding and fully vested. Stock option activity from January 1, 1996 through
September 30, 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..................................................... 19,700 $ 3.65
---------
December 31, 1996............................................. 19,700 3.65 7,500 $ 2.45
Granted..................................................... 45,000 5.33
Cancelled................................................... (27,800) 4.58
---------
December 31, 1997............................................. 36,900 5.00 27,900 4.03
Granted (unaudited)......................................... 60,725 8.00
Cancelled (unaudited)....................................... (32,000) 5.00
---------
September 30, 1998 (unaudited)................................ 65,625 7.78 14,900 7.01
---------
---------
</TABLE>
Options outstanding as of September 30, 1998 (unaudited) are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE OPTIONS YEARS TO CURRENTLY
PRICE OUTSTANDING EXPIRATION EXERCISABLE
- ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
$5.00............................................................ 4,900 10.00 4,900
8.00............................................................ 60,725 4.13 10,000
----------- -----------
65,625 4.57 14,900
----------- -----------
----------- -----------
</TABLE>
The Company applies the provisions of APB No. 25 and related interpretations
in accounting for its stock options. Accordingly, no compensation cost has been
recognized as the exercise price assigned to the options at the date of grant
equalled or exceeded the estimated fair market value. Had compensation cost for
the Company's stock options been determined based on the fair value at the grant
dates
F-14
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL STOCK (CONTINUED)
for awards consistent with the method prescribed by SFAS No. 123, the Company's
pro forma net loss attributable to common shareholders and loss per share would
have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997
------------- -------------- NINE MONTHS
ENDED
SEPTEMBER 30,
1998
--------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss attributable to common shareholders:
Actual...................................... $ (5,174,919) $ (10,900,202) $ (10,509,124)
Pro forma................................... $ (5,180,919) $ (10,922,202) $ (10,525,124)
Basic and diluted loss per share:
Actual...................................... $ (3.34) $ (6.80) $ (6.50)
Pro forma................................... $ (3.35) $ (6.82) $ (6.51)
</TABLE>
The weighted average fair value of options granted during 1996, 1997 and
1998 was estimated at $2.30, $1.90 and $1.60 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 September 30, 1998 aggregate to the
following annual amounts:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 472,000
1999............................................................................ 1,465,000
2000............................................................................ 135,000
------------
$ 2,072,000
------------
------------
</TABLE>
The Company leases certain of its facilities and billboards under
non-cancelable operating leases expiring in various years through 2000. Total
rent expense for all operating leases amounted to $2,740, $287,896, $1,806,054
and $1,360,874 (unaudited) in the period from September 25, 1995 (inception)
through December 31, 1995, the years ended December 31, 1996 and 1997 and the
nine months ended
F-15
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
September 30, 1998, respectively. Future minimum lease payments under
non-cancelable operating leases as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 628,000
1999............................................................................ 1,820,000
2000............................................................................ 832,000
2001............................................................................ 151,000
------------
$ 3,431,000
------------
------------
</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
------------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 3,500,000 $ 6,200,000
Book depreciation in excess of tax............................ 150,000 250,000
Other......................................................... 100,000
------------- -------------
Total deferred tax assets................................... 3,650,000 6,550,000
Deferred tax liabilities........................................ -- --
------------- -------------
Net deferred tax asset.......................................... 3,650,000 6,550,000
Valuation allowance............................................. (3,650,000) (6,550,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</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 September 30, 1998, the Company has net operating loss carryforwards of
approximately $16 million (unaudited) 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-16
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED 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
----------------- NINE MONTHS ENDED
SEPTEMBER 30,
1998
-----------------
(UNAUDITED)
<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, 1996 and 1997 and September 30, 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,
--------------------------------------------------
1996 1997 SEPTEMBER 30, 1998
---------------------- -------------------------- --------------------------
HISTORICAL HISTORICAL HISTORICAL
CARRYING CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Convertible notes
payable................ $ 484,000 $ 482,000 $ 346,000 $ 348,000 $ 173,000 $ 209,000
Note payable............. -- -- 3,168,000 3,009,000 4,414,000 4,536,000
</TABLE>
F-17
<PAGE>
FLASHNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's reserve accounts:
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING OPERATIONS DEDUCTIONS END OF PERIOD
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Accounts Receivable Balance...............
Period ended December 31, 1996............ $ 0 $ 28,414 $ 0 $ 28,414
Year ended December 31, 1997.............. 28,414 100,000 93,346 35,068
Period ended September 30, 1998........... 35,068 11,640 4,172 42,536
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
During November and December 1998, options to purchase 47,645 shares of
common stock at $12 per share were granted to an officer and an employee of the
Company under the Plan. During December 1998, options to purchase 79,990 and
5,000 shares of common stock at $30 per share and $20 per share, respectively,
were granted to a director, officers and a consultant. During January, 1999,
options to purchase 44,395 and 4,700 shares of common stock at $20 per share and
$30 per share, respectively, were granted to a director, officer and employees.
Such options vest over periods ranging from 0 to 5 years and expire over periods
ranging from 2 to 10 years.
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.
During January 1999 the Company entered into a $5 million term loan
agreement with Goldman Sachs Credit Partners L.P. ("Goldman"). The term loan
matures January 15, 2000, initially bears interest at 13%, is subject to a
repayment fee and is secured by a second lien on the Company's assets. As part
of this financing, a Goldman affiliate obtained the right to acquire within 180
days of the consumation of the Company's proposed initial public offering up to
$5 million of the Company's common stock at the initial public offering price.
F-18
<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.......................................... $ 12,788
-----------
NASD fee...................................................... 5,100
-----------
Nasdaq National Market listing fee............................ *
Printing and engraving expenses............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Blue sky fees and expenses.................................... *
Transfer agent fees........................................... *
Miscellaneous................................................. *
-----------
Total..................................................... $ *
-----------
-----------
</TABLE>
- ------------------------
* To be included by amendment.
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.
The registrant currently carries directors and officers liability insurance
with policy limits of $2,000,000.
Reference is made to Section 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
issuance's 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 218,750 shares of common stock to
Albert Lee Thurburn, FlashNet's Chairman of the Board and Chief Executive
Officer, and 93,750 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 1,250,000 shares of common
stock for an aggregate purchase price of $250,000. Michael Scott Leslie,
FlashNet's President, purchased 187,500 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 52,070 shares of common stock at an exercise price of
$.01 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 $10.00 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 6,560 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 September 30,
1998,
- The remaining outstanding principal of the notes was $201,33, $24,000 of
which was held by affiliates,
II-2
<PAGE>
- A total of $297,000 in principal amount of the notes had been converted
into 29,700 shares of common stock, 5,600 of which are held by
affiliates; and
- Warrants to acquire 50,020 shares of common stock were outstanding and
unexercised, of which warrants to purchase 6,560 shares of common stock
were held by affiliates.
4. In December 1996, FlashNet sold 31,888 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 FlashNets 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 to be
made on August 15, 1999. Thereafter interest payments are 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 investment 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.................................... 10,000 $ 2.00
5,000 $ 2.67
5,000 $ 4.00
27,700 $ 5.00
8,000 $ 6.00
9,000 $ 8.00
October 1, 1997 through the date hereof....................................... 60,725 $ 8.00
47,645 $ 12.00
49,395 $ 20.00
84,690 $ 30.00
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<S> <C>
1.1* Underwriting Agreement.
3.1 TRIANGLE Restated Articles of Incorporation of the Company, dated February 18, 1998.
3.2 TRIANGLE Certificate of Designations of Series A Convertible Preferred Stock of FlashNet,
dated May 7, 1998 and Statement of Increase in Number of Shares of Series A
Convertible Preferred Stock of FlashNet, dated July 31, 1998.
3.3 TRIANGLE Bylaws of FlashNet, adopted September 27, 1995.
3.4 TRIANGLE Form of Restated Articles of Incorporation of FlashNet, as in effect upon closing
of this offering.
3.5 TRIANGLE 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 Term Loan Agreement, dated January 15, 1999, between FlashNet and Goldman Sachs
Credit Partners L.P.
4.10 Term Note, dated January 15, 1999, payable by FlashNet to Goldman Sachs Credit
Partners L.P.
4.11 Borrower Pledge and Security Agreement, dated January 15, 1999, between FlashNet
and Goldman Sachs Credit Partners L.P.
4.12 Subsidiary Pledge and Security Agreement, dated January 15, 1999, between
FlashNet's subsidiaries and Goldman Sachs Credit Partners L.P.
4.13 Trademark Security Agreement, dated January 15, 1999, between FlashNet and
Goldman Sachs Credit Partners L.P.
4.14 Common Stock Purchase Option, dated January 15, 1999, between FlashNet and
Goldman Sachs Credit Partners L.P.
4.15 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.
5.2* Opinion of Brobeck, Phleger & Harrison LLP
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
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 Letter Agreement between FlashNet and R. Todd Wallace, dated March 23, 1998.
10.24 Letter Agreement between FlashNet and M. Edward Mayhugh, dated May 27, 1998.
10.25 Letter Agreement between FlashNet and Russel A. Wiseman, dated January 7, 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. Reference is made to Exhibit 5.2.
24.1 Power of Attorney (see page II-7).
27.1 TRIANGLE Financial Data Schedule
</TABLE>
- ------------------------
* To be included by amendment.
+ 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. 1 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 January 29, 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 January 29, 1999
Albert Lee Thurburn officer)
/s/ MICHAEL SCOTT LESLIE
- ------------------------------ President, Chief Operating January 29, 1999
Michael Scott Leslie Officer and Director
Executive Vice President,
Chief Financial Officer
ANDREW N. JENT* and Secretary (principal
- ------------------------------ financial officer and January 29, 1999
Andrew N. Jent principal accounting
officer)
JOHN B. KLEINHEINZ*
- ------------------------------ Director January 29, 1999
John B. Kleinheinz
JAMES A. RYFFEL*
- ------------------------------ Director January 29, 1999
James A. Ryffel
KEVIN A. STADTLER*
- ------------------------------ Director January 29, 1999
Kevin A. Stadtler
JAMES B. FRANCIS, JR.*
- ------------------------------ Director January 29, 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* Underwriting Agreement.
3.1 TRIANGLE Restated Articles of Incorporation of the Company, dated February 18, 1998.
3.2 TRIANGLE Certificate of Designations of Series A Convertible Preferred Stock of the
Company, dated May 7, 1998 and Statement of Increase in Number of Shares of
Series A Convertible Preferred Stock of the Company, dated July 31, 1998.
3.3 TRIANGLE Bylaws of the Company, adopted September 27, 1995.
3.4 TRIANGLE Form of Restated Articles of Incorporation of the Company, as in effect upon
closing of this offering.
3.5 TRIANGLE Form of Bylaws of the Company, as in effect upon closing of this offering.
4.1 TRIANGLE 12% Convertible Notes Purchase Agreement, dated July 8, 1996, between the Company
and a purchaser of such notes. Each purchaser is a party to an identical
agreement with the Company.
4.2 TRIANGLE Common Stock Purchase Agreement, dated December 5, 1996, between the Company and
Stephen B. Markwardt.
4.3 TRIANGLE Secured Promissory Note, dated December 10, 1997, payable by the Company to
Ascend Communications, Inc.
4.4 TRIANGLE Warrant to Purchase Common Stock, issued by the Company to Ascend Communications,
Inc. on December 10, 1997.
4.5 TRIANGLE Stock Purchase Agreement, dated May 7, 1998, by and among the Company, 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 the Company 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 the
Company.
4.8 TRIANGLE First Amendment to Registration Rights Agreement, dated August 3, 1998, by and
among the investors named in 4.7 above and the Company.
4.9 Term Loan Agreement dated January 15, 1999, between FlashNet and Goldman Sachs
Credit Partners L.P.
4.10 Term Note dated January 15, 1999, payable by FlashNet to Goldman Sachs Credit
Portfolio L.P.
4.11 Borrower Pledge and Security Agreement, dated January 15, 1999, between FlashNet
and Goldman Sachs Credit Partners L.P.
4.12 Subsidiary Pledge and Security Agreement, dated January 15, 1999, between
FlashNet's subsidiaries and Goldman Sachs Credit Partners L.P.
4.13 Trademark Security Agreement, dated January 15, 1999, between FlashNet and
Goldman Sachs Credit Partners L.P.
4.14 Common Stock Purchase Option dated January 15, 1999, between FlashNet and Goldman
Sachs Credit Partners L.P.
4.15 Second Amendment to Registration Rights Agreement, dated January 15, 1999, by and
among the Investors named in 4.7 above, Flashnet and Goldman Sachs Credit
Partners L.P.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.16* Specimen Certificate for shares of common stock.
5.1* Opinion of Cantey & Hanger, L.L.P.
5.2* Opinion of Brobeck, Phleger & Harrison LLP
10.1+ Master Lease Agreement, dated June 7, 1996, between the Company, as Lessee, and
Ascend Credit Corporation, as Lessor.
10.2 TRIANGLE Master Lease Agreement, dated October 31, 1996, between the Company, as Lessee,
and Shiva Corporation, as Lessor.
10.3 TRIANGLE Letter lease agreement, dated September 27, 1996, between the Company and U.S.
Robotics
10.4 TRIANGLE Letter lease agreement, dated October 14, 1996, between the Company and U.S.
Robotics
10.5+ Master Lease Agreement, dated June 12, 1997, between the Company, as Lessee, and
EMC 2 Corporation, as Lessor.
10.6 TRIANGLE Warrant letter agreement, dated July 31, 1996, between the Company and ACSI
Advanced Technologies, Inc.
10.7 TRIANGLE Letter agreement, dated June 17, 1997, between the Company and ACSI Advanced Data
Services, Inc. (successor to ACSI Advanced Technologies, Inc.)
10.8 TRIANGLE Management Consulting Services Agreement, dated June 17, 1997, between the
Company 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 the Company, as Tenant, and Colonial
Savings, F. A., as Landlord, including Addendum, dated May 23, 1997.
10.11+ Lease Agreement, dated February 13, 1998, between the Company and Leonard
Properties.
10.12 TRIANGLE Merchant Bank Credit Card Agreement, dated June 29, 1998, between the Company and
First Charter Bank, N.A.
10.13 TRIANGLE Agreement, dated December 12, 1997, between the Company and Summit National Bank.
10.14 TRIANGLE Netscape Communications Corporation Network Service Provider Distribution
Agreement, dated March 26, 1996, between the Company and Netscape
Communications Corporation.
10.15+ Software License and Support Agreement, dated August 28, 1998, between the
Company and Portal Software, Inc.
10.16 TRIANGLE Software Distribution and Licensing Agreement, dated December 24, 1996, between
the Company and Solid Oak Software, Inc.
10.17+ Shopsite Distributor Agreement, dated June 11, 1998, between the Company and Open
Market, Inc.
10.18+ PSINet Wholesale Usage Agreement, dated February 17, 1998, between the Company
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 the
Company and A. Lee Thurburn.
10.20 TRIANGLE Noncompetition and Nondisclosure Agreement, dated May 7, 1998, by and between the
Company and Michael Scott Leslie.
10.21 TRIANGLE Letter Agreement between the Company and Andrew N. Jent, dated November 3, 1998.
10.22 TRIANGLE Letter Agreement between the Company and Terri Frey, dated June 24, 1998.
10.23 Letter Agreement between FlashNet and R. Todd Wallace, dated March 23, 1998.
10.24 Letter Agreement between FlashNet and M. Edward Mayhugh, dated May 27, 1998.
10.25 Letter Agreement between FlashNet and Russel A. Wiseman, dated January 7, 1999.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
21.1 TRIANGLE Subsidiaries of the registrant.
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. Reference is made to Exhibit 5.2.
24.1 Power of Attorney (see page II-7).
27.1 TRIANGLE Financial Data Schedule
</TABLE>
- ------------------------
* To be included by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
TRIANGLE Previously filed.
<PAGE>
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TERM LOAN AGREEMENT
dated as of
January 15, 1999
among
FLASHNET COMMUNICATIONS, INC.,
as Borrower
FLASHNET MARKETING, INC.,
and
FLASHNET TELECOM, INC.,
as Guarantors
THE LENDERS NAMED HEREIN,
and
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as Administrative Agent
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.1. DEFINED TERMS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.2. INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE II. THE CREDIT FACILITY. . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.1. COMMITMENTS TO MAKE TERM LOANS. . . . . . . . . . . . . . . . . . . . 11
SECTION 2.2. INTEREST; PAYMENT IN KIND OPTION; AND DEFAULT INTEREST. . . . . . . . 12
SECTION 2.3. MANDATORY PREPAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.4. OPTIONAL PREPAYMENT.. . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.5. EFFECT OF NOTICE OF PREPAYMENT. . . . . . . . . . . . . . . . . . . . 13
SECTION 2.6. PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 2.7. RIGHT OF SET OFF; SHARING OF PAYMENTS, ETC. . . . . . . . . . . . . . 14
SECTION 2.8. CERTAIN FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE III. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . 15
SECTION 3.1. CORPORATE ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 3.2. QUALIFICATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 3.3. CHARTER AND BYLAWS. . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 3.4. CAPITALIZATION OF THE BORROWER. . . . . . . . . . . . . . . . . . . . 15
SECTION 3.5. AUTHORITY RELATIVE TO THIS AGREEMENT. . . . . . . . . . . . . . . . . 16
SECTION 3.6. NONCONTRAVENTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 3.7. GOVERNMENTAL APPROVALS. . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 3.8. SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 3.9. COMMON STOCK PURCHASE OPTION. . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.10. FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.11. ABSENCE OF UNDISCLOSED LIABILITIES.. . . . . . . . . . . . . . . . . 18
SECTION 3.12. ABSENCE OF CERTAIN CHANGES.. . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.13. TAX MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.14. COMPLIANCE WITH LAWS.. . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.15. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.16. TITLE TO PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.17. SUFFICIENCY AND CONDITION OF PROPERTIES. . . . . . . . . . . . . . . 22
SECTION 3.18. REAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 3.19. TANGIBLE PERSONAL PROPERTY.. . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.20. LEASED PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 3.21. SPECIAL REPRESENTATION REGARDING SUBSCRIBERS.. . . . . . . . . . . . 24
SECTION 3.22. RECEIVABLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 3.23. INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 3.24. PERMITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 3.25. AGREEMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 3.26. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3.27. ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 3.28. LABOR RELATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 3.29. EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.30. INSIDER INTERESTS. . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.31. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 3.32. FINANCIAL REQUIREMENTS.. . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 3.33. BANK ACCOUNTS AND POWERS OF ATTORNEY.. . . . . . . . . . . . . . . . 31
SECTION 3.34. INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 3.35. BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
i
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SECTION 3.36. ILLEGAL PAYMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 3.37. PRIVATE OFFERING; RULE 144A MATTERS. . . . . . . . . . . . . . . . . 32
SECTION 3.38. REGISTRATION RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 3.39. BROKERAGE FEES.. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 3.40. DISCLOSURE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 3.41. DUE AUTHORIZATION AND ENFORCEABILITY.. . . . . . . . . . . . . . . . 33
SECTION 3.42. NO VIOLATION OF REGULATIONS OF BOARD OF GOVERNORS OF FEDERAL
RESERVE SYSTEM. . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 3.43. GOVERNMENTAL REGULATIONS.. . . . . . . . . . . . . . . . . . . . . . 33
SECTION 3.44. YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE IV. COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.1. USE OF PROCEEDS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.2. NOTICE OF DEFAULT AND RELATED MATTERS.. . . . . . . . . . . . . . . . 34
SECTION 4.3. MERGER; SALE OF ALL OR SUBSTANTIALLY ALL ASSETS.. . . . . . . . . . . 34
SECTION 4.4. INFORMATION; SEC REPORTS; COMPLIANCE CERTIFICATES.. . . . . . . . . . 34
SECTION 4.5. EXISTENCE; BUSINESS AND PROPERTIES; INSURANCE.. . . . . . . . . . . . 36
SECTION 4.6. COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 4.7. RESTRICTED PAYMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 4.8. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM SUBSIDIARIES.. . . . 37
SECTION 4.9. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF
ADDITIONAL PREFERRED STOCK. . . . . . . . . . . . . . . . . . . . 38
SECTION 4.10. LIMITATION ON SALES OF ASSETS, SUBSIDIARY STOCK AND ACQUISITIONS.. . 39
SECTION 4.11. LIMITATION ON TRANSACTIONS WITH AFFILIATES.. . . . . . . . . . . . . 39
SECTION 4.12. LINE OF BUSINESS; LIMITATION ON BORROWER'S ACTIVITIES. . . . . . . . 39
SECTION 4.13. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 4.14. STAY, EXTENSION AND USURY LAWS.. . . . . . . . . . . . . . . . . . . 39
SECTION 4.15. OBLIGATIONS AND TAXES. . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.16. SUBSCRIBERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.17. ADDITIONAL GUARANTEES AND SUBSIDIARY PLEDGE AND SECURITY
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.18. YEAR 2000 COMPLIANCE.. . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 4.19. MATERIAL CONTRACTS.. . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE V. CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 5.1. CORPORATE AND OTHER PROCEEDINGS; OTHER LOAN DOCUMENTS.. . . . . . . . 40
SECTION 5.2. NO MATERIAL LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 5.3. NO EVENT OF DEFAULT.. . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 5.4. NO CHANGES IN FINANCIAL MARKETS.. . . . . . . . . . . . . . . . . . . 42
SECTION 5.5. DELIVERY OF OPINIONS. . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 5.6. ADMINISTRATIVE AGENT'S EXPENSES.. . . . . . . . . . . . . . . . . . . 42
SECTION 5.7. FEES AND EXPENSES OF COUNSEL FOR LENDERS. . . . . . . . . . . . . . . 42
SECTION 5.8. CONSENTS AND APPROVALS. . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 5.9. MARGIN REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE VI. TRANSFER OF THE TERM LOANS, THE INSTRUMENTS EVIDENCING SUCH TERM
LOANS AND THE SECURITIES; REPRESENTATIONS OF LENDERS; PARTICIPATIONS . . . . . . . 43
SECTION 6.1. TRANSFER OF THE TERM LOANS, THE INSTRUMENTS EVIDENCING THE TERM
LOANS AND THE SECURITIES.. . . . . . . . . . . . . . . . . . . . 43
SECTION 6.2. PERMITTED ASSIGNMENTS.. . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 6.3. PERMITTED PARTICIPANTS; EFFECT. . . . . . . . . . . . . . . . . . . . 43
SECTION 6.4. DISSEMINATION OF INFORMATION. . . . . . . . . . . . . . . . . . . . . 44
SECTION 6.5. REPLACEMENT TERM NOTES UPON TRANSFER OR EXCHANGE. . . . . . . . . . . 44
SECTION 6.6. REGISTER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 7.1. EVENTS OF DEFAULT.. . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 7.2. ACCELERATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 7.3. RIGHTS AND REMEDIES CUMULATIVE. . . . . . . . . . . . . . . . . . . . 47
SECTION 7.4. DELAY OR OMISSION NOT WAIVER. . . . . . . . . . . . . . . . . . . . . 47
SECTION 7.5. WAIVER OF PAST DEFAULTS.. . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 7.6. RIGHTS OF LENDERS TO RECEIVE PAYMENT. . . . . . . . . . . . . . . . . 47
ARTICLE VIII. GUARANTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 8.1. THE GUARANTEE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 8.2. LIMITATION ON LIABILITY.. . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8.3. STAY OF ACCELERATION. . . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE IX. INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 9.1. INDEMNIFICATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 9.2. INDEMNITY NOT AVAILABLE.. . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 9.3. SETTLEMENT OF CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 9.4. APPEARANCE EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 9.5. SURVIVAL OF INDEMNIFICATION.. . . . . . . . . . . . . . . . . . . . . 51
SECTION 9.6. LIABILITY NOT EXCLUSIVE; PAYMENTS.. . . . . . . . . . . . . . . . . . 51
ARTICLE X. THE ADMINISTRATIVE AGENT. . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.1. APPOINTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.2. DELEGATION OF DUTIES.. . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.3. EXCULPATORY PROVISIONS.. . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.4. RELIANCE BY THE ADMINISTRATIVE AGENT.. . . . . . . . . . . . . . . . 51
SECTION 10.5. NOTICE OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.6. NON-RELIANCE ON THE ADMINISTRATIVE AGENT AND OTHER LENDERS.. . . . . 52
SECTION 10.7. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 10.8. ADMINISTRATIVE AGENT, IN ITS INDIVIDUAL CAPACITIES.. . . . . . . . . 52
SECTION 10.9. SUCCESSOR ADMINISTRATIVE AGENT.. . . . . . . . . . . . . . . . . . . 53
SECTION 10.10. DUTIES OF ADMINISTRATIVE AGENT. . . . . . . . . . . . . . . . . . . 53
ARTICLE XI. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 11.1. EXPENSES; DOCUMENTARY TAXES. . . . . . . . . . . . . . . . . . . . . 54
SECTION 11.2. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 11.3. CONSENT TO AMENDMENTS AND WAIVERS. . . . . . . . . . . . . . . . . . 55
SECTION 11.4. PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 11.5. NEW YORK LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL . . . 56
SECTION 11.6. REPLACEMENT TERM NOTES.. . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 11.7. APPOINTMENT OF AGENT FOR SERVICE.. . . . . . . . . . . . . . . . . . 56
SECTION 11.8. MARSHALLING; RECAPTURE.. . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 11.9. LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 11.10. INDEPENDENCE OF COVENANTS.. . . . . . . . . . . . . . . . . . . . . 57
SECTION 11.11. CURRENCY INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 11.12. WAIVER OF IMMUNITY. . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 11.13. FREEDOM OF CHOICE . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 11.14. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 11.15. MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 11.16. SEVERABILITY CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 11.17. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. . . 58
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
EXHIBIT A. FORM OF ASSIGNMENT AND ACCEPTANCE
EXHIBIT B. FORM OF CO-SALE AGREEMENT
EXHIBIT C. FORM OF EQUITY REGISTRATION RIGHTS AGREEMENT
EXHIBIT D. FORM OF TERM NOTE
EXHIBIT E. FORM OF OPINION OF CANTEY & HANGER, L.L.P.
SCHEDULE 3.2 QUALIFICATIONS
SCHEDULE 3.6 NONCONTRAVENTIONS
SCHEDULE 3.7 GOVERNMENT APPROVALS
SCHEDULE 3.8 SUBSIDIARIES
SCHEDULE 3.11 LIABILITIES
SCHEDULE 3.12 CERTAIN CHANGES
SCHEDULE 3.13 TAX MATTERS
SCHEDULE 3.14 COMPLIANCE WITH LAWS
SCHEDULE 3.15 LEGAL PROCEEDINGS
SCHEDULE 3.16 ENCUMBRANCES
SCHEDULE 3.18 REAL PROPERTY
SCHEDULE 3.19 PERSONAL PROPERTY
SCHEDULE 3.20 LEASE PROPERTY
SCHEDULE 3.23 INTELLECTUAL PROPERTY
SCHEDULE 3.24 NOTICES OF ALLEGED FAILURES TO HAVE PERMITS
SCHEDULE 3.25 AGREEMENTS
SCHEDULE 3.26 EMPLOYEE BENEFIT PLANS
SCHEDULE 3.27 ENVIRONMENTAL MATTERS
SCHEDULE 3.28 LABOR RELATIONS
SCHEDULE 3.29 DIRECTORS, OFFICERS, EMPLOYEES
SCHEDULE 3.30 INSIDER INTERESTS
SCHEDULE 3.32 DEPOSITS, ETC. WITH GOVERNMENTAL ENTITIES
SCHEDULE 3.33 BANK ACCOUNTS
SCHEDULE 4.11 TRANSACTIONS WITH AFFILIATES
</TABLE>
iv
<PAGE>
THIS TERM LOAN AGREEMENT, dated as of January 15, 1999 (as
amended, restated, supplemented and/or otherwise modified from time to time,
this "agreement"), is by and among:
(A) FLASHNET COMMUNICATIONS, INC., a Texas corporation (the
"BORROWER");
(B) FLASHNET MARKETING, INC., a Texas corporation, and FLASHNET
TELECOM, INC., A Texas corporation, as guarantors (each a "GUARANTOR"
and, collectively, the "GUARANTORS");
(C) each of the Lenders; AND
(D) GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agent.
the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. DEFINED TERMS. As used in this Agreement, the
following terms shall have the meanings specified below:
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into, or became a Subsidiary of, such specified Person including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person's merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"ACTION" has the meaning specified in SECTION 9.2.
"ADMINISTRATIVE AGENT" means Goldman Sachs Credit Partners L.P.,
acting as agent pursuant to Article X or any successor or replacement
Administrative Agent, acting in such capacity.
"AFFILIATE OR AFFILIATE" means, with respect to any Person, any
other Person that, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, such Person. For
the purposes of this definition, "control" when used with respect to any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract, or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
PROVIDED that for purposes of SECTION 4.11, beneficial ownership of 10% or more
of the voting securities of a Person shall be deemed to be control. Neither the
Lenders nor any of their Affiliates will be treated as an Affiliate of the
Borrower or any of its Subsidiaries for purposes of this Agreement.
"AFFILIATE TRANSACTION" has the meaning specified in SECTION 4.11.
"AGREEMENT" has the meaning specified in the preamble to this
Agreement.
<PAGE>
"APPLICABLE ENVIRONMENTAL LAWS" has the meaning specified in
SECTION 3.27(B).
"APPLICABLE LAW" means any statute, law, rule, or regulation or
any judgment, order, writ, injunction, or decree of any Governmental Entity to
which a specified person or property is subject.
"APPLICABLE REPAYMENT FEE" means a fee that shall be paid by the
Borrower to the Lenders on the date of the payment of any principal of the Term
Loan, which fee shall be calculated as of such date by multiplying the
outstanding principal amount of the Term Loans (including any Capitalized
Interest thereon pursuant to SECTION 2.2(C)) being repaid on such date by the
applicable percentage set forth in the table below:
MONTHS SUCCEEDING CLOSING DATE
------------------------------
<TABLE>
<CAPTION>
REPAYMENT AFTER END BUT NO LATER THAN REPAYMENT FEE
OF MONTH: END OF MONTH: (% OF PRINCIPAL)
--------- ------------- ----------------
<S> <C> <C>
-- 3 1.125%
3 4 1.500
4 5 1.875
5 6 2.250
6 7 2.625
7 8 3.000
8 9 3.375
9 10 3.750
10 11 4.125
11 -- 4.500
</TABLE>
; PROVIDED, HOWEVER, that the Applicable Repayment Fee shall not be due and
payable by the Borrower or shall be refunded to the Borrower in accordance with
the terms of Section 1 the Common Stock Purchase Option; PROVIDED FURTHER,
solely for purposes of the definition of "Applicable Repayment Fee", the term
"month" or "months" shall mean the period of time from the 15th day of a
calendar month to the 15th day of the next succeeding calendar month.
"ASCEND NOTE" means that certain Secured Promissory Note, dated
December 10, 1997, in an initial principal amount of $6,500,000, made by the
Borrower in favor of Ascend Communications, Inc., as amended, modified,
supplemented or restated from time to time.
"ASSET SALE" means (i) the sale, lease, conveyance or other
disposition of any assets or rights (including, without limitation, by way of a
sale and leaseback) other than sales of inventory or equipment in the ordinary
course of business, and (ii) the issue or sale by the Borrower or any of its
Subsidiaries of Equity Interests of any of the Borrower's Subsidiaries.
Notwithstanding the foregoing: (i) a transfer of assets by the Borrower to a
Subsidiary that is a Guarantor and is a party to the Subsidiary Pledge and
Security Agreement or by a Subsidiary to the Borrower or to another Subsidiary
of the Borrower that is a Guarantor and is a party to the Subsidiary Pledge and
Security Agreement, (ii) an issuance of Equity Interests by a Subsidiary to the
Borrower or to another Subsidiary that is a party to the Subsidiary Pledge and
Security Agreement and is a Guarantor hereunder and (iii) a disposition of
dollars in the ordinary course of business shall not be deemed to be an Asset
Sale.
2
<PAGE>
"ASSIGNMENT AND ACCEPTANCE" shall mean an assignment and
acceptance entered into by a Lender and an assignee, and accepted by the
Administrative Agent, in the form of EXHIBIT A or such other form as shall be
approved by the Administrative Agent.
"AUDITED FINANCIAL STATEMENTS" has the meaning specified in
SECTION 3.10.
"BANKRUPTCY LAW" means (i) Title 11 of the U.S. Code (11 U.S.C.
Section 101 ET. SEQ.), as amended from time, and any successor statute or (ii)
any other law of the United States, any political subdivision thereof or any
other jurisdiction relating to bankruptcy, insolvency, winding up, liquidation,
reorganization or relief of debtors.
"BENEFICIAL OWNER" and "BENEFICIAL OWNERSHIP" each has the meaning
as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act.
"BENEFICIAL ARRANGEMENTS" has the meanings specified in SECTION
3.26(D).
"BOARD" means the Board of Governors of the Federal Reserve System
of the United States or any successor.
"BORROWER" has the meaning specified in the preamble to this
Agreement.
"BORROWER PLEDGE AND SECURITY AGREEMENT" means the Borrower Pledge
and Security Agreement dated as of the date hereof between the Borrower and the
Agent, as amended, modified or supplemented from time to time.
"BUSINESS DAY" means each day other than a Saturday, a Sunday or
any other day on which banking institutions in the City of New York, Fort Worth,
Texas or at a place of payment are authorized by law, regulation or executive
order to remain closed.
"CAPITAL LEASE OBLIGATIONS" of any person means the obligations of
such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"CAPITALIZED INTEREST" has the meaning specified in SECTION
2.2(C).
"CAPITAL STOCK" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock and (iii) in the case of a partnership or limited
liability company, partnership interests (whether general or limited) or
membership interests, respectively.
"CHANGE OF CONTROL" means the occurrence of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as such term is defined in Section 13(d)(3) of the
Exchange Act) (other than the holders of the Capital Stock of the Borrower as of
the Closing Date) becomes the beneficial owner, directly or indirectly, of more
than 50% of the Voting Stock of the Borrower.
"CLOSING DATE" means the date on or before January 15, 1999 on
which the Term Loan is funded and the conditions set forth in Article V are
satisfied or waived in accordance with Section 11.3.
3
<PAGE>
"CODE" means the Internal Revenue Code of 1986, as amended, and
any regulation promulgated thereunder.
"COMMITMENT" means, with respect to any Lenders, the amount set
forth opposite such Lender's signature on the signature pages of this Agreement.
"COMMON STOCK" has the meaning specified in SECTION 3.4.
"COMMON STOCK PURCHASE OPTION" means the Common Stock Purchase
Option dated the date hereof between the Borrower and Goldman Sachs Credit
Partners L.P., as amended, modified or supplemented from time to time.
"CONVERTIBLE NOTES" means each of the 12% Convertible Notes dated
July 8, 1996 issued pursuant to the terms of a 12% Convertible Notes Purchase
Agreement, dated as of July 8, 1998, between the Borrower and the holder or
holders of such 12% Convertible Notes, as amended, modified, supplemented or
restated from time to time.
"CO-SALE AGREEMENT" means the Second Amendment To Co-Sale
Agreement dated the date hereof among Goldman Sachs Credit Partners L.P. and
each of the other parties listed therein, in the form attached as EXHIBIT B.
"CUSTODIAN" means any receiver, interim receiver, receiver and
manager, trustee, assignee, liquidator, sequestrator, custodian or similar
official under any Bankruptcy Law.
"DEFAULT" means any event that, with the passage of time or the
giving of notice or both, would constitute an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the Maturity
Date of the Term Loans.
"DOLLARS" or "$" shall mean lawful money of the United States of
America.
"EMPLOYEE PLANS" has the meaning specified in SECTION 3.26(a).
"ENCUMBRANCES" means liens, charges, pledges, options, mortgages,
deeds of trust, security interests, claims, restrictions (whether on voting,
sale, transfer, disposition, or otherwise), easements, and other encumbrances of
every type and description, whether imposed by law, agreement, understanding, or
otherwise.
"ENVIRONMENT" shall mean ambient air, surface water and
groundwater (including potable water, navigable water and wetlands), the land
surface or subsurface strata, the workplace or as otherwise defined in any
Applicable Environmental Law.
"EQUITY INTERESTS" means, collectively, Capital Stock and all
warrants, options or other rights to acquire Capital Stock (but excluding any
debt security that is convertible into, or exchangeable for, Capital Stock).
4
<PAGE>
"EQUITY REGISTRATION RIGHTS AGREEMENT" means the Second Amendment
to Registration Rights Agreement dated the date hereof, between the Borrower,
Goldman Sachs Credit Partners L.P. and each of the other parties listed therein,
in the form attached as EXHIBIT C, as amended, modified or supplemented from
time to time.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and any regulation promulgated thereunder.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that, together with the Borrower or any of its Subsidiaries is
treated as a single employer under Section 414(b) or (c) of the Code, or solely
for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as
a single employer under Section 414 of the Code.
"ERISA EVENT" means (a) any "reportable event," as defined in
Section 4043 of ERISA or the regulations issued thereunder, with respect to a
Plan except a reportable event for which the requirement of notice to the PBGC
had been waived; (b) the adoption of any amendment to a Plan that would require
the provision of security pursuant to Section 401(a)(29) of the Code or Section
307 of ERISA; (c) the existence with respect to any Plan of an "accumulated
funding deficiency" (as defined in Section 412 of the Code or Section 302 of
ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the
Code or Section 303(d) of ERISA of an application for a waiver of the minimum
funding standard with respect to any Plan; (e) the incurrence of any liability
in excess of $1,000,000 under Title IV of ERISA with respect to the termination
of any Plan or the withdrawal or partial withdrawal of the Borrower or any of
its Subsidiaries or any of their ERISA Affiliates from any Plan or Multiemployer
Plan; (f) the receipt by the Borrower or any of its Subsidiaries or any ERISA
Affiliate from the PBGC or a plan administrator of a Multiemployer Plan of any
notice relating to the intention to terminate any Plan or Plans or to appoint a
trustee to administer any Plan; (g) the receipt by the Borrower or any of its
Subsidiaries or any ERISA Affiliate of any notice concerning the imposition of
Withdrawal Liability in excess of $1,000,000 or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA; (h) the occurrence of a "prohibited
transaction" with respect to which the Borrower or any of its Subsidiaries is a
party to the prohibited transaction and is a "disqualified person" (within the
meaning of Section 4975 of the Code) or with respect to which the Borrower or
any of its Subsidiaries could otherwise be liable; and (i) any other event or
condition with respect to a Plan or Multiemployer Plan that could reasonably be
expected to result in liability of the Borrower or any of its Subsidiaries.
"EVENT OF DEFAULT" means any event specified in SECTION 7.1.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FINANCIAL STATEMENTS" has the meaning specified in SECTION 3.10.
"GAAP" means with respect to the financial statements or other
financial information of any Person, generally accepted accounting principles in
the United States which are in effect from time to time.
"GOVERNMENTAL ENTITY" means any court or tribunal in any
jurisdiction (domestic or foreign) or any federal, state, municipal, or other
governmental body, agency, authority, department, commission, board, bureau, or
instrumentality (domestic or foreign).
5
<PAGE>
"GUARANTEE" means the guarantee by each of the Guarantors pursuant
to Article VIII hereof.
"GUARANTEE" of or by any Person means any obligation, contingent
or otherwise, of such Person guaranteeing (the "primary obligor") or having the
economic effect of guaranteeing any Indebtedness or other obligation of any
other Person in any manner, whether directly or indirectly, and including any
obligation of such Person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or
other obligation or to purchase (or to advance or supply funds for the purchase
of) any security for the payment of such Indebtedness or other obligation, (b)
to purchase or lease property, securities or services for the purpose of
assuring the owner of such Indebtedness or other obligation of the payment of
such Indebtedness or other obligation or (c) to maintain working capital, equity
capital or any other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Indebtedness or other
obligation; PROVIDED, HOWEVER, that the term "guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business.
"GUARANTEED OBLIGATIONS" has the meaning specified in SECTION 8.1.
"GUARANTOR" and "GUARANTORS" have the meaning specified in the
preamble to this Agreement.
"HAZARDOUS MATERIAL" has the meaning specified in SECTION 3.27(b).
"INDEBTEDNESS" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money (b) all obligations of such Person
evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such Person under conditional sale or other title retention
agreements relating to property or assets purchased by such Person, (d) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (excluding trade accounts payable, purchase money security
transactions on equipment that will be paid within sixty days and accrued
obligations incurred in the ordinary course of business), (e) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such Person, whether or not the obligations secured thereby
have been assumed (PROVIDED that, for purposes hereof, the amount of such
Indebtedness shall be limited to the lesser of (x) the principal amount thereof
and (y) the fair market value of such property), (f) all guarantees by such
person of Indebtedness of others, (g) all Capital Lease Obligations of such
Person, (h) all obligations of such Person as an account party in respect of
letters of credit and bankers' acceptances and (i) all obligations of such
person for production payments from property operated by or on behalf of such
person. The Indebtedness of any Person shall include the Indebtedness of any
partnership in which such Person is a general partner
"INDEMNIFIED PARTY" has the meaning specified in SECTION 9.1.
"INDEMNIFYING PARTY" has the meaning specified in SECTION 9.1.
"INTELLECTUAL PROPERTY" means patents, trademarks, service marks,
trade names, service names, brand names, copyrights, trade secrets, know-how,
technology, inventions, computer software (including documentation and object
and source codes), and similar rights, and all registrations, applications,
licenses, and rights with respect to any of the foregoing.
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"INTEREST PAYMENT DATE" means (i) the 15th day of each month,
commencing February 15, 1999, (ii) the Maturity Date, and (iii) the date of any
prepayment of all or any portion of the principal of the Term Loans.
"INVESTMENTS" means, with respect to any Person, all investments
by such Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"IRS" means the Internal Revenue Service.
"LATEST BALANCE SHEET" has the meaning specified in SECTION 3.10.
"LATEST FINANCIAL STATEMENTS" has the meaning specified in SECTION
3.10.
"LENDERS" shall mean (a) each financial institution that has
executed a counterpart to this Agreement (other than any such financial
institution that has ceased to be a party hereto pursuant to an Assignment and
Acceptance) and (b) any financial institution that has become a party hereto
pursuant to an Assignment and Acceptance.
"LIEN" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
capital lease and any other preferential arrangement that has substantially the
same practical effect as a security interest in any asset).
"LIQUIDATED DAMAGES" means any and all liquidated damages then
owing pursuant to any of the Loan Documents.
"LOAN DOCUMENTS" means this Agreement, the Term Notes, the
Security Agreements and the Related Documents.
"LOAN REGISTER" means the register maintained by the
Administrative Agent on behalf of the Borrower pursuant to SECTION 6.6.
"MAJORITY LENDERS" means, at any time, Lenders holding at least a
majority of the then aggregate unpaid principal balance of the Term Loan, or, if
no such principal amount is then outstanding, Lenders having at least a majority
of the total Commitments; PROVIDED that, for purposes hereof, neither the
Borrower nor any of its Affiliates shall be included in (i) the Lenders holding
such amount of the Loans or having such amount of the Commitments or (ii)
determining the aggregate unpaid principal amount of the Loans or the total
Commitments.
"MATERIAL CONTRACT" has the meaning specified in SECTION 3.6.
"MATERIAL ADVERSE EFFECT" means any change, development, or effect
(individually or in the aggregate) which is, or is reasonably likely to be,
materially adverse (i) to the business, assets, results of operations, condition
(financial or otherwise), or prospects of a party, or (ii) to the ability of a
party to perform on a timely basis any material obligation under this Agreement,
any other Loan Document to
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which such party is a party or any agreement, instrument, or document entered
into or delivered in connection herewith.
"MATURITY DATE" means January 15, 2000.
"MULTIEMPLOYER PLAN" has the meaning specified in SECTION 3.26(b).
"OBLIGATIONS" means all now existing and hereafter arising
obligations and liabilities of any of the Borrower and the Guarantors to any and
all of the Lenders arising under or in connection with the Loan Documents,
whether absolute or contingent, and whether for principal, interest, penalties,
premium, fees, indemnifications, reimbursements, damages (including, if
applicable, Liquidated Damages), Applicable Repayment Fees or otherwise and
specifically including post-petition interest (whether or not an allowable
claim).
"OFFICER" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operation Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Vice-President of such Person.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of
either the Borrower or any Guarantor by an Officer of the Borrower or any
Guarantor, as the case may be, who must be the principal executive officer, a
vice chairman, the principal financial officer, the treasurer or the principal
accounting officer of the Borrower or any Guarantor, as the case may be.
"OPINION OF COUNSEL" means an opinion from legal counsel of the
Borrower or any Guarantor, which legal counsel is reasonably acceptable to the
Administrative Agent.
"PARTICIPANTS" has the meaning specified in SECTION 6.3.
"PAYMENT DEFAULT" means any Default or Event of Default under
SECTION 7.1(b), (c) or (d) or any matured or unmatured default under the
analogous provisions of the documents governing the Ascend Note.
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any of its functions under ERISA.
"PERMITS" has the meaning specified in SECTION 4.5.
"PERMITTED INVESTMENTS" means investments in any Wholly Owned
Subsidiary of the Borrower that is a Guarantor and is a party to the Subsidiary
Pledge and Security Agreement.
"PERMITTED LIENS" means:
(a) Liens for taxes not yet due or which are being contested in
compliance with SECTION 4.15;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business and
securing obligations that are not due and payable or which are being contested
in compliance with SECTION 4.15;
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(c) pledges and deposits made in the ordinary course of business
in compliance with workmen's compensation, unemployment insurance and other
security laws or regulations;
(d) deposits to secure the performance of bids, trade contracts
(other than for Indebtedness), leases (other than Capital Lease Obligations),
statutory obligations, surety and appeal bonds, performance bonds, reclamation
bonds and other obligations of a like nature incurred in the ordinary course of
business;
(e) Liens created by or relating to any legal proceeding which at
the time is being contested in good faith by appropriate proceedings; PROVIDED
that, in the case of a Lien consisting of an attachment or judgment Lien, the
judgment it secures shall, within 60 days of entry thereof, have been discharged
or execution thereof stayed pending appeal, or discharged within 60 days after
the expiration of such stay;
(f) zoning restrictions, easements, rights-of-way, restrictions on
use of real property and other similar encumbrances incurred in the ordinary
course of business which, in the aggregate, are not substantial in amount and do
not materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the business of the Borrower or any of
its Subsidiaries;
(g) Liens relating to or arising under the Ascend Note and
existing Capital Lease Obligations and Liens specified on SCHEDULE 3.16; and
(h) other liens securing obligations not to exceed, individually
or in the aggregate, $250,000.
"PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
enterprise, unincorporated organization or Governmental Entity.
"PLAN" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or
any of its Subsidiaries or any ERISA Affiliate is (or, if such plan were
terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as
defined in Section 3(5) of ERISA.
"PREFERRED STOCK" means the Borrower's Preferred Stock, par value
$1.00 per share.
"PREPAYMENT DATE" has the meaning specified in SECTION 2.5.
"PROCEEDINGS" means all proceedings, actions, claims, suits,
investigations, and inquiries by or before any arbitrator or Governmental
Entity.
"PURCHASERS" has the meaning specified in SECTION 6.2
"REAL PROPERTY" has the meaning specified in SECTION 3.18.
"REGULATION D" means Regulation D of the Board as the same may be
amended or supplemented from time to time.
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"RELATED DOCUMENTS" means the Common Stock Purchase Option, the
Equity Registration Rights Agreement and the Co-Sale Agreement.
"RELEASE" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, disposing,
depositing, dispersing, emanating or migrating of any Hazardous Material in,
into, onto or through the environment.
"RESTRICTED INVESTMENT" means any Investment other than a
Permitted Investment.
"RESTRICTED PAYMENTS" has the meaning specified in SECTION 4.7(a).
"SEC" means the Securities and Exchange Commission.
"SECURITY AGREEMENTS" means, collectively, the Borrower Pledge and
Security Agreement, the Subsidiary Pledge and Security Agreement and the
Trademark Security Agreement.
"SECURITIES" means, collectively, the Common Stock Purchase Option
and the Common Stock to be purchased pursuant to the terms of the Common Stock
Purchase Option.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERIES A PREFERRED" means the Series A Convertible Preferred
Stock of the Borrower.
"SHARES" means the shares of Common Stock of the Borrower to be
issued under the Common Stock Purchase Option.
"STATED MATURITY" means, with respect to any installment of
interest or principal on any series of Indebtedness, the date on which such
payment of interest or principal was scheduled to be paid in the original
documentation governing such Indebtedness, and shall not include any contingent
obligations to repay, redeem or repurchase any such interest or principal prior
to the date originally scheduled for the payment thereof.
"SUBSIDIARY" means any corporation more than 50% of whose
outstanding voting securities, or any general partnership, joint venture, or
similar entity more than 50% of whose total equity interests, is owned, directly
or indirectly, by the Borrower, or any limited partnership of which the Borrower
or any Subsidiary is a general partner.
"SUBSIDIARY PLEDGE AND SECURITY AGREEMENT" means the Subsidiary
Pledge and Security Agreement dated as of the date hereof among FlashNet
Marketing, Inc., FlashNet Telecom Inc., each additional grantor that becomes a
party thereto and the Agent, as amended, modified or supplemented from time to
time.
"TAX RETURN" means any return or report, including any related or
supporting information, with respect to Taxes.
"TAXES" means any income taxes or similar assessments or any
sales, excise, occupation, use, ad valorem, property, production, severance,
transportation, employment, payroll, franchise, or other tax imposed by any
United States federal, state, or local (or any foreign or provincial) taxing
authority, including any interest, penalties, or additions attributable thereto.
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"TERM LOAN" means a loan made by any Lender to the Borrower
pursuant to SECTION 2.1.
"TERM NOTE" means a promissory note of the Borrower in the form
attached as EXHIBIT D hereto evidencing the Term Loan of any Lender.
"TO THE BEST KNOWLEDGE" of a specified Person (or similar
references to a Person's knowledge) means all information to be attributed to
such Person actually or constructively known to (a) such Person in the case of
an individual or (b) in the case of a corporation or other entity, an executive
officer or employee who devoted substantive attention to matters of such nature
during the ordinary course of his employment by such Person. A Person has
"constructive knowledge" of those matters which the individual involved could
reasonably be expected to have as a result of undertaking an investigation of
such a scope and extent as a reasonably prudent man would undertake concerning
the particular subject matter.
"TRADEMARK SECURITY AGREEMENT" means the Trademark Security
Agreement dated as of the date hereof, between the Borrower and the Agent, as
amended, modified or supplemented from time to time.
"TRANSFEREE" has the meaning specified in SECTION 6.4.
"VOTING STOCK" means, with respect to any Person at any time, the
Capital Stock of such Person that is at such time entitled to vote in the
election of the board of directors of such Person.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such
Person, 100% of the Capital Stock and other Equity Interests of which is owned
directly or indirectly by such Person.
"YEAR 2000 COMPLIANT" has the meaning specified in SECTION 3.44.
"YEAR 2000 PROBLEM" has the meaning specified in SECTION 3.44.
SECTION 1.2. INTERPRETATION. In this Agreement, the singular
includes the plural and the plural includes the singular; words implying any
gender include the other genders; references to any section, exhibit or schedule
are to sections, exhibits or schedules hereto unless otherwise indicated;
references to statutes are to be construed as including all statutory provisions
consolidating, amending or replacing the statute referred to; references to
"writing" include printing, typing, lithography and other means of reproducing
words in a visible form; "including" following a word or phrase shall not be
construed to limit the generality of such word or phrase; and an accounting term
not otherwise defined has the meaning assigned to it in accordance with GAAP.
ARTICLE II.
THE CREDIT FACILITY
SECTION 2.1. COMMITMENTS TO MAKE TERM LOANS. In reliance upon the
representations and warranties of the Borrower set forth herein and subject to
the terms and conditions herein set forth, each of the Lenders severally agrees
to make a Term Loan to the Borrower on the Closing Date in the amount of such
Lender's Commitment. The proceeds of each Term Loan shall be disbursed by wire
transfer on the Closing Date as provided in written instructions delivered by
the Borrower to each of the Lenders on the Business Day prior to the Closing
Date. Each Term Loan will mature on the Maturity Date. Except as specified in
Section 1 of the Common Stock Purchase Opsion,
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the Borrower shall pay to the Lenders the Applicable Repayment Fee in connection
with any payment by or on behalf of the Borrower of any principal of the Term
Loans.
SECTION 2.2. INTEREST; PAYMENT IN KIND OPTION; AND DEFAULT
INTEREST.
(a) INTEREST RATE ON TERM LOANS. Subject to SECTION 2.2(c), the
Borrower shall pay to the Lenders interest on the outstanding principal amount
of the Term Loans at a rate PER ANNUM equal to 13%; PROVIDED, HOWEVER, that if
the Term Loans are not paid in full on or prior to the sixth Interest Payment
Date immediately succeeding the Closing Date, interest shall accrue on the
outstanding principal amount of the Term Loans at a rate PER ANNUM equal to
15.5%; PROVIDED, FURTHER, that the rate PER ANNUM equal to 15.5% shall apply
retroactively from such sixth Interest Payment Date to and including the Closing
Date and all Capitalized Interest from and including the Closing Date to such
Interest Payment Date shall be recalculated based upon a PER ANNUM rate of
interest equal to 15.5%.
(b) BASIS OF COMPUTATION OF INTEREST; PAYMENT OF INTEREST. Subject
to SECTION 2.2(a), all interest on the Term Loans shall be computed on the basis
of a 360-day year consisting of twelve 30-day months and shall accrete monthly
in arrears. The payment of interest is to be made not later than 12:00 noon (New
York City time) on each Interest Payment Date by wire transfer of immediately
available funds in accordance with SECTION 2.6.
(c) CAPITALIZED INTEREST. On each of the six Interest Payment
Dates immediately succeeding the Closing Date, the accrued and unpaid interest
that is then due and payable on the Term Loans shall be added to the then
aggregate outstanding principal amount of the Term Loans (such interest added to
the outstanding principal amount of the Term Loans, the "CAPITALIZED INTEREST"),
effective on and as of the applicable Interest Payment Date, and such
Capitalized Interest shall thereafter accrue interest at the applicable rate of
interest on the Term Loans. All references in this Agreement to the principal
amount or principal balance of the Term Loans (or any similar references) shall
include all such Capitalized Interest.
(d) DEFAULT INTEREST. (i) If the Borrower shall default in the
payment of the principal of or interest on any Term Loan or any other Obligation
becoming due hereunder, by acceleration or otherwise, or under any other Loan
Document, the Borrower shall on demand from time to time pay interest, to the
extent permitted by law, on the entire amount to but excluding the date of
actual payment (after as well as before judgment) to the extent lawful on and
after the Maturity Date, at a rate PER ANNUM equal to 450 basis points in excess
of the otherwise applicable interest rate on the Term Loans. In addition, on the
Maturity Date the Applicable Repayment Fee shall be added to the outstanding
principal amount of the Term Loans as of the Maturity Date and, effective on and
as of the Maturity Date, such Applicable Repayment Fee shall accrue interest at
a rate per annum equal to 450 basis points in excess of the otherwise applicable
interest rate on the Term Loans.
SECTION 2.3. MANDATORY PREPAYMENT. Subject to the security
interest granted under the Ascend Note to the extent such security interest is
perfected and not avoided, the Borrower shall prepay the Term Loans ratably in
accordance with the aggregate outstanding principal balances thereof, with any
insurance proceeds relating to the full or partial loss, theft, damage or
destruction of any inventory, equipment or other assets of the Borrower to the
extent that such insurance proceeds are not utilized by Borrower to replace,
repair or restore such inventory, equipment or assets within two (2) months
immediately succeeding the date of such loss, theft, damage or destruction. The
Borrower shall provide the Administrative Agent with an Officer's Certificate
setting forth in reasonable detail a description of any such loss, theft, damage
or destruction, the amount of insurance proceeds received or
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to be received in respect thereof and the disposition, if any, of such insurance
proceeds to replace, repair or restore such inventory, equipment or assets. The
Borrower shall also provide the Administrative Agent with any additional
information, including, but not limited to, copies of bills and invoices, with
respect to the foregoing. On or prior to the Fourth Business Day succeeding the
date of determination that such insurance proceeds are due and payable to the
Lenders in accordance with this SECTION 2.3, the Borrower shall apply such
insurance proceeds to prepay the Loans pursuant to this SECTION 2.3, by paying
to each Lender an amount equal to 100% of such Lender's PRO RATA share of the
aggregate principal amount of the Term Loans to be prepaid, PLUS accrued and
unpaid interest thereon to the Prepayment Date, PLUS the Applicable Repayment
Fee.
SECTION 2.4. OPTIONAL PREPAYMENT. The Borrower may, upon three
Business Days' prior written notice to each of the Lenders, prepay the Term
Loans at any time, in whole or in part, on a PRO RATA basis, by paying to each
applicable Lender an amount equal to 100% of such Lender's PRO RATA share of the
aggregate principal amount of Term Loans to be prepaid, PLUS accrued and unpaid
interest thereon to the Prepayment Date, PLUS the Applicable Repayment Fee.
SECTION 2.5. EFFECT OF NOTICE OF PREPAYMENT. The Borrower shall
notify the Lenders in writing at their addresses shown in the Loan Register of
any date set for prepayment (each such day, a "PREPAYMENT DATE") of Term Loans.
Once such notice is sent or mailed, the Term Loans to be prepaid shall become
due and payable on the Prepayment Date set forth in such notice.
Such notice may not be conditional.
SECTION 2.6. PAYMENTS.
(a) WIRE TRANSFER. Except as provided in SECTION 2.2(c) with
respect to Capitalized Interest, the principal of, the Applicable Repayment Fees
and interest on each Term Loan and all other Obligations arising under the Loan
Documents shall be payable by wire transfer in immediately available funds (in
United States dollars) to the Administrative Agent for the respective accounts
of the Lenders set forth below their signatures on the signature pages of this
Agreement or otherwise designated in the Loan Register from time to time to the
Borrower by any Lender by 12 noon, New York City time, on the due date therefor.
(b) PAYMENTS ON BUSINESS DAYS. If any payment to be made hereunder
or under any Term Note shall be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day (and such extension of
time shall be included in computing interest in connection with such payment).
(c) PARTIAL PREPAYMENTS AND REDEMPTIONS. All partial prepayments
and redemptions of the outstanding principal balance of the Term Loans shall be
made ratably amongst the applicable Lenders in accordance with their respective
shares of the aggregate outstanding principal balance of the Term Loans eligible
for prepayment or redemption.
(d) NO DEFENSE. To the fullest extent permitted by law, the
Borrower and the Guarantors shall make all payments hereunder, under the Term
Notes and under the other Loan Documents regardless of any defense or
counterclaim.
(e) ALLOCATION. Any money paid to, received by, or collected by
the Administrative Agent or any Lenders pursuant to this Agreement or any other
Loan Document, shall be applied in the following order, at the date or dates
fixed by the Administrative Agent:
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FIRST: to any unpaid fees and reimbursement or unpaid
expenses of the Administrative Agent hereunder;
SECOND: to the payment of all costs, expenses, other fees,
commissions and taxes owing to any Lender hereunder;
THIRD: to the indefeasible payment of all accrued interest
to the date of such payment or collection and any Applicable
Repayment Fees;
FOURTH: to the indefeasible payment of the amounts then due and
unpaid under this Agreement, the Term Notes or any other Loan Document
for principal, in respect of which or for the benefit of which such money
has been paid or collected, ratably, without preference or priority of
any kind, according to the amounts due and payable on the Term Notes for
principal; and
FIFTH: the balance, if any, to the Person lawfully
entitled thereto.
SECTION 2.7. RIGHT OF SET OFF; SHARING OF PAYMENTS, ETC.
(a) RIGHT OF SET-OFF. In addition to any rights now or hereafter
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence and during the continuance of any Event of
Default or if the Borrower becomes insolvent, however evidenced, the Borrower
authorizes each Lender at any time or from time to time, without presentment,
demand, protest or other notice of any kind to the Borrower or to any other
Person, any such notice being hereby expressly waived, to set off and to
appropriate and apply any and all deposits (general or special, time or demand,
provisional or final, whether or not collected or available) in any currency and
any other indebtedness at any time held or owing by such Lender or any of its
Affiliates (including, without limitation, by branches and agencies of such
Lender wherever located) to or for the credit or the account of the Borrower
against and on account of the Obligations of the Borrower to such Lender under
this Agreement or under any of the other Loan Documents, including, without
limitation, all interests in or participation in the Obligations purchased by
such Lender, and all other claims of any nature or description arising out of or
in connection with this Agreement or any other Loan Document, irrespective of
whether or not such Lender shall have made any demand hereunder and although the
Obligations, liabilities or claims, or any of them, shall be contingent or
unmatured. A Lender may exercise such rights notwithstanding that the amounts
concerned may be expressed in different currencies and each Lender is authorized
to effect any necessary conversions at a market rate of exchange reasonably
selected by it. A Lender exercising its rights under this SECTION 2.17(a) shall
provide prompt notice to the Borrower following such exercise.
(b) SHARING. If any Lender shall obtain from the Borrower payment
of any principal of or interest on any Term Loan owing to it or payment of any
other amount under this Agreement, a Loan Document or any Term Note held by it
though the exercise of any right of set-off, banker's lien or counterclaim or
similar right or otherwise (other than from the Administrative Agent as provided
herein) and, as a result of such payment, such Lender shall have received a
greater percentage of the principal of or interest on the Term Loans or such
other amounts then due to such Lender by the Borrower than the percentage
received by any other Lender, it shall promptly purchase from such other Lenders
participations in (or, if and to the extent specified by such Lender, direct
interests in) the Term Loans or such other amounts, respectively, owing to such
other Lenders (or any interest due thereon, as the case may be) in such amounts,
and make such other adjustments from time to time as shall be equitable, to the
end that all the Lenders shall share the benefit of such excess payment (net of
any expenses which may be incurred by such Lender in obtaining or preserving
such excess payment) pro rata in accordance with the
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unpaid principal of and/or interest on the Term Loans or such other amounts,
respectively, owing to each of the Lenders. To such end all the Lenders shall
make appropriate adjustments among themselves (by the resale of participation
sold or otherwise) if such payment is rescinded or must otherwise be restored.
(c) NO REQUIREMENT. Nothing in this Agreement shall require any
Lender to exercise any such right or shall affect the right of any Lender to
exercise, and retain the benefits of exercising, any such right with respect to
any other indebtedness or obligation of the Borrower. If, under any applicable
bankruptcy, insolvency or other similar law, any Lender receives a secured claim
in lieu of a set-off to which this SECTION 2.7 applies, such Lender shall, to
the extent practicable, exercise its rights in respect of such secured claim in
manner consistent with the rights of the Lenders entitled under this SECTION 2.7
to share in the benefits of any recovery on such secured claim.
SECTION 2.8. CERTAIN FEES. The Borrower agrees to pay to the
Administrative Agent, for its own account, amounts for the Lenders' reasonable
legal and other out-of-pocket expenses incurred in connection with the Term
Loans, the Loan Documents hereunder and all other amounts owing under this
Agreement.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
As of the Closing Date, the Borrower and each Guarantor hereby
jointly and severally agrees with, and represents and warrants to, the Lenders
that each of the following representations and warranties is true:
SECTION 3.1. CORPORATE ORGANIZATION. The Borrower is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Texas and has all requisite corporate power and corporate authority to
own, lease, and operate its properties and to carry on its business as now being
conducted. No actions or proceedings to dissolve the Borrower are pending or, to
the best knowledge of the Borrower, threatened.
SECTION 3.2. QUALIFICATION. The Borrower is duly qualified or
licensed to do business as a foreign corporation and is in good standing, or, as
designated on SCHEDULE 3.2, has applied for such qualification or licensing, in
each of the jurisdictions set forth on SCHEDULE 3.2, which are all the
jurisdictions in which it owns, leases, or operates property or in which such
qualification or licensing is required for the conduct of its business.
SECTION 3.3. CHARTER AND BYLAWS. The Borrower has made available
to the Lenders accurate and complete copies of (i) the charter and bylaws of
each of the Borrower and the Subsidiaries as currently in effect, (ii) the stock
records of each of the Borrower and the Subsidiaries, and (iii) the minutes of
all meetings of the respective Boards of Directors of the Borrower and the
Subsidiaries, any committees of such Boards, and the shareholders of the
Borrower and the Subsidiaries (and all consents in lieu of such meetings). Such
records, minutes, and consents accurately reflect the stock ownership of the
Borrower and the Subsidiaries and all actions taken by such Boards of Directors,
committees, and shareholders. Neither the Borrower nor any Subsidiary is in
violation of any provision of its charter or bylaws, other than violations
which, individually or in the aggregate, do not and will not have a Material
Adverse Effect.
SECTION 3.4. CAPITALIZATION OF THE BORROWER. The authorized
Capital Stock of the Borrower consists of 5,000,000 shares of Common Stock, no
par value (the "COMMON STOCK"), of which,
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as of the date hereof, 1,626,138 shares are outstanding and no shares are held
in the Borrower's treasury, and 2,000,000 shares of preferred stock of which, as
of the date hereof, 1,364,085 shares are outstanding and no shares are held in
the Borrower's treasury. All outstanding shares of Capital Stock of the Borrower
have been validly issued and are fully paid and nonassessable, and no shares of
Capital Stock of the Borrower are subject to, nor have any been issued in
violation of, preemptive or similar rights. Except as set forth on SCHEDULE
3.14, all issuances, sales, and repurchases by the Borrower of shares of its
Capital Stock have been effected in compliance with all Applicable Laws,
including without limitation applicable federal and state securities laws. As of
the date hereof, an aggregate of 244,757 shares of Common Stock of the Borrower
are reserved for issuance and are issuable upon the exercise of stock options
granted under the Borrower's stock option plan (such options currently
outstanding are to purchase a total of 225,180 shares of Common Stock);
furthermore, an aggregate of 502,905 shares of Common Stock of the Borrower are
reserved for issuance and are issuable upon the exercise of outstanding warrants
(subject to certain anti-dilution provisions applicable thereto); furthermore,
an aggregate of 20,130 shares of Common Stock are reserved for issuance and are
issuable upon the conversion of outstanding convertible notes. Except as
disclosed above in this SECTION 3.4, there are outstanding (i) no shares of
Capital Stock or other voting securities of the Borrower, (ii) no securities of
the Borrower convertible into or exchangeable for shares of Capital Stock or
other voting securities of the Borrower, (iii) no options or other rights to
acquire from the Borrower, and no obligation of the Borrower to issue or sell,
any shares of capital stock or other voting securities of the Borrower or any
securities of the Borrower convertible into or exchangeable for such capital
stock or voting securities, and (iv) no equity equivalents, interests in the
ownership or earnings, or other similar rights of or with respect to the
Borrower. There are no outstanding obligations of the Borrower or any Subsidiary
to repurchase, redeem, or otherwise acquire any of the foregoing shares,
securities, options, equity equivalents, interests, or rights, except as
otherwise provided in the Certificate of Designations for the Preferred Stock.
The Borrower is not a party to, and is not aware of, any voting agreement,
voting trust, or similar agreement or arrangement relating to any class or
series of its capital stock.
SECTION 3.5. AUTHORITY RELATIVE TO THIS AGREEMENT. The Borrower
has full corporate power and corporate authority to execute, deliver, and
perform this Agreement and the other Loan Documents to which it is a party and
to consummate the transactions contemplated hereby and thereby. The execution,
delivery, and performance by the Borrower of this Agreement and the other Loan
Documents to which it is a party, and the consummation by it of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action of the Borrower. This Agreement has been duly executed and
delivered by the Borrower and constitutes, and each Loan Document executed or to
be executed by the Borrower has been, or when executed will be, duly executed
and delivered by the Borrower and constitutes, or when executed and delivered
will constitute, valid and legally binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
except that such enforceability may be limited by (i) applicable bankruptcy,
insolvency, reorganization, moratorium, and similar laws affecting creditors'
rights generally and (ii) equitable principles which may limit the availability
of certain equitable remedies (such as specific performance) in certain
instances.
SECTION 3.6. NONCONTRAVENTION. The execution, delivery, and
performance by the Borrower and each of the Guarantors of this Agreement and the
other Loan Documents to which it is a party and the consummation by it of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or result in a violation of any provision of the charter or bylaws of the
Borrower or any Guarantor, (ii) conflict with or result in a violation of any
provision of, or constitute (with or without the giving of notice or the passage
of time or both) a default under, or give rise (with or without the giving of
notice or the passage of time or both) to any right of termination,
cancellation, or acceleration under, or
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require any consent, approval, authorization or waiver of, or notice to, any
party to, any bond, debenture, note (including, without limitation, the Ascend
Note and the Convertible Notes) mortgage, indenture, lease, contract, agreement,
or other instrument or obligation (each, a "MATERIAL CONTRACT"), to which the
Borrower or any Guarantor is a party or by which the Borrower or any Guarantor
or any of their respective properties may be bound or any Permit held by the
Borrower or any Guarantor, (iii) except with respect to Liens in favor of the
Administrative Agent and the Lenders, result in the creation or imposition of
any Encumbrance upon the properties of the Borrower or any Guarantor, or (iv)
assuming compliance with the matters referred to in SECTION 3.7, violate any
Applicable Law binding upon the Borrower or any Guarantor, except, in the case
of clauses (ii), (iii), and (iv) above, for any such conflicts, violations,
defaults, terminations, cancellations, accelerations, or Encumbrances which
would not, individually or in the aggregate, have a Material Adverse Effect, and
except, in the case of clause (ii) above, for (A) such consents, approvals,
authorizations, and waivers that have been obtained and are unconditional and in
full force and effect and such notices that have been duly given and (B) such
consents, approvals, authorizations, waivers, and notices that are disclosed on
SCHEDULE 3.6.
SECTION 3.7. GOVERNMENTAL APPROVALS. No consent, approval, order,
or authorization of, or declaration, filing, or registration with, any
Governmental Entity is required to be obtained or made by the Borrower or any
Guarantor in connection with the execution, delivery, or performance by the
Borrower and each of the Guarantors of this Agreement and the other Loan
Documents to which it is a party or the consummation by it of the transactions
contemplated hereby or thereby, other than as set forth on SCHEDULE 3.7.
SECTION 3.8. SUBSIDIARIES.
(a) The Borrower does not own, directly or indirectly, any Capital
Stock of, or other equity interest in, any corporation or have any direct or
indirect equity or ownership interest in any other person, other than the
Subsidiaries. SCHEDULE 3.8 lists each Subsidiary, the jurisdiction of
incorporation of each Subsidiary, and the authorized and outstanding Capital
Stock of each Subsidiary. Each Subsidiary is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation. Each Subsidiary has all requisite corporate power and corporate
authority to own, lease, and operate its properties and to carry on its business
as now being conducted. No actions or proceedings to dissolve any Subsidiary are
pending, or to the knowledge of the Borrower, threatened.
(b) Except as otherwise indicated on SCHEDULE 3.8, all the
outstanding Capital Stock or other equity interests of each Subsidiary are owned
directly or indirectly by the Borrower, free and clear of all Encumbrances. All
outstanding shares of Capital Stock of each Subsidiary have been validly issued
and are fully paid and nonassessable. No shares of Capital Stock or other equity
interests of any Subsidiary are subject to, nor have any been issued in
violation of, preemptive or similar rights.
(c) Except as set forth on SCHEDULE 3.8, there are outstanding (i)
no shares of Capital Stock or other voting securities of any Subsidiary, (ii) no
securities of the Borrower or any Subsidiary convertible into or exchangeable
for shares of Capital Stock or other voting securities of any Subsidiary, (iii)
no options or other rights to acquire from the Borrower or any Subsidiary, and
no obligation of the Borrower or any Subsidiary to issue or sell, any shares of
Capital Stock or other voting securities of any Subsidiary or any securities
convertible into or exchangeable for such Capital Stock or voting securities,
and (iv) no equity equivalents, interests in the ownership or earnings, or other
similar rights of or with respect to any Subsidiary. There are no outstanding
obligations of the Borrower or any Subsidiary to
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repurchase, redeem, or otherwise acquire any of the foregoing shares,
securities, options, equity equivalents, interests, or rights.
SECTION 3.9. COMMON STOCK PURCHASE OPTION. The shares of Common
Stock to be issued by the Borrower pursuant to the Common Stock Purchase Option
have been duly authorized for such issuance and, when issued and delivered by
the Borrower in accordance with the provisions of the Common Stock Purchase
Option, will be validly issued, fully paid, and nonassessable. The issuance of
the Common Stock under the Common Stock Purchase Option is not subject to any
preemptive or similar rights, except for those which are the subject of waivers
that have been obtained and are unconditional and in full force and effect.
SECTION 3.10. FINANCIAL STATEMENTS. The Borrower has delivered to
Lenders accurate and complete copies of (i) the Borrower's audited consolidated
balance sheets as of December 31, 1995, 1996 and 1997, and the related audited
consolidated statements of income, stockholders' equity, and cash flows for each
of the years then ended, and the notes and schedules thereto, together with the
reports thereon of Deloitte & Touche, L.L.P., independent public accountants
(the "AUDITED FINANCIAL STATEMENTS"), and (ii) the Borrower's unaudited
consolidated balance sheet as of September 30, 1998 (the "LATEST BALANCE
SHEET")) and the related unaudited consolidated statements of income,
stockholders' equity, and cash flows for the three-month period then ended
(together with the Latest Balance Sheet, the "LATEST FINANCIAL STATEMENTS"),
certified by the Borrower's chief financial officer (collectively, the
"FINANCIAL STATEMENTS"). The Financial Statements (i) represent actual bona fide
transactions, (ii) have been prepared from the books and records of the Borrower
and its consolidated Subsidiaries in conformity with GAAP applied on a basis
consistent with preceding years throughout the periods involved, except that the
Latest Financial Statements are not accompanied by notes or other textual
disclosure required by GAAP, and (iii) fairly present in all material respects
the Borrower's consolidated financial position as of the respective dates
thereof and its consolidated results of operations and cash flows for the
periods then ended. Except for a $1,000,000 consulting services fee received by
the Borrower in 1997 from American Communications Services, Inc., the statements
of income included in the Financial Statements do not contain any items of
special or nonrecurring income, and the balance sheets included in the Financial
Statements do not reflect any write-up or revaluation increasing the book value
of any assets, nor have there been any transactions since September 30,1998
giving rise to special or nonrecurring income or any such write-up or
revaluation. All financial projections, forecasts, and other forward-looking
information provided by the Borrower to Lenders were, as of their respective
dates, prepared in good faith and on a basis that management of the Borrower
believed to be reasonable.
SECTION 3.11. ABSENCE OF UNDISCLOSED LIABILITIES. To the best
knowledge of the Borrower, neither the Borrower nor any Subsidiary has any
liability or obligation (whether accrued, absolute, contingent, unliquidated, or
otherwise, and whether due or to become due), except (i) liabilities reflected
on the Latest Balance Sheet, (ii) liabilities described in the notes
accompanying the Audited Financial Statements dated as of December 31, 1997,
(iii) liabilities which have arisen since the date of the Latest Balance Sheet
in the ordinary course of business (none of which is a material liability for
breach of contract, breach of warranty, tort, or infringement), (iv) liabilities
arising under executory contracts entered into in the ordinary course of
business (none of which is a material liability for breach of contract), (v)
liabilities specifically set forth on SCHEDULE 3.11, and (vi) other liabilities
which, in the aggregate, are not material to the Borrower and the Subsidiaries
considered as a whole.
SECTION 3.12. ABSENCE OF CERTAIN CHANGES. Except as disclosed on
SCHEDULE 3.12, since September 30, 1998: (i) there has not been any change,
development, or effect, individually or in the aggregate, that has had, or might
reasonably be expected to have, a Material Adverse Effect on the
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Borrower or a Subsidiary; (ii) the businesses of the Borrower and the
Subsidiaries have been conducted only in the ordinary course consistent with
past practice; (iii) neither the Borrower nor any Subsidiary has incurred any
material liability, engaged in any material transaction, or entered into any
material agreement outside the ordinary course of business consistent with past
practice; (iv) neither the Borrower nor any Subsidiary has suffered any material
loss, damage, destruction, or other casualty to any of its assets (whether or
not covered by insurance); and (v) neither the Borrower nor any Subsidiary has
or has taken action to:
(a) amend its charter or bylaws;
(b) (i) issue, sell, or deliver (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to
purchase, or otherwise) any shares of its Capital Stock of any class or
any other securities or equity equivalents; or (ii) amend in any respect
any of the terms of any such securities outstanding as of the date
hereof;
(c) (i) split, combine, or reclassify any shares of its Capital
Stock; (ii) declare, set aside, or pay any dividend or other distribution
(whether in cash, stock, or property or any combination thereof) in
respect of its Capital Stock; (iii) repurchase, redeem, or otherwise
acquire any of its securities or any securities of any Subsidiary; or
(iv) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing a liquidation, dissolution, merger,
consolidation, restructuring, recapitalization, or other reorganization
of the Borrower or any Subsidiary;
(d) (i) except in the ordinary course of business consistent with
past practice, create, incur, guarantee, or assume any indebtedness for
borrowed money or otherwise become liable or responsible for the
obligations of any other person; (ii) make any loans, advances, or
capital contributions to, or investments in, any other person (other than
to wholly owned Subsidiaries); (iii) pledge or otherwise encumber shares
of Capital Stock of the Borrower or any Subsidiary; or (iv) except in the
ordinary course of business consistent with past practice, mortgage or
pledge any of its assets, tangible or intangible, or create or suffer to
exist any lien thereupon;
(e) (i) enter into, adopt, or (except as may be required by law)
amend or terminate any bonus, profit sharing, compensation, severance,
termination, stock option, stock appreciation right, restricted stock,
performance unit, stock equivalent, stock purchase, pension, retirement,
deferred compensation, employment, severance, or other employee benefit
agreement, trust, plan, fund, or other arrangement for the benefit or
welfare of any director, officer, or employee; (ii) except for normal
increases in the ordinary course of business consistent with past
practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense to the Borrower, increase in any manner
the compensation or fringe benefits of any director, officer, or
employee; or (iii) pay to any director, officer, or employee any benefit
not required by any employee benefit agreement, trust, plan, fund, or
other arrangement as in effect on the date hereof;
(f) acquire, sell, lease, transfer, or otherwise dispose of,
directly or indirectly, any assets outside the ordinary course of
business consistent with past practice or any assets that in the
aggregate are material to the Borrower and the Subsidiaries considered as
a whole;
(g) acquire (by merger, consolidation, or acquisition of stock or
assets or otherwise) any corporation, partnership, or other business
organization or division thereof;
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(h) make any capital expenditure or expenditures which,
individually, is in excess of $150,000 or, in the aggregate, are in
excess of $750,000;
(i) amend any Tax Return or make any Tax election or settle or
compromise any federal, state, local, or foreign Tax liability material
to the Borrower and the Subsidiaries considered as a whole;
(j) pay, discharge, or satisfy any claims, liabilities, or
obligations (whether accrued, absolute, contingent, unliquidated, or
otherwise, and whether asserted or unasserted), other than the payment,
discharge, or satisfaction in the ordinary course of business consistent
with past practice, or in accordance with their terms, of liabilities
reflected or reserved against in the Financial Statements or incurred
since September 30, 1998 in the ordinary course of business consistent
with past practice;
(k) enter into any lease, contract, agreement, commitment,
arrangement, or transaction outside the ordinary course of business
consistent with past practice;
(l) amend, modify, or change in any material respect any existing
lease, contract, or agreement, other than in the ordinary course of
business consistent with past practice;
(m) waive, release, grant, or transfer any rights of value, other
than in the ordinary course of business consistent with past practice;
(n) lay off any of its employees;
(o) change any of its banking or safe deposit arrangements;
(p) change any of the accounting principles or practices used by
it, except for any change required by reason of a concurrent change in
GAAP and notice of which has been given in writing by the Borrower to the
Administrative Agent; or
(q) authorize or propose, or agree in writing or otherwise to
take, any of the actions described in this Section.
SECTION 3.13. TAX MATTERS. Except as disclosed on SCHEDULE
3.13:
(a) the Borrower and each Subsidiary have duly filed all federal,
state, local, and foreign Tax Returns required to be filed by or with
respect to them with the IRS or other applicable taxing authority, and no
extensions with respect to such Tax Returns have been requested or
granted;
(b) the Borrower and each Subsidiary have paid, or adequately
reserved against in the Financial Statements, all Taxes due, or claimed
by any Taxing authority to be due, from or with respect to them, except
Taxes that are being contested in good faith by appropriate legal
proceedings and for which adequate reserves have been set aside as
disclosed on SCHEDULE 3.13;
(c) there has been no issue raised or adjustment proposed (and
none is pending) by the IRS or any other taxing authority in connection
with any of the Tax Returns;
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(d) the Borrower and each Subsidiary have made all deposits
required with respect to Taxes;
(e) no waiver or extension of any statute of limitations as to any
federal, state, local, or foreign Tax matter has been given by or
requested from the Borrower or any Subsidiary; and
(f) the Borrower has not filed a consent under Section 341(f) of
the Code.
SECTION 3.14. COMPLIANCE WITH LAWS. Except as disclosed on
SCHEDULE 3.14, to the best knowledge of the Borrower, the Borrower and the
Subsidiaries have complied with all Applicable Laws (including without
limitation Applicable Laws relating to securities, properties, business products
and services, manufacturing processes, advertising and sales practices,
employment practices, terms and conditions of employment, wages and hours,
safety, occupational safety, health, environmental protection, product safety,
and civil rights). Neither the Borrower nor any Subsidiary has received any
written notice, which has not been dismissed or otherwise disposed of, that the
Borrower or any Subsidiary has not so complied. Neither the Borrower nor any
Subsidiary is charged or, to the best knowledge of the Borrower, threatened
with, or, to the best knowledge of the Borrower, under investigation with
respect to, any violation of any Applicable Law relating to any aspect of the
business of the Borrower or any Subsidiary.
SECTION 3.15. LEGAL PROCEEDINGS. There are no Proceedings pending
or, to the best knowledge of the Borrower, threatened against or involving the
Borrower or any Subsidiary (or any of their respective directors or officers in
connection with the business or affairs of the Borrower or any Subsidiary) or
any properties or rights of the Borrower or any Subsidiary, except (i) as
disclosed on SCHEDULE 3.15, (ii) for any Proceedings that pertain to routine
claims by Persons other than Governmental Entities that are fully covered by
insurance (subject to applicable insurance deductibles), (iii) for minor product
or service warranty claims arising in the usual and ordinary course of business
which in the aggregate may be satisfied at nominal cost to the Borrower, and
(iv) for Proceedings which, individually or in the aggregate, if prosecuted to
judgment, would not have a Material Adverse Effect on the Borrower. Except as
disclosed on SCHEDULE 3.15, any and all potential liability of the Borrower and
the Subsidiaries under such Proceedings is adequately covered (except for
standard deductible amounts) by the existing insurance maintained by the
Borrower and the Subsidiaries described in SECTION 3.31. Neither the Borrower
nor any Subsidiary is subject to any judgment, order, writ, injunction, or
decree of any Governmental Entity which has had or is reasonably likely to have
a Material Adverse Effect. There are no Proceedings pending or, to the best
knowledge of the Borrower, threatened seeking to restrain, prohibit, or obtain
damages or other relief in connection with this Agreement or the other Loan
Documents or the transactions contemplated hereby or thereby.
SECTION 3.16. TITLE TO PROPERTIES. Each of the Borrower and the
Subsidiaries has good and indefeasible title, and in the case of real property
insurable title, to all properties (real, personal, and mixed, tangible and
intangible) it owns or purports to own, including without limitation the
properties reflected in its books and records and in the Latest Balance Sheet,
other than those disposed of after the date of such balance sheet in the
ordinary course of business consistent with past practice, free and clear of all
Encumbrances and Liens except Permitted Liens, except: as disclosed on SCHEDULE
3.16, as set forth in the Latest Balance Sheet as securing specific liabilities,
liens for Taxes not yet due and payable, statutory liens (including
materialmen's, mechanic's, repairmen's, landlord's, and other similar liens)
arising in connection with the ordinary course of business securing payments not
yet due and payable, and such imperfections or irregularities of title, if any,
as (A) are not substantial in character, amount, or extent and do not materially
detract from the value of the property subject thereto, (B) do not materially
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interfere with either the present or intended use of such property, and (C) do
not, individually or in the aggregate, materially interfere with the conduct of
the Borrower's or any Subsidiary's normal operations. Except as disclosed on
SCHEDULE 3.16, no financing statement (or other instrument sufficient or
effective as a financing statement) under the Uniform Commercial Code with
respect to any properties of the Borrower or any Subsidiary has been filed and
is effective in any jurisdiction, and the Borrower and the Subsidiaries have not
signed any such financing statement (or other instrument) or any mortgage or
security agreement authorizing any secured party thereunder to file any such
financing statement (or other instrument).
SECTION 3.17. SUFFICIENCY AND CONDITION OF PROPERTIES. The
properties owned, leased, or used by the Borrower and the Subsidiaries are (i)
in the case of tangible properties, in good operating condition and repair
(ordinary wear and tear excepted) and have been maintained in accordance with
standard industry practice, (ii) suitable for the purposes used, and (iii)
adequate and sufficient for the normal operation of the Borrower's and the
Subsidiaries' businesses, as presently conducted. The Borrower and the
Subsidiaries own or have a valid leasehold interest in, or otherwise have a
valid right to use, all such properties. To the best knowledge of the Borrower,
such properties and their uses conform in all material respects to all
Applicable Laws, and the Borrower has not, nor has any Subsidiary, received any
notice to the contrary. All such tangible properties are in the Borrower's or a
Subsidiary's possession or under their control.
SECTION 3.18. REAL PROPERTY.
(a) Set forth on SCHEDULE 3.18 is a list, by street address and
(in the case of owned real property) deed reference, of all real property owned
or leased by the Borrower or any Subsidiary (for purposes of this Section, the
"REAL PROPERTY"), a summary description of the principal facilities and
structures (if any) located thereon, and, with respect to leased Real Property,
a summary description of the applicable leases and the material terms thereof.
There are no persons (other than the Borrower or a Subsidiary) in possession of
any portion of the Real Property as lessees, tenants at sufferance, or
trespassers, nor does any person (other than the Borrower or a Subsidiary) have
a lease, tenancy, or other right of occupancy or use of any portion of the Real
Property. The Real Property has full and free access to and from public
highways, streets, and roads, and the Borrower has no knowledge of any pending
or threatened Proceeding or any other fact or condition which would limit or
result in the termination of such access. To the best knowledge of the Borrower,
there exists no Proceeding or court order, or building code provision, deed
restriction, or restrictive covenant (recorded or otherwise), or other private
or public limitation, which might in any way impede or adversely affect the
continued use of the Real Property by the Borrower and the Subsidiaries in the
manner it is currently used.
(b) To the best knowledge of the Borrower, all buildings,
improvements, and fixtures situated on the Real Property conform in all material
respects to all Applicable Laws. All the Real Property is zoned for the various
purposes for which such Real Property is being used, and there exists no pending
or, to the best knowledge of the Borrower, threatened Proceeding which might
adversely affect the validity of such zoning.
(c) The Real Property is connected to and serviced by water,
sewage disposal, gas, telephone, and electric facilities which are adequate for
the current use of the Real Property and, to the best knowledge of the Borrower,
are in compliance with all Applicable Laws. To the best knowledge of the
Borrower, all public utilities required for the operation of the Real Property
enter the Real Property through adjoining public streets or, if they pass
through adjoining private land, do so in accordance with
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valid public easements, and all utility lines and mains located on the Real
Property have been properly dedicated to, and are serviced and maintained by,
the appropriate public or quasi-public entity.
(d) The buildings, improvements, and fixtures situated on the Real
Property are in good condition and repair (excepting ordinary wear and tear and
minor maintenance and repair problems which would normally be associated with
such assets when used in connection with the operation of the Borrower's and the
Subsidiaries' businesses), free of any patent structural defects of a material
nature.
(e) Neither the whole nor any part of the Real Property is subject
to any pending Proceeding for condemnation or other taking by any Governmental
Entity, and, to the best knowledge of the Borrower, no such condemnation or
other taking is contemplated or threatened.
(f) There are no unpaid charges, debts, liabilities, claims, or
obligations incurred by or against the Borrower arising from the construction,
occupancy, ownership, use, or operation of the Real Property, or the buildings,
improvements, or fixtures situated thereon, or the business operated thereon,
which could give rise to any mechanic's or materialmen's or other statutory lien
against the Real Property, or the buildings, improvements, or fixtures situated
thereon, or any part thereof, or for which the Borrower or any Subsidiary will
be responsible.
(g) Except for the Borrower's facility at 1800 and 1812 North
Forest Park Boulevard in Fort Worth, Texas, the Real Property is not within any
area determined by the Department of Housing and Urban Development to be flood
prone under the Federal Flood Disaster Protection Act of 1973.
(h) The Borrower has made available to the Administrative Agent
accurate and complete copies of all title insurance policies, title reports,
other title documents, surveys, certificates of occupancy, and Permits in the
possession of the Borrower relating to the Real Property or the buildings,
improvements, or fixtures situated thereon.
SECTION 3.19. TANGIBLE PERSONAL PROPERTY. Set forth on SCHEDULE
3.19 is a list, as of the most recent practicable date, of all furniture,
equipment, machinery, computer hardware, materials, motor vehicles, rolling
stock, apparatus, tools, implements, appliances, and other tangible personal
property (other than spare parts, supplies, and inventory) owned, leased, or
used by the Borrower or any Subsidiary, except for items having a value
individually of less than $10,000 which do not, in the aggregate, have a value
exceeding $100,000. The motor vehicles and rolling stock owned or leased by the
Borrower and the Subsidiaries are utilized solely for the transportation by the
Borrower or a Subsidiary, for its own account and not for the account of others,
of inventories, supplies, and other items relating to the operation of the
Borrower's and the Subsidiaries' businesses, and such activities do not require
the obtainment of any Permit.
SECTION 3.20. LEASED PROPERTY. Set forth on SCHEDULE 3.20 is a
list and summary description of the material terms of all leases under which the
Borrower or any Subsidiary is the lessee of real or personal property. Each of
the Borrower and the Subsidiaries has good and valid leasehold interests in all
properties held by it under lease. The lessee under each such lease and its
predecessor under each such lease, if any, has been in peaceable possession (or
remedied any claims relating thereto) of the property covered thereby since the
commencement of the original term of such lease. No waiver, indulgence, or
postponement of the lessee's obligations under any such lease has been granted
by the lessor or of the lessor's obligations thereunder by the lessee. The
lessee under each such lease is not in breach of or in default under such lease,
nor has any event occurred which (with or without the giving of notice or the
passage of time or both) would constitute a default by the lessee under such
lease, and the
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lessee has not received any notice from, or given any notice to, the lessor
indicating that the lessee or the lessor is in breach of or in default under
such lease. To the best knowledge of the Borrower, none of the lessors under
such leases is in breach thereof or in default thereunder. The lessee under each
such lease has full right and power to occupy or possess, as the case may be,
all the property covered by such lease.
SECTION 3.21. SPECIAL REPRESENTATION REGARDING SUBSCRIBERS. As of
December 31, 1998, the Borrower had a total of approximately 170,000 subscribers
under contract with the Borrower regarding the provision of Internet services.
SECTION 3.22. RECEIVABLES. All receivables (including accounts and
notes receivable, employee advances, and accrued interest receivables) of the
Borrower and the Subsidiaries as reflected on the Latest Balance Sheet or
arising since the date thereof are valid obligations of the respective makers
thereof, have arisen in the ordinary course of business for goods or services
delivered or rendered, are not subject to any valid defenses, counterclaims, or
set offs, and have been collected or are collectible in full at their recorded
amounts in the ordinary course of business without the expectation of the need
to resort to litigation or other extraordinary collection efforts, net of all
cash discounts and doubtful accounts as reflected on the Latest Balance Sheet
(in the case of receivables so reflected) or on the books of the Borrower and
the Subsidiaries (in the case of receivables arising since the date thereof).
The allowances for doubtful accounts reflected on the Latest Balance Sheet and
on the books of the Borrower and the Subsidiaries were determined in accordance
with GAAP and were and are reasonable in light of historical data and other
relevant information.
SECTION 3.23. INTELLECTUAL PROPERTY. Except for the trademarks,
service marks, and trade names set forth on SCHEDULE 3.23, the Borrower and the
Subsidiaries do not own, hold, use, or have pending any Intellectual Property.
The Borrower and the Subsidiaries own or have rights to use all trademarks,
service marks, and trade names, free from burdensome restrictions, that are
necessary for the operation of their respective businesses as presently
conducted. The Borrower and the Subsidiaries have not received any written
notice or claim of any infringement, violation, misuse, or misappropriation by
the Borrower or any Subsidiary of any Intellectual Property owned or purported
to be owned by any other person.
SECTION 3.24. PERMITS. To the best knowledge of the Borrower,
except for qualifications or licenses to do business in the states expressly
listed on SCHEDULE 3.2 as states with which the Borrower has a pending
application for qualification or license, the Borrower and the Subsidiaries hold
all Permits necessary or required for the conduct of the business of the
Borrower and the Subsidiaries as currently conducted. Each of such Permits is in
full force and effect, the Borrower or such Subsidiary is in compliance with all
its obligations with respect thereto, and, to the best knowledge of the
Borrower, no event has occurred which permits, or with or without the giving of
notice or the passage of time or both would permit, the revocation or
termination of any thereof. Except as disclosed on SCHEDULE 3.24, no notice has
been issued by any Governmental Entity and no Proceeding is pending or, to the
best knowledge of the Borrower, threatened with respect to any alleged failure
by the Borrower or a Subsidiary to have any Permit the absence of which would
have a Material Adverse Effect.
SECTION 3.25. AGREEMENTS.
(a) Set forth on SCHEDULE 3.25 is a list of all the following
agreements, arrangements, and understandings (written or oral, formal or
informal) (collectively, for purposes of this Section, "agreements", and each a
Material Contract) to which the Borrower or any Subsidiary is a party or by
which the Borrower or any Subsidiary or any of their respective properties is
otherwise bound:
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(i) collective bargaining agreements and similar agreements
with employees as a group;
(ii) employee benefit agreements, trusts, plans, funds, or other
arrangements of any nature;
(iii) agreements with any current or former shareholder, director,
officer, employee, consultant, or advisor or any affiliate of any such
person;
(iv) agreements between or among the Borrower and any of the
Subsidiaries;
(v) indentures, mortgages, security agreements, notes, loan or
credit agreements, or other agreements relating to the borrowing of money
by the Borrower or any Subsidiary or to the direct or indirect guarantee
or assumption by the Borrower or any Subsidiary of any obligation of
others, including any agreement that has the economic effect although not
the legal form of any of the foregoing;
(vi) agreements relating to the acquisition or disposition of
assets, other than those entered into in the ordinary course of business
consistent with past practice;
(vii) agreements relating to the acquisition or disposition of any
interest in any business enterprise;
(viii) agreements with respect to the lease of real or personal
property;
(ix) agreements concerning the management or operation of any real
property;
(x) any broker, distributor, dealer, manufacturer's
representative, sales, agency, sales promotion, advertising, market
research, marketing, consulting, research and development, maintenance,
service, or repair agreement involving more than $10,000;
(xi) license, royalty, or other agreements relating to
Intellectual Property;
(xii) partnership, joint venture, and profit sharing agreements
(xiii) agreements with any Governmental Entity;
(xiv) agreements relating to the release or disposal of Hazardous
Material;
(xv) agreements in the nature of a settlement or a conciliation
agreement arising out of any claim asserted by any other person;
(xvi) agreements containing any covenant limiting the freedom of
the Borrower or any Subsidiary to engage in any line of business or
compete with any other person in any geographic area or during any period
of time;
(xvii) powers of attorney granted by the Borrower or any
Subsidiary in favor of any person;
(xviii) agreements not made in the ordinary course of business;
and
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(xix) other agreements, whether or not made in the ordinary course
of business, that are material to the business, assets, results of
operations, condition (financial or otherwise), or prospects of the
Borrower and the Subsidiaries considered as a whole.
(b) The Borrower has made available to the Lenders accurate and
complete copies of the agreements listed on SCHEDULE 3.25. Each of such
agreements is a valid and binding agreement of the Borrower and the Subsidiaries
(to the extent each is a party thereto) and (to the best knowledge of the
Borrower) the other party or parties thereto, enforceable against the Borrower
and the Subsidiaries (to the extent each is a party thereto) and (to the best
knowledge of the Borrower) such other party or parties in accordance with its
terms. Except as set forth on SCHEDULE 3.25, neither the Borrower nor any
Subsidiary is in breach of or in default under, nor has any event occurred which
(with or without the giving of notice or the passage of time or both) would
constitute a default by the Borrower or any Subsidiary under, any of such
agreements, and neither the Borrower nor any Subsidiary has received any notice
from, or given any notice to, any other party indicating that the Borrower or
any Subsidiary is in breach of or in default under any of such agreements. To
the best knowledge of the Borrower, no other party to any of such agreements is
in breach of or in default under such agreements, nor has any assertion been
made by the Borrower or any Subsidiary of any such breach or default.
(c) Neither the Borrower nor any Subsidiary has received notice of
any plan or intention of any other party to any agreement to exercise any right
of offset with respect to, or any right to cancel or terminate, any agreement,
and neither the Borrower nor any Subsidiary knows of any fact or circumstance
that would justify the exercise by any such other party of such a right other
than the automatic termination of such agreement in accordance with its terms.
Neither the Borrower nor any Subsidiary currently contemplates, or has reason to
believe any other person currently contemplates, any amendment or change to any
agreement, which amendment or change could have a Material Adverse Effect.
SECTION 3.26. ERISA.
(a) Set forth on SCHEDULE 3.26 is a list identifying each
"employee benefit plan", as defined in Section 3(3) of ERISA, (i) which is
subject to any provision of ERISA, (ii) which is maintained, administered, or
contributed to by the Borrower or any affiliate of the Borrower, and (iii) which
covers any employee or former employee of the Borrower or any affiliate of the
Borrower or under which the Borrower or any affiliate of the Borrower has any
liability. The Borrower has made available to the Administrative Agent accurate
and complete copies of such plans (and, if applicable, the related trust
agreements) and all amendments thereto and written interpretations thereof,
together with (i) the three most recent annual reports (Form 5500 including, if
applicable, Schedule B thereto) prepared in connection with any such plan and
(ii) the most recent actuarial valuation report prepared in connection with any
such plan. Such plans are referred to in this Section as the "EMPLOYEE PLANS."
For purposes of this Section only, an "affiliate" of any person means any other
person which, together with such person, would be treated as a single employer
under Section 414 of the Code. The only Employee Plans which individually or
collectively would constitute an "employee pension benefit plan" as defined in
Section 3(2) of ERISA are identified as such on SCHEDULE 3.26.
(b) Except as otherwise identified on SCHEDULE 3.26, (i) no
Employee Plan constitutes a "multiemployer plan", as defined in Section 3(37) of
ERISA (for purposes of this Section, a "MULTIEMPLOYER PLAN"), (ii) no Employee
Plan is maintained in connection with any trust described in Section 501(c)(9)
of the Code, (iii) no Employee Plan is subject to Title IV of ERISA or to the
minimum funding standards of ERISA and the Code, and (iv) during the past five
years, neither the Borrower nor
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any of its affiliates have made or been required to make contributions to any
Multiemployer Plan. There are no accumulated funding deficiencies as defined in
Section 412 of the Code (whether or not waived) with respect to any Employee
Plan. The fair market value of the assets held with respect to each Employee
Plan which is an employee pension benefit plan, as defined in Section 3(2) of
ERISA, exceeds the actuarially determined present value of all benefit
liabilities accrued under such Employee Plan (whether or not vested) determined
using reasonable actuarial assumptions. Neither the Borrower nor any affiliate
of the Borrower has incurred any material liability under Title IV of ERISA
arising in connection with the termination of, or complete or partial withdrawal
from, any plan covered or previously covered by Title IV of ERISA. The Borrower
and all of the affiliates of the Borrower have paid and discharged promptly when
due all liabilities and obligations arising under ERISA or the Code of a
character which if unpaid or unperformed might result in the imposition of a
lien against any of the assets of the Borrower or any Subsidiary. Nothing done
or omitted to be done and no transaction or holding of any asset under or in
connection with any Employee Plan has or will make the Borrower or any
Subsidiary or any director or officer of the Borrower or any Subsidiary subject
to any liability under Title I of ERISA or liable for any Tax pursuant to
Section 4975 of the Code that could have a Material Adverse Effect. There are no
pending or, to the best knowledge of the Borrower, threatened claims by or on
behalf of the Employee Plans, or by any participant therein, alleging a breach
or breaches of fiduciary duties or violations o Applicable Laws which could
result in liability on the part of the Borrower, its officers or directors, or
such Employee Plans, under ERISA or any other Applicable Law and there is no
basis for any such claim.
(c) Each Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified since the
date of its adoption, and each trust forming a part thereof is exempt from Tax
pursuant to Section 501(a) of the Code. Accurate and complete copies of the most
recent IRS determination letters with respect to any such Plans have been made
available to the Administrative Agent. Each Employee Plan has been maintained in
compliance with its terms and with the requirements prescribed by all Applicable
Laws, including but not limited to ERISA and the Code, which are applicable to
such Plans.
(d) There is set forth on SCHEDULE 3.26 a list of each employment,
severance, or other similar contract, arrangement, or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation rights, or other forms of incentive compensation or post-retirement
insurance, compensation, or benefits which (i) is not an Employee Plan, (ii) is
entered into, maintained, or contributed to, as the case may be, by the Borrower
or any affiliate of the Borrower, and (iii) covers any employee or former
employee of the Borrower or any affiliate of the Borrower or under which the
Borrower or any affiliate of the Borrower has any liability. Such contracts,
plans, and arrangements as are described in the preceding sentence are referred
to for purposes of this Section as the "BENEFIT ARRANGEMENTS." Each Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by Applicable Laws.
(e) Neither the Borrower nor any affiliate of the Borrower has
performed any act or failed to perform any act, and there is no contract,
agreement, plan, or arrangement covering any employee or former employee of the
Borrower or any affiliate of the Borrower, that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to the terms of Section 162(a)(1) or 280G of the Code, or could give
rise to any penalty or excise Tax pursuant to Section 4980B or 4999 of the Code.
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(f) Except as disclosed on SCHEDULE 3.26, there has been no
amendment, written interpretation, or announcement (whether or not written) by
the Borrower or any affiliate of the Borrower of or relating to, or change in
employee participation or coverage under, any Employee Plan or Benefit
Arrangement which would increase materially the expense of maintaining such
Employee Plan or Benefit Arrangement above the level of the expense incurred in
respect thereof for the most recent fiscal year.
SECTION 3.27. ENVIRONMENTAL MATTERS.
(a) Except as disclosed on SCHEDULE 3.27:
(i) to the best knowledge of the Borrower, the properties,
operations, and activities of the Borrower and the Subsidiaries comply
with all Applicable Environmental Laws (as defined below);
(ii) the Borrower and the Subsidiaries and the properties,
operations, and activities of the Borrower and the Subsidiaries are not
subject to any existing, pending, or, to the best knowledge of the
Borrower, threatened Proceeding under, or to any remedial obligations
under, any Applicable Environmental Laws;
(iii) to the best knowledge of the Borrower, all Permits, if any,
required to be obtained by the Borrower or any Subsidiary under any
Applicable Environmental Laws in connection with any aspect of the
business of the Borrower or the Subsidiaries, including without
limitation those relating to the treatment, storage, disposal, or release
of a Hazardous Material (as defined below), have been duly obtained and
are in full force and effect, and the Borrower and the Subsidiaries are
in compliance with the terms and conditions of all such Permits;
(iv) to the best knowledge of the Borrower, the Borrower and the
Subsidiaries have satisfied and are currently in compliance with all
financial responsibility requirements applicable to their respective
operations and imposed by any Governmental Entity under any Applicable
Environmental Laws, and the Borrower and the Subsidiaries have not
received any notice of noncompliance with any such financial
responsibility requirements;
(v) to the best knowledge of the Borrower, there are no physical
or environmental conditions existing on any property owned or leased by
the Borrower or any Subsidiary or resulting from the Borrower's or any
Subsidiary's operations or activities, past or present, at any location,
that would give rise to any on-site or off-site remedial obligations
under any Applicable Environmental Laws;
(vi) to the best knowledge of the Borrower, since the effective
date of the requirements of Applicable Environmental Laws, all Hazardous
Materials generated by the Borrower or any Subsidiary or used in
connection with their respective properties, operations, or activities
have been transported only by carriers authorized under Applicable
Environmental Laws to transport such materials, and have been disposed of
only at treatment, storage, and disposal facilities authorized under
Applicable Environmental Laws to treat, store, or dispose of such
materials, and, to the best knowledge of the Borrower, such carriers and
facilities have been and are operating in compliance with such
authorizations and are not the subject of any existing, pending, or
threatened Proceeding in connection with any Applicable Environmental
Laws;
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(vii) to the best knowledge of the Borrower, there has been no
exposure of any person or property to Hazardous Materials, nor has there
been any release of Hazardous Materials into the environment, by the
Borrower or any Subsidiary or in connection with their respective
properties, operations, or activities that could reasonably be expected
to give rise to any claim for damages or compensation; and
(viii) the Borrower and the Subsidiaries shall make available to
the Administrative Agent all internal and external environmental audits
and studies and all correspondence on substantial environmental matters
in the possession of the Borrower and the Subsidiaries relating to any of
the current or former properties, operations, or activities of the
Borrower and the Subsidiaries, provided that the Borrower and the
Subsidiaries shall not be required to make available any such audits,
studies, or correspondence that may be subject to the attorney-client
privilege or similar privilege.
(b) For purposes of this Agreement, "APPLICABLE ENVIRONMENTAL
LAWS" means any and all Applicable Laws pertaining to health, safety, or the
environment in effect (currently or hereafter) in any and all jurisdictions in
which the Borrower or any Subsidiary has conducted operations or activities or
owned or leased property, including, without limitation, the Clear Air Act, as
amended, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, the Rivers and Harbors Act of 1899, as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances
Control Act, as amended, the Superfund Amendments and Reauthorization Act of
1986, as amended, the Hazardous Materials Transportation Act, as amended, the
Texas Water Code, the Texas Solid Waste Disposal Act, and other environmental
conservation or protection laws. For purposes of this Agreement, the term
"HAZARDOUS MATERIAL" means (i) any substance which is listed or defined as a
hazardous substance, hazardous constituent, or solid waste pursuant to any
Applicable Environmental Laws and (ii) petroleum (including crude oil and any
fraction thereof), natural gas, and natural gas liquids.
(c) The representations and warranties contained in this SECTION
3.27 would continue to be true and correct following disclosure to the
applicable Governmental Entities of all relevant facts, conditions, and
circumstances, if any, pertaining to the properties, operations, and activities
of the Borrower and the Subsidiaries.
SECTION 3.28. LABOR RELATIONS.
(a) Except as disclosed on SCHEDULE 3.28, (i) there are no
collective bargaining agreements or other labor union contracts applicable to
any employees to or by which the Borrower or any Subsidiary is a party or is
bound, no such agreement or contract has been requested by any employee or group
of employees of the Borrower or any Subsidiary, and no discussions have occurred
with respect thereto by management of the Borrower or any Subsidiary with any
such employees; (ii) no employees of the Borrower or any Subsidiary are
represented by any labor organization, collective bargaining representative, or
group of employees; (iii) no labor organization, collective bargaining
representative, or group of employees claims to represent a majority of the
employees of the Borrower or any Subsidiary in an appropriate unit of the
Borrower or any Subsidiary; (iv) neither the Borrower nor any Subsidiary is
aware of or involved with any representational campaign or other organizing
activities by any union or other organization or group seeking to become the
collective bargaining representative of any of its employees; (v) neither the
Borrower nor any Subsidiary is obligated to bargain collectively with respect to
wages, hours, and other terms and conditions of employment with any recognized
or certified labor
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organization, collective bargaining representative, or group of employees; and
(vi) neither the Borrower nor any Subsidiary has experienced or is aware of any
strikes, work stoppages, work slowdowns, or lockouts or any threats thereof by
or with respect to any of its employees.
(b) To the best knowledge of the Borrower, the Borrower and the
Subsidiaries are in compliance in all material respects with all Applicable Laws
pertaining to employment and employment practices and wages, hours, and other
terms and conditions of employment in respect of their respective employees and
have no accrued liability for any arrears of wages or any Taxes or penalties for
failure to comply with any thereof. To the best knowledge of the Borrower, the
Borrower and the Subsidiaries are not engaged in any unfair labor practices or
unlawful employment practices. There is no pending or, to the best knowledge of
the Borrower, threatened Proceeding against or involving the Borrower or any
Subsidiary by or before, and neither the Borrower nor any Subsidiary is subject
to any judgment, order, writ, injunction, or decree of or inquiry from, the
National Labor Relations Board, the Equal Employment Opportunity Commission, the
Department of Labor, or any other Governmental Entity in connection with any
current, former, or prospective employee of the Borrower or any Subsidiary.
(c) The Borrower believes that relations with the employees of the
Borrower and the Subsidiaries are satisfactory.
SECTION 3.29. EMPLOYEES. Set forth on SCHEDULE 3.29 is a list
of:
(a) all directors and officers of the Borrower and the
Subsidiaries, and
(b) the name, social security number, and dates of employment by
the Borrower or a Subsidiary of each employee, agent, and consultant of
the Borrower and the Subsidiaries as of December 31, 1998, whose annual
rate of compensation in the current fiscal year will equal or exceed
$60,000, together with the total amounts of salary, bonuses, and other
compensation paid or payable by the Borrower or any Subsidiary to each
such person for the current fiscal year and the immediately preceding
fiscal year.
Except as disclosed on SCHEDULE 3.29, no severance payment, stay-on or incentive
payment, or similar obligation will be owed by the Borrower or any Subsidiary to
any of their respective directors, officers, or employees upon consummation of,
or as a result of, the transactions contemplated by this Agreement, nor will any
such director, officer, or employee be entitled to an increase in severance
payments or other benefits as a result of the transactions contemplated by this
Agreement in the event of the subsequent termination of his or her employment.
SECTION 3.30. INSIDER INTERESTS. Except as disclosed on SCHEDULE
3.30 no shareholder, director, officer, or employee of the Borrower or any
Subsidiary or any associate of any such shareholder, director, officer, or
employee is presently, directly or indirectly, a party to any transaction with
the Borrower or any Subsidiary, including, without limitation, any agreement,
arrangement, or understanding, written or oral, providing for the employment of,
furnishing of services by, rental of real or personal property from, or
otherwise requiring payments to any such shareholder, director, officer,
employee, or associate. To the best knowledge of the Borrower, no shareholder,
director, officer, or employee of the Borrower or any Subsidiary or any
associate of any such shareholder, director, officer, or employee owns, directly
or indirectly, any interest in, or serves as a director, officer, or employee
of, any customer, supplier, or competitor of the Borrower or any Subsidiary. For
purposes of this Section only, an "associate" of any shareholder, director,
officer, or employee means (i) a spouse, parent, sibling, child, mother- or
father-in-law, son- or daughter-in-law, or brother- or sister-in-law of such
shareholder,
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director, officer, or employee or (ii) any corporation, partnership, trust, or
other entity in which such shareholder, director, officer, or employee or
associate thereof has a substantial ownership or beneficial interest (other than
an interest in a public corporation which does not exceed three percent of its
outstanding securities) or is a director, officer, partner, or trustee or person
holding a similar position.
SECTION 3.31. INSURANCE. The Borrower and the Subsidiaries
maintain with sound and reputable insurers, and there are currently in full
force and effect, policies of insurance with respect to their respective assets
and operations against such casualties and contingencies of such types and in
such amounts as are customary for corporations of similar size engaged in
similar lines of business. All premiums due and payable with respect to such
policies have been timely paid. No notice of cancellation of, or indication of
an intention not to renew, any such policy has been received by the Borrower or
any Subsidiary. During the past three years, no application by the Borrower or
any Subsidiary for insurance with respect to its assets or operations has been
denied for any reason.
SECTION 3.32. FINANCIAL REQUIREMENTS. Set forth on SCHEDULE 3.32
is a list and summary description of all bonds, deposits, financial assurance
requirements, and insurance coverage required, to the best knowledge of the
Borrower, to be submitted to Governmental Entities for the continued ownership
and operation of the business and assets of the Borrower and the Subsidiaries.
SECTION 3.33. BANK ACCOUNTS AND POWERS OF ATTORNEY. Set forth on
SCHEDULE 3.33 are: (i) the name and address of each bank or other financial
institution with which the Borrower or any Subsidiary has an account or safe
deposit box or vault, the account and safe deposit box and vault numbers
thereof, the purpose of each thereof, and the names of all persons authorized to
draw thereon or to have access thereto, (ii) the names of all persons authorized
to borrow funds on behalf of the Borrower or any Subsidiary and the names and
addresses of all entities from which they are authorized to borrow funds, and
(iii) the names of all persons, if any, holding proxies, powers of attorney, or
other like instruments from the Borrower or any Subsidiary. No such proxies,
powers of attorney, or other like instruments are irrevocable.
SECTION 3.34. INVESTMENTS. The temporary cash investments
reflected on the balance sheets included in the Financial Statements have
maturities not more than 12 months from the date of acquisition by the Borrower
or a Subsidiary and consist of: (i) securities issued or guaranteed or insured
by the United States of America or any agency or instrumentality thereof; (ii)
time deposit certificates of deposit and banker's acceptances of commercial
banks organized under the laws of the United States of America or any state
thereof with total assets of more than $50,000,000; (iii) commercial paper
issued by any person incorporated in the United States rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc.; or (iv) shares of money
market funds substantially all of whose assets are comprised of securities or
assets of the type described in clauses (i) through (iii) above.
SECTION 3.35. BOOKS AND RECORDS. All the books and records of the
Borrower and the Subsidiaries, including all personnel files, employee data, and
other materials relating to employees, are substantially complete and correct in
all material respects, have been maintained in accordance with good business
practice and, to the best knowledge of the Borrower, all Applicable Laws, and,
in the case of the books of account, have been prepared and maintained in
accordance with GAAP. Such books and records fairly reflect, in reasonable
detail, all material transactions, revenues, expenses, assets, and liabilities
of the Borrower and the Subsidiaries.
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SECTION 3.36. ILLEGAL PAYMENTS. To the best knowledge of the
Borrower, none of the Borrower or any Subsidiary or any director, officer,
employee, or agent of the Borrower or any Subsidiary has, directly or
indirectly, paid or delivered any fee, commission, or other sum of money or item
of property however characterized to any broker, finder, agent, government
official, or other person, in the United States or any other country, in any
manner related to the business or operations of the Borrower or any Subsidiary,
which the Borrower or any Subsidiary or any such director, officer, employee, or
agent knows or has reason to believe to have been illegal under any Applicable
Law.
SECTION 3.37. PRIVATE OFFERING; RULE 144A MATTERS.
(a) Based in part on the accuracy of the representations and
warranties of, and compliance with the covenants and agreements by, the Lenders
in Section 6.1, the making of the Term Loans hereunder and the issuance of the
instruments evidencing such Term Loans and the Securities are and will be exempt
from the registration and prospectus delivery requirements of the Securities
Act. Neither the Borrower nor any Guarantor has issued or sold Term Loans, the
instruments evidencing such Term Loans or the Securities to anyone other than
the Lenders. No securities of the same class as the Term Loans, the instruments
evidencing such Term Loans or the Securities have been issued or sold by the
Borrower or any Guarantor within the six-month period immediately prior to the
date hereof. The Borrower and each Guarantor agrees that neither it, nor anyone
acting on its behalf, will (i) offer the Term Loans, the instruments evidencing
such Term Loans or the Securities so as to subject the making, issuance and/or
sale of the Term Loans, the instruments evidencing such Term Loans or the
Securities, to the registration or prospectus delivery requirements of the
Securities Act or (ii) offer any similar securities for issuance or sale to, or
solicit any offer to acquire any of the same from, or otherwise approach or
negotiate with respect to the same with, anyone if the issuance or sale of the
Term Loans, the instruments evidencing such Term Loans, the Securities and any
such securities would be integrated as a single offering for the purposes of the
Securities Act, including without limitation, Regulation D thereunder, in such a
manner as would require registration under the Securities Act thereof. Each Term
Note, and (subject to the terms of the Common Stock Purchase Option) each of the
Shares shall have a legend setting forth the restrictions on the transferability
thereof imposed by the Securities Act for so long as such restrictions apply.
(b) In the case of each offer, sale or issuance of the Term Loans
or the Securities no form of general solicitation or general advertising was or
will be used by the Borrower or any Guarantor or their representatives,
including, but not limited to, advertisements, articles, notices or other
communications published in any newspaper, magazine or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising.
(c) The Common Stock Purchase Option, but not the Common Stock,
will be eligible for resale pursuant to Rule 144A under the Securities Act. When
the Common Stock Purchase Option is issued and delivered pursuant to the Loan
Documents, it will not be of the same class (within the meaning of Rule 144A(d)
(3) under the Securities Act) as any other security of the Borrower or any
Guarantor that is listed on a national securities exchange registered under
Section 6 of the Exchange Act or that is quoted in a United States automated
interdealer quotation system.
SECTION 3.38. REGISTRATION RIGHTS. Except for demand and
piggyback registration rights granted to Ascend Communications, Inc.,
"piggy-back" registration rights granted to holders of the Convertible Notes,
and demand and piggy back registration rights granted to purchasers of the
Series A
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Preferred pursuant to the Registration Rights Agreement dated as of May
7, 1998 and all amendments thereto, the Borrower has no obligation to register
any of its securities under the Securities ACT.
SECTION 3.39. BROKERAGE FEES. Neither the Borrower nor any of its
affiliates has retained any financial advisor, broker, agent, or finder or paid
or agreed to pay any financial advisor, broker, agent, or finder on account of
this Agreement or any transaction contemplated hereby. The Borrower shall
indemnify and hold harmless the Lenders from and against any and all losses,
claims, damages, and liabilities (including legal and other expenses reasonably
incurred in connection with investigating or defending any claims or actions)
with respect to any finder's fee, brokerage commission, or similar payment in
connection with any transaction contemplated hereby asserted by any person on
the basis of any act or statement made or alleged to have been made by the
Borrower or any of its affiliates.
SECTION 3.40. DISCLOSURE. No representation or warranty made by
the Borrower and each of the Guarantors in this Agreement or in any other Loan
Document, and no statement of the Borrower contained in any document,
certificate, or other writing furnished or to be furnished by the Borrower
pursuant hereto or thereto or in connection herewith or therewith, contains or
will contain, at the time of delivery, any untrue statement of a material fact
or omits or will omit, at the time of delivery, to state any material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which they are made, not misleading. The Borrower knows of
no matter (other than matters of a general economic character not relating
solely to the Borrower or any Subsidiary in any specific manner) which has not
been disclosed to the Lenders pursuant to this Agreement which has or is
reasonably likely to have a Material Adverse Effect on the Borrower. The
Borrower has delivered or made available to the Lenders accurate and complete
copies of all agreements, documents, and other writings referred to or listed in
this Article III or any Schedule hereto.
SECTION 3.41. DUE AUTHORIZATION AND ENFORCEABILITY. Each of the
Loan Documents: (i) has been duly authorized, executed and delivered by each
Subsidiary (to the extent each is a party thereto) and (ii) constitutes a valid
and binding obligation of each Subsidiary (to the extent each is a party
thereto) enforceable against each such Person in accordance with its terms,
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting the enforceability
of creditors' rights generally and by general principles of equity (whether
arising under a proceeding at law or in equity).
SECTION 3.42. NO VIOLATION OF REGULATIONS OF BOARD OF GOVERNORS OF
FEDERAL RESERVE SYSTEM. None of the transactions contemplated by this Agreement
(including without limitation the use of the proceeds from the Term Loans) will
violate or result in a violation of Section 7 of the Exchange Act, or any rule
or regulation issued pursuant thereto, including, without limitation,
Regulations T, U and X of the Board.
SECTION 3.43. GOVERNMENTAL REGULATIONS. None of the Borrower or
any of its Subsidiaries is or will be subject to regulation under the Investment
Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935,
as amended, the Federal Power Act, the Interstate Commerce Act or to any other
statute, rule or regulation limiting its ability to incur Indebtedness for
borrowed money.
SECTION 3.44. YEAR 2000 COMPLIANCE. The Borrower has (i) initiated
a review and assessment of all areas within its and each of its Subsidiaries'
business and operations (including those affected by suppliers, vendors and
customers) that could be adversely affected by the "YEAR 2000 PROBLEM" (that is,
the risk that computer applications used by the Borrower or any of its
Subsidiaries (or
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suppliers, vendors and customers) may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) developed a plan and timeline for addressing the
Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in
accordance with that timetable. Based on the foregoing, the Borrower believes
that all computer applications (including those of its suppliers, vendors and
customers) that are material to its or any of its Subsidiaries' business and
operations are reasonably expected on a timely basis to be able to perform
properly date-sensitive functions for all dates before and after January 1, 2000
(that is, be "YEAR 2000 COMPLIANT"), except to the extent that a failure to do
so could not reasonably be expected to have Material Adverse Effect.
ARTICLE IV.
COVENANTS
So long as any Commitment shall remain outstanding or any
Obligation shall remain unpaid, the Borrower and each Guarantor covenants and
agrees with the Lenders as follows:
SECTION 4.1. USE OF PROCEEDS. The Borrower shall use the
proceeds of the Term Loans for general corporate purposes.
SECTION 4.2. NOTICE OF DEFAULT AND RELATED MATTERS. The Borrower
shall furnish to the Administrative Agent (with copies for each Lender) written
notice, promptly upon becoming aware of the existence of:
(a) any condition or event that constitutes a Default or an Event
of Default, specifying the nature and period of existence thereof and the
action taken or proposed to be taken with respect thereto;
(b) the filing or commencement of, or any threat or notice of
intention of any Person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any Governmental
Entity, against or affecting the Borrower or any of its Subsidiaries or
any of their respective Affiliates that could reasonably be expected to
result in, individually or in the aggregate, a Material Adverse Effect;
and
(c) any development that, individually or in the aggregate, has
resulted in, or could reasonably be expected to have, a Material Adverse
Effect.
SECTION 4.3. MERGER; SALE OF ALL OR SUBSTANTIALLY ALL ASSETS.
(a) The Borrower and each Guarantor shall not consolidate or merge
with or into any other Person or sell, convey, transfer or lease its properties
and assets substantially as an entirety to any Person.
SECTION 4.4. INFORMATION; SEC REPORTS; COMPLIANCE CERTIFICATES.
(a) The Borrower shall, and shall cause each of its Subsidiaries
to, promptly provide such information concerning the businesses, properties,
liabilities and financial condition of the Borrower and such Subsidiaries as any
Lender may from time to time reasonably request. The Borrower shall, and shall
cause each of its respective Subsidiaries to:
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(i) keep proper books of record and account in which full, true
and correct entries shall be made of all dealings and transactions in
relation to its business and activities,
(ii) permit the Lenders or their representatives to visit and
inspect any of their respective properties, to examine and make abstracts
from any of their respective books and records and to discuss their
respective businesses, finances and accounts with their respective
executive officers and, subject to the right of the Borrower's
representatives to participate in any such discussion, with their
independent public accountants, all upon reasonable notice and at such
reasonable times and as often as may reasonably be desired,
(iii) permit the Lenders or their representatives to consult with
the Borrower and such Subsidiaries with respect to their businesses and
make proposals with respect to such businesses (such proposals not to
impede and may facilitate faster or more secure repayment of the
Obligations), and meet with the respective executive officers of the
Borrower and such Subsidiaries with respect to such proposals,
(iv) provide to Lenders, within 90 days after the end of each
fiscal year of the Borrower, the Borrower's consolidated balance sheet
and related statement of income and cash flows, showing the financial
condition of the Borrower and the Guarantors on a consolidated basis as
of the close of such fiscal year and the results of their respective
operations during such year, to be audited by other independent public
accountants of recognized national standing reasonably acceptable to the
Administrative Agent and accompanied by an opinion of such accountants
(which shall not be qualified in any material respect other than with
respect to the Cases) and to be certified by the chief financial officer
of the Borrower to the effect that such consolidated financial statements
fairly present the financial condition and results of operations of the
Borrower and the Guarantors on a consolidated basis in accordance with
GAAP consistently applied,
(v) provide to Lenders, within 45 days after the end of the first
three fiscal quarters of the Borrower (commencing with the fiscal quarter
ending on or about March 31, 1999), the Borrower's consolidated balance
sheets and related statements of income and cash flows, showing the
financial condition of the Borrower and the Guarantors on a consolidated
basis as of the close of such fiscal quarter and the results of their
respective operations during such fiscal quarter and the then elapsed
portion of the fiscal year, each certified by a Financial Officer as
fairly presenting the financial condition and results of operations of
the Borrower and the Guarantors on a consolidated basis in accordance
with GAAP consistently applied, subject to normal year-end audit
adjustments, and
(vi) provide to Lenders, commencing with the fiscal month ending
on or about March 31, 1999, within 30 days of the end of each fiscal
month of the Borrower (or 45 days if such fiscal month end is also the
end of any of the first three fiscal quarters, or 90 days if such fiscal
month end is also the end of the fiscal year), the unaudited monthly
income statement, balance sheet and cash flow report of the Borrower and
the Guarantors on a consolidated basis as of the close of such fiscal
month and the results of their respective operations during such fiscal
period and the then elapsed portion of the fiscal year (and such other
cash flow reports and operating statements as the Administrative Agent
may reasonably request), all certified by the chief financial officer as
fairly presenting the results of operations of the Borrower and the
Guarantors on a consolidated basis subject to normal year-end audit
adjustments.
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(b) The Borrower shall furnish to the Lenders (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the SEC on Forms 10-Q and 10-K if the Borrower were required to file
such financial information, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" that describes the financial
condition and results of operations of the Borrower and its Subsidiaries and,
with respect to the annual information only, a report thereon by the Borrower's
certified independent public accountants (who shall be a firm of established
national reputation) and (ii) all current reports that would be required to be
filed with the SEC on Form 8-K if the Borrower were required to file such
reports, in each case within the time periods set forth in the SEC's rules and
regulations. In addition, until such time as the Borrower and each of the
Guarantors is subject to Section 13 or 15(d) of the Exchange Act, the Borrower
and each of the Guarantors shall furnish to the Lenders, each holder of
securities and to prospective investors designated by the Lenders or such a
holder, upon their request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
(c) The Borrower shall deliver to the Lenders, within 60 days
after the end of each fiscal quarter, an Officers' Certificate stating that a
review of the activities of the Borrower and its Subsidiaries during the
preceding fiscal quarter (or since the Closing Date in the case of the first
such Officer's Certificate) has been performed with a view to determining
whether the Borrower and its Subsidiaries have kept, observed, performed and
fulfilled their respective Obligations under this Agreement, and further stating
that (i) the Borrower and its Subsidiaries have kept, observed, performed and
fulfilled each and every covenant contained in this Agreement and are not in
default in the performance or observance of any of the terms, provisions or
conditions hereof or under any other mortgage, indenture or debt instrument (or,
if a Default, Event of Default or default under any such mortgage, indenture or
debt instrument shall have occurred, describing all such Defaults, Events of
Default or defaults and what action the Borrower is taking or proposes to take
with respect thereto).
(d) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the annual financial
statements delivered pursuant to paragraph (b) above shall be accompanied by a
written statement of the Borrower's certified independent public accountants
(who shall be from a firm of established national reputation) that, solely in
making the examination necessary for certification of such financial statements
and without independent investigation or inquiry, nothing has come to their
attention that would lead them to believe that the Borrower or any of its
respective Subsidiaries has violated any provisions of Article IV of this
Agreement or, if any such violation has occurred, specifying the nature and
period of existence thereof, it being understood that such accountants shall not
be liable directly or indirectly to any Person for any failure to obtain
knowledge of any such violation.
(e) The Administrative Agent and each Lender covenants and agrees
that any information, financial statements, certificates or documents obtained
pursuant to this SECTION 4.4 shall not be utilized in a manner that violates any
federal or state securities laws.
SECTION 4.5. EXISTENCE; BUSINESS AND PROPERTIES; INSURANCE.
The Borrower shall, and shall cause each of its Subsidiaries to,
(a) do or cause to be done all things necessary to preserve, renew and keep in
full force and effect its legal existence, and (b) do or cause to be done all
things necessary to obtain, preserve, renew, extend and keep in full force and
effect the rights, licenses, permits, franchises, consents, approvals,
variances, exemptions, patents, copyrights, trademarks, trade names and other
authorizations of or from Governmental Entities (collectively, "PERMITS") that
are material to the conduct of its business; maintain and operate such business
in
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substantially the manner in which it is presently conducted and operated and
extensions or ancillary businesses that are not, individually or in the
aggregate, material to the Borrower and its Subsidiaries taken as a whole; and
at all times maintain and preserve all property material to the conduct of such
business and keep such property in good repair, working order and condition and
from time to time make, or cause to be made, all needful and proper repairs,
renewals, additions, improvements and replacements thereto necessary in order
that the business carried on in connection therewith may be properly conducted
in all material respects at all times.
The Borrower shall, and shall cause its Subsidiaries, to keep its
insurable properties insured in such amount as are customary for corporations of
similar sizes engaged in similar activities at all times by financially sound
and reputable insurers; maintain such other insurance (including self
insurance), to such extent and against such risks, including fire and other
risks insured against by extended coverage, as is customary with companies in
the same or similar businesses operating in the same or similar locations,
including public liability insurance against claims for personal injury or death
or property damage occurring upon, in, about or in connection with the use of
any properties owned, occupied or controlled by it; and maintain such other
insurance as may be required by law.
SECTION 4.6. COMPLIANCE WITH LAWS. The Borrower shall, and shall
cause each of its Subsidiaries to, comply in all respects with all applicable
laws, ordinances, rules, regulations and requirements of governmental
authorities (including Applicable Environmental Laws and ERISA and the rules and
regulations thereunder), except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings or where non-compliance
therewith could not reasonably be expected to have a Material Adverse Effect.
SECTION 4.7. RESTRICTED PAYMENTS.
(a) The Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any other payment or distribution on account of their respective Equity
Interests (including, without limitation, any payment in connection with any
merger or consolidation) to the direct or indirect holders of any of their
respective Equity Interests (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Borrower or payable to
the Borrower or a Subsidiary of the Borrower); (ii) purchase, redeem or
otherwise acquire or retire for value (including without limitation, in
connection with any merger or consolidation) any Equity Interests of the
Borrower or any of its Affiliates (other than any such Equity Interests owned by
the Borrower or any Subsidiary of the Borrower); (iii) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is PARI PASSU or subordinated to the Term Loans,
except a payment of interest or principal at its Stated Maturity or, in the case
of the Ascend Note, upon the occurrence of the consummation of any initial
public offering of the Borrower; or (iv) make any Restricted Investment (all
such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "RESTRICTED PAYMENTS").
SECTION 4.8. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM
SUBSIDIARIES. The Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary of the Borrower to (i)(a) pay dividends or make any other
distributions to the Borrower or any of its Subsidiaries (1) on its Capital
Stock or other Equity Interests or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any Indebtedness owed
to the Borrower or any of its Subsidiaries, (ii) make loans or advances to the
Borrower or any of its Subsidiaries or (iii) transfer any of its properties or
assets to the Borrower or any of its Subsidiaries, except for such
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encumbrances or restrictions existing under or by reason of (a) the Ascend Note,
(b) this Agreement and the other Loan Documents, (c) applicable law, (d)
restrictions of the nature described in clause (iii) above by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (e) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired; and (f) any encumbrance or restriction on the transfer of any property
or asset in an agreement relating to the acquisition or creation or disposition
of such property or asset or any Lien on such property or asset that is
otherwise permitted by the terms of this Agreement.
SECTION 4.9. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS
AND ISSUANCE OF ADDITIONAL PREFERRED STOCK.
(a) The Borrower shall not, and shall not permit any of its
respective Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become liable, contingently or otherwise, with
respect to (collectively, "INCUR"), or permit to exist, any Indebtedness
(including Acquired Debt) or any shares of Preferred Stock, except for:
(i) The currently outstanding Series A Preferred and Indebtedness
under the Ascend Note and the Convertible Notes that is outstanding on
the date hereof;
(ii) the Term Loans and the Guarantees;
(iii) the incurrence by any Guarantor or any of its Wholly Owned
Subsidiaries or future Wholly Owned Subsidiaries of intercompany
Indebtedness between or among such Guarantor and any of its Wholly Owned
Subsidiaries or future Wholly Owned Subsidiaries; PROVIDED, HOWEVER, that
(i) if any Guarantor or the Borrower is the obligor on such Indebtedness,
such Indebtedness is expressly subordinated to the prior payment in full
in cash of all Obligations and (ii)(A) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than any Guarantor or any of its Wholly Owned
Subsidiaries or future Wholly Owned Subsidiaries and (B) any sale or
other transfer of any such Indebtedness to a Person that is neither a
Guarantor nor one of its Wholly Owned Subsidiaries or future Wholly Owned
Subsidiaries shall be deemed, in each case, to constitute an incurrence
of such Indebtedness by such Guarantor or such Subsidiary or future
Wholly Owned Subsidiary, as the case may be;
(iv) the incurrence by the Borrower or any of its Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed $250,000;
(v) Indebtedness outstanding on the date hereof and set forth on
SCHEDULES 3.11, 3.16 OR 3.20; and
(vi) the incurrence by the Borrower or any of its Subsidiaries of
additional Indebtedness under Capital Lease Obligations and/or operating
leases relating to the lease of equipment in an aggregate principal
amount not exceeding $2,000,000.
(b) For purposes of determining compliance with this SECTION 4.9,
accrual of interest, the accretion of accreted value and the payment of interest
by capitalizing the same or issuing additional Indebtedness will not be deemed
to be an incurrence of Indebtedness. In addition, liabilities of the
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Borrower resulting from prepaid customer accounts and reflected on the
Borrower's financial statements as deferred revenue will not be deemed to be an
incurrence of Indebtedness.
SECTION 4.10. LIMITATION ON SALES OF ASSETS, SUBSIDIARY STOCK AND
ACQUISITIONS. The Borrower shall not, and shall not permit any of its
Subsidiaries to, enter into any agreement with respect to or consummate any
Asset Sale. Borrower shall not, and shall not permit any of its Subsidiaries, to
acquire any assets of any Person, except in the ordinary course of business and
in a manner that is consistent with past practices, or the Capital Stock of any
Person.
SECTION 4.11. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The
Borrower shall not, and shall not permit any of its Subsidiaries to, make any
payment to, or sell, lease, transfer or otherwise dispose of any properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate of any such Person (each of
the foregoing, an "AFFILIATE TRANSACTION"), unless (i) such Affiliate
Transaction is on terms that are no less favorable to the Borrower or the
relevant Subsidiary than those that would have been obtained in a comparable
transaction by the Borrower or such Subsidiary with an unrelated Person on an
"arms-length basis" and (ii) the Borrower delivers to the Lenders with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $250,000, a resolution of its
board of directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of its
board of directors, PROVIDED that the foregoing restrictions shall not apply to
(x) transactions between or among the Borrower and its Subsidiaries not
otherwise prohibited by this Agreement, and (y) transactions pursuant to
agreements entered into or in effect on the Closing Date and set forth in
SCHEDULE 4.11.
SECTION 4.12. LINE OF BUSINESS; LIMITATION ON BORROWER'S
ACTIVITIES. The Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, engage to any material extent in any line of
business other than the businesses conducted on the Closing Date and extensions
or ancillary businesses that are not, individually or in the aggregate, material
to the Borrower and its Subsidiaries taken as a whole.
SECTION 4.13. LIENS. The Borrower shall not directly or
indirectly, create, incur, assume or suffer to exist any Lien or Encumbrances on
any asset now owned or hereafter acquired by the Borrower, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
SECTION 4.14. STAY, EXTENSION AND USURY LAWS. The Borrower and
each of the Guarantors covenants (to the extent that they may lawfully do so)
that it shall not, and shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force, that may
affect the covenants in or the performance of this Agreement or any other Loan
Document; and the Borrower waives, and agrees to cause its Subsidiaries to waive
(to the extent that they may lawfully do so), all benefit or advantage of any
such law, and covenants that it shall not, and shall not permit its Subsidiaries
to, by resort to any such law, hinder, delay or impede the execution of any
power herein granted to the Lenders, but shall suffer and permit, and shall
cause its Subsidiaries to suffer and permit, the execution of every such power
as though no such law has been enacted.
SECTION 4.15. OBLIGATIONS AND TAXES. The Borrower shall, and shall
cause its Subsidiaries to, pay its Indebtedness and other Obligations promptly
and in accordance with their terms
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and pay and discharge promptly when due all material taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits or
in respect of its property, before the same shall become delinquent or in
default, as well as all material lawful claims for labor, materials and supplies
or otherwise that, if unpaid, might give rise to a Lien or Encumbrance upon such
properties or any part thereof; PROVIDED, HOWEVER, that such payment and
discharge shall not be required with respect to any such tax, assessment,
charge, levy or claim so long as the validity or amount thereof shall be
contested in good faith by appropriate proceedings and the Borrower shall have
set aside on its books adequate reserves with respect thereto in accordance with
GAAP and such contest operates to suspend collection of the contested
obligation, tax, assessment or charge and enforcement of a Lien or Encumbrance.
SECTION 4.16. SUBSCRIBERS. The Borrower shall maintain a total of
100,000 or more paying dial up subscribers with the Borrower regarding the
provision of any Internet services, in each case, for a customary fee.
SECTION 4.17. ADDITIONAL GUARANTEES AND SUBSIDIARY PLEDGE AND
SECURITY AGREEMENT. If the Borrower or any of its Subsidiaries shall acquire or
create another Subsidiary after the date hereof, then such newly acquired or
created Subsidiary (i) shall become a Guarantor, shall execute and deliver a
notation of Guarantee on the date of such acquisition or creation, as
applicable, and shall become a party to this Agreement by executing a joinder
agreement in form and substance satisfactory to the Administrative Agent, (ii)
shall become a party to the Subsidiary Pledge and Security Agreement or execute
and deliver to the Administrative Agent an agreement similar to the Subsidiary
Pledge and Security Agreement, in form and substance satisfactory to the
Administrative Agent and (iii) in the case of clauses (i) and/or (ii) deliver an
Opinion of Counsel to the Administrative Agent in form and substance
satisfactory to the Administrative Agent.
SECTION 4.18. YEAR 2000 COMPLIANCE. The Borrower shall promptly
notify the Administrative Agent in the event the Borrower discovers or
determines that any computer application (including those of its suppliers,
vendors and customers) that is material to its or any of its Subsidiaries'
business and operations will not be Year 2000 Compliant, except to the extent
that such failure could not reasonably be expected to have a Material Adverse
Effect.
SECTION 4.19. MATERIAL CONTRACTS. The Borrower shall not amend,
modify, supplement or restate any Material Contract.
ARTICLE V.
CONDITIONS
The obligation of each of the Lenders to make Term Loans is
subject to (i) the representations and warranties of the Borrower and each of
the Guarantors in Article III being true, correct and complete in all respects
on and as of the Closing Date to the same extent as though made on and as of the
Closing Date, (ii) on or prior to the Closing Date, the Borrower and each such
Guarantor, as the case may be, having performed and complied with all covenants
and conditions to be performed and observed by it under this Agreement and the
other Loan Documents on or prior to the Closing Date and (iii) the prior or
concurrent satisfaction of each of the following conditions:
SECTION 5.1. CORPORATE AND OTHER PROCEEDINGS; OTHER LOAN
DOCUMENTS. On or before the Closing Date, all corporate and other proceedings
taken or to be taken in connection with this Agreement and the other the Loan
Documents and all documents incidental thereto not previously found acceptable
by the Administrative Agent shall be satisfactory in form and substance to the
Administrative
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Agent, and the Administrative Agent shall have received on behalf of the Lenders
the following items, each of which shall be in form and substance satisfactory
to the Administrative Agent and, unless otherwise noted, dated the Closing Date:
(a) a certified copy of the Borrower's and each of the Guarantor's
charters, in each case together with a certificate of status, compliance, good
standing or like certificate with respect to the Borrower and each Guarantor
issued by the appropriate government officials of the respective jurisdiction of
its formation, each to be dated a recent date prior to the Closing Date;
(b) a copy of the Borrower's and each of the Guarantor's bylaws,
in each case certified as of the Closing Date by its respective Secretary or one
of its Assistant Secretaries;
(c) resolutions of the Borrower's and each of the Guarantor's
Boards of Directors approving and authorizing the execution, delivery and
performance of this Agreement, each of the other Loan Documents, as applicable,
and any other documents, instruments and certificates required to be executed by
the Borrower or such Guarantor in connection herewith or therewith and approving
and authorizing the execution, delivery and payment of the Term Notes and the
consummation of the transactions contemplated thereby, each certified as of the
Closing Date by its respective Secretary or one of its Assistant Secretaries as
being in full force and effect without modification or amendment;
(d) signature and incumbency certificates of the Borrower's and
each of the Guarantor's Officers executing this Agreement, the Term Notes, the
other Loan Documents to which it is a party and any other documents executed in
connection therewith;
(e) original executed copies of this Agreement and the Term Notes
drawn to the order of the Lenders;
(f) a notation of Guarantee, executed and delivered by each
Guarantor, dated the date of this Agreement, substantially in the form set forth
in EXHIBIT D hereto, as applicable;
(g) an Officers' Certificate from the Borrower and each of the
Guarantors to the effect that (i) the representations and warranties in Article
III are true, correct and complete in all respects on and as of the Closing Date
to the same extent as though made on and as of that date, (ii) on or prior to
the Closing Date, the Borrower or such Guarantor, as the case may be, has
performed and complied with all covenants and conditions to be performed and
observed by it under this Agreement and the other Loan Documents to which it is
a party on or prior to the Closing Date and (iii) all conditions to the
consummation of the transactions contemplated hereby have been satisfied on the
terms set forth in the documentation relating thereto and have not been waived
or amended without the Administrative Agent's prior written consent;
(h) original copies of each of the other Loan Documents executed
by each of the parties thereto; and
(i) original executed copies of the UCC-1's to be filed in
connection with the Security Agreements.
SECTION 5.2. NO MATERIAL LOSS. Neither the Borrower nor any of its
Subsidiaries shall have sustained any loss or interference with respect to its
businesses or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, which loss or interference, in the sole
judgment of the Administrative Agent, has had or is reasonably likely to have a
Material Adverse Effect; there shall not have been, in the sole judgment of the
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Administrative Agent, any material adverse change, or any development involving
a prospective material adverse change, in the business, condition (financial or
other), results of operations, management, prospects or value of the Borrower
and its Subsidiaries, taken as a whole.
SECTION 5.3. NO EVENT OF DEFAULT. No event shall have occurred and
be continuing or would result from the consummation of the transactions
contemplated hereby that would constitute an Event of Default.
SECTION 5.4. NO CHANGES IN FINANCIAL MARKETS. No material adverse
change in the financial or capital markets shall have occurred which, in the
sole judgment of the Administrative Agent, would make it impractical or
inadvisable to proceed with the funding of the Term Loans, and no banking
moratorium shall have been declared by Federal or New York State banking
officials.
SECTION 5.5. DELIVERY OF OPINIONS. The Administrative Agent shall
have received originally executed copies of one or more favorable written
opinions of (i) Cantey & Hanger, L.L.P., counsel for the Borrower and the
Guarantors, in the form of EXHIBIT E hereto and addressed to the Lenders, and
(ii) such other opinions of counsel and such certificates or opinions of
accountants, appraisers or other professionals as the Administrative Agent shall
have reasonably requested, in the case of clauses (i) and/or (ii) in form and
substance satisfactory to the Administrative Agent.
SECTION 5.6. ADMINISTRATIVE AGENT'S EXPENSES. On or before the
Closing Date, upon receipt of a billing statement on invoice, the Borrower shall
have reimbursed the Administrative Agent for its out-of-pocket costs and
expenses incurred in connection with this Agreement and the other Loan Documents
and in connection with the transactions contemplated hereby and thereby.
SECTION 5.7. FEES AND EXPENSES OF COUNSEL FOR LENDERS. On or
before the Closing Date, upon receipt of a billing statement or invoice, the
Borrower shall have paid the fees and expenses of Latham & Watkins, counsel for
the Lenders, incurred in connection with the preparation, negotiation, execution
and delivery of this Agreement, the other Loan Documents, the documents,
certificates and opinions delivered in connection herewith and therewith and in
connection with the transactions contemplated hereby and thereby. Such payment
shall be made by wire transfer of immediately available funds to an account
designated in writing by Latham & Watkins.
SECTION 5.8. CONSENTS AND APPROVALS. On or before the Closing
Date, all governmental, shareholder and third-party consents and approvals
necessary or desirable in connection with the transactions contemplated hereby
shall have been obtained, including, but not limited to, the consent and waiver
of Ascend Communications, Inc. relating to the Ascend Note and the consent and
waiver relating to any preemptive rights; all such consents and approvals shall
be in full force and effect; and all applicable waiting periods shall have
expired without any action being taken by any authority that could restrain,
prevent or impose any material adverse conditions on the transactions or that
could seek or threaten any of the foregoing. Copies of all such authorizations,
consents and approvals shall have been delivered to the Administrative Agent on
the Closing Date.
SECTION 5.9. MARGIN REGULATIONS. The making of the Term Loans in
the manner contemplated in this Agreement shall not violate the applicable
provisions of Regulation T, U or X of the Board or any other regulation of the
Board.
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ARTICLE VI.
TRANSFER OF THE TERM LOANS, THE INSTRUMENTS EVIDENCING SUCH TERM
LOANS AND THE SECURITIES; REPRESENTATIONS OF LENDERS; PARTICIPATIONS
SECTION 6.1. TRANSFER OF THE TERM LOANS, THE INSTRUMENTS
EVIDENCING THE TERM LOANS AND THE SECURITIES. Each Lender acknowledges that none
of the Term Loans, the instruments evidencing such Term Loans and the Securities
have been registered under the Securities Act and represents and agrees that it
is acquiring the Term Loans, the instruments evidencing such Term Loans and the
Securities for its own account and that it will not, directly or indirectly,
transfer, sell, assign, pledge or otherwise dispose of its Term Loans, the
instruments evidencing such Term Loans or the Securities (or any interest
therein) unless such transfer, sale, assignment, pledge or other disposition is
made (i) pursuant to an effective registration statement under the Securities
Act or (ii) pursuant to an available exemption from registration under, and
otherwise in compliance with, the Securities Act. Each Lender represents,
warrants, covenants and agrees to and with the Borrower and each Guarantor that
it is either (i) a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act acting for its own account or the account of one or
more other qualified institutional buyers, and is aware that the Borrower and
each Guarantor may rely upon the exemption from the provisions of Section 5 of
the Securities Act provided by Rule 144A thereunder or (ii) an institutional
"accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7)
under the Securities Act. Each Lender acknowledges that the instruments
evidencing the Term Loans and the Securities will bear a legend restricting the
transfer thereof in accordance with the Securities Act.
Subject to the provisions of the previous paragraph, the Borrower
and each Guarantor agrees that, with the consent of the Administrative Agent,
each Lender will be free to sell or transfer all or any part of the Term Loans,
the instruments evidencing the Term Loans or the Securities (including, without
limitation, participation interests in the Term Loans) to any third party and to
pledge any or all of the Securities to any commercial bank or other
institutional lender; provided, however: (i) in no event shall there be more
than five (5) such purchasers, transferees, or participants at any one time; and
(ii) in no event shall any Lender be permitted to make any such sale, transfer
or other disposition to a third party who is not either a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act or
an institutional "accredited investor" within the meaning of Rule 501(a)(1)(2(3)
or (7) under the Securities Act. Any sale, transfer or other disposition by any
Lender shall be exempt from the registration requirements of the Securities Act.
SECTION 6.2. PERMITTED ASSIGNMENTS. Subject to the provisions of
SECTION 6.1, any Lender may, in the ordinary course of its business and in
accordance with applicable law, at any time assign to one or more banks or other
entities ("PURCHASERS") all or any part of its rights and obligations hereunder
and under the other Loan Documents. Such assignment shall be made pursuant to an
Assignment and Acceptance substantially in the form of EXHIBIT A or in such
other form as may be agreed to by the parties thereto. The consent of the
Administrative Agent shall be required prior to an assignment becoming effective
with respect to a Purchaser which is not a Lender or an Affiliate thereof. Such
consent shall not be unreasonably withheld or delayed.
SECTION 6.3. PERMITTED PARTICIPANTS; EFFECT. Subject to the
provisions of SECTION 6.1, (a) any Lender may, in the ordinary course of its
business and in accordance with applicable law, at any time sell to one or more
banks or other entities ("PARTICIPANTS") participating interests in any Term
Loan owing to such Lender, any Term Note held by such Lender, any Commitment of
such Lender or any other interest of such Lender under the Loan Documents;
PROVIDED that the aggregate amount of such participating interest shall not be
less than $1,000,000. In the event of any such sale by a Lender of
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participating interests to a Participant, such Lender's obligations under the
Loan Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
such Lender shall remain the owner of its Term Loans and the holder of any Term
Note issued to it in evidence thereof for all purposes under the Loan Documents,
all amounts payable by the Borrower under this Agreement shall be determined as
if such Lender had not sold such participating interests, and the Borrower and
the Administrative Agent shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under the Loan
Documents.
(b) Each Lender shall retain the sole right to approve, without
the consent of any Participant, any amendment, modification or waiver of any
provision of the Loan Documents other than any amendment, modification or waiver
with respect to any Term Loan or Commitment in which such Participant has an
interest which forgives principal, interest or fees or reduces the interest rate
or fees payable with respect to any such Term Loan or Commitment, extends the
Maturity Date, postpones any date fixed for any regularly scheduled payment of
principal of, or interest or fees on, any such Term Loan or Commitment or
releases any guarantor of any such Term Loan or releases all or substantially
all of the collateral, if any, securing any such Term Loan.
(c) The Borrower agrees that each Participant shall be deemed to
have the right of setoff provided in SECTION 2.7 in respect of its participating
interest in amounts owing under the Loan Documents to the same extent as if the
amount of its participating interest were owing directly to it as a Lender under
the Loan Documents, provided that each Lender shall retain the right of setoff
provided in SECTION 2.7 with respect to the amount of participating interests
sold to each Participant. The Lender agree to share with each Participant, and
each Participant, by exercising the right of setoff provided in SECTION 2.7,
agrees to share with each Lender, any amount received pursuant to the exercise
of its right of setoff, such amounts to be shared in accordance with SECTION 2.7
as if each Participant were a Lender.
SECTION 6.4. DISSEMINATION OF INFORMATION. The Borrower authorizes
each Lender to disclose to any Participant or Purchaser or any other Person
acquiring an interest in the Loan Documents by operation of law (each a
"TRANSFEREE") and any prospective Transferee any and all information in such
Lender's possession concerning the creditworthiness of the Borrower and its
Subsidiaries. Each Lender covenants and agrees that it will obtain the agreement
and covenant of such Transferee or prospective Transferee that such Person shall
not utilize such information in violation of any federal or state securities
laws.
SECTION 6.5. REPLACEMENT TERM NOTES UPON TRANSFER OR EXCHANGE.
Upon surrender of any Term Notes by any Lender in connection with any permitted
transfer or exchange, the Borrower will execute and deliver in exchange therefor
a new Term Note or Term Notes of the same aggregate tenor and principal amount,
payable to the order of such Persons and in such denominations as such Lender
may request. The Borrower may require payment by such Lender of a sum sufficient
to cover any stamp tax or governmental charge imposed in respect of any such
transfer.
SECTION 6.6. REGISTER. The Administrative Agent on behalf of the
Borrower shall maintain a register (the "LOAN REGISTER") of the principal amount
of the Term Loans held by each Lender and any interest due and payable with
respect thereto. The Administrative Agent will allow any Lender to inspect and
copy such register at the Administrative Agent's principal place of business
during normal business hours.
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ARTICLE VII.
EVENTS OF DEFAULT
SECTION 7.1. EVENTS OF DEFAULT. The occurrence of any one or more
of the following events shall constitute an "EVENT OF DEFAULT: "
(a) any representation or warranty made or deemed made by the
Borrower or any of its Subsidiaries herein or in any other Loan Document or in
any certificate, document or financial or other statement furnished by any of
them at any time under or in connection with this Agreement or any other Loan
Document shall prove to have been incorrect in any material respect on or as of
the date made or deemed made;
(b) the Borrower defaults in the payment of the principal of or
Applicable Repayment Fee or premium on any of the Term Loans when the same shall
become due and payable, whether at its Maturity Date, upon acceleration, upon
redemption, or otherwise;
(c) the Borrower defaults in the payment of any interest upon any
of the Term Loans when the same becomes due and payable and such default
continues for five calendar days;
(d) the Borrower defaults in the payment of any other Obligations
payable under this Agreement or any of the other Loan Documents and such default
continues for five calendar days following the earlier to occur of (x) discovery
of such default by the Borrower and (y) the date on which notice of such default
is received by the Borrower from the Administrative Agent or any Lender;
(e) the Borrower or any of its Subsidiaries fails to observe or
perform any of its covenants or agreements contained in Article IV and, with
respect to SECTIONS 4.1, 4.2, 4.4, 4.5, 4.6, 4.15, 4.16, 4.17, and 4.18, such
failure continues for a period of 10 days following the earlier to occur of (x)
discovery of such failure by the Borrower and (y) the date on which notice of
such failure is received by the Borrower from the Administrative Agent or any
Lender;
(f) the Borrower or any of its Subsidiaries fails to observe or
perform any of its covenants or agreements (other than those set forth in clause
(e) above) contained in any of the Loan Documents, and such failure continues
for a period of 30 days following the earlier to occur of (x) discovery of such
failure by the Borrower and (y) the date on which notice of such failure is
received by the Borrower from the Administrative Agent;
(g) a default occurs under any mortgage, indenture or instrument
under which there is or may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Borrower or any of its
Subsidiaries (including, without limitation, the Ascend Note and the Convertible
Notes) (or the payment of which is guaranteed by the Borrower or any of its
Subsidiaries), whether such Indebtedness or guarantee now exists, or is created
after the date of this Agreement, which default (i) is caused by a failure to
pay principal of or premium, if any, or interest on such Indebtedness prior to
the expiration of the grace period provided in such Indebtedness on the date of
such default or (ii) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a default described in clause (a) above or the
maturity of which has been so accelerated aggregates $500,000;
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(h) a final judgment or final judgments for the payment of money
are entered by a court or courts of competent jurisdiction against the Borrower
or any of its Subsidiaries and such judgment or judgments remain undischarged
for a period (during which execution shall not be effectively stayed) of 60
days, if the aggregate of all such undischarged judgments exceeds $500,000;
(i) the Borrower or any of its Subsidiaries that, taken as a
whole, would constitute a material subsidiary pursuant to or within the meaning
of any Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it in an
involuntary case,
(iii) consents to the appointment of a Custodian of it or for all
or substantially all of its property,
(iv) makes a general assignment for the benefit of its creditors,
or
(v) generally is not paying its debts as they become due; or
(j) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(i) is for relief against the Borrower or any of its Subsidiaries
that, taken as a whole, would constitute a material subsidiary in an
involuntary case;
(ii) appoints a Custodian of the Borrower or any of its
Subsidiaries that, taken as a whole, would constitute a material
subsidiary or for all or substantially all of the property of the
Borrower or any of its Subsidiaries that, taken as a whole, would
constitute a material subsidiary; or
(iii) orders the liquidation of the Borrower or any of its
Subsidiaries that, taken as a whole, would constitute a material
subsidiary;
and the order or decree remains unstayed and in effect for 60 consecutive
days;
(k) Any material covenant, agreement or obligation of the Borrower
or any Guarantor contained in or evidenced by any of the Loan Documents shall
cease to be enforceable, or shall be determined to be unenforceable, in
accordance with its terms; the Borrower or any Guarantor shall deny or disaffirm
in writing its obligations under any of the Loan Documents or any Liens granted
in connection therewith.
(l) the Borrower or any ERISA Affiliate shall fail to pay when
due, after the expiration of any applicable grace period, any installment
payment with respect to its Withdrawal Liability under a Multiemployer Plan;
(ii) the Borrower or any ERISA Affiliate shall fail to satisfy its contribution
requirements under Section 412(c)(11) of the Code, whether or not it has sought
a waiver under Section 412(d) of the Code; (iii) in the case of an ERISA Event
involving the withdrawal from a Plan of a "substantial employer" (as defined in
Section 4001(a)(2) or Section 4062(e) of ERISA), the withdrawing employer's
proportionate share of that Plan's Unfunded Pension Liabilities is more than
$500,000; (iv) in the case of an ERISA Event involving the complete or partial
withdrawal from a Multiemployer Plan, the withdrawing employer has incurred a
withdrawal liability in an aggregate
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amount exceeding $500,000; (v) in the case of an ERISA Event not described in
clause (iii) or (iv), the Unfunded Pension Liabilities of the relevant Plan or
Plans exceed $500,000; (vi) a Plan that is intended to be qualified under
Section 401(a) of the Code shall lose its qualification, and with respect to
such loss of qualification, the Borrower or ERISA Affiliate can reasonably be
expected to be required to pay (for additional taxes, payments to or on behalf
of Plan participants, or otherwise) an aggregate amount exceeding $500,000; or
(vii) the occurrence of any combination of events listed in clauses (iii)
through (vi) that involves a net increase in aggregate Unfunded Pension
Liabilities and unfunded liabilities in excess of $500,000;
(m) any one of the three following individuals shall either: (i)
become deceased; (ii) become unable to work for a period of two consecutive
months or more; or (iii) cease to be employed by Borrower in their respective
capacities as of the Closing Date: M. Scott Leslie, Albert Lee Thurburn and
Andrew N. Jent, and a replacement satisfactory to the Majority Lenders has not
been appointed by Borrower within 30 days; PROVIDED, HOWEVER, that with respect
to Mr. Thurburn it shall not be an Event of Default hereunder so long as he is
employed by the Borrower in one of the following capacities: the Chairman of the
Board or the Chief Executive Officer; or
(n) a Change of Control shall have occurred.
SECTION 7.2. ACCELERATION. If any Event of Default (other than an
Event of Default specified in SECTION 7.1(I) or 7.1(j)) occurs and is
continuing, the Lenders holding at least 25% in aggregate principal amount of
the then outstanding Term Loans may, by written notice to the Borrower, declare
the unpaid principal of and any accrued and unpaid interest and fees on all of
the Term Loans to be immediately due and payable. Upon such declaration, all
Obligations in respect of the Term Loans shall become immediately due and
payable immediately. If an Event of Default specified in SECTION 7.1(I) or
7.1(j) occurs, all Obligations in respect of the Loans shall IPSO FACTO become
and be immediately due and payable without any declaration, notice or other act
on the part of any Lender.
SECTION 7.3. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy
herein conferred upon or reserved to the Lenders is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent or subsequent assertion or employment of any
other appropriate right or remedy.
SECTION 7.4. DELAY OR OMISSION NOT WAIVER. No delay or omission by
any Lender to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article VII or by law to the Lender may be exercised from time to time, and as
often as may be deemed expedient, by the Lender.
SECTION 7.5. WAIVER OF PAST DEFAULTS. Subject to SECTION 11.3, the
Majority Lenders by written notice to the Borrower may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default (except nonpayment of principal or
interest that has become due solely because of the acceleration) have been cured
or waived.
SECTION 7.6. RIGHTS OF LENDERS TO RECEIVE PAYMENT. Notwithstanding
anything to the contrary contained in this Agreement, the right of any Lender to
receive payment of principal of,
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premium, if any, and interest on the Term Loans and Term Notes held by such
Lender, on or after the respective due dates expressed in this Agreement or the
Term Notes, or to bring suit for the enforcement of any such payment on or after
such respective dates, shall not be impaired or affected without the consent of
such Lender.
ARTICLE VIII.
GUARANTEE
SECTION 8.1. THE GUARANTEE.
(a) Each Guarantor hereby absolutely, unconditionally and
irrevocably guarantees the full and punctual payment (whether at the Maturity
Date, upon acceleration or otherwise) of the principal of and interest, fees and
Applicable Repayment Fees on the Term Loans and the Term Notes, and the full and
punctual payment of all other Obligations of the Borrower under this Agreement,
the Term Notes and the other Loan Documents, including all costs of collection
and enforcement thereof and interest thereon which would be owing by the
Borrower but for the effect of any Bankruptcy Law (collectively, the "GUARANTEED
OBLIGATIONS"). Each Guarantor understands, agrees and confirms that each of the
Lenders may enforce this Guarantee up to the full amount guaranteed by each
Guarantor hereunder against each Guarantor without proceeding against any other
obligor or against any security for the Guaranteed Obligations. All payments
made by each Guarantor under this Guarantee shall be paid at the place and in
the manner specified in SECTION 2.6. Each Guarantor agrees that this is a
continuing Guarantee of payment and not merely a Guarantee of collection.
(b) The obligations of each Guarantor hereunder shall be
unconditional and absolute and, without limiting the generality of the
foregoing, shall not be released, discharged or otherwise affected by:
(i) any extension, renewal, settlement, compromise, waiver or
release in respect of any Obligation of the Borrower under this
Agreement, the Term Notes or any other Loan Document, by operation of law
or otherwise;
(ii) any modification or amendment of or restatement of or
supplement to this Agreement, the Term Notes or any of the other Loan
Documents;
(iii) any release, non-perfection or invalidity of any direct or
indirect security for, or any other Person's guarantee of, any of the
Guaranteed Obligations;
(iv) any change in the corporate existence, structure or ownership
of the Borrower or any other guarantor of the Borrower's Obligations, or
any insolvency, bankruptcy, reorganization or other similar proceeding
affecting the Borrower or any obligor or any of their respective assets
or any resulting release or discharge of any Obligation of the Borrower
contained in this Agreement or any other Loan Documents;
(v) the existence of any claim, set-off or other rights which any
obligor may have at any time against the Borrower or any other Person,
whether in connection herewith or with any unrelated transactions,
PROVIDED that nothing herein shall prevent the assertion of any such
claim by separate suit or compulsory counterclaim;
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(vi) any invalidity or unenforceability relating to or against the
Borrower for any reason of this Agreement, the Term Notes or any other
Loan Document, or any provision of applicable law or regulation
purporting to prohibit the payment by the Borrower of the principal of,
interest, Applicable Repayment Fee, premium or fees on the Term Loans or
any other amount payable by the Borrower under this Agreement, the Term
Notes or any of the other Loan Documents; or
(vii) any other act or omission to act or delay of any kind by the
Borrower or any other Person or any other circumstance whatsoever which
might, but for the provisions of this paragraph, constitute a legal or
equitable discharge of Guaranteed Obligations hereunder.
(c) Each Guarantor hereby waives diligence, presentment, demand of
payment, filing of claims with a court in the event of insolvency or bankruptcy
of the Borrower, any right to require a proceeding first against the Borrower or
another obligor, protest, notice and all demands whatsoever and covenants that,
subject to this Article VIII, this Guarantee shall not be discharged except by
complete payment and performance of all Guaranteed Obligations.
(d) If any Lender is required by any court or otherwise to return
to the Borrower or any Guarantor, or any Custodian for the Borrower or any of
the other obligors or their respective assets, any amount paid to any Lender,
this Guarantee, to the extent of the amount so returned, shall be reinstated in
full force and effect.
(e) Each Guarantor agrees that it shall not be entitled to any
right of subrogation in relation to the Lenders in respect of any Guaranteed
Obligations until payment in full of all Guaranteed Obligations. Each Guarantor
further agrees that (i) the maturity of the Guaranteed Obligations may be
accelerated as provided in SECTION 7.2 notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the Guaranteed
Obligations and (ii) in the event of any declaration of acceleration of such
Guaranteed Obligations as provided in SECTION 7.2, such Guaranteed Obligations
(whether or not due and payable) shall forthwith become due and payable by each
Guarantor for the purpose of this Guarantee.
SECTION 8.2. LIMITATION ON LIABILITY. Each Guarantor and, by its
acceptance of any Term Note, each Lender, hereby confirms that it is the
intention of all such parties that this Guarantee not constitute a fraudulent
transfer or conveyance for purposes of any Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar
law to the extent applicable to this Guarantee. To effectuate the foregoing
intention, the Lenders and the Guarantors hereby irrevocably agree that the
Obligations of each Guarantor under this Guarantee shall be limited to the
maximum amount as will, after giving effect to such maximum amount and all other
contingent and fixed liabilities of each Guarantor that are relevant under such
laws, result in the Obligations of each Guarantor under the Guarantee not
constituting a fraudulent transfer or conveyance.
SECTION 8.3. STAY OF ACCELERATION. In the event that acceleration
of the time for payment of any Guaranteed Obligation is stayed upon insolvency,
bankruptcy or reorganization of the Borrower, all such amounts otherwise subject
to acceleration under the terms of this Agreement and the Term Notes shall
nonetheless by payable by the Guarantors forthwith on demand by any Lender.
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ARTICLE IX.
INDEMNITY
SECTION 9.1. INDEMNIFICATION. The Borrower and each Guarantor
(each, an "INDEMNIFYING PARTY" and, collectively, the "INDEMNIFYING PARTIES")
jointly and severally agree to indemnify and hold harmless each Lender and their
respective controlling persons and Affected Parties and each director, officer,
employee, affiliate and agent thereof (each, an "INDEMNIFIED PARTY") from and
against any and all losses, claims, damages and liabilities, joint or several,
to which any Indemnified Party may become subject relating to or arising out of
or in connection with the transactions contemplated by this Agreement (including
the use of the proceeds of the Term Loans) or any other Loan Document or the
Transactions contemplated hereby or thereby, and to reimburse each Indemnified
Party, promptly upon demand, for expenses (including counsel fees and expenses)
as they are incurred in connection with the investigation of, preparation for or
defense of any pending or threatened loss, claim, damage or liability, or any
litigation, proceeding or other action in respect thereof, including any amount
paid in settlement of any litigation, proceeding or other action (commenced or
threatened) to which the Indemnifying Parties shall have consented in writing
(such consent not to be unreasonably withheld) whether or not any Indemnified
Party is a party and whether or not liability resulted; PROVIDED, HOWEVER, that
the indemnity contained in this SECTION 9.1 will not apply to any Indemnified
Party with respect to losses, claims, damages, liabilities or related expenses
arising from the willful misconduct or gross negligence of such Indemnified
Party.
SECTION 9.2. INDEMNITY NOT AVAILABLE. If indemnification were for
reason of public policy not to be available, the Indemnifying Parties, on the
one hand, and the Lenders, on the other hand, agree to contribute (in proportion
to their respective Commitments in the case of the Lenders) to the losses,
claims, damages, liabilities or expenses (or any investigation, claim,
litigation, proceeding or other action (collectively, an "ACTION") in respect
thereof) for which such indemnification is held unavailable in such proportion
as is appropriate to reflect the relative benefits to the Indemnifying Parties,
on the one hand, and the Lenders, on the other hand, in connection with the
matter giving rise to such losses, claims, damages, liabilities or expenses (or
actions in respect thereof). The Borrower and each Guarantor agree that for the
purposes of this SECTION 9.2 the relative benefits to the Borrower and its
Subsidiaries on the one hand, and the Indemnified Parties on the other hand, of
the transactions contemplated by this Agreement, including, without limitation,
the Term Loans and the other transactions contemplated by any of the Loan
Documents in any way relating to any Term Loan, including the use of the
proceeds of the Term Loans shall be deemed to be in the same proportion that the
proceeds of all Term Loans made or to be made to the Borrower bears to the
interest and fees paid or to be paid to the Lenders in connection with the Term
Loans; PROVIDED, HOWEVER, that, to the extent permitted by applicable law, in no
event shall the Indemnified Parties be required to contribute an aggregate
amount in excess of the aggregate interest and fees actually paid to the Lenders
in connection with the Term Loans. The foregoing contribution agreement shall be
in addition to any rights that any Indemnified Party may have at common law or
otherwise. No investigation or failure to investigate by any Indemnified Party
shall impair the foregoing indemnification and contribution agreement or any
right an Indemnified Party may have.
SECTION 9.3. SETTLEMENT OF CLAIMS. The Borrower and each Guarantor
agree that, neither it nor any of its Subsidiaries will settle, compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding in respect of which indemnification or contribution could be
sought under SECTION 9.1 or 9.2 (whether or not any indemnified Party is an
actual or potential party to such claim, action or proceeding) without the prior
written consent of the Indemnified Parties, unless such settlement, compromise
or consent includes an unconditional release of each Indemnified
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Party from all liability arising out of such claim, action or proceeding, which
consent shall not be unreasonably withheld.
SECTION 9.4. APPEARANCE EXPENSES. If an Indemnified Party is
requested or required to appear as a witness in any action brought by or on
behalf of or against the Borrower, any Guarantor or any Affiliate thereof in
which such Indemnified Party is not named as a defendant, the Borrower agrees to
reimburse such Indemnified Party for all reasonable expenses incurred by it in
connection with such Indemnified Party's appearing and preparing to appear as
such a witness, including, without limitation, the reasonable fees and
disbursements of its legal counsel.
SECTION 9.5. SURVIVAL OF INDEMNIFICATION. The provisions contained
in this Article IX shall remain in full force and effect whether or not any of
the transactions contemplated hereby are consummated and notwithstanding the
termination of this Agreement or the payment in full of all Obligations
hereunder.
SECTION 9.6. LIABILITY NOT EXCLUSIVE; PAYMENTS. The agreements of
each Indemnifying Party in this Article IX shall be in addition to any liability
that each may otherwise have. All amounts due under this Article IX shall be
payable as incurred upon written demand therefor.
ARTICLE X.
THE ADMINISTRATIVE AGENT
SECTION 10.1. APPOINTMENT. Each Lender hereby irrevocably
designates and appoints the Administrative Agent as the agent of such Lender
under this Agreement and the other Loan Documents, and each such Lender
irrevocably authorizes the Administrative Agent, in such capacity, to take such
action on its behalf under the provisions of this Agreement and the other Loan
Documents and to exercise such powers and perform such duties as are expressly
delegated to the Administrative agent by the terms of this Agreement and the
other Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Agreement, the Administrative Agent shall have no duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the
Administrative Agent.
SECTION 10.2. DELEGATION OF DUTIES. The Administrative Agent may
execute any of its duties under this Agreement and the other Loan Documents by
or through agents or attorneys-in-fact and shall be entitled to the advice of
counsel concerning all matters pertaining to such duties. The Administrative
Agent shall not be responsible for the negligence or misconduct of any agents or
attorneys in-fact selected by it with reasonable care.
SECTION 10.3. EXCULPATORY PROVISIONS. Neither the Administrative
Agent nor any of its officers, directors, employees, agents, attorneys-in-fact
or Affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any
other Loan Document (except for its own gross negligence or willful misconduct)
or (ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by the Borrower or any of its
Subsidiaries or any officer thereof contained in this Agreement or any other
Loan Document or in any certificate, report, statement, opinion or other
document referred to or provided for in, or received by the Administrative Agent
under or in connection with, this Agreement or any other Loan Document or for
the value, validity, effectiveness, genuineness, enforceability or sufficiency
of this
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Agreement or any other Loan Document or for any failure of the Borrower or any
of its Subsidiaries to perform its obligations hereunder or thereunder. The
Administrative Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower or any
of its Subsidiaries.
SECTION 10.4. RELIANCE BY THE ADMINISTRATIVE AGENT. The
Administrative Agent shall be entitled to rely, and shall be fully protected in
relying, upon any Term Note, writing, resolution, notice, consent, certificate,
affidavit, letter, telecopy, telex or teletype message, statement, order or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons and upon advice
and statements of legal counsel (including, without limitation, counsel to the
Borrower or any of its Subsidiaries), independent accountants and other experts
selected by the Administrative Agent. The Administrative Agent may deem and
treat the payee of the Term Note as the owner thereof for all purposes unless a
written notice of assignment, negotiation or transfer thereof shall have been
filed with the Administrative Agent. The Administrative Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any
other Loan Document unless it shall first receive such advice or concurrence of
the Majority Lenders as it deems appropriate or it shall first be indemnified to
its satisfaction by the Lenders against any and all liability and expense which
may be incurred by it by reason of taking or continuing to take any such action.
The Administrative Agent shall in all cases be fully protected in acting, or in
refraining from acting, under this Agreement and the other Loan Documents in
accordance with a request of the Majority Lenders, and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lenders and all future holders of the Loans.
Section 10.5. Notice of Default. The Administrative Agent shall
not be deemed to have knowledge or notice of the occurrence of any Default or
Event of Default hereunder unless the Administrative Agent has received notice
from a Lender, the Borrower or any of its Subsidiaries referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default." In the event that the Administrative Agent
receives such a notice, the Administrative Agent shall give notice thereof to
the Lenders. The Administrative Agent shall take such action with respect to
such Default or Event of Default as shall be reasonably directed by the Majority
Lenders; PROVIDED that unless and until the Administrative Agent shall have
received such directions, the Administrative Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interests of the Lenders.
SECTION 10.6. NON-RELIANCE ON THE ADMINISTRATIVE AGENT AND OTHER
LENDERS. Each Lender expressly acknowledges that neither the Administrative
Agent nor any of its officers, directors, employees, agents, attorneys-in-fact
or Affiliates has made any representations or warranties to it and that no act
by the Administrative Agent hereafter taken, including any review of the affairs
of the Borrower or any of its Subsidiaries, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition, prospects and credit worthiness of the Borrower
and its Subsidiaries and made its own decision to make its Loans hereunder and
enter into this Agreement. Each Lender confirms that it is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act.
Each Lender also represents that it will, independently and without reliance
upon the Administrative Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not
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taking action under this Agreement and the other Loan Documents, and to make
such investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition, prospects and credit
worthiness of the Borrower and its Subsidiaries. Except for notices, reports and
other documents expressly required to be furnished to the Lender by the
Administrative Agent hereunder, the Administrative Agent shall have no any duty
or responsibility to provide any Lenders with any credit or other information
concerning the business, operations, property, financial or other condition,
prospects or credit worthiness of the Borrower or any of its Subsidiaries which
may come into the possession of the Administrative Agent or any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates.
SECTION 10.7. INDEMNIFICATION. The Lenders agree to indemnify the
Administrative Agent in its capacity as such (to the extent not reimbursed by
the Borrower or any of its Subsidiaries and without limiting the obligation of
the Borrower and any of its Subsidiaries to do so), ratably according to their
respective Commitments in effect on the date on which indemnification is sought,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (include, without limitation, at any time
following the payment of the Loans) be imposed on, incurred by or asserted
against the Administrative Agent in any way relating to or arising out of, the
Commitments, this Agreement, any other Loan Document or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the
Administrative Agent under or in connection with any of the foregoing, PROVIDED
that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from the Administrative
Agent's gross negligence or willful misconduct. The agreements in this
subsection shall survive the payment of the Loans and all other Obligations
payable hereunder.
SECTION 10.8. ADMINISTRATIVE AGENT, IN ITS INDIVIDUAL CAPACITIES.
The Administrative Agent and its Affiliates may make loans to, accept deposits
from and generally engage in any kind of business with the Borrower as though
the Administrative Agent were not acting in such capacities hereunder and under
the other Loan Documents. With respect to the Term Loans made or renewed by it
and the Term Note issued to it the Administrative Agent shall have the same
rights and powers under this Agreement and the other Loan Documents as any
Lender and may exercise the same as though it were not the Administrative Agent,
and the terms "Lender" and "Lenders" shall include the Administrative Agent in
its individual capacity.
SECTION 10.9. SUCCESSOR ADMINISTRATIVE AGENT.
(a) The Administrative Agent may resign as Administrative Agent
upon 30 days' notice to the Lenders. If the Administrative Agent shall resign as
Administrative Agent under this Agreement and the other Loan Documents then the
Majority Lenders shall appoint from among the Lenders a successor agent for the
Lenders, which successor agent, shall succeed to the rights, powers and duties
of the Administrative Agent, hereunder. Effective upon such appointment and
approval, the term "Administrative Agent" shall mean and include such successor
agent, and the former Administrative Agent's rights, powers and duties as
Administrative Agent shall be terminated, without any other or further act or
deed on the part of such former Administrative Agent any of the parties to this
Agreement or any holders of the Loans. After any retiring Administrative Agent's
resignation as Administrative Agent the provisions of this Article X shall inure
to its benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.
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(b) Upon the assignment by Goldman Sachs Credit Partners L.P.,
acting in its capacity as Lender hereunder, of any of its rights and obligations
hereunder to a Purchaser, such Purchaser may simultaneously with such assignment
replace Goldman Sachs Credit Partners L.P., acting in its capacity as
Administrative Agent hereunder, as the Administrative Agent hereunder.
SECTION 10.10. DUTIES OF ADMINISTRATIVE AGENT. Except as expressly
set forth herein, the Administrative Agent, in its capacity as such, shall have
no duties or responsibilities, and shall incur no liabilities, under this
Agreement or the other Loan Documents.
ARTICLE XI.
MISCELLANEOUS
SECTION 11.1. EXPENSES; DOCUMENTARY TAXES. The Borrower and the
Guarantors hereby jointly and severally agree to pay (a) all out-of-pocket
expenses (including, without limitation, expenses incurred in connection with
due diligence of the Lenders) associated with the preparation, execution and
delivery, administration, waiver, enforcement or modification and enforcement of
the documentation contemplated hereby and (b) the fees and disbursements of
legal counsel to the Lenders in connection with the transactions contemplated
herein, including in each case those incurred prior to the date hereof. The
Borrower and the Guarantors hereby jointly and severally agree to indemnify the
Lenders against any transfer taxes, documentary taxes, assessments or charges
made by any Governmental Entity by reason of the execution and delivery, or the
terms, of this Agreement or any of the other Loan Documents.
Section 11.2. notices. All notices and other communications
pertaining to this Agreement or any Term Note shall be in writing and shall be
delivered (a) in person (with receipt acknowledged), (b) by facsimile (confirmed
immediately in writing by a copy mailed by registered or certified mail, return
receipt requested, postage prepaid, addressed as hereafter set forth), (c) by
registered or certified mail, return receipt requested, postage prepaid, or (d)
by overnight courier, addressed as follows:
(i) If to the Administrative Agent, to it at:
85 Broad Street, 14th Floor
New York, New York 10004
Attention: Richard Katz
Telephone: 212-902-5492
Facsimile No.: (212) 357-4451
WITH A SEPARATE COPY TO EACH OF:
Goldman Sachs Credit Partners L.P.
85 Broad Street, 14th Floor
New York, New York 10004
Attention: Melissa Fisher
Telephone: 212-902-6525
Telefax: 212-357-4451
Goldman Sachs Credit Partners L.P.
85 Broad Street, 6th Floor
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New York, New York 10004
Attention: Lola Small
Telephone: 212-902-4599
Telefax: 212-357-4597
Latham & Watkins
885 Third Avenue, Suite 1000
New York, New York 10022
Attention: Kirk A. Davenport
Telephone: 212-906-1200
Facsimile No.: (212) 751-4864
(ii) If to any Lenders, to it at its address set forth
on the signature pages hereto:
(iii) If to the Borrower or any Guarantor, to it at:
1812 North Forest Park Blvd.
Fort Worth, Texas 76102
Attention: M. Scott Leslie, President
Facsimile No.: (817) 870-0296
WITH A COPY TO:
Cantey & Hanger, L.L.P.
801 Cherry Street
Suite 2100
Fort Worth, Texas 76102
Attention: Dean A. Tetirick
Facsimile No.: (817) 877-2807
or to such other Person or address as shall be furnished in writing delivered to
the other parties in compliance with this Section.
SECTION 11.3. CONSENT TO AMENDMENTS AND WAIVERS.
(a) Except as provided in SECTION 11.3(B), this Agreement and the
Term Notes may be amended or supplemented with the consent of the Borrower, each
Guarantor and the Majority Lenders and any existing default or compliance with
any provision of this Agreement or the Term Notes may be waived with the consent
of the Majority Lenders. Term Notes held by the Borrower or any of its
Affiliates will not be deemed to be outstanding for purposes of this SECTION
11.3.
(b) Notwithstanding the provisions of SECTION 11.3(A), without the
consent of each Lender affected thereby, an amendment or waiver may not: (i)
reduce the principal amount of any Term Loan, (ii) change the fixed maturity of
any Term Loan, (iii) reduce the rate of or change the time for payment of
interest on any Term Loan, (iv) waive a Default or Event of Default in the
payment of principal of, Applicable Repayment Fee, or premium, fees or interest,
if any, on the Term Loans or any other amounts payable under any of the Loan
Documents, (v) make any Loan payable in money other than that stated in the
applicable Term Loan, (vi) make any change in the provisions of this Agreement
relating to the rights of Lenders to receive (A) prepayments on, or (B) payments
of principal of,
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Applicable Repayment Fee, premium, if any, or interest on, the Term Loans, (vii)
release any Guarantor from its Guarantee except as provided herein or (viii)
make any change in the foregoing amendment and waiver provisions.
(c) The Borrower shall not and shall not permit any of its
Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Lender for
or as an inducement to any consent, waiver or amendment permitted by SECTION
11.3(A) unless such consideration is offered to be paid and is paid to all
Lenders that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or amendment.
SECTION 11.4. PARTIES. This Agreement shall inure to the benefit
of and be binding upon the Administrative Agent, each Lender, the Borrower, each
Guarantor and each of their respective successors and assigns. Except as
expressly provided in this Agreement, nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other Person any legal
or equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. Except as expressly provided in this Agreement, this
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Affected Parties and their respective
successors and assigns, and for the benefit of no other Person.
SECTION 11.5. NEW YORK LAW; SUBMISSION TO JURISDICTION; WAIVER OF
JURY TRIAL. THIS AGREEMENT AND THE TERM NOTES SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. THE BORROWER, EACH
GUARANTOR AND EACH OF THE LENDERS HEREBY SUBMITS TO THE NONEXCLUSIVE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY (EACH, A "NEW
YORK COURT") FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO
THE TERM NOTES, THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY. THE BORROWER, EACH GUARANTOR AND EACH OF THE
LENDERS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE BORROWER,
EACH GUARANTOR AND EACH OF THE LENDERS IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE TERM
NOTES, THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
SECTION 11.6. REPLACEMENT TERM NOTES. If any Term Note becomes
mutilated and is surrendered by the applicable Lender to the Borrower, or if any
Lender claims that any of its Term Notes has been lost, destroyed or wrongfully
taken, the Borrower shall execute and deliver to such Lender a replacement Term
Note, upon the delivery by such Lender of an indemnity to the Borrower to save
it and any agent of it harmless in respect of such loss, destruction or wrongful
taking with respect to such Term Note.
SECTION 11.7. APPOINTMENT OF AGENT FOR SERVICE. The Borrower
designates and appoints CT Corporation System and such other Persons as may
irrevocably agree in writing to serve as their respective agent to receive on
their behalf service of all process in any proceedings in any New
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York Court, such service being hereby acknowledged by the Borrower to be
effective and binding in every respect. If any agent appointed by a the Borrower
refuses to receive and forward such service, that the Borrower hereby agrees
that service upon it by mail shall constitute sufficient service.
SECTION 11.8. MARSHALLING; RECAPTURE. Neither the Administrative
Agent nor any Lender shall be under any obligation to marshall any assets in
favor of the Borrower or any other party or against or in payment of any or all
of the Obligations. To the extent any Lender receives any payment by or on
behalf of the Borrower, which payment or any part thereof is subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to the Borrower or its estate, trustee, receiver, custodian or any
other party under any Bankruptcy Law, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
obligation or part thereof which has been paid, reduced or satisfied by the
amount so repaid shall be reinstated by the amount so repaid and shall be
included within the liabilities of Borrower to such Lenders as of the date such
initial payment, reduction or satisfaction occurred.
SECTION 11.9. LIMITATION OF LIABILITY. No claim may be made by the
Borrower, any Guarantor or any other Person against the Administrative Agent or
any Lender or the Affiliates, directors, officers, employees, attorneys or
agents of any of them for any special, indirect, consequential or punitive
damages in respect of any claim for breach of contract or any theory of
liability arising out of or related to the transactions contemplated by this
Agreement or the other Loan Documents, or any act, omission or event occurring
in connection therewith; and the Borrower and each Guarantor hereby waive,
release and agree not to sue and shall cause each of its respective Subsidiaries
to waive, release or agree not to sue (if required), upon any claim for any such
damages, whether or not accrued and whether or not known or suspected to exist
in its favor.
SECTION 11.10. INDEPENDENCE OF COVENANTS. All covenants hereunder
shall be given independent effect so that if a particular action or condition is
not permitted by any of such covenants, the fact that it would be permitted by
an exception to, or be otherwise within the limitations of, another covenant
shall not avoid the occurrence of a Default or Event of Default if such action
is taken or condition exists.
SECTION 11.11. CURRENCY INDEMNITY. The Borrower acknowledges and
agrees that this is a credit transaction where specification of dollars is of
the essence and dollars shall be the currency of account and payment in all
events. If, pursuant to a judgment or for any other reason, payment shall be
made in another currency and such payment, after prompt conversion to dollars
and transfer to New York City in accordance with normal banking procedures,
falls short of the sum due the Lenders in dollars, the Borrower shall pay the
Lenders such shortfall and the Lender shall have a separate cause of action for
such amount.
SECTION 11.12. WAIVER OF IMMUNITY. To the extent that the
Borrower or any Guarantor has or hereafter may acquire any immunity from:
(a) the jurisdiction of any court of (i) any jurisdiction in which
the Borrower or any Guarantor owns or leases property or assets or (ii)
the United States, the State of New York or any political subdivision
thereof; or
(b) from any legal process (whether through service of notice,
attachment prior to judgment, attachment in aid of execution, execution
or otherwise) with respect to itself or its
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property and assets, this Agreement, any Loan Document or actions to
enforce judgments in respect of any thereof,
it hereby irrevocably waives such immunity in respect of its obligations under
the above-referenced document.
SECTION 11.13. FREEDOM OF CHOICE. The submission to the
jurisdiction of the courts referred to in this Article XI shall not (and shall
not be construed so as to) limit the right of any Lender to take proceedings
against the Borrower or any Guarantor in the courts of any country in which the
Borrower or such Guarantor has assets or in any other court of competent
jurisdiction nor shall the taking of proceedings in any one or more
jurisdictions preclude the taking of proceedings in any other jurisdiction
(whether concurrently or not) if and to the extent permitted by applicable law.
SECTION 11.14. SUCCESSORS AND ASSIGNS. Whenever in this Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and assigns of such party; and all covenants and
agreements of the Borrower and each Guarantor in this Agreement shall bind their
respective successors and assigns. Neither the Borrower nor any Guarantor may
assign or transfer any of its rights or obligations hereunder (by operation of
law or otherwise) without the prior written consent of the Majority Lenders. Any
assignment by any Lenders must be made in compliance with Article 6 hereof.
SECTION 11.15. MERGER. This Agreement and the other Loan Documents
constitutes the entire contract among the parties relating to the subject matter
hereof and thereof and supersedes any and all previous agreements among the
parties relating to the subject matter hereof and thereof.
SECTION 11.16. SEVERABILITY CLAUSE. In case any provision in this
Agreement or any Term Note shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby and such
provision shall be ineffective in such jurisdiction only to the extent of such
invalidity, illegality or unenforceability.
SECTION 11.17. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO
SURVIVE DELIVERY. All representations, warranties and agreements contained in or
incorporated into this Agreement, or contained in Officers' Certificates
submitted pursuant hereto, shall remain operative and in full force and effect
until all Obligations under all of the Loan Documents have been repaid in full,
regardless of any investigation made by or on behalf of the Lenders or any
controlling Person of the Lenders, or by or on behalf of the Borrower or any
controlling Person of the Borrower, and shall survive delivery of the Term
Notes. Each of the Schedules of this Agreement shall be deemed to include and
incorporate all disclosures made on the other Schedules to this Agreement.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
FLASHNET COMMUNICATIONS, INC.,
as Borrower
By: /s/ M. Scott Leslie
------------------------------------
Name: M. Scott Leslie
Title: President and Secretary
FLASHNET MARKETING, INC.,
as Guarantor
By: /s/ M. Scott Leslie
------------------------------------
Name: M. Scott Leslie
Title: President and Treasurer
FLASHNET TELECOM, INC.,
as Guarantor
By: /s/ M. Scott Leslie
------------------------------------
Name: M. Scott Leslie
Title: President
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as Administrative Agent
By: /s/ Richard Katz
------------------------------------
Name: Richard Katz
Title: Authorized Signatory
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LENDERS:
Commitment Amount:
$5,000,000 GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Richard Katz
--------------------------------------------------
Name: Richard Katz
Title: Authorized Signatory
Wire Transfer Instructions
Citibank, N.A.
ABA #021000089
Acct. #40717188
Name: Goldman Sachs Credit Partners, L.P.
Ref.: FlashNet
Attn.: John Makrinos
Notices and Communications to be Separately Delivered
to Following Parties
Goldman Sachs Credit Partners L.P.
85 Broad Street - 14th Floor
New York, New York 10004
Attention: Richard Katz
Telephone: 212-902-4599
Telefax: 212-357-4451
Goldman Sachs Credit Partners L.P.
85 Broad Street - 14th Floor
New York, New York 10004
Attention: Melissa Fisher
Telephone: 212-902-6525
Telefax: 212-357-4451
Goldman Sachs Credit Partners L.P.
85 Broad Street - 6th Floor
New York, New York 10004
Attention: Lola Small
Telephone: 212-902-4599
Telefax: 212-357-4597
60
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Exhibit A
FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Term Loan Agreement, dated as of _______,
199_ (as amended, supplemented or otherwise modified from time to time, the
"TERM LOAN AGREEMENT"), by and among FLASHNET COMMUNICATIONS, INC., a Texas
corporation, (the "BORROWER"), FLASHNET MARKETING, INC., a Texas corporation,
and FLASHNET TELECOM, INC., a Texas corporation, as guarantors (each a
"GUARANTOR" and, collectively the "GUARANTORS"), the Lenders named therein, and
GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agent for the Lenders (in
such capacity, the "ADMINISTRATIVE AGENT"). Unless otherwise defined herein,
terms defined in the Term Loan Agreement and used herein shall have the meanings
given to them in the Term Loan Agreement.
The Assignor identified on Schedule I hereto (the "ASSIGNOR") and the
Assignee identified on Schedule I hereto (the "ASSIGNEE") agree as follows:
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date (as defined below), the percentage interest described in Schedule
1 hereto (the "ASSIGNED INTEREST") in and to the Assignor's rights and
obligations under the Term Loan Agreement (the "ASSIGNED FACILITIES"), in a
principal amount for the Assigned Facilities as set forth on Schedule I hereto.
2. The Assignor (a) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Term Loan Agreement or with respect to the
execution, legality, validity, enforceability, genuineness, sufficiency or value
of the Term Loan Agreement, any other Loan Document or any other instrument or
document furnished pursuant thereto, other than that the Assignor has not
created any adverse claim upon the interest being assigned by it hereunder and
that such interest is free and clear of any such adverse claim: (b) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower, any of its Subsidiaries or any other
obligor or the performance or observance by the Borrower, any of its
Subsidiaries or any other obligor of any of their respective obligations under
the Term Loan Agreement or any other Loan Document or any other instrument or
document furnished pursuant hereto or thereto; and (c) attaches any Term Notes
held by it evidencing the Assigned Facilities and (i) requests that the
Administrative Agent, upon request by the Assignee, exchange the attached Term
Notes for a new Term Note or Term Notes payable to the Assignee and (ii) if the
Assignor has retained any interest in the Assigned Facility, requests that the
Administrative Agent exchange the attached Term Notes for a new Term Note or
Term Notes payable to the Assignor, in each case in amounts which reflect the
assignment being made hereby (and after giving effect to any other assignments
which are effective on the Effective Date).
3. The Assignee (a) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (b) confirms that it
has received a copy of the Term Loan Agreement, and all schedules and exhibits
thereto together with copies of the financial information delivered pursuant to
SECTION 4.4 thereof and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Assignment and Acceptance; (c) agrees that it will, independently and without
reliance upon the Assignor, the Administrative Agent or any other Lenders and
based on such documents and information as it shall deem appropriate at the
time, continue to make its
<PAGE>
own credit decisions in taking or not taking action under the Term Loan
Agreement, the other Loan Documents or any other instrument or document
furnished pursuant hereto or thereto; (d) appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers and discretion under the Term Loan Agreement, the other Loan
Documents or any other instrument or document furnished pursuant hereto or
thereto as are delegated to the Administrative Agent by' the terms thereof,
together with such powers as are incidental thereto; (e) agrees that it will be
bound by the provisions of the Term Loan Agreement and will perform in
accordance with its terms all the obligations which by the terms of the Term
Loan Agreement are required to be performed by it as a Lenders; (f) confirms
that all of the representations and warranties set forth in SECTION 6.1 of the
Term Loan Agreement are true and correct in all material respects as to Assignee
as of the date hereof; and (g) agrees that it shall have no recourse against the
Assignor with respect to any matters relating to the Term Loan Agreement, the
other Loan Documents or any others instrument or documents furnished pursuant
hereto or thereto.
4. [RESERVED]
5. The effective date of this Assignment and Acceptance shall be the
Effective Date of Assignment described in Schedule I hereto (the "EFFECTIVE
DATE"). Following the execution of this Assignment and Acceptance, it shall be
delivered to the Administrative Agent for acceptance by it and recording by the
Administrative Agent pursuant to SECTION 6.6 of the Term Loan Agreement,
effective as of the Effective Date (which shall not, unless otherwise agreed to
by the Administrative Agent, be earlier than five Business Days after the date
of such acceptance and recording by the Administrative Agent).
6. Upon such acceptance and recording, from and after the Effective
Date, the Administrative Agent shall make all payments in respect of the
Assigned Interest (including payments of principal, interest, fees and other
amounts) to the Assignor for amounts which have accrued to the Effective Date
and to the Assignee for amounts which have accrued subsequent to the Effective
Date. The Assignor and the Assignee shall make all appropriate adjustments in
payments by the Administrative Agent for periods prior to the Effective Date or
with respect to the making of this assignment directly between themselves.
7. From and after the Effective Date, (a) the Assignee shall be a
party to the Term Loan Agreement and, to the extent provided in this Assignment
and Acceptance, have the rights and obligations of a Lender thereunder and under
the other Loan Documents and shall be bound by the provisions thereof and (b)
the Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Term Loan
Agreement.
8. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed as of the date first above written by their respective
duly authorized officers on Schedule I hereto.
3
<PAGE>
Schedule I
to Assignment and Acceptance
Name of Assignor:
----------------------------
Name of Assignee:
----------------------------
Effective Date of Assignment:
-------------------
<TABLE>
<CAPTION>
Principal Commitment
Amount Assigned Commitment Percentage Assigned(1)
-------------------- ---------------------------------
<S> <C> <C>
Term Loan $________________ _____ . _________%
</TABLE>
- ----------
(1) Calculate the Commitment Percentage that is assigned to at least 9
decimal places and show as a percentage of the aggregate commitments
of all Lenders.
<PAGE>
<TABLE>
<CAPTION>
[Name of Assignee] [Name of Assignor]
<S> <C>
By: By:
--------------------------------- -------------------------------
Name Name:
Title: Title:
</TABLE>
Accepted:
[NAME OF ADMINISTRATIVE AGENT]
as Administrative Agent
By:
---------------------------------
Name:
Title:
<PAGE>
Exhibit B
FORM OF CO-SALE AGREEMENT
<PAGE>
Exhibit C
FORM OF EQUITY REGISTRATION RIGHTS AGREEMENT
<PAGE>
Exhibit D
THE SECURITY EVIDENCED OR CONSTITUTED HEREBY HAS BEEN ACQUIRED FOR INVESTMENT
AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
SECURITY MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE
REGISTRATION PROVISIONS OF SAID ACT (OR AN EXEMPTION THEREFROM) HAVE BEEN
COMPLIED WITH.
No. I-__ New York, New York
$______________ ______________, 199_
FORM OF TERM NOTE
FOR VALUE RECEIVED, the undersigned, FLASHNET COMMUNICATIONS, INC., a
Texas corporation (the "BORROWER"), promises to pay to the order of
_______________________________, or its registered assigns (the "HOLDER"), the
principal sum of the aggregate of (i) __________________ Dollars ($_______) and
(ii) the aggregate amount by which the principal amount of this Term Note is
increased by Capitalized Interest pursuant to Section 2.2(c) of the Term Loan
Agreement referred to below, and to pay interest from the date hereof on the
unpaid principal amount hereof (including any Capitalized Interest) from time to
time outstanding, at the rates PER ANNUM and on the dates specified in that
certain Term Loan Agreement, dated as of _______, 199_, among the Borrower,
FLASHNET MARKETING, INC., a Texas corporation, and FLASHNET TELECOM, INC., a
Texas corporation, as guarantors (each a "GUARANTOR" and, collectively, the
"GUARANTORS"), the Lenders named therein, and GOLDMAN SACHS CREDIT PARTNERS
L.P., as Administrative Agent (as amended, supplemented, restated and/or
otherwise modified from time to time, the "TERM LOAN AGREEMENT"). Terms used
herein and not otherwise defined have the meanings assigned to them in the Term
Loan Agreement. In the event the principal amount of this Term Note is increased
in accordance with Section 2.2(c) of the Term Loan Agreement, the Holder may
exchange this Term Note for a Term Note definitively stating the aggregate
principal amount hereof pursuant to Section 6.5 of the Term Loan Agreement.
The unpaid principal balance (including any Capitalized Interest) of
this Term Note, together with all accrued and unpaid interest thereon, and the
Applicable Repayment Fee shall become due and payable on the Maturity Date.
The Borrower promises to pay interest on demand, to the extent
permitted by law, on any overdue principal and interest from their due dates at
the rate PER ANNUM as specified in Section 2.2 of the Term Loan Agreement.
All payments of the principal of, Applicable Repayment Fees, and
interest on this Term Note shall be made in money of the United States of
America that at the time of payment is legal tender for the payment of public
and private debts, by transfer of immediately available funds into a bank
account designated by the Holder in writing to the Borrower. The principal
amount of this Term Note is subject to increase in accordance with Section
2.2(c) of the Term Loan Agreement.
The Borrower agrees to pay, upon demand, all reasonable out-of-pocket
expenses (including, without limitation, the reasonable fees and disbursements
of legal counsel to the Holder) associated with the waiver, enforcement or
modification of the Term Loan Agreement or this Term Note.
<PAGE>
This Term Note is entitled to the benefits of a joint and several
unconditional and irrevocable guarantee (the "NOTE GUARANTEE") of, INTER ALIA,
the due and punctual payment of the principal of, the Applicable Repayment Fee,
premium (if any) and interest on this Term Note as set forth the Term Loan
Agreement. Each of the Guarantors has acknowledged its liability under the Note
Guarantee by signing this Term Note.
The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The nonexercise by the Holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
This Term Note is one of the Term Notes referred to in the Term Loan
Agreement, which Agreement, among other things, contains provisions for the
acceleration of the maturity hereof upon the happening of certain events, for
optional and mandatory prepayment in full of the principal hereof prior to
maturity and for the amendment or waiver of certain provisions of the Term Loan
Agreement, all upon the terms and conditions therein specified. In the event of
any conflict between the provisions of this Term Note and the Term Loan
Agreement, the provisions of the Term Loan Agreement shall govern.
THIS TERM NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK.
2
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Term Note to be
signed in its corporate name by its duly authorized officer and to be dated as
of the day and year first above written.
FLASHNET COMMUNICATIONS, INC.,
as Borrower
By:
---------------------------
Name:
Title:
ACKNOWLEDGMENT OF NOTE GUARANTEE:
FLASHNET MARKETING, INC.,
as Guarantor
By:
-------------------------------
Name:
Title:
FLASHNET TELECOM, INC.,
as Guarantor
By:
-------------------------------
Name:
Title:
3
<PAGE>
Exhibit E
FORM OF OPINION OF CANTEY & HANGER, L.L.P.
<PAGE>
THE SECURITY EVIDENCED OR CONSTITUTED HEREBY HAS BEEN ACQUIRED FOR INVESTMENT
AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
SECURITY MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE
REGISTRATION PROVISIONS OF SAID ACT (OR AN EXEMPTION THEREFROM) HAVE BEEN
COMPLIED WITH.
No. 1 New York, New York
$5,000,000 January 15, 1999
TERM NOTE
FOR VALUE RECEIVED, the undersigned, FLASHNET COMMUNICATIONS, INC., a
Texas corporation (the "BORROWER"), promises to pay to the order of GOLDMAN
SACHS CREDIT PARTNERS L.P., or its registered assigns (the "HOLDER"), the
principal sum of the aggregate of (i) FIVE MILLION Dollars ($5,000,000) and (ii)
the aggregate amount by which the principal amount of this Term Note is
increased by Capitalized Interest pursuant to Section 2.2(c) of the Term Loan
Agreement referred to below, and to pay interest from the date hereof on the
unpaid principal amount hereof (including any Capitalized Interest) from time to
time outstanding, at the rates PER ANNUM and on the dates specified in that
certain Term Loan Agreement, dated as of January 15, 1999, among the Borrower,
FLASHNET MARKETING, INC., a Texas corporation, and FLASHNET TELECOM, INC., a
Texas corporation, as guarantors (each a "GUARANTOR" and, collectively, the
"GUARANTORS"), the Lenders named therein, and GOLDMAN SACHS CREDIT PARTNERS
L.P., as Administrative Agent (as amended, supplemented, restated and/or
otherwise modified from time to time, the "TERM LOAN AGREEMENT"). Terms used
herein and not otherwise defined have the meanings assigned to them in the Term
Loan Agreement. In the event the principal amount of this Term Note is
increased in accordance with Section 2.2(c) of the Term Loan Agreement, the
Holder may exchange this Term Note for a Term Note definitively stating the
aggregate principal amount hereof pursuant to Section 6.5 of the Term Loan
Agreement.
The unpaid principal balance (including any Capitalized Interest) of
this Term Note, together with all accrued and unpaid interest thereon, and the
Applicable Repayment Fee shall become due and payable on the Maturity Date.
The Borrower promises to pay interest on demand, to the extent
permitted by law, on any overdue principal and interest from their due dates at
the rate PER ANNUM as specified in Section 2.2 of the Term Loan Agreement.
All payments of the principal of, Applicable Repayment Fees, and
interest on this Term Note shall be made in money of the United States of
America that at the time of payment is legal tender for the payment of public
and private debts, by transfer of immediately available funds into a bank
account designated by the Holder in writing to the Borrower. The principal
amount of this Term Note is subject to increase in accordance with Section
2.2(c) of the Term Loan Agreement.
The Borrower agrees to pay, upon demand, all reasonable out-of-pocket
expenses (including, without limitation, the reasonable fees and disbursements
of legal counsel to the Holder) associated with the waiver, enforcement or
modification of the Term Loan Agreement or this Term Note.
This Term Note is entitled to the benefits of a joint and several
unconditional and irrevocable guarantee (the "NOTE GUARANTEE") of, INTER ALIA,
the due and punctual payment of the
<PAGE>
principal of, the Applicable Repayment Fee, premium (if any) and interest on
this Term Note as set forth the Term Loan Agreement. Each of the Guarantors has
acknowledged its liability under the Note Guarantee by signing this Term Note.
The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The nonexercise by the Holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
This Term Note is one of the Term Notes referred to in the Term Loan
Agreement, which Agreement, among other things, contains provisions for the
acceleration of the maturity hereof upon the happening of certain events, for
optional and mandatory prepayment in full of the principal hereof prior to
maturity and for the amendment or waiver of certain provisions of the Term Loan
Agreement, all upon the terms and conditions therein specified. In the event of
any conflict between the provisions of this Term Note and the Term Loan
Agreement, the provisions of the Term Loan Agreement shall govern.
THIS TERM NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK.
2
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Term Note to be
signed in its corporate name by its duly authorized officer and to be dated as
of the day and year first above written.
FLASHNET COMMUNICATIONS, INC.,
as Borrower
By: /s/ A. L. Thurburn
---------------------------------
Name: A. L. Thurburn
Title: CEO & COB
ACKNOWLEDGMENT OF NOTE GUARANTEE:
FLASHNET MARKETING, INC.,
as Guarantor
By: /s/ A. L. Thurburn
---------------------------------
Name: A. L. Thurburn
Title: V.P. & Secretary
FLASHNET TELECOM, INC.,
as Guarantor
By: /s/ A. L. Thurburn
--------------------------------
Name: A. L. Thurburn
Title: COB
3
<PAGE>
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BORROWER PLEDGE AND SECURITY AGREEMENT
dated as of
January 15, 1999
FLASHNET COMMUNICATIONS, INC.,
as Grantor
and
GOLDMAN SACHS CREDIT PARTNERS L.P.
as Agent,
as Secured Party
-----------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION I. DEFINITIONS...........................................................1
1.1. Certain Terms...................................................1
1.2. Terms Defined in Term Loan Agreement............................3
1.3. Terms Defined in the Uniform Commercial Code....................4
1.4. Terms Generally.................................................5
SECTION II. THE SECURITY INTERESTS...............................................5
2.1. Grant of Security Interests....................................5
2.2. Delivery of Instruments And Securities.........................7
2.3. Investment Property............................................7
2.4. Registration of Pledge.........................................8
2.5. Financing Statements...........................................8
2.6. Secured Party Filing...........................................8
2.7. Further Assurances.............................................8
2.8. Power of Attorney..............................................9
2.9. Survival of Security INTERESTS................................10
2.10. Reinstatement of Security Interests...........................10
2.11. Grantor Remains Liable........................................11
SECTION III. REPRESENTATIONS, WARRANTIES AND COVENANTS..........................11
3.1. The Collateral................................................11
3.2. Maintenance of Perfection.....................................12
3.3. Defense of Collateral.........................................13
3.4. Transfer or Encumbrance.......................................13
3.5. Payments, Dividends and Distributions.........................13
3.6. Voting Rights.................................................13
3.7. Maintenance of Collateral.....................................14
3.8. Concerning Equipment and Inventory............................14
3.9. Concerning Accounts, Instruments and other Claims.............15
3.10. Substituted Performance.......................................16
SECTION IV. DEFAULT; REMEDIES...................................................16
4.1. Default.......................................................16
4.2. Remedies upon Default.........................................16
4.3. Waivers by Grantor............................................17
4.4. Standard of Care..............................................18
4.5. Application of Proceeds.......................................18
4.6. Indemnity and Expenses........................................18
4.7. Surplus, Deficiency...........................................19
4.8. Information Related to the Collateral.........................19
4.9. Sale Exempt from Registration.................................19
i
<PAGE>
4.10. Rights and Remedies Cumulative................................20
4.11. No Direct Enforcement by Beneficiaries........................20
SECTION V. CONCERNING THE SECURED PARTY.........................................20
5.1. Agent for Holders.............................................20
5.2. Agent shall be the Secured Party..............................20
5.3. No Assurances or Liability....................................21
5.4. Holders Bound.................................................21
SECTION VI. MISCELLANEOUS PROVISIONS............................................21
6.1. Continuing Security Interests; Release........................21
6.2. Amendments; Etc...............................................21
6.3. Failure or Indulgence not Waiver; Remedies Cumulative.........22
6.4. Notices.......................................................22
6.5. Severability..................................................22
6.6. Headings......................................................22
6.7. Governing Law; Terms..........................................22
6.8. Consent to Jurisdiction and Service of Process................22
6.9. Waiver of Jury Trial..........................................23
6.10. Counterparts..................................................23
6.11. Ascend Note...................................................23
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 3.1(b): Capital Stock and Intercompany NOTES
Schedule 3.1(c): Intellectual Property
Schedule 3.1(d): Other Investment Property
Schedule 3.1(e): Location of Equipment and Inventory
Schedule 3.1(g): Location of Grantor
Schedule 3.1(h): Names
Schedule 3.1(i): Taxpayer ID Number
</TABLE>
ii
<PAGE>
BORROWER PLEDGE AND SECURITY AGREEMENT
This BORROWER PLEDGE AND SECURITY AGREEMENT (this "AGREEMENT") is
dated as of January 15, 1999, and entered into by and between FLASHNET
COMMUNICATIONS, INC., a Texas corporation (the "GRANTOR"), and GOLDMAN SACHS
CREDIT PARTNERS, L.P., in its capacity as Administrative Agent (in such capacity
the "AGENT") under the Term Loan Agreement described herein (in such capacity,
the "SECURED PARTY"), FOR THE BENEFIT OF the Persons that now are or at any time
hereafter become party as Lender to the Term Loan Agreement (the "LENDERS" and
the Agent and the Lenders, collectively, the "BENEFICIARIES").
RECITALS
The Grantor has requested that Term Loans be made to the Grantor on
terms and conditions set forth in that certain Term Loan Agreement dated as of
the day and year first above written, by and among Grantor, Secured Party and
the Lenders.
To induce the Beneficiaries to enter into the Term Loan Agreement, and
in consideration thereof and of any and all Term Loans at any time made
thereunder, the Grantor has agreed to grant to the Secured Party, for the
benefit of the Beneficiaries, the collateral security described herein as
security for the payment of the Secured Obligations on the terms herein set
forth.
ACCORDINGLY, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Grantor hereby agrees with Secured Party for the benefit of the
Beneficiaries as follows:
SECTION I.
DEFINITIONS
1.1. CERTAIN TERMS. As used in this Agreement, the following terms
have the meanings specified below:
"BANKRUPTCY CODE" means Title 11 of the United States Code, as from
time to time amended, or any successor statute.
"CAPITAL STOCK" means any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation,
regardless of type, class, preference or designation, any and all equivalent
ownership interests in a Person other than a corporation, including membership
interests, partnership interests or other equity interests, and any and all
warrants, options, purchase rights, conversion or exchange rights, voting
rights, calls or claims of any character with respect thereto.
"CLAIM" has the meaning set forth in the Bankruptcy Code.
<PAGE>
"COLLATERAL" has the meaning set forth in subsection 2.1.
"DISCHARGE OF THE OBLIGATIONS" means that all obligations of the
Lenders to make Term Loans under the Term Loan Agreement have expired or been
terminated and have been absolutely, unconditionally and irrevocably discharged
and all Obligations at any time created, incurred or outstanding (except
Obligations for indemnification which are then contingent and in respect of
which no claim or demand has then been made) have been fully and finally paid or
satisfied in cash or in accordance with the Loan Documents.
"EXCLUDED ASSETS" means (i) rights, licenses and franchises granted by
any Governmental Entity, licensor, lessor or other third party upon which it is
unlawful to create a Lien and (ii) that certain Master Lease Agreement, dated
June 7, 1998, between the Grantor, as lessee, and Ascend Credit Corporation, as
lessor.
"HOLDER" means, in respect of any Secured Obligation, the Person
entitled to enforce payment thereof and specifically includes each Lender and
the Secured Party.
"INTERCOMPANY NOTES" means any promissory note executed by a
Subsidiary of the Grantor in favor of the Grantor.
"LOAN PARTIES" means the Borrower and the Guarantors.
"OBLIGATIONS" means all direct or indirect debts, liabilities and
obligations of the Borrower of any and every type and description at any time
arising under or in connection with the Term Loan Agreement or any other Loan
Document, to the Secured Party, the Agent, any Lender or any Person entitled to
indemnification pursuant to the Term Loan Agreement or any other Loan Document,
in each case whether now outstanding or hereafter created or incurred, whether
or not the right of such Person to payment in respect of any such debts,
liabilities or obligations is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured or unsecured and whether or not such claim is discharged, stayed or
otherwise affected by any bankruptcy case or insolvency, reorganization,
receivership, dissolution or liquidation proceeding, and shall include (a) all
liabilities of the Borrower for principal of, Applicable Repayment Fees, and
interest on any and all Term Loans at any time outstanding under the Term Loan
Agreement, (b) all liabilities of the Borrower under the Loan Documents for any
fees, costs, taxes, expenses, indemnification and other amounts payable
thereunder, and (c) all other liabilities of the Borrower under or in respect of
any of the Loan Documents or any of the transactions contemplated thereby and
specifically includes any and all present and future "Obligations" as such term
is defined in the Term Loan Agreement.
"PERFECTED" means, as to the security interests granted to Secured
Party in subsection 2.1, that (a) except with respect to the Ascend Note to the
extent the security interest granted under the Ascend Note is perfected and not
avoided, a creditor on a simple contract cannot acquire a judicial lien that is
superior to such security interests and (b) if a case were
2
<PAGE>
pending under the Bankruptcy Code in which Grantor is the debtor, such security
interests would be a Lien that is perfected in such bankruptcy case.
"POST-PETITION INTEREST AND EXPENSE CLAIMS" means any and all claims
of any Holder of Secured Obligations (a) for interest on any Obligations
determined for any period of time occurring after the commencement of any case
under the Bankruptcy Code or any other insolvency, reorganization, receivership,
dissolution or liquidation proceeding at the contract rate (including any
applicable post-default increase therein) set forth in the Term Loan Agreement
or any other Loan Document or (b) for cost and expense reimbursements or
indemnification on the terms set forth in the Term Loan Agreement or any other
Loan Document relating to costs and expenses incurred and indemnification rights
accrued at any time after the commencement of any such case or proceeding, in
each case to the extent such claim accrues or becomes payable in accordance with
the provisions of the Term Loan Agreement or other Loan Documents (or would have
accrued or become payable if enforceable or allowable in such case or
proceeding), whether or not such claim is enforceable, allowable or allowed in
such case or proceeding and even if such claim is disallowed therein.
"REQUIREMENT OF LAW" means as to any Person, the certificate of
incorporation and by-laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Entity, in each case applicable to
or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"SECURED OBLIGATIONS" is defined in subsection 2.1.
"SECURITY DOCUMENTS" means the Security Agreements and all other
security documents hereafter delivered to the Agent granting or purporting to
grant a Lien on any asset or assets of any Person to secure Obligations of the
Borrower and/or any other Loan Party hereunder and/or under any of the Loan
Documents or to secure any guarantee of any such obligations and liabilities.
"TERM LOAN AGREEMENT" means the Term Loan Agreement described in the
Recitals as such agreement from time to time may be modified, amended, restated,
extended, refinanced or replaced in any manner or in any respect (including so
as to reduce or increase the amount or cost of Term Loans made thereunder or to
shorten or extend the time of payment thereunder or in any other manner change
the amount or terms of Term Loans made to the Borrower or the identity, rights
or obligations of any party thereto).
"TRANSFER" means sell, transfer, exchange, lease, or otherwise dispose
of.
1.2. TERMS DEFINED IN TERM LOAN AGREEMENT. Unless the context
otherwise requires, the following terms used in this Agreement are used as
defined in the Term Loan Agreement:
3
<PAGE>
Applicable Repayment Fee
Ascend Note
Borrower
Business Day
Commitment
Default
Event of Default
Governmental Entity
Guarantee
Guarantor
Indebtedness
Investments
Lien
Loan Documents
Majority Lenders
Material Adverse Effect
Permitted Investments
Permitted Liens
Person
Security Agreements
Subsidiary
Term Loan
1.3. TERMS DEFINED IN THE UNIFORM COMMERCIAL CODE. When capitalized,
the following terms used in this Agreement or the other Security Documents have
the meanings given to them in the Uniform Commercial Code, as in effect in the
State of New York on the date of this Agreement:
Accounts
Certificated Security
Chattel Paper
Commodity Account
Commodity Contract
Commodity Intermediary
Control
Documents
Equipment
Financial Asset
Fixtures
General Intangibles
Goods
Instruments
Inventory
Investment Property
4
<PAGE>
Securities Account
Securities Intermediary
Security
Security Certificate
Security Entitlement
Uncertificated Security
1.4. TERMS GENERALL. The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include," "includes" and "including" shall
be deemed to be followed by the phrase "without limitation." The word "will"
shall be construed to have the same meaning and effect as the word "shall."
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person's successors,
transferees and assigns, (c) the words "herein," "hereof" and "hereunder," and
words of similar import, shall be construed to refer to this Agreement in its
entirety and not to any particular provision hereof, (d) all references herein
to Sections, subsections, Exhibits and Schedules shall be construed to refer to
Sections and subsections of, and Exhibits and Schedules to, this Agreement, and
(e) the words "asset" and "property" shall be construed to have the same meaning
and effect and to refer to any and all tangible and intangible assets and
properties, whether real, personal or mixed and of every type and description.
SECTION II.
THE SECURITY INTERESTS
2.1. GRANT OF SECURITY INTERESTS. As security for the payment of the
Obligations and all Post-Petition Interest and Expense Claims (collectively, the
"SECURED OBLIGATIONS"), Grantor hereby assigns to Secured Party for the benefit
of the Beneficiaries, and grants Secured Party for the benefit of the
Beneficiaries security interests in, all of Grantor's right, title and interest
in and to the following types or items of property wherever located, in each
case whether now or hereafter existing, owned or acquired by Grantor, or in
which Grantor now owns or hereafter acquires an interest (collectively, the
"COLLATERAL"):
(a) all Inventory, including specifically all raw materials,
work-in-process, finished goods, supplies, materials, spare parts, Goods held
for sale or on lease or for lease or furnished or to be furnished under
contracts of service, merchandise inventory, rental inventory, and returned or
repossessed Goods and all rights to enforce return or repossession by
reclamation, stoppage in transit or otherwise,
(b) all Equipment, including specifically all manufacturing,
printing, distribution, delivery, retailing, vending, data processing,
communications, office and other
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equipment in all of its forms, all vehicles, all tools, dies, and molds, all
Fixtures, all other Goods used or bought for use primarily in a business and all
other Goods except Inventory,
(c) all Accounts,
(d) all Chattel Paper,
(e) all Documents,
(f) all Instruments and all other Claims that are in any respect
evidenced or represented by any writing, including specifically the Intercompany
Notes described on SCHEDULE 3.1(B) and all other Intercompany Notes and all
other writings evidencing or representing a Claim against any Subsidiary of the
Borrower or any other Person,
(g) (i) 100% of the issued and outstanding Capital Stock of any
Subsidiary, and (ii) all other Securities not described in the preceding clause
(i), whether constituting Certificated Securities or Uncertificated Securities,
all Financial Assets, all Security Entitlements, all Securities Accounts, all
Commodity Contracts, all Commodity Accounts, and all other Investment Property,
including specifically the Security Certificates described on SCHEDULE 3.1(B)
and all other Capital Stock and all Investments permitted under subsection 4.9
of the Term Loan Agreement,
(h) all money, cash and cash equivalents, including specifically
all deposit accounts and all certificates of deposit,
(i) all General Intangibles, including specifically (a) the
property described on SCHEDULE 3.1(C), (b) all registered, unregistered and
common law trademarks and service marks, trademark and service mark
applications, and all trademark, service mark and tradename license agreements
to which Grantor is a party (whether as licensor or licensee) and all Claims
(including infringement claims) relating thereto, (c) all patents and patent
applications and all patent license agreements to which Grantor is a party
(whether as licensor or licensee) and all Claims (including infringement claims)
relating thereto, (d) all registered and unregistered copyrights, copyright
applications and all copyright license agreements to which Grantor is a party
(whether as licensor or licensee) and Claims (including infringement claims)
relating thereto, (e) all other intellectual property in which Grantor has an
interest, including proprietary research and development, technical knowledge
and processes, inventions (whether or not patentable and whether or not reduced
to practice) know-how, trade secrets, trade names, trade styles, logos, license
agreements and user rights and Claims (including infringement claims) relating
thereto, (f) all customer lists and agreements, (g) all supplier lists and
agreements, (h) all employee and consultant lists, rights, and agreements, (i)
all computing, data and information processing and communications programs,
discs, designs, and information and the data and other entries thereon, (j) all
books, records, catalogs, back issues, library rights and all manifestations and
embodiments thereof, (k) all tax refunds, (l) all policies of insurance and
condemnation awards of every type and description and the proceeds thereof, (m)
all loans receivable, letters of credit, bonds and undertakings, deferred
purchase price or deferred purchase
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consideration, consulting or non-competition payments and other Indebtedness,
liabilities and obligations receivable not constituting an Account and not
evidenced or represented by any Instrument, Chattel Paper or Security, (n) all
rights of recoupment, recourse, reimbursement, subrogation, indemnity or
contribution arising on account of any agreement, transaction or event, (o) all
other causes of action and Claims of every type and description, whether fixed
or contingent, liquidated or not liquidated, accrued or not accrued, and all
judgments, orders and recoveries thereon, (p) all other agreements and contract
rights of every type and description and Claims thereon or relating in any
manner thereto, (q) all other rights, privileges, benefits, entitlements,
franchises, licenses and expectancies of every type and description, (r) all
other intangible property of every type and description, and (s) all goodwill
associated with any of the foregoing,
(j) all property that is at any time delivered to, or that is at
any time in the Control of, Secured Party, and
(k) any and all Fixtures located on any and all owned or leased
real property held by the Grantor,
TOGETHER, IN EACH CASE, WITH (w) all accessions thereto and products and
replacements thereof, (x) all guaranties, Liens and other forms of collateral
security therefor, and (y) all dividends, distributions, and payments received
thereon or in exchange or substitution therefor or upon Transfer thereof, and
(z) all other proceeds thereof,
EXCEPT AND EXCLUDING, HOWEVER, each item of property that is an Excluded Asset,
for as long as it remains an Excluded Asset.
2.2. DELIVERY OF INSTRUMENTS AND SECURITIES. On the date that the
security interest under the Ascend Note is extinguished or if acquired after
such date, immediately upon acquisition thereof by Grantor, without any notice
from or demand by Secured Party, (a) Grantor shall deliver to Secured Party the
Intercompany Notes and Security Certificates described on SCHEDULE 3.1(B) and
all other Instruments (except checks received and collected in the ordinary
course of business) and Security Certificates at any time constituting
Collateral, in each case in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer, assignments in blank or
with appropriate endorsements, in form and substance satisfactory to Secured
Party, and (b) Grantor shall cause the issuer of each Uncertificated Security
constituting Collateral to register Secured Party as the registered owner
thereof, either upon original issuance or by registration of transfer and shall
execute and deliver all writings necessary to cause such issuer to do so.
2.3. INVESTMENT PROPERTY. Grantor will cause Secured Party's security
interests in Investment Property to be and remain continuously Perfected by
Control and, in addition, will cause such security interests to be Perfected by
filing. Grantor will not grant or permit any other security interest or Lien
upon any Investment Property constituting Collateral. If so requested at any
time by Secured Party or the Majority Lenders as to any Security Entitlement or
Securities Account or any Commodity Contract or Commodity Account that
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constitutes Collateral, Grantor will promptly cause each Person who is a
Securities Intermediary as to any such Security Entitlement or Securities
Account and each Person who is a Commodity Intermediary as to any such Commodity
Contract or Commodity Account to deliver a written agreement enforceable by
Secured Party for the benefit of the Beneficiaries waiving and releasing, and
agreeing not to create, grant, accept or hold, any priority, PARI PASSU or
junior security interest or Lien therein. Grantor will not cause or permit any
Capital Stock in any Subsidiary which constitutes Collateral to be outstanding
as an Uncertificated Security (except as required by Requirements of Law) or to
constitute a Security Entitlement or be held in a Securities Account.
2.4. REGISTRATION OF PLEDGE. On and after the date that the security
interest granted under the Ascend Note, to the extent such security interest is
perfected and not avoided, is extinguished, Secured Party may at any time when
any Event of Default is continuing and without any notice to any Loan Party or
any other Person, transfer to and register in Secured Party's name, as pledgee,
any and all Instruments and Investment Property constituting Collateral. Such
transfer and registration shall not foreclose or otherwise affect any rights or
interests of any Loan Party and shall not increase, restrict or reduce any of
Secured Party's rights and remedies. If after any such transfer and registration
Grantor remains entitled under subsection 3.6 to exercise voting rights with
respect to Capital Stock included in such Investment Property, Secured Party
shall, at the written request of Grantor, deliver to Grantor a revocable proxy
or other instrument sufficient to permit Grantor to exercise such voting rights
to the extent permitted under subsection 3.6.
2.5. FINANCING STATEMENTS. Grantor will duly execute, deliver and
(subject to execution by Secured Party, where required by law) file duly
completed financing statements naming Grantor as debtor, naming Secured Party as
secured party, and covering the Collateral, in the proper filing office in each
jurisdiction in which a financing statement is required from time to time to be
filed in order to ensure that the security interests granted to Secured Party in
subsection 2.1 are at all times continuously Perfected, to the extent that,
under applicable law, such security interests can be Perfected by the filing of
a financing statement.
2.6. SECURED PARTY FILING. Secured Party is hereby authorized to file
one or more financing statements and continuations thereof and amendments
thereto, relative to all or any part of the Collateral, without the signature of
Grantor where permitted by law.
2.7. FURTHER ASSURANCES. Grantor will promptly (and in any event
within five Business Days after request by Secured Party or the Majority
Lenders) execute and deliver, and use its reasonable and diligent best efforts
to obtain from other Persons, all instruments and documents (including security
agreements, security assignments, Lien releases, Lien waivers, transfer
documents and transfer notices, financing statements and other Lien notices), in
form and substance satisfactory to Secured Party or the Majority Lenders, and
take all other actions which are necessary or, in the good faith judgment of
Secured Party or the Majority Lenders, desirable or appropriate in order to
create, maintain, Perfect, ensure the agreed priority of, protect or enforce
Secured Party's security interests in the Collateral, to enable Secured Party to
exercise
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and enforce its rights and remedies hereunder with respect to any Collateral, to
protect the Collateral against the rights, claims or interests of third persons,
or to effect or to assure further the purposes and provisions of this Agreement,
and Grantor agrees to pay all costs related thereto and all reasonable expenses
incurred by Secured Party in connection therewith.
2.8. POWER OF ATTORNEY. Grantor hereby irrevocably constitutes and
appoints Secured Party and any officer, agent or nominee of Secured Party, with
full power of substitution, as its true and lawful attorney-in-fact with full
power and authority, in the name of Grantor or in its own name, to take any and
all actions and to execute and deliver any and all agreements, documents,
notices, instruments and writings that Secured Party or the Majority Lenders may
determine to be necessary or desirable to create, Perfect or ensure the agreed
priority of the security interests granted in subsection 2.1 or, upon the
occurrence and during the continuance of an Event of Default, to enforce such
security interests in any lawful and commercially reasonable manner or otherwise
to protect Secured Party's interest in the Collateral in any lawful and
commercially reasonable manner, including the power and right on behalf of
Grantor, without notice to or assent by Grantor, to do any or all of the
following if and whenever Grantor is in default under this Agreement as set
forth in subsection 4.1:
(a) to ask for, demand, sue for, collect, settle and give
acquittance for any and all moneys due or to become due with respect to any or
all of the Collateral and otherwise to demand and enforce payment and collection
of any and all Claims constituting Collateral,
(b) to sign and file in any office in any jurisdiction financing
statements, Lien notices, collateral assignments and any other instruments or
writings that may be required or, in the opinion of Secured Party or the
Majority Lenders, appropriate to create or Perfect a security interest in or
Lien upon any of the Collateral as security for the Secured Obligations,
(c) to accept, hold, collect, endorse, transfer and deliver any
and all checks, notes, drafts, acceptances, documents and other negotiable and
nonnegotiable Instruments, Securities, Documents and Chattel Paper constituting
Collateral that may be delivered to Secured Party in accordance with the
provisions of this Agreement, whether made payable to Grantor or otherwise,
(d) to commence, file, prosecute, defend, settle, compromise or
adjust any Claim, suit, action or proceeding with respect to any or all of the
Collateral or otherwise to enforce the rights of Secured Party with respect to
any of the Collateral,
(e) to obtain, contest, enforce, adjust and settle Claims for
insurance proceeds or condemnation awards constituting proceeds of Collateral or
required to be paid to Secured Party pursuant to this Agreement or the Term Loan
Agreement,
(f) to do, at its option and at the expense and for the account
of Grantor, at any time and from time to time, all lawful and commercially
reasonable acts and
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things that Secured Party or the Majority Lenders may deem necessary or
desirable to protect or preserve the Collateral or to realize upon the
Collateral,
(g) to contest, settle, pay or discharge taxes or Liens (other
than Liens permitted under this Agreement or the Term Loan Agreement) levied or
placed upon or threatened against any of the Collateral, and for such purposes
(A) the legality or validity thereof and amounts necessary to settle or
discharge the same may be determined by Secured Party or the Majority Lenders in
its or their commercially reasonable discretion and (B) Grantor agrees
immediately upon demand to reimburse Secured Party for any payments made by
Secured Party on account of any such taxes or Liens, as part of the Secured
Obligations,
(h) to sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with the Accounts and other
documents relating to the Collateral, and
(i) generally to sell, Transfer, pledge, make any agreement with
respect to or otherwise deal with any of the Collateral as fully and completely
as though Secured Party were the absolute owner thereof for all purposes, and to
do, at Secured Party's option and at Grantor's expense, at any time or from time
to time, all acts and things that Secured Party or the Majority Lenders deem
necessary to protect, preserve or realize upon the Collateral and Secured
Party's security interests therein in order to effect the intent of this
Agreement, all as fully and effectively as Grantor might do.
The power granted in this subsection 2.8 is a power coupled with an
interest, is irrevocable and shall be discharged upon Discharge of the
Obligations.
2.9. SURVIVAL OF SECURITY INTERESTS. The security interests granted
hereby shall, unless released in writing by Secured Party, (a) remain
enforceable as security for all Secured Obligations now outstanding or created
or incurred at any future time (whether or not created or incurred pursuant to
any agreement presently in effect or hereafter made and notwithstanding any
subsequent repayment of any of the Secured Obligations or any other act,
occurrence or event), until Discharge of the Obligations, and (b) survive any or
other Transfer of any Collateral and remain enforceable against each transferee
and subsequent owner thereof, except for any sale or other Transfer that is
permitted at the time under the Term Loan Agreement, Inventory sold in the
ordinary course of business, and any other Collateral that is expressly and
specifically released from the security interests created hereby pursuant to a
written release signed by Secured Party.
2.10. REINSTATEMENT OF SECURITY INTERESTS. If at any time any payment
on any Secured Obligation is set aside, avoided or rescinded or must otherwise
be restored or returned, this Agreement and the security interests granted to
Secured Party herein and all other Obligations of Grantor hereunder shall remain
in full force and effect and, if previously released or terminated, shall be
automatically and fully reinstated, without any necessity for any act, consent
or agreement of Grantor, as fully as if such payment had never been made and as
fully as if any such release or termination had never become effective.
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2.11. GRANTOR REMAINS LIABLE. Anything contained herein to the
contrary notwithstanding, (a) Grantor shall remain liable under all contracts
and agreements included in the Collateral, to the extent set forth therein, to
perform all of its duties and obligations thereunder to the same extent as if
this Agreement had not been executed, (b) the exercise by Secured Party of any
of its rights hereunder shall not release Grantor from any of its duties or
obligations under any contract or agreement included in the Collateral, (c)
Secured Party shall not have any obligation or liability under any contract or
agreement included in the Collateral by reason of this Agreement or the grant to
Secured Party of any security interest in such contract or agreement, and (d)
Secured Party shall not be obligated to perform any of the obligations or duties
of Grantor under any contract or agreement included in the Collateral or to take
any action to collect or enforce any claim for payment assigned hereunder.
SECTION III.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Grantor represents and warrants to Secured Party and agrees with
Secured Party that:
3.1. THE COLLATERAL.
(a) OWNERSHIP. Except as otherwise expressly permitted under the
Term Loan Agreement, including, without limitation, Permitted Liens, (i) Grantor
owns or has an interest in the Collateral free and clear of any and all Liens
and (ii) no effective financing statement or other instrument similar in effect
covering all or any part of the Collateral is on file in any filing or recording
office, except those in favor of Secured Party.
(b) INTERESTS IN AND CLAIMS AGAINST SUBSIDIARIES. SCHEDULE 3.1(B)
sets forth accurately and completely all Capital Stock owned by Grantor in any
direct Subsidiary of Grantor, and all other Capital Stock owned by Grantor and
all Intercompany Notes issued to Grantor. All such Capital Stock has been duly
authorized and validly issued and was not issued in breach or derogation of
preemptive rights of any Person or in violation of any applicable securities
laws.
(c) INTELLECTUAL PROPERTY. SCHEDULE 3.1(C) sets forth accurately
and completely (a) all registered and unregistered trademarks and servicemarks
and all trademark and servicemark applications owned by Grantor, all trademark
and service mark license agreements to which Grantor is a party (whether as
licensor or licensee), and all pending or overtly threatened infringement Claims
by or against Grantor and other litigation relating to any such trademarks,
servicemarks, trademark or servicemark applications or trademark or servicemark
license agreements, (b) all patents and patent applications owned by Grantor,
all patent license agreements to which Grantor is a party (whether as licensor
or licensee), and all pending or overtly threatened infringement Claims by or
against Grantor and other litigation relating to any such patents, patent
applications or patent license agreements, and (c) all registered and
unregistered copyrights and copyright applications owned by Grantor, all
copyright license
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agreements to which Grantor is a party (whether as licensor or licensee) and all
pending or overtly threatened infringement claims by or against Grantor or other
litigation relating to any such copyrights, copyright application or copyright
license agreements.
(d) OTHER INVESTMENT PROPERTY. SCHEDULE 3.1(D) sets forth
accurately and completely all other Investment Property of Grantor except
Permitted Investments.
(e) LOCATION OF EQUIPMENT AND INVENTORY. All Equipment and
Inventory are located and intended to be kept at one of the collateral locations
specified on SCHEDULE 3.1(E).
(f) NO CONSUMER GOODS OR FARM PRODUCTS. Grantor does not own any
assets that are, as to it, consumer goods or farm products.
(g) LOCATION OF GRANTOR. The Grantor's chief place of business,
chief executive office and office or offices where the Grantor keeps its records
regarding its Accounts and all originals of its Chattel Paper are located, and
during the preceding four months were located, at the Grantor locations
specified on SCHEDULE 3.1(G).
(h) NAMES. The correct legal name of Grantor is set forth in the
preamble to this Agreement. Grantor does not conduct business or hold itself out
under, and in the past five years has not conducted business or held itself out
under, any other name (including any trade-name or fictitious business name)
except any name listed on SCHEDULE 3.1(H).
(i) TAXPAYER ID NUMBER. The proper taxpayer identification number
for Grantor is accurately set forth on SCHEDULE 3.1(I).
(j) PERFECTION. The security interests granted to Secured Party
in subsection 2.1 are lawful, valid and, subject to the security interest
granted under the Ascend Note to the extent such security interest is perfected
and not avoided, enforceable security interests that at all times have been, and
remain, duly and continuously Perfected.
(k) AMENDMENT OF SCHEDULE 3.1. Grantor may at any time
unilaterally amend SCHEDULE 3.1 in any respect required by the occurrence of any
event that does not constitute or give rise to a Default, by giving written
notice thereof to Secured Party. To be effective, such notice must state
conspicuously that it constitutes an amendment to certain factual matters
relating to the Collateral set forth in subsection 3.1 of this Agreement.
3.2. MAINTENANCE OF PERFECTION. Grantor will not (a) cause, permit or
suffer any voluntary or involuntary change in its name, identity or corporate
structure, or in the location of its chief executive office, or (b) keep any
records relating to its Accounts or any tangible Collateral (other than mobile
goods) at any location other than a location set forth in SCHEDULE 3.1, unless
(in each case) (i) SCHEDULE 3.1 has first been appropriately supplemented with
respect thereto, and (ii) an appropriate financing statement has been filed in
the proper office and in the proper form, and all other requisite actions have
been taken, to Perfect and
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continue the Perfection (without loss of priority) of Secured Party's security
interests in the Collateral.
3.3. DEFENSE OF COLLATERAL. Grantor will defend the Collateral against
all claims and demands of all Persons at any time claiming any interest therein.
3.4. TRANSFER OR ENCUMBRANCE. Grantor will not encumber or otherwise
Transfer any item of Collateral or any interest therein, or permit or suffer any
item of Collateral to be encumbered, sold, assigned or otherwise transferred,
unless (a) such action is permitted at the time under the Term Loan Agreement
and (ii) each Loan Party makes all payments on account of the Secured
Obligations required to be made therefrom and takes all other actions required
to be taken in connection therewith under the Term Loan Agreement or any other
Loan Document.
3.5. PAYMENTS, DIVIDENDS AND DISTRIBUTIONS. Grantor shall be entitled
to receive all payments in respect of Collateral and all dividends and
distributions on Capital Stock and other Investment Property constituting
Collateral, so long as (a) no Event of Default has occurred and is continuing or
would result, and (b) each Loan Party makes all payments on account of the
Secured Obligations or the Obligations of such Loan Party required to be made
therefrom and takes all other actions required to be taken in connection
therewith under the Term Loan Agreement or any other Loan Document.
3.6. VOTING RIGHTS. So long as no Event of Default has occurred or
would result, Grantor shall have and may exercise all voting rights with respect
to any and all Capital Stock constituting Collateral, except that:
(a) NO BREACH. Grantor shall not act or vote in favor of any
action that would constitute or cause a breach of any obligations of any Loan
Party under the Term Loan Agreement or under any other Loan Document;
(b) NO CAPITAL STRUCTURE CHANGES. Grantor shall not act or vote
in favor of (i) the authorization or issuance of any Capital Stock restricted
pursuant to subsection 4.9 of the Term Loan Agreement, or (ii) any
reclassification, readjustment, reorganization, merger, amalgamation,
liquidation, winding up, consolidation, sale, lease, assignment or other
disposition of assets, or dissolution, without giving Secured Party at least 15
days' prior written notice of the actions described in this clause (ii);
(c) MATERIAL ADVERSE CHANGES. Grantor shall not act or vote in
favor of any action that has or is reasonably likely to have a material adverse
effect on the value of any of the Collateral or Secured Party's rights therein
or that has, or would reasonably be expected to result in, a Material Adverse
Effect; and
(d) TERMINATION OF VOTING RIGHTS. At any time when Grantor is in
default under this Agreement as set forth in subsection 4.1, and subject to the
security interest granted under the Ascend Note to the extent such security
interest is perfected and not avoided,
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Secured Party may terminate any or all of Grantor's voting rights with respect
to any or all Capital Stock constituting Collateral, either by giving written
notice of such termination to Grantor or by transferring such Capital Stock into
Secured Party's name, and Secured Party shall thereupon have the sole right and
power to exercise such voting rights.
3.7. MAINTENANCE OF COLLATERAL. Grantor shall:
(a) not use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement or any other Loan Document or any
applicable Requirement of Law or any policy of insurance covering any such
Collateral if such unlawful use or violation could reasonably result in a
Material Adverse Effect;
(b) notify Secured Party of any change in Grantor's name,
identity or corporate structure within 30 days after such change;
(c) give Secured Party 30 days' prior written notice of any
change in Grantor's chief place of business, chief executive office, places of
business, Collateral locations or federal taxpayer ID number or the office where
Grantor keeps its Chattel Paper and its records regarding any Accounts;
(d) if the Lenders give value to enable Grantor to acquire rights
in or the use of any Collateral, use such value for such purposes; and
(e) pay promptly when due all material property and other taxes,
assessments and governmental charges or levies imposed upon any Collateral and
all Claims that are or might become secured by any Lien upon any Collateral,
except to the extent the same is being contested as permitted under the Term
Loan Agreement; PROVIDED, that, notwithstanding any other provision in the Loan
Documents, Grantor shall in any event pay such taxes, assessments, charges,
levies and Claims not later than five days prior to the date of any proposed
sale under any judgment, writ or warrant of attachment or other legal process
entered or filed against Grantor or any Collateral as a result of the failure to
make such payment.
3.8. CONCERNING EQUIPMENT AND INVENTORY. Grantor will:
(a) cause the Equipment to be maintained and preserved in the
same condition, repair and working order as when new (ordinary wear and tear and
worn-out and surplus equipment excepted) and in accordance with Grantor's past
practices and make or cause to be made all repairs, replacements and other
improvements in connection therewith that are necessary or desirable to such
end;
(b) keep correct and accurate records of the Inventory, itemizing
and describing the kind, type and quantity of Inventory, Grantor's cost therefor
and (where applicable) the current list prices for the Inventory, in the
ordinary course of Grantor's business;
(c) if any Inventory is in possession or control of any agent,
carrier, warehouseman, bailee, consignee or processor, upon the occurrence of an
Event of Default
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instruct such Person to hold all such Inventory for the account of Secured Party
and subject to the instructions of Secured Party; and
(d) subject to the security interest granted under the Ascend
Note to the extent such security interest is perfected and not avoided, if so
requested at any time by Secured Party or the Majority Lenders, promptly endorse
and deliver to Secured Party each and all negotiable Documents constituting
Collateral.
3.9. CONCERNING ACCOUNTS, INSTRUMENTS AND OTHER CLAIMS. Grantor will:
(a) maintain accurate and complete records concerning the
Accounts, Instruments and all other Claims and the identity, name and address of
each account debtor or obligor thereon, hold and preserve such records in
safekeeping, permit representatives of Secured Party at any time during normal
business hours upon reasonable prior notice to inspect, copy and make abstracts
from such records, and render to Secured Party, at Grantor's cost and expense,
such clerical and other assistance as may be reasonably requested with regard
thereto,
(b) if so requested at any time by Secured Party or the Majority
Lenders, Grantor will certify and deliver to Secured Party complete and correct
copies of each contract or agreement constituting Collateral,
(c) continue to collect, at Grantor's expense, all amounts due or
to become due to Grantor under Accounts, Instruments and other Claims and, in
connection therewith take such action as Grantor (or, whenever Grantor is in
default under this Agreement as set forth in subsection 4.1, as Secured Party or
the Majority Lenders) may reasonably deem necessary or advisable to enforce
collection of amounts due or to become due thereunder; PROVIDED, that Secured
Party shall have the right at any time when Grantor is in default under this
Agreement as set forth in subsection 4.1 (i) to notify the account debtors or
obligors under any or all Accounts, Instruments or other Claims of the
assignment of such Accounts, Instruments or Claims to Secured Party and to
direct such account debtors or obligors to make payment of all amounts due or to
become due to Grantor thereunder directly to Secured Party, (ii) to notify each
Person maintaining a lockbox or similar arrangement to which account debtors or
obligors under any Accounts, Instruments or other Claims have been directed to
make payment to remit all amounts representing collections on checks and other
payment items from time to time sent to or deposited in such lockbox or other
arrangement directly to Secured Party and (iii) at the expense of Grantor, to
demand payment of any Accounts, Instruments and Claims and enforce collection
thereof by legal proceedings in any lawful manner and to extend, renew adjust,
settle or compromise the amount or payment thereof, in the same manner and to
the same extent as Grantor might have done, and
(d) if Secured Party at any time exercises any of the rights
described in the PROVISO in subsection 3.9(c), (i) segregate from all other
funds and hold in trust for Secured Party and immediately deliver to Secured
Party (in the identical form received) all amounts and proceeds (including
checks and other instruments) received by Grantor in respect of any and all
Accounts, Instruments and other Claims, and (ii) not adjust, settle or
compromise the amount or
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payment of any Account or Claim, or release wholly or partly any account debtor
or obligor thereon, or allow any credit or discount thereon.
3.10. SUBSTITUTED PERFORMANCE. Secured Party may at any time (but
shall not be obligated to) (a) perform any of the obligations of Grantor under
this Agreement if Grantor fails to perform such obligation within five Business
Days (or, in the case of insurance, within one Business Day) after written
demand by Secured Party and (b) make any payments and do any other acts which
Secured Party or the Majority Lenders may deem necessary or desirable to protect
Secured Party's security interests in the Collateral, including the right to
pay, purchase, contest or compromise any Lien that attaches or is asserted
against any Collateral, to procure insurance, and to appear in and defend any
action or proceeding relating to any Collateral, and Grantor agrees promptly to
reimburse Secured Party for all payments made by Secured Party in doing so,
together with interest thereon at the rate then applicable to the Term Loans,
all attorneys' fees and disbursements incurred by Secured Party in connection
therewith, whether or not suit is brought, and all other costs and expenses
related thereto.
SECTION IV.
DEFAULT; REMEDIES
4.1. DEFAULT. Grantor shall be in default under this Agreement (a)
whenever any Event of Default has occurred and is continuing and (b) at all
times after the Term Loans have become due and payable, whether at maturity,
upon acceleration pursuant to Article VII of the Term Loan Agreement or
otherwise.
4.2. REMEDIES UPON DEFAULT. At any time when Grantor is in default
under this Agreement as set forth in subsection 4.1, Secured Party may exercise
and enforce, in any order, (a) each and all of the rights and remedies available
to a secured party upon default under the Uniform Commercial Code or other
applicable law, (b) each and all of the rights and remedies available to it
under the Term Loan Agreement or any other Loan Document and (c) each and all of
the following rights and remedies:
(a) COLLECTION RIGHTS. Without notice to Grantor or any other
Loan Party, Secured Party may notify any or all account debtors and obligors on
any Accounts, Instruments or other Claims constituting Collateral of Secured
Party's security interests therein and may direct, demand and enforce payment
thereof directly to Secured Party.
(b) TAKING POSSESSION. Secured Party may (i) enter upon any and
all premises owned or leased by Grantor where Collateral is located (or believed
by Secured Party to be located), with or (to the fullest extent permitted by
law) without judicial process and without any obligation to pay rent, (ii) prior
to the disposition of the Collateral, store, process, repair or recondition the
Collateral or otherwise prepare the Collateral for disposition in any manner to
the extent Secured Party deems appropriate, (iii) take possession of Grantor's
premises or place custodians or a receiver in exclusive control thereof, remain
on such premises and use the same and any of Grantor's Equipment for the purpose
of completing any work in process or otherwise
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preparing the Collateral for sale or selling or otherwise Transferring the
Collateral, (iv) take possession of all items of Collateral that are not then in
its possession, either upon such premises or by removal from such premises, and
(v) require Grantor or the Person in possession thereof to deliver such
Collateral to Secured Party at one or more locations designated by Secured Party
and reasonably convenient to it and Grantor.
(c) FORECLOSURE. Secured Party may sell, lease, license or
otherwise dispose of or Transfer any or all of the Collateral or any part
thereof in one or more parcels at public sale or in private sale or transaction,
on any exchange or market or at Secured Party's offices or on Grantor's premises
or at any other location, for cash, on credit or for future delivery, and may
enter into all contracts necessary or appropriate in connection therewith,
without any notice whatsoever unless required by law. Where permitted by law,
one or more of the Beneficiaries may be the purchasers at any such sale and in
such event, if such bid is made by all of the Lenders or by all of the Holders
of Secured Obligations or otherwise whenever a credit bid is expressly permitted
under the Term Loan Agreement or approved in writing by the Agent and the
Majority Lenders, the Beneficiaries bidding at such sale may bid part or all of
the Obligations owing to them without necessity of any cash payment on account
of the purchase price, even though any other purchaser at such sale is required
to bid a purchase price payable in cash. Grantor agrees that at least 10
calendar days' written notice to Grantor of the time and place of any public
sale or the time after which any private sale is to be made shall be
commercially reasonable. The giving of notice of any such sale or other
disposition shall not obligate Secured Party to proceed with the sale or
disposition, and any such sale or disposition may be postponed or adjourned from
time to time, without further notice.
(d) USE OF INTELLECTUAL PROPERTY. Secured Party may, on a
royalty-free basis, use and license use of any trademark, trade name, service
mark, trade style, copyright, patent or technical knowledge or process owned,
held or used by Grantor in respect of any Collateral as to which any right or
remedy of Secured Party is exercised or enforced.
In addition, each Holder of any Secured Obligation may exercise and
enforce such rights and remedies for the collection of such Secured Obligation
as may be available to it by law or agreement.
4.3. WAIVERS BY GRANTOR. Grantor hereby irrevocably waives (a) all
rights of redemption from any foreclosure sale, (b) to the extent permitted by
law, the benefit of all valuation, appraisal, exemption and moratorium laws, (c)
to the fullest extent permitted by law, all rights to notice or a hearing prior
to the exercise by Secured Party of its right to take possession of any
Collateral, whether by self-help or by legal process and any right to object to
the Secured Party taking possession of any Collateral by self-help, and (d) if
Secured Party seeks to obtain possession of any Collateral by replevin, claim
and delivery, attachment, levy or other legal process, (i) any notice or demand
for possession prior to the commencement of legal proceedings, (ii) the posting
of any bond or security in any such proceedings, and (iii) any requirement that
Secured Party retain possession and not dispose of any Collateral until after a
trial or final judgment in such proceedings.
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4.4. STANDARD OF CARE. The powers conferred on Secured Party hereunder
are solely to protect its interest in the Collateral and shall not impose any
duty upon it to exercise any such powers. Except for the exercise of reasonable
care in the custody of any Collateral in its possession and the accounting for
moneys actually received by it hereunder, Secured Party shall have no duty as to
any Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or to protect, preserve, vote or exercise any rights
pertaining to any Collateral. Secured Party shall be deemed to have exercised
reasonable care in the custody and preservation of Collateral in its possession
if such Collateral is accorded treatment substantially equal to that which
Secured Party accords its own property or if it selects, with reasonable care, a
custodian to hold such Collateral on its behalf.
4.5. APPLICATION OF PROCEEDS. Except as expressly provided elsewhere
in this Agreement or the Term Loan Agreement, all proceeds received by Secured
Party in respect of any sale of, collection from, or other realization upon all
or any part of the Collateral shall be applied by Secured Party against the
Secured Obligations in the following order of priority:
FIRST: To the payment of all costs and expenses of such sale,
collection or other realization, including compensation to Secured Party
and its agents and counsel, and all other expenses, liabilities and
advances made or incurred by Secured Party in connection therewith, and all
amounts for which Secured Party is entitled to indemnification hereunder
and all advances made by Secured Party hereunder for the account of
Grantor, and to the payment of all costs and expenses paid or incurred by
Secured Party in connection with the exercise of any right or remedy
hereunder, all in accordance with subsection 4.6;
SECOND: To the payment of all other Secured Obligations (for the
ratable benefit of the Holders thereof) then due and payable; and
THIRD: To the payment to or upon the order of the Grantor, or to
whomsoever may be lawfully entitled to receive the same or as a court of
competent jurisdiction may direct, of any surplus then remaining from such
proceeds.
4.6. INDEMNITY AND EXPENSES.
(a) INDEMNITY. Grantor will defend, indemnify and hold harmless
Secured Party and each Beneficiary from and against any and all claims, losses
and liabilities in any way relating to, growing out of or resulting from this
Agreement and the transactions contemplated hereby (including enforcement of any
interest, right or remedy created hereby), provided that Grantor shall have no
obligation to indemnify a person with respect to claims, losses or liabilities
which are attributable to such person's gross negligence or willful misconduct
(as determined in a final non-appealable court of competent jurisdiction).
(b) EXPENSES. Grantor will pay to Secured Party upon demand the
amount of any and all costs and expenses, including the fees and expenses of its
counsel and of any advisors, consultants, experts and agents, that Secured Party
may incur in connection with
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(i) the custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any of the Collateral, (ii) the exercise or
enforcement of any of the interests, rights or remedies of Secured Party
hereunder, (iii) the failure by Grantor to perform or observe any of the
provisions hereof, or (iv) the proof, allowance, protection, administration,
treatment, discharge, collection or enforcement of any of the Secured
Obligations or any of the Collateral in any bankruptcy case or insolvency,
reorganization, receivership, dissolution or liquidation proceeding of or
affecting any Loan Party.
4.7. SURPLUS, DEFICIENCY. Any surplus proceeds of any sale or other
disposition by Secured Party of any Collateral remaining after Discharge of the
Obligations and after all Secured Obligations are paid in full and in cash shall
be paid over to Grantor or to whomever may be lawfully entitled to receive such
surplus or as a court of competent jurisdiction may direct, but prior to
Discharge of the Obligations, such surplus proceeds may be retained by Secured
Party and held as Collateral until Discharge of the Obligations. The Borrower
and each Guarantor shall be and remain liable for any deficiency.
4.8. INFORMATION RELATED TO THE COLLATERAL. Upon the occurrence and
continuation of an Event of Default, if Secured Party determines to sell or
otherwise Transfer any Collateral, Grantor shall, and shall cause any Person
controlled by it to, furnish to Secured Party all information Secured Party may
request that pertains or could pertain to the value or condition of the
Collateral or that would or might facilitate such sale or Transfer. Secured
Party shall have the right, notwithstanding any confidentiality obligation or
agreement otherwise binding upon it, freely to disclose such information, and
any and all other information (including confidential information) pertaining in
any manner to the Collateral or the assets, liabilities, results of operations,
business or prospects of any Loan Party, freely to any Person that Secured Party
in good faith believes to be a potential or prospective purchaser in such sale
or Transfer, without liability for any disclosure, dissemination or use that may
be made as to such information by any such Person.
4.9. SALE EXEMPT FROM REGISTRATION. Secured Party shall be entitled at
any such sale or other Transfer, if it deems it advisable to do so, to restrict
the prospective bidders or purchasers to Persons who will provide assurances
satisfactory to Secured Party that the Collateral may be offered and sold to
them without registration under the Securities Act of 1933, as amended, and
without registration or qualification under any other applicable state, federal
or foreign law. Upon the consummation of any such sale, Secured Party shall have
the right to assign, transfer and deliver to the purchaser or purchasers thereof
the Collateral so sold. Secured Party may solicit offers to buy the Collateral,
or any part of it, from a limited number of investors deemed by Secured Party,
in its good faith judgment or in good faith reliance upon advice of its counsel,
to meet the requirements to purchase securities under Regulation D promulgated
under the Securities Act of 1933, as amended, as then in effect (or any other
Requirement of Law of similar import). If Secured Party solicits such offers
from such investors, then the acceptance by Secured Party of the highest offer
obtained from any of them shall be deemed to be a commercially reasonable method
of disposition of the Collateral
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4.10. RIGHTS AND REMEDIES CUMULATIVE. The rights provided for in this
Agreement and the other Loan Documents are cumulative and are not exclusive of
any other rights, powers or privileges or remedies provided by law or in equity,
or under any other instrument, document or agreement. Secured Party may exercise
and enforce each right and remedy available to it either before or concurrently
with or after, and independently of, any exercise or enforcement of any other
right or remedy of Secured Party or any Holder of any Secured Obligation against
any Person or property. All such rights and remedies shall be cumulative, and no
one of them shall exclude or preclude any other.
4.11. NO DIRECT ENFORCEMENT BY BENEFICIARIES. Secured Party may freely
exercise and enforce any and all of its rights and remedies hereunder, for the
benefit of the Beneficiaries. No Beneficiary, other than Secured Party, shall
have any independent right to collect, take possession of, foreclose against or
otherwise enforce the security interests granted hereby.
SECTION V.
CONCERNING THE SECURED PARTY
5.1. AGENT FOR HOLDERS. Secured Party is executing and delivering this
Agreement, and accepting the security interests, rights, remedies, powers and
benefits conferred upon Secured Party hereby, both for its own benefit and as
agent for all present and future Holders of Secured Obligations. The provisions
of the Term Loan Agreement and all rights, powers, immunities and indemnities
granted to secured party under the Term Loan Agreement or any other Loan
Document, or under any separate agreement made by or otherwise binding upon any
Holder of Secured Obligations, shall apply in respect of such execution,
delivery and acceptance and in respect of any and all actions taken or omitted
by Secured Party under, in connection with or in respect of this Agreement.
5.2. AGENT SHALL BE THE SECURED PARTY. Secured Party shall at all
times be the same Person that is the Agent under the Term Loan Agreement.
Written notice of resignation by the Agent pursuant to subsection 10.9 of the
Term Loan Agreement shall also constitute notice of resignation as Secured Party
under this Agreement; and appointment of a successor Agent pursuant to
subsection 10.9 of the Term Loan Agreement shall also constitute appointment of
a successor Secured Party under this Agreement. Upon the acceptance of any
appointment as Agent under subsection 10.9 of the Term Loan Agreement by a
successor Agent, the successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring
Secured Party under this Agreement, and the retiring Secured Party under this
Agreement shall promptly (a) transfer to such successor Secured Party all sums,
securities and other items of Collateral held hereunder, together with all
records and other documents necessary or appropriate in connection with the
performance of the duties of the successor Secured Party under this Agreement,
and (b) execute and deliver to such successor Secured Party such amendments to
financing statements, and take such other actions, as may be necessary or
appropriate in connection with the assignment to such successor Secured Party of
the security interests created hereunder, whereupon such retiring Secured Party
shall be discharged from its
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duties and obligations under this Agreement. After any retiring Agent's
resignation hereunder as Secured Party, the provisions of this Agreement shall
inure to its benefit as to any actions taken or omitted to be taken by it under
this Agreement while it was Secured Party hereunder.
5.3. NO ASSURANCES OR LIABILITY. Secured Party makes no statement,
promise, representation or warranty whatsoever, and shall have no liability
whatsoever, to any Holder of any Secured Obligations as to the authorization,
execution, delivery, legality, enforceability or sufficiency of this Agreement
or as to the creation, Perfection, priority, or enforceability of any security
interests granted hereunder or as to existence, ownership, quality, condition,
value or sufficiency of any Collateral or as to any other matter whatsoever.
5.4. HOLDERS BOUND. Except where the consent of others may be required
pursuant to the express provisions of subsection 11.3 of the Term Loan
Agreement, any modification, amendment, waiver, release, termination or
discharge of any security interest, right, remedy, power or benefit conferred
upon Secured Party that is effectuated in a writing signed by Secured Party
shall be binding upon all Holders of Secured Obligations if it is (i) authorized
pursuant to any provision of the Term Loan Agreement or any other Loan Document,
(ii) required by law or (iii) authorized or ratified either (A) by the Majority
Lenders or (B) by the Holders of at least a majority in outstanding principal
amount of the Secured Obligations (other than contingent or unliquidated Secured
Obligations).
SECTION VI.
MISCELLANEOUS PROVISIONS
6.1. CONTINUING SECURITY INTERESTS; RELEASE. This Agreement creates
continuing security interests in the Collateral and shall (a) remain in full
force and effect until the Discharge of the Obligations, (b) be binding upon
Grantor and its successors and assigns, and (c) inure, together with the rights
and remedies of Secured Party hereunder, to the benefit of and be enforceable by
Secured Party and its successors, transferees and assigns acting in the capacity
of Agent under the Term Loan Agreement. Subject to and upon Discharge of the
Obligations or in connection with a sale or other disposition of any Collateral
permitted under the Term Loan Agreement, Secured Party shall (as soon as
reasonably practicable after it receives from Grantor a written request for
release of the Collateral) execute and deliver to Grantor an instrument in form
and substance satisfactory to Secured Party releasing (on a quitclaim basis,
without recourse, without warranty, and without any liability whatsoever) any
security interest Secured Party may then hold in the Collateral and thereupon
Secured Party shall, at Grantor's expense, execute and deliver to Grantor such
Uniform Commercial Code termination statements and other like documents as
Grantor may reasonably request to evidence such release.
6.2. AMENDMENTS; ETC. No amendment or waiver of any provision of this
Agreement, or consent to any departure by Grantor herefrom, shall in any event
be effective unless the same shall be in writing and signed by Secured Party,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which it was given.
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6.3. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure
or delay on the part of Secured Party in the exercise of any power, right or
privilege hereunder shall impair such power, right or privilege or be construed
to be a waiver of any default or acquiescence therein, nor shall any single or
partial exercise of any such power, right or privilege preclude any other or
further exercise thereof or of any other power, right or privilege. All rights
and remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
6.4. NOTICES. Any and all notices and communications to be given to
Grantor or Secured Party shall be given in accordance with subsection 11.2 of
the Term Loan Agreement, and shall be effective as provided therein.
6.5. SEVERABILITY. In case any provision in or obligation under this
Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.
6.6. HEADINGS. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
6.7. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS
THEREOF EXCEPT TO THE EXTENT THAT THE NEW YORK UNIFORM COMMERCIAL CODE PROVIDES
THAT THE PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER,
IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
Notwithstanding the foregoing, the creation, Perfection, priority and
enforcement of a security interest in any deposit account shall be governed by
the laws of the state in which the depositary bank, or branch bank, maintaining
such deposit account is located.
6.8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. The Grantor
hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which it
is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the courts of the State of
New York, the courts of the United States of America for the Southern District
of New York, and appellate courts from any thereof;
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(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to it at its
address set forth in subsection 10.2 of the Term Loan Agreement or at such other
address of which the Secured Party shall have been notified pursuant thereto,
such service being hereby acknowledged by Grantor to be sufficient for personal
jurisdiction in any action against Grantor in any such court and to be otherwise
effective and binding service in every respect;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it may -have to claim or recover in any legal action or proceeding
referred to in this subsection any special, exemplary, punitive or consequential
damages.
6.9. WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope
of this waiver is intended to be all-encompassing of any and all disputes that
may be filed in any court and that relate to the subject matter of this
transaction, including without limitation contract claims, tort claims, breach
of duty claims, and all other common law and statutory claims. Grantor and
Secured Party each acknowledge that this waiver is a material inducement for
Grantor and Secured Party to enter into a business relationship, that Grantor
and Secured Party have already relied on this waiver in entering into this
Agreement and that each will continue to rely on this waiver in their related
future dealings. Each party hereto further warrants and represents that it has
reviewed this waiver with its legal counsel and that it knowingly and
voluntarily waives its jury trial rights following consultation with legal
counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of
litigation, this Agreement may be filed as a written consent to a trial by the
court.
6.10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
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6.11. ASCEND NOTE. Notwithstanding any other provisions in this
Agreement to the contrary, the security interest granted in subsection 2.1 is
subject to the security interest granted in the Ascend Note to the extent that
the security interest relating to the Ascend Note is perfected and not avoided.
The Obligations, however, are not subordinate to the Ascend Note and such
obligations are senior Indebtedness of the Borrower ranking PARI PASSU with the
Ascend Note.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Grantor and Secured Party have executed this
Borrower Pledge and Security Agreement as of the day and year first above
written.
GRANTOR
FLASHNET COMMUNICATIONS, INC.,
a Texas corporation
By: /s/ M. Scott Leslie
-----------------------------
Name: M. Scott Leslie
Title: President & Secretary
SECURED PARTY
Accepted and agreed as of
the day and year first above written:
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as Agent
By: /s/ Richard Katz
---------------------------
Name: Richard Katz
Title: Authorized Signatory
<PAGE>
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBSIDIARY PLEDGE AND SECURITY AGREEMENT
dated as of
January 15, 1999
FLASHNET MARKETING, INC.,
FLASHNET TELECOM, INC.,
AND EACH
ADDITIONAL GRANTOR
THAT BECOMES PARTY HERETO
as Grantors
and
GOLDMAN SACHS CREDIT PARTNERS L.P.
as Agent,
as Secured Party
-------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1. CERTAIN TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2. TERMS DEFINED IN TERM LOAN AGREEMENT. . . . . . . . . . . . . . . . .4
1.3. TERMS DEFINED IN THE UNIFORM COMMERCIAL CODE. . . . . . . . . . . . .4
1.4. TERMS GENERALLY . . . . . . . . . . . . . . . . . . . . . . . . . . .5
ARTICLE II. THE SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . .5
2.1. GRANT OF SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . .5
2.2. DELIVERY OF INSTRUMENTS AND SECURITIES. . . . . . . . . . . . . . . .7
2.3. INVESTMENT PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . .8
2.4. REGISTRATION OF PLEDGE. . . . . . . . . . . . . . . . . . . . . . . .8
2.5. FINANCING STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . .8
2.6. SECURED PARTY FILING. . . . . . . . . . . . . . . . . . . . . . . . .8
2.7. FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . . .8
2.8. POWER OF ATTORNEY.. . . . . . . . . . . . . . . . . . . . . . . . . .9
2.9. SURVIVAL OF SECURITY INTERESTS .. . . . . . . . . . . . . . . . . . 10
2.10. REINSTATEMENT OF SECURITY INTERESTS. . . . . . . . . . . . . . . . 10
2.11. EACH GRANTOR REMAINS LIABLE. . . . . . . . . . . . . . . . . . . . 11
2.12. APPLICATION OF GUARANTY PROVISIONS . . . . . . . . . . . . . . . . 11
2.13. LIABILITY JOINT AND SEVERAL. . . . . . . . . . . . . . . . . . . . 11
ARTICLE III. REPRESENTATIONS, WARRANTIES AND COVENANTS . . . . . . . . . . . . . . 11
3.1. THE COLLATERAL.. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2. MAINTENANCE OF PERFECTION . . . . . . . . . . . . . . . . . . . . . 13
3.3. DEFENSE OF COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . 13
3.4. TRANSFER OR ENCUMBRANCE . . . . . . . . . . . . . . . . . . . . . . 13
3.5. PAYMENTS, DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . 13
3.6. VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.7. MAINTENANCE OF COLLATERAL . . . . . . . . . . . . . . . . . . . . . 14
3.8. CONCERNING EQUIPMENT AND INVENTORY. . . . . . . . . . . . . . . . . 15
3.9. CONCERNING ACCOUNTS, INSTRUMENTS AND OTHER CLAIMS . . . . . . . . . 15
3.10. SUBSTITUTED PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IV. DEFAULT; REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.1. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.2. REMEDIES UPON DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 16
4.3. WAIVERS BY GRANTORS . . . . . . . . . . . . . . . . . . . . . . . . 18
4.4. STANDARD OF CARE. . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.5. APPLICATION OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . 18
4.6. INDEMNITY AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . 19
4.7. SURPLUS, DEFICIENCY . . . . . . . . . . . . . . . . . . . . . . . . 19
4.8. INFORMATION RELATED TO THE COLLATERAL . . . . . . . . . . . . . . . 19
4.9. SALE EXEMPT FROM REGISTRATION . . . . . . . . . . . . . . . . . . . 20
4.10. RIGHTS AND REMEDIES CUMULATIVE . . . . . . . . . . . . . . . . . . 20
4.11. NO DIRECT ENFORCEMENT BY BENEFICIARIES . . . . . . . . . . . . . . 20
</TABLE>
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<TABLE>
<S> <C>
ARTICLE V. CONCERNING THE SECURED PARTY. . . . . . . . . . . . . . . . . . . . . . 20
5.1. AGENT FOR HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.2. AGENT SHALL BE THE SECURED PARTY. . . . . . . . . . . . . . . . . . 21
5.3. NO ASSURANCES OR LIABILITY. . . . . . . . . . . . . . . . . . . . . 21
5.4. HOLDERS BOUND.. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VI. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . 22
6.1. CONTINUING SECURITY INTERESTS; RELEASE. . . . . . . . . . . . . . . 22
6.2. AMENDMENTS; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.3. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE . . . . . . . 22
6.4. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.5. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.6. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.7. GOVERNING LAW; TERMS. . . . . . . . . . . . . . . . . . . . . . . . 22
6.8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. . . . . . . . . . . 22
6.9. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . . . . 23
6.10. ADDITIONAL GRANTORS. . . . . . . . . . . . . . . . . . . . . . . . 24
6.11. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 3.1(b): Capital Stock and Intercompany Notes
Schedule 3.1(c): Intellectual Property
Schedule 3.1(d): Other Investment Property
Schedule 3.1(e): Locations of Equipment and Inventory
Schedule 3.1(g): Locations of Grantors
Schedule 3.1(h): Names
Schedule 3.1(i): Taxpayer ID Numbers
EXHIBITS
Exhibit A Form of Joinder Agreement
</TABLE>
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SUBSIDIARY PLEDGE AND SECURITY AGREEMENT
This SUBSIDIARY PLEDGE AND SECURITY AGREEMENT (this "AGREEMENT") is
dated as of January 15, 1999, and entered into by and among FLASHNET MARKETING,
INC., a Texas corporation ("MARKETING"), FLASHNET TELECOM, INC., a Texas
corporation ("TELECOM"), each other Person that at any time agrees in writing to
be bound as a Grantor hereunder (the "ADDITIONAL GRANTORS" and together with
Marketing, and Telecom, each a "GRANTOR" and, collectively, the "GRANTORS"), and
GOLDMAN SACHS CREDIT PARTNERS L.P. in its capacity as Administrative Agent (in
such capacity the "AGENT") under the Term Loan Agreement described herein (in
such capacity, the "SECURED PARTY"), FOR THE BENEFIT OF the Persons that now are
or at any time hereafter become party as Lender to the Term Loan Agreement (the
"LENDERS" and the agent and the Lenders collectively, the "BENEFICIARIES").
RECITALS
Marketing and Telecom are Subsidiaries (as defined herein) of FlashNet
Communications, Inc., a Texas corporation (the "BORROWER"). Each Person that
hereafter agrees to become bound hereby as a Grantor is, on the date it becomes
bound hereby, a Subsidiary of the Borrower.
The Borrower has requested that Term Loans be made to the Borrower on
terms and conditions set forth in that certain Term Loan Agreement, dated as of
the day and year first above written, by and among Borrower, Secured Party, and
the Lenders.
To induce the Beneficiaries to enter into the Term Loan Agreement, and
in consideration thereof and of any and all Term Loans at any time made
thereunder, (a) Grantors have provided the Guarantees in the Term Loan Agreement
and have agreed to grant to the Secured Party, for the benefit of the
Beneficiaries, the collateral security described herein as security for the
payment of the Secured Obligations on the terms herein set forth, and (b) the
Borrower has agreed in the Term Loan Agreement to cause each Person that
hereafter becomes a Subsidiary of the Borrower to become bound by the provisions
of the Term Loan Agreement as a Guarantor thereunder and to become bound by the
provisions hereof as a Grantor hereunder.
ACCORDINGLY, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each Grantor hereby agrees with Secured Party for the benefit of
the Beneficiaries as follows:
SECTION I.
DEFINITIONS
1.1. CERTAIN TERMS. As used in this Agreement, the following terms
have the meanings specified below:
"BANKRUPTCY CODE" means Title 11 of the United States Code, as from
time to time amended, or any successor statute.
<PAGE>
"BORROWER" is defined in the Recitals.
"CAPITAL STOCK" means any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation,
regardless of type, class, preference or designation, any and all equivalent
ownership interests in a Person other than a corporation, including membership
interests, partnership interests or other equity interests, and any and all
warrants, options, purchase rights, conversion or exchange rights, voting
rights, calls or claims of any character with respect thereto.
"CLAIM" has the meaning set forth in the Bankruptcy Code.
"COLLATERAL" has the meaning set forth in subsection 2.1.
"DISCHARGE OF THE CREDIT OBLIGATIONS" means that all obligations of
the Lenders to make Term Loans under the Term Loan Agreement have expired or
been terminated and have been absolutely, unconditionally and irrevocably
discharged and all Obligations at any time created, incurred or outstanding
(except Obligations for indemnification which are then contingent and in respect
of which no claim or demand has then been made) have been fully and finally paid
or satisfied in cash or in accordance with the Loan Documents.
"EXCLUDED ASSETS" means rights, licenses and franchises granted by any
Governmental Entity, licensor, lessor or other third party upon which it is
unlawful to create a Lien.
"HOLDER" means, in respect of any Secured Obligation, the Person
entitled to enforce payment thereof and specifically includes each Lender and
the Secured Party.
"INTERCOMPANY NOTES" means any promissory note executed by the
Borrower or a Subsidiary of a Grantor in favor of such Grantor.
"LOAN PARTIES" means the Borrower and the Guarantors.
"OBLIGATIONS" means all direct or indirect debts, liabilities and
obligations of each Grantor of any and every type and description at any time
arising under or in connection with the Guarantee or any other Loan Document to
which such Guarantor is a party, to the Secured Party, the Agent, any Lender, or
any Person entitled to indemnification pursuant to the Term Loan Agreement or
any other Loan Document, in each case whether now outstanding or hereafter
created or incurred, whether or not the right of such Person to payment in
respect of any such debts, liabilities or obligations is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured and whether or not such claim
is discharged, stayed or otherwise affected by any bankruptcy case or
insolvency, reorganization, receivership, dissolution or liquidation proceeding,
and shall include (a) all liabilities of such Grantor under the Guarantee for
principal of, Applicable Repayment Fees, and interest on any and all Term Loans
at any time outstanding under the Term Loan Agreement, (b) all liabilities of
such Grantor under the Term Loan Agreement and/or the Loan Documents to which it
is a party for any fees, costs, taxes, expenses, indemnification and other
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amounts payable thereunder, (c) all liabilities of such Grantor under any
Intercompany Note, and (d) all other liabilities of such Grantor under the Term
Loan Agreement and/or under or in respect of any of the Loan Documents to which
such Grantor is a party or any of the transactions contemplated thereby and
specifically includes any and all present and future "Obligations" as such term
is defined in the Term Loan Agreement.
"PERFECTED" means, as to the security interests granted to Secured
Party in subsection 2.1, that (a) a creditor on a simple contract cannot acquire
a judicial lien that is superior to such security interests and (b) if a case
were pending under the Bankruptcy Code in which any Grantor is the debtor, such
security interests would be a Lien that is perfected in such bankruptcy case.
"POST-PETITION INTEREST AND EXPENSE CLAIMS" means any and all claims
of any Holder of Secured Obligations (a) for interest on any Obligations
determined for any period of time occurring after the commencement of any case
under the Bankruptcy Code or any other insolvency, reorganization, receivership,
dissolution or liquidation proceeding at the contract rate (including any
applicable post-default increase therein) set forth in the Term Loan Agreement
or any other Loan Document or (b) for cost and expense reimbursements or
indemnification on the terms set forth in the Term Loan Agreement or any other
Loan Document relating to costs and expenses incurred and indemnification rights
accrued at any time after the commencement of any such case or proceeding, in
each case to the extent such claim accrues or becomes payable in accordance with
the provisions of the Term Loan Agreement or other Loan Documents (or would have
accrued or become payable if enforceable or allowable in such case or
proceeding), whether or not such claim is enforceable, allowable or allowed in
such case or proceeding and even if such claim is disallowed therein.
"REQUIREMENT OF LAW" means, as to any Person, the certficate of
incorporation and by-laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Entity, in each case applicable to
or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"SECURED OBLIGATIONS" is defined in subsection 2.1.
"SECURITY DOCUMENTS" means the Security Agreements and all other
security documents hereafter delivered to the Agent granting or purporting to
grant a Lien on any asset or assets of any Person to secure Obligations of the
Borrower and/or any other Loan Party hereunder and/or under any of the Loan
Documents or to secure any guarantee of any such obligations and liabilities.
"TERM LOAN AGREEMENT" means the Term Loan Agreement described in the
Recitals as such agreement from time to time may be modified, amended, restated,
extended, refinanced or replaced in any manner or in any respect (including so
as to reduce or increase the amount or cost of Term Loans made thereunder or to
shorten or extend the time of payment thereunder or in any other manner change
the amount or terms of Term Loans made to the Borrower or the identity, rights
or obligations of any party thereto).
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"TRANSFER" means sell, transfer, exchange, lease, or otherwise dispose
of.
1.2. TERMS DEFINED IN TERM LOAN AGREEMENT. Unless the context
otherwise requires, the following terms used in this Agreement are used as
defined in the Term Loan Agreement:
Applicable Repayment Fee
Borrower
Business Day
Commitment
Default
Event of Default
Governmental Entity
Guarantee
Guarantor
Indebtedness
Investments
Lien
Loan Documents
Majority Lenders
Material Adverse Effect
Permitted Investments
Permitted Liens
Person
Security Agreements
Subsidiary
Term loan
1.3. TERMS DEFINED IN THE UNIFORM COMMERCIAL CODE. When capitalized,
the following terms used in this Agreement or the other Security Documents have
the meanings given to them in the Uniform Commercial Code, as in effect in the
State of New York on the date of this Agreement:
Accounts
Certificated Security
Chattel Paper
Commodity Account
Commodity Contract
Commodity Intermediary
Control
Documents
Equipment
Financial Asset
Fixtures
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General Intangibles
Goods
Instruments
Inventory
Investment Property
Securities Account
Securities Intermediary
Security
Security Certificate
Security Entitlement
Uncertificated Security
1.4. TERMS GENERALLY. The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include," "includes" and "including" shall
be deemed to be followed by the phrase "without limitation." The word "will"
shall be construed to have the same meaning and effect as the word "shall."
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person's successors,
transferees and assigns, (c) the words "herein," "hereof" and "hereunder," and
words of similar import, shall be construed to refer to this Agreement in its
entirety and not to any particular provision hereof, (d) all references herein
to Sections, subsections, Exhibits and Schedules shall be construed to refer to
sections and subsections of, and Exhibits and Schedules to, this Agreement, and
(e) the words "asset" and "property" shall be construed to have the same meaning
and effect and to refer to any and all tangible and intangible assets and
properties, whether real, personal or mixed and of every type and description.
SECTION II.
THE SECURITY INTERESTS
2.1. GRANT OF SECURITY INTERESTS. As security for the payment of the
Obligations and all Post-Petition Interest and Expense Claims (collectively, the
"SECURED OBLIGATIONS"), each Grantor hereby assigns to Secured Party for the
benefit of the Beneficiaries, and grants Secured Party for the benefit of the
Beneficiaries security interests in, all of such Grantor's right, title and
interest in and to the following types or items of property wherever located, in
each case whether now or hereafter existing, owned or acquired by such Grantor,
or in which such Grantor now owns or hereafter acquires an interest
(collectively, the "COLLATERAL"):
(a) all Inventory, including specifically all raw materials,
work-in-process, finished goods, supplies, materials, spare parts, Goods held
for sale or on lease or for lease or
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<PAGE>
furnished or to be furnished under contracts of service, merchandise inventory,
rental inventory, and returned or repossessed Goods and all rights to enforce
return or repossession by reclamation, stoppage in transit or otherwise,
(b) all Equipment, including specifically all manufacturing, printing,
distribution, delivery, retailing, vending, data processing, communications,
office and other equipment in all of its forms, all vehicles, all tools, dies,
and molds, all Fixtures, all other Goods used or bought for use primarily in a
business and all other Goods except Inventory,
(c) all Accounts,
(d) all Chattel Paper,
(e) all Documents,
(f) all Instruments and all other Claims that are in any respect
evidenced or represented by any writing, including specifically the Intercompany
Notes described on SCHEDULE 3.1(b) and all other Intercompany Notes and all
other writings evidencing or representing a Claim against Borrower or any
Subsidiary of the Borrower or any other Person,
(g) (i) 100% of the issued and outstanding Capital Stock of any
Subsidiary of Grantor, and (ii) all other Securities not described in the
preceding clause (i), whether constituting Certificated Securities or
Uncertificated Securities, all Financial Assets, all Security Entitlements, all
Securities Accounts, all Commodity Contracts, all Commodity Accounts, and all
other Investment Property, including specifically the Security Certificates
described on SCHEDULE 3.1(b) and all other Capital Stock and all Investments
permitted under subsection 4.9 of the Term Loan Agreement,
(h) all money, cash and cash equivalents, including specifically all
deposit accounts and all certificates of deposit,
(i) all General Intangibles, including specifically (a) the property
described on SCHEDULE 3.1(c), (b) all registered, unregistered and common law
trademarks and service marks, trademark and servicemark applications, and all
trademark, service mark and tradename license agreements to which such Grantor
is a party (whether as licensor or licensee) and all Claims (including
infringement claims) relating thereto, (c) all patents and patent applications
and all patent license agreements to which such Grantor is a party (whether as
licensor or licensee) and all Claims (including infringement claims) relating
thereto, (d) all registered and unregistered copyrights, copyright applications
and all copyright license agreements to which such Grantor is a party (whether
as licensor or licensee) and Claims (including infringement claims) relating
thereto, (e) all other intellectual property in which such Grantor has an
interest, including proprietary research and development, technical knowledge
and processes, inventions (whether or not patentable and whether or not reduced
to practice), know-how, trade secrets, trade names, trade styles, logos, license
agreements and user rights and Claims (including infringement claims) relating
thereto, (f) all customer lists and agreements, (g) all supplier lists and
agreements, (h) all employee and consultant lists, rights, and agreements, (i)
all computing, data
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<PAGE>
and information processing and communications programs, discs, designs, and
information and the data and other entries thereon, (j) all books, records,
catalogs, back issues, library rights and all manifestations and embodiments
thereof, (k) all tax refunds, (l) all policies of insurance and condemnation
awards of every type and description and the proceeds thereof, (m) all loans
receivable, letters of credit, bonds and undertakings, deferred purchase price
or deferred purchase consideration, consulting or non-competition payments and
other Indebtedness, liabilities and obligations receivable not constituting an
Account and not evidenced or represented by any Instrument, Chattel Paper or
Security, (n) all rights of recoupment, recourse, reimbursement, subrogation,
indemnity or contribution (including those arising under the Guarantee, or any
other Guarantee or any payment thereon, and those arising on account of any
other agreement, transaction or event), (o) all other causes of action and
Claims of every type and description, whether fixed or contingent, liquidated or
not liquidated, accrued or not accrued, and all judgments, orders and recoveries
thereon, (p) all other agreements and contract rights of every type and
description and Claims thereon or relating in any manner thereto, (q) all other
rights, privileges, benefits, entitlements, franchises, licenses and
expectancies of every type and description, (r) all other intangible property of
every type and description, and (s) all goodwill associated with any of the
foregoing,
(j) all property that is at any time delivered to, or that is is at
any time in the Control of, Secured Party, and
(k) any and all Fixtures located on any and all owned or leased real
property held by such Grantor,
TOGETHER, IN EACH CASE, WITH (w) all accessions thereto and products and
replacements thereof, (x) all guaranties, Liens and other forms of collateral
security therefor, and (y) all dividends, distributions, and payments received
thereon or in exchange or substitution therefor or upon Transfer thereof, and
(z) all other proceeds thereof,
EXCEPT AND EXCLUDING, HOWEVER, each item of property that is an Excluded Asset,
for as long as it remains an Excluded Asset.
2.2. DELIVERY OF INSTRUMENTS AND SECURITIES. On the date hereof or, if
hereafter acquired, immediately upon acquisition thereof, without any notice
from or demand by secured Party, (a) each Grantor shall deliver to Secured Party
the Intercompany Notes and Security Certificates described on SCHEDULE 3.1(b) as
owned by it and all other Instruments (except checks received and collected in
the ordinary course of business) and Security Certificates at any time owned by
it and constituting Collateral, in each case in suitable form for transfer by
delivery or accompanied by duly executed instruments of transfer, assignments in
blank or with appropriate endorsements, in form and substance satisfactory to
Secured Party, and (b) each grantor shall cause the issuer of each
Uncertificated Security owned by it and constituting Collateral to register
Secured Party as the registered owner thereof, either upon original issuance or
by registration of transfer and shall execute and deliver all writings necessary
to cause such issuer to do so.
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<PAGE>
2.3. INVESTMENT PROPERTY. Each Grantor will cause Secured Party's
security interests in Investment Property owned by such Grantor to be and remain
continuously Perfected by Control and, in addition, will cause such security
interests to be Perfected by filing. No Grantor will grant or permit any other
security interest or Lien upon any Investment Property constituting Collateral.
If so requested at any time by Secured Party or the Majority Lenders as to any
Security Entitlement or Securities Account or any Commodity Contract or
Commodity Account that is owned by any Grantor and constitutes Collateral, such
Grantor will promptly cause each Person who is a Securities Intermediary as to
any such Security Entitlement or Securities Account and each Person who is a
Commodity Intermediary as to any such Commodity Contract or Commodity Account to
deliver a written agreement enforceable by Secured Party for the benefit of the
Beneficiaries waiving and releasing, and agreeing not to create, grant, accept
or hold, any priority, PARI PASSU or junior security interest or Lien therein.
No Grantor will cause or permit any Capital Stock in any Subsidiary which
constitutes Collateral to be outstanding as an Uncertificated Security (except
as required by Requirements of Law) or to constitute a Security Entitlement or
be held in a Securities Account.
2.4. REGISTRATION OF PLEDGE. Secured Party may at any time when any
Event of Default is continuing and without any notice to any Loan Party or any
other Person, transfer to and register in Secured Party's name, as pledgee, any
and all Instruments and Investment Property constituting Collateral. Such
transfer and registration shall not foreclose or otherwise affect any rights or
interests of any Loan Party and shall not increase, restrict or reduce any of
Secured Party's rights and remedies. If after any such transfer and registration
any Grantor remains entitled under subsection 3.6 to exercise voting rights with
respect to Capital Stock included in such Investment Property, Secured Party
shall, at the written request of such Grantor, deliver to such Grantor a
revocable proxy or other instrument sufficient to permit such Grantor to
exercise such voting rights to the extent permitted under subsection 3.6.
2.5. Financing Statements. Each Grantor will duly execute, deliver and
(subject to execution by Secured Party, where required by law) file duly
completed financing statements naming such Grantor as debtor, naming Secured
Party as secured party, and covering the Collateral, in the proper filing office
in each jurisdiction in which a financing statement is required from time to
time to be filed in order to ensure that the security interests granted to
Secured Party in subsection 2.1 are at all times continuously Perfected, to the
extent that, under applicable law, such security interests can be Perfected by
the filing of a financing statement.
2.6. SECURED PARTY FILING. Secured Party is hereby authorized to file
one or more financing statements and continuations thereof and amendments
thereto, relative to all or any part of the Collateral, without the signature of
any Grantor where permitted by law.
2.7. FURTHER ASSURANCES. Each Grantor will promptly (and in any event
within five Business Days after request by Secured Party or the Majority
Lenders) execute and deliver, and use its reasonable and diligent best efforts
to obtain from other Persons, all instruments and documents (including security
agreements, security assignments, Lien releases, Lien waivers, transfer
documents and transfer notices, financing statements and other Lien notices), in
form and substance satisfactory to Secured Party or the Majority Lenders, and
take all other actions
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which are necessary or, in the good faith judgment of Secured Party or the
Majority Lenders, desirable or appropriate in order to create, maintain,
Perfect, ensure the agreed priority of, protect or enforce Secured Party's
security interests in the Collateral, to enable Secured Party to exercise and
enforce its rights and remedies hereunder with respect to any Collateral, to
protect the Collateral against the rights, claims or interests of third persons,
or to effect or to assure further the purposes and provisions of this Agreement,
and each Grantor agrees to pay all costs related thereto and all reasonable
expenses incurred by Secured Party in connection therewith.
2.8. Power of Attorney. Each Grantor hereby irrevocably constitutes
and appoints Secured Party and any officer, agent or nominee of Secured Party,
with full power of substitution, as its true and lawful attorney-in-fact with
full power and authority, in the name of such Grantor or in its own name, to
take any and all actions and to execute and deliver any and all agreements,
documents, notices, instruments and writings that Secured Party or the Majority
Lenders may determine to be necessary or desirable to create, Perfect or ensure
the agreed priority of the security interests granted in subsection 2.1 or, upon
the occurrence and during the continuance of an Event of Default to enforce such
security interests in any lawful and commercially reasonable manner or otherwise
to protect Secured Party's interest in the Collateral in any lawful and
commercially reasonable manner, including the power and right on behalf of any
Grantor, without notice to or assent by any Grantor, to do any or all of the
following if and whenever any Grantor is in default under this Agreement as set
forth in subsection 4.1:
(a) to ask for, demand, sue for, collect, settle and give acquittance
for any and all moneys due or to become due with respect to any or all of the
Collateral and otherwise to demand and enforce payment and collection of any and
all Claims constituting Collateral,
(b) to sign and file in any office in any jurisdiction financing
statements, Lien notices, collateral assignments and any other instruments or
writings that may be required or, in the opinion of Secured Party or the
Majority Lenders, appropriate to create or Perfect a security interest in or
Lien upon any of the Collateral as security for the Secured Obligations,
(c) to accept, hold, collect, endorse, transfer and deliver any and
all checks, notes, drafts, acceptances, documents and other negotiable and
nonnegotiable Instruments, Securities, Documents and Chattel Paper constituting
Collateral that may be delivered to Secured Party in accordance with the
provisions of this Agreement, whether made payable to a Grantor or otherwise,
(d) to commence, file, prosecute, defend, settle, compromise or adjust
any Claim, suit, action or proceeding with respect to any or all of the
Collateral or otherwise to enforce the rights of Secured Party with respect to
any of the Collateral,
(e) to obtain, contest, enforce, adjust and settle Claims for
insurance proceeds or condemnation awards constituting proceeds of Collateral or
required to be paid to Secured Party pursuant to this Agreement or the Term Loan
Agreement,
(f) to do, at its option and at the expense and for the account of any
Grantor, at any time and from time to time, all lawful and commercially
reasonable acts and things that
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Secured Party or the Majority Lenders may deem necessary or desirable to protect
or preserve the Collateral or to realize upon the Collateral,
(g) to contest, settle, pay or discharge taxes or Liens (other than
Liens permitted under this Agreement or the Term Loan Agreement) levied or
placed upon or threatened against any of the Collateral, and for such purposes
(A) the legality or validity thereof and amounts necessary to settle or
discharge the same may be determined by Secured Party or the Majority Lenders in
its or their commercially reasonable discretion and (B) each Grantor agrees
immediately upon demand to reimburse Secured Party for any payments made by
Secured Party on account of any such taxes or Liens, as part of the Secured
Obligations,
(h) to sign and endorse any invoices, freight or express bills, bills
of lading, storage or warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with the Accounts and other documents
relating to the Collateral, and
(i) generally to sell, Transfer, pledge, make any agreement with
respect to or otherwise deal with any of the Collateral as fully and completely
as though Secured Party were the absolute owner thereof for all purposes, and to
do, at Secured Party's option and at Grantors' expense, at any time or from time
to time, all acts and things that Secured Party or the Majority Lenders deem
necessary to protect, preserve or realize upon the Collateral and Secured
Party's security interests therein in order to effect the intent of this
Agreement, all as fully and effectively as any Grantor might do.
The power granted in this subsection 2.8 is a power coupled with an
interest, is irrevocable and shall be discharged upon Discharge of the
Obligations.
2.9. SURVIVAL OF SECURITY INTERESTS. The security interests granted
hereby shall, unless released in writing by Secured Party, (a) remain
enforceable as security for all Secured Obligations now outstanding or created
or incurred at any future time (whether or not created or incurred pursuant to
any agreement presently in effect or hereafter made and notwithstanding any
subsequent repayment of any of the Secured Obligations or any other act,
occurrence or event), until Discharge of the Obligations, and (b) survive any
sale or other Transfer of any Collateral and remain enforceable against each
transferee and subsequent owner thereof, except for any sale or other Transfer
that is permitted at the time under the Term Loan Agreement, Inventory sold in
the ordinary course of business, and any other Collateral that is expressly and
specifically released from the security interests created hereby pursuant to a
written release signed by Secured Party.
2.10. REINSTATEMENT OF SECURITY INTERESTS. If at any time any payment
on any Secured Obligation is set aside, avoided or rescinded or must otherwise
be restored or returned, this Agreement and the security interests granted to
Secured Party herein and all other Obligations of each Grantor hereunder shall
remain in full force and effect and, if previously released or terminated, shall
be automatically and fully reinstated, without any necessity for any act,
consent or agreement of any Grantor, as fully as if such payment had never been
made and as fully as if any such release or termination had never become
effective.
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2.11. EACH GRANTOR REMAINS LIABLE. Anything contained herein to the
contrary notwithstanding, (a) each Grantor shall remain liable under all
contracts and agreements included in the Collateral, to the extent set forth
therein, to perform all of its duties and obligations thereunder to the same
extent as if this Agreement had not been executed, (b) the exercise by Secured
Party of any of its rights hereunder shall not release any Grantor from any of
its duties or obligations under any contract or agreement included in the
Collateral, (c) Secured Party shall not have any obligation or liability under
any contract or agreement included in the Collateral by reason of this Agreement
or the grant to Secured Party of any security interest in such contract or
agreement, and (d) Secured Party shall not be obligated to perform any of the
obligations or duties of any Grantor under any contract or agreement included in
the Collateral or to take any action to collect or enforce any claim for payment
assigned hereunder.
2.12. APPLICATION OF GUARANTY PROVISIONS. Each and all of the
provisions set forth in Article VIII of the Term Loan Agreement, that govern or
in any respect relate to any Guarantor's Guarantee of payment of the Guaranteed
Obligations (as defined therein) or the liability of any Guarantor thereunder or
any recourse, reimbursement, contribution, indemnity or subrogation rights
related thereto and the subordination of claims arising therefrom shall apply
with like force and effect to the security interest granted by such Guarantor as
Grantor under this Agreement and to the liability of such Guarantor as Grantor
under this Agreement, MUTATIS MUTANDIS, to the end and with the effect that (a)
such security interest and liability hereunder shall be as equally absolute,
unconditional, continuing, unlimited, enduring, assured and protected as such
Guaranteed Obligations and the liability of such Guarantor under the Guarantee
are absolute, unconditional, continuing, unlimited, enduring, assured and
protected and (b) all recourse, reimbursement, contribution, indemnity or
subrogation rights are forever waived, released and discharged with respect to
such security interest or any enforcement of such security interest or the
liability of any Grantor hereunder on the same terms as those set forth in
Section 4 of the Guarantee, with the exceptions therein set forth.
2.13. LIABILITY JOINT AND SEVERAL. The security interest granted by
each Grantor herein and all liability of each Grantor hereunder shall be the
joint and several obligation of each Grantor and may be freely enforced against
each Grantor, for the full amount of the Secured Obligations and all other
liabilities of such Grantor hereunder, without regard to whether enforcement is
sought or available against any other Grantor.
SECTION III.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Each Grantor represents and warrants to Secured Party and agrees with
Secured Party that:
3.1. THE COLLATERAL.
(a) OWNERSHIP. Except as otherwise expressly permitted under the Term
Loan Agreement, including, without limitation, Permitted Liens, (i) such Grantor
owns or has an
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interest in the Collateral free and clear of any and all Liens and (ii) no
effective financing statement or other instrument similar in effect covering all
or any part of the Collateral is on file in any filing or recording office,
except those in favor of Secured Party.
(b) INTERESTS IN AND CLAIMS AGAINST SUBSIDIARIES. SCHEDULE 3.1(b) sets
forth accurately and completely all Capital Stock owned by such Grantor in any
direct Subsidiary of such Grantor and all other Capital Stock owned by such
Grantor and all Intercompany Notes issued to such Grantor. All such Capital
Stock have been duly authorized and validly issued and were not issued in breach
or derogation of preemptive rights of any Person or in violation of any
applicable securities laws.
(c) INTELLECTUAL PROPERTY. SCHEDULE 3.1(c) sets forth accurately and
completely (a) all registered and unregistered trademarks and servicemarks and
all trademark and servicemark applications owned by such Grantor, all trademark
and service mark license agreements to which such Grantor is a party (whether as
licensor or licensee), and all pending or overtly threatened infringement Claims
by or against such Grantor and other litigation relating to any such trademarks,
servicemarks, trademark or servicemark applications or trademark or servicemark
license agreements, (b) all patents and patent applications owned by such
Grantor, all patent license agreements to which such Grantor is a party (whether
as licensor or licensee), and all pending or overtly threatened infringement
Claims by or against such Grantor and other litigation relating to any such
patents, patent applications or patent license agreements, and (c) all
registered and unregistered copyrights and copyright applicaitons owned by such
Grantor, all copyright license agreements to which such Grantor is a party
(whether as licensor or licensee) and all pending or overtly threatened
infringement claims by or against such Grantor or other litigation relating to
any such copyrights, or copyright application or copyright license agreements.
(d) OTHER INVESTMENT PROPERTY. SCHEDULE 3.1(d) sets forth accurately
and completely all other Investment Property of such Grantor, except Permitted
Investments.
(e) LOCATION OF EQUIPMENT AND INVENTORY. All Equipment and Inventory
are located and intended to be kept at one of the collateral locations specified
on SCHEDULE 3.1(e).
(f) NO CONSUMER GOODS OR FARM PRODUCTS. Such Grantor does not own any
assets that are, as to it, consumer goods or farm products.
(g) LOCATION OF GRANTORS. Such Grantor's chief place of business,
chief executive office and office or offices where such Grantor keeps its
records regarding its Accounts and all originals of its Chattel Paper are
located, and during the preceding four months were located, at the Grantor
locations specified on SCHEDULE 3.1(g).
(h) NAMES. The correct legal name of such Grantor is set forth in the
preamble to this Agreement. Such Grantor does not conduct its business or hold
itself out under, and in the past five years has not conducted business or held
itself out under, any other name (including any trade-name or fictitious
business name) except any name listed on SCHEDULE 3.1(h).
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(i) TAXPAYER ID NUMBER. The proper taxpayer identification number for
Grantor is accurately set forth on SCHEDULE 3.1(i).
(j) PERFECTION. The security interests granted to Secured Party in
subsection 2.1 are lawful, valid and enforceable security interests that at all
times have been, and remain, duly and continuously Perfected.
(k) AMENDMENT OF SCHEDULE 3.1. Such Grantor may at any time
unilaterally amend SCHEDULE 3.1 in any respect required by the occurrence of any
event that does not constitute or give rise to a Default, by giving written
notice thereof to Secured Party. To be effective, such notice must state
conspicuously that it constitutes an amendment to certain factual matters
relating to the Collateral set forth in subsection 3.1 of this Agreement.
3.2. MAINTENANCE OF PERFECTION. No Grantor will (a) cause, permit or
suffer any voluntary or involuntary change in its name, identity or corporate
structure, or in the location of its chief executive office, or (b) keep any
records relating to its Accounts or any tangible Collateral (other than mobile
goods) at any location other than a location set forth in SCHEDULE 3.1, unless
(in each case) (i) SCHEDULE 3.1 has first been appropriately supplemented with
respect thereto, and (ii) an appropriate financing statement has been filed in
the proper office and in the proper form, and all other requisite actions have
been taken, to Perfect and continue the Perfection (without loss of priority) of
Secured Party's security interests in the Collateral.
3.3. DEFENSE OF COLLATERAL. Each Grantor will defend the Collateral
against all claims and demands of all Persons at any time claiming any interest
therein.
3.4. RANSFER OR ENCUMBRANCE. No Grantor will encumber or otherwise
Transfer any item of Collateral or any interest therein, or permit or suffer any
item of Collateral to be encumbered, sold, assigned or otherwise transferred,
unless (a) such action is permitted at the time under the Term Loan Agreement
and (ii) each Loan Party makes all payments on account of the Secured
Obligations required to be made therefrom and takes all other actions required
to be taken in connection therewith under the Term Loan Agreement or any other
Loan Document.
3.5. PAYMENTS, DIVIDENDS AND DISTRIBUTIONS. Each Grantor shall be
entitled to receive all payments in respect of Collateral owned by it and all
dividends and distributions on Capital Stock and other Investment Property owned
by it, so long as (a) no Event of Default has occurred and is continuing or
would result, and (b) each Loan Party makes all payments on account of the
Secured Obligations or the Obligations of such Loan Party required to be made
therefrom and takes all other actions required to be taken in connection
therewith under the Term Loan Agreement or any other Loan Document.
3.6. VOTING RIGHTS. So long as no Event of Default has occurred or
would result, each Grantor shall have and may exercise all voting rights with
respect to any and all Capital Stock constituting Collateral, except that:
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(a) NO BREACH. No Grantor shall act or vote in favor of any action
that would constitute or cause a breach of any obligations of any Loan Party
under the Term Loan Agreement or under any other Loan Document;
(b) NO CAPITAL STRUCTURE CHANGES. No Grantor shall act or vote in
favor of (i) the authorization or issuance of any Capital Stock restricted
pursuant to subsection 4.9 of the Term Loan Agreement, or (ii) any
reclassification, readjustment, reorganization, merger, amalgamation,
liquidation, winding up, consolidation, sale, lease, assignment or disposition
of assets, or dissolution, without giving Secured Party at least 15 days' prior
written notice of the actions described in this clause (ii);
(c) MATERIAL ADVERSE CHANGES. No Grantor shall act or vote in favor of
any action that has or is reasonably likely to have a material adverse effect on
the value of any of the Collateral or Secured Party's rights therein or that
has, or would reasonably be expected to result in, a Material Adverse Effect;
and
(d) TERMINATION OF VOTING RIGHTS. At any time when any Grantor is in
default under this Agreement as set forth in subsection 4.1, Secured Party may
terminate any or all of each Grantor's voting rights with respect to any or all
Captial Stock constituting Collateral, either by giving written notice of such
termination to the Borrower or by transferring such Capital Stock into Secured
Party's name, and Secured Party shall thereupon have the sole right and power to
exercise such voting rights.
3.7. MAINTENANCE OF COLLATERAL. Each Grantor shall:
(a) not use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement or any other Loan Document or any
applicable Requirement of Law or any policy of insurance covering any such
Collateral if such unlawful use or violation could reasonably be expected to
result in a Material Adverse Effect;
(b) notify Secured Party of any change in such Grantor's name,
identity or corporate structure within 30 days after such change;
(c) give Secured Party 30 days' prior written notice of any change in
such Grantor's chief place of business, chief executive office, places of
business, Collateral locations or federal taxpayer ID number or the office where
such Grantor keeps its Chattel Paper and its records regarding any Accounts;
(d) if the Lenders give value to enable such Grantor to acquire rights
in or the use of any Collateral, use such value for such purposes; and
(e) pay promptly when due all material property and other taxes,
assessments and governmental charges or levies imposed upon any Collateral and
all Claims that are or might become secured by any Lien upon any Collateral,
except to the extent the same is being contested as permitted under the Term
Loan Agreement; PROVIDED, that, notwithstanding any other provision in the Loan
Documents, each Grantor shall in any event pay such taxes,
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assessments, charges, levies and Claims not later than five days prior to the
date of any proposed sale under any judgment, writ or warrant of attachment or
other legal process entered or filed against any Grantor or any Collateral as a
result of the failure to make such payment.
3.8. CONCERNING EQUIPMENT AND INVENTORY. Each Grantor will:
(a) cause the Equipment to be maintained and preserved in the same
condition, repair and working order as when new (ordinary wear and tear and
worn-out and surplus equipment excepted) and in accordance with such Grantor's
past practices and make or cause to be made all repairs, replacements and other
improvements in connection therewith that are necessary or desirable to such
end;
(b) keep correct and accurate records of the Inventory, itemizing and
describing the kind, type and quantity of Inventory, such Grantor's cost
therefor and (where applicable) the current list prices for the Inventory, in
the ordinary course of such Grantor's business;
(c) if any Inventory is in possession or control of any agent,
carrier, warehouseman, bailee, consignee or processor, upon the occurrence of an
Event of Default instruct such Person to hold all such Inventory for the account
of Secured Party and subject to the instructions of Secured Party; and
(d) if so requested at any time by Secured Party or the Majority
Lenders, promptly endorse and deliver to Secured Party each and all negotiable
Documents constituting Collateral.
3.9. CONCERNING ACCOUNTS, INSTRUMENTS AND OTHER CLAIMS. Each Grantor
will:
(a) maintain accurate and complete records concerning the Accounts,
Instruments and all other Claims and the identity, name and address of each
account debtor or obligor thereon, hold and preserve such records in
safekeeping, permit representatives of Secured Party at any time during normal
business hours upon reasonable prior notice to inspect, copy and make abstracts
from such records, and render to Secured Party, at such Grantor's cost and
expense, such clerical and other assistance as may be reasonably requested with
regard thereto,
(b) if so requested at any time by Secured Party or the Majority
Lenders, such Grantor will certify and deliver to Secured Party complete and
correct copies of each contract or agreement constituting Collateral,
(c) continue to collect, at such Grantor's expense, all amounts due or
to become due to such Grantor under Accounts, Instruments and other Claims and,
in connection therewith take such action as such Grantor (or, whenever any
Grantor is in default under this Agreement as set forth in subsection 4.1, as
Secured Party or the Majority Lenders) may reasonably deem necessary or
advisable to enforce collection of amounts due or to become due thereunder;
PROVIDED, that Secured Party shall have the right at any time when any Grantor
is in default under this Agreement as set forth in subsection 4.1 (i) to notify
the account debtors or
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obligors under any or all Accounts, Instruments or other Claims of the
assignment of such Accounts, Instruments or Claims to Secured Party and to
direct such account debtors or obligors to make payment of all amounts due or to
become due to any Grantor thereunder directly to Secured Party, (ii) to notify
each Person maintaining a lockbox or similar arrangement to which account
debtors or obligors under any Accounts, Instruments or other Claims have been
directed to make payment to remit all amounts representing collections on checks
and other payment items from time to time sent to or deposited in such lockbox
or other arrangement directly to Secured Party and (iii) at the expense of
Grantors, to demand payment of any Accounts, Instruments and Claims and enforce
collection thereof by legal proceedings in any lawful manner and to extend,
renew adjust, settle or compromise the amount or payment thereof, in the same
manner and to the same extent as any Grantor might have done, and
(d) if Secured Party at any time exercises any of the rights described
in the PROVISO in subsection 3.9(c), (i) segregate from all other funds and hold
in trust for Secured Party and immediately deliver to Secured Party (in the
identical form received) all amounts and proceeds (including checks and other
instruments) received by any Grantor in respect of any and all Accounts,
Instruments and other Claims, and (ii) not adjust, settle or compromise the
amount or payment of any Account or Claim, or release wholly or partly any
account debtor or obligor thereon, or allow any credit or discount thereon.
3.10. SUBSTITUTED PERFORMANCE. Secured Party may at any time (but
shall not be obligated to) (a) perform any of the obligations of any Grantor
under this Agreement if such Grantor fails to perform such obligation within
five Business Days (or, in the case of insurance, within one Business Day) after
written demand by Secured Party and (b) make any payments and do any other acts
which Secured Party or the Majority Lenders may deem necessary or desirable to
protect Secured Party's security interests in the Collateral, including the
right to pay, purchase, contest or compromise any Lien that attaches or is
asserted against any Collateral, to procure insurance, and to appear in and
defend any action or proceeding relating to any Collateral, and each Grantor
agrees promptly to reimburse Secured Party for all payments made by Secured
Party in doing so, together with interest thereon at the rate then applicable to
the Term Loans, all attorneys' fees and disbursements incurred by Secured Party
in connection therewith, whether or not suit is brought, and all other costs and
expenses related thereto.
SECTION IV.
DEFAULT; REMEDIES
4.1. DEFAULT. Grantors shall be in default under this Agreement (a)
whenever any Event of Default has occurred and is continuing and (b) at all
times after the Term Loans have become due and payable, whether at maturity,
upon acceleration pursuant to Article VII of the Term Loan Agreement or
otherwise.
4.2. REMEDIES UPON DEFAULT. At any time when any Grantor is in default
under this Agreement as set forth in subsection 4.1, Secured Party may exercise
and enforce, in any order, (a) each and all of the rights and remedies available
to a secured party upon default under
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the Uniform Commercial Code or other applicable law, (b) each and all of the
rights and remedies available to it under the Term Loan Agreement or any other
Loan Document and (c) each and all of the following rights and remedies:
(a) COLLECTION RIGHTS. Without notice to any Grantor or any other Loan
Party, Secured Party may notify any or all account debtors and obligors on any
Accounts, Instruments or other Claims constituting Collateral of Secured Party's
security interests therein and may direct, demand and enforce payment thereof
directly to Secured Party.
(b) TAKING POSSESSION. Secured Party may (i) enter upon any and all
premises owned or leased by any Grantor where Collateral is located (or believed
by Secured Party to be located), with or (to the fullest extent permitted by
law) without judicial process and without any obligation to pay rent, (ii) prior
to the disposition of the Collateral, store, process, repair or recondition the
Collateral or otherwise prepare the Collateral for disposition in any manner to
the extent Secured Party deems appropriate, (iii) take possession of any
Grantor's premises or place custodians or a receiver in exclusive control
thereof, remain on such premises and use the same and any Grantor's Equipment
for the purpose of completing any work in process or otherwise preparing the
Collateral for sale or selling or otherwise Transferring the Collateral, (iv)
take possession of all items of Collateral that are not then in its possession,
either upon such premises or by removal from such premises, and (v) require any
Grantor or the Person in possession thereof to deliver such Collateral to
Secured Party at one or more locations designated by Secured Party and
reasonably convenient to it and each Grantor owning an interest therein.
(c) FORECLOSURE. Secured Party may sell, lease, license or otherwise
dispose of or Transfer any or all of the Collateral or any part thereof in one
or more parcels at public sale or in private sale or transaction, on any
exchange or market or at Secured Party's offices or on any Grantor's premises or
at any other location, for cash, on credit or for future delivery, and may enter
into all contracts necessary or appropriate in connection therewith, without any
notice whatsoever unless required by law. Where permitted by law, one or more of
the Beneficiaries may be the purchasers at any such sale and in such event, if
such bid is made by all of the Lenders or by all of the Holders of Secured
Obligations or otherwise whenever a credit bid is expressly permitted under the
Term Loan Agreement or approved in writing by the Agent and the Majority
Lenders, the Beneficiaries bidding at such sale may bid part or all of the
Obligations owing to them without necessity of any cash payment on account of
the purchase price, even though any other purchaser at such sale is required to
bid a purchase price payable in cash. Each Grantor agrees that at least 10
calendar days' written notice to such Grantor of the time and place of any
public sale of Collateral owned by it (or, to the extent such Grantor is
entitled by law to notice thereof, the public sale of any other Collateral), or
the time after which any private sale of Collateral owned by it (or, to the
extent such Grantor is entitled by law to notice thereof, the private sale of
any other Collateral) is to be made, shall be commercially reasonable. For
purposes of such notice, to the fullest extent permitted by law (i) each Grantor
waives notice of any sale of Collateral owned by any other Grantor and (ii) each
Grantor agrees that notice given to the Borrower shall constitute notice given
to such Grantor. The giving of notice of any such sale or other disposition
shall not obligate Secured Party to proceed with the sale or disposition,
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and any such sale or disposition may be postponed or adjourned from time to
time, without further notice.
(d) USE OF INTELLECTUAL PROPERTY. Secured Party may, on a royalty-free
basis, use and license use of any trademark, trade name, servicemark, trade
style, copyright, patent or technical knowledge or process owned, held or used
by any Grantor in respect of any Collateral as to which any right or remedy of
Secured Party is exercised or enforced.
In addition, each Holder of any Secured Obligation may exercise and
enforce such rights and remedies for the collection of such Secured Obligation
as may be available to it by law or agreement.
4.3. WAIVERS BY GRANTORS. Each Grantor hereby irrevocably waives (a)
all rights of redemption from any foreclosure sale, (b) to the extent permitted
by law, the benefit of all valuation, appraisal, exemption and moratorium laws,
(c) to the fullest extent permitted by law, all rights to notice or a hearing
prior to the exercise by Secured Party of its right to take possession of any
Collateral, whether by self-help or by legal process and any right to object to
the Secured Party taking possession of any Collateral by self-help, and (d) if
Secured Party seeks to obtain possession of any Collateral by replevin, claim
and delivery, attachment, levy or other legal process, (i) any notice or demand
for possession prior to the commencement of legal proceedings, (ii) the posting
of any bond or security in any such proceedings, and (iii) any requirement that
Secured Party retain possession and not dispose of any Collateral until after a
trial or final judgment in such proceedings.
4.4. STANDARD OF CARE. The powers conferred on Secured Party hereunder
are solely to protect its interest in the Collateral and shall not impose any
duty upon it to exercise any such powers. Except for the exercise of reasonable
care in the custody of any Collateral in its possession and the accounting for
moneys actually received by it hereunder, Secured Party shall have no duty as to
any Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or to protect, preserve, vote or exercise any rights
pertaining to any Collateral. Secured Party shall be deemed to have exercised
reasonable care in the custody and preservation of Collateral in its possession
if such Collateral is accorded treatment substantially equal to that which
Secured Party accords its own property or if it selects, with reasonable care, a
custodian to hold such Collateral on its behalf.
4.5. APPLICATION OF PROCEEDS. Except as expressly provided elsewhere
in this Agreement or the Term Loan Agreement, all proceeds received by Secured
Party in respect of any sale of, collection from, or other realization upon all
or any part of the Collateral shall be applied by Secured Party against the
Secured Obligations in the following order of priority:
FIRST: To the payment of all costs and expenses of such sale,
collection or other realization, including compensation to Secured Party
and its agents and counsel, and all other expenses, liabilities and
advances made or incurred by Secured Party in connection therewith, and all
amounts for which Secured Party is entitled to indemnification hereunder
and all advances made by Secured Party hereunder for the account of any
Grantor, and to the payment of all costs and expenses paid or incurred by
Secured Party in
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connection with the exercise of any right or remedy hereunder, all in
accordance with subsection 4.6;
SECOND: To the payment of all other Secured Obligations (for the
ratable benefit of the Holders thereof) then due and payable; and
THIRD: To the payment to or upon the order of the Grantor entitled
thereto, or to whomsoever may be lawfully entitled to receive the same or
as a court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds.
4.6. INDEMNITY AND EXPENSES.
(a) INDEMNITY. Each Grantor will defend, indemnify and hold harmless
Secured Party and each Beneficiary from and against any and all claims, losses
and liabilities in any way relating to, growing out of or resulting from this
Agreement and the transactions contemplated hereby (including enforcement of any
interest, right or remedy created hereby), provided that Grantor shall have no
obligation to indemnify a person with respect to claims, losses or liabilities
which are attributable to such person's gross negligence or willful misconduct
(as determined in a final non-appeable court of competent jurisdiction).
(b) EXPENSES. Each Grantor will pay to Secured Party upon demand the
amount of any and all costs and expenses, including the fees and expenses of its
counsel and of any advisors, consultants, experts and agents, that Secured Party
may incur in connection with (i) the custody, preservation, use or operation of,
or the sale of, collection from, or other realization upon, any of the
Collateral, (ii) the exercise or enforcement of any of the interests, rights or
remedies of Secured Party hereunder, (iii) the failure by any Grantor to perform
or observe any of the provisions hereof, or (iv) the proof, allowance,
protection, administration, treatment, discharge, collection or enforcement of
any of the Secured Obligations or any of the Collateral in any bankruptcy case
or insolvency, reorganization, receivership, dissolution or liquidation
proceeding of or affecting any Loan Party.
4.7. SURPLUS, DEFICIENCY. Any surplus proceeds of any sale or other
disposition by Secured Party of any Collateral remaining after Discharge of the
Obligations and after all Secured Obligations are paid in full and in cash shall
be paid over to the Grantor entitled thereto, or to whomever may be lawfully
entitled to receive such surplus or as a court of competent jurisdiction may
direct, but prior to Discharge of the Obligations, such surplus proceeds may be
retained by Secured Party and held as Collateral until Discharge of the
Obligations. The Borrower and each Guarantor shall be and remain liable for any
deficiency.
4.8. INFORMATION RELATED TO THE COLLATERAL. Upon the occurrence and
continuation of an Event of Default, if Secured Party determines to sell or
otherwise Transfer any Collateral, each Grantor shall, and shall cause any
Person controlled by it to, furnish to Secured Party all information Secured
Party may request that pertains or could pertain to the value or condition of
the Collateral or that would or might facilitate such sale or Transfer. Secured
Party shall have the right, notwithstanding any confidentiality obligation or
agreement otherwise
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binding upon it, freely to disclose such information, and any and all other
information (including confidential information) pertaining in any manner to the
Collateral or the assets, liabilities, results of operations, business or
prospects of any Loan Party, freely to any Person that Secured Party in good
faith believes to be a potential or prospective purchaser in such sale or
Transfer, without liability for any disclosure, dissemination or use that may be
made as to such information by any such Person.
4.9. SALE EXEMPT FROM REGISTRATION. Secured Party shall be entitled at
any such sale or other Transfer, if it deems it advisable to do so, to restrict
the prospective bidders or purchasers to Persons who will provide assurances
satisfactory to Secured Party that the Collateral may be offered and sold to
them without registration under the Securities Act of 1933, as amended, and
without registration or qualification under any other applicable state, federal
or foreign law. Upon the consummation of any such sale, Secured Party shall have
the right to assign, transfer and deliver to the purchaser or purchasers thereof
the Collateral so sold. Secured Party may solicit offers to buy the Collateral,
or any part of it, from a limited number of investors deemed by Secured Party,
in its good faith judgment or in good faith reliance upon advice of its counsel,
to meet the requirements to purchase securities under Regulation D promulgated
under the Securities Act of 1933, as amended, as then in effect (or any other
Requirement of Law of similar import). If Secured Party solicits such offers
from such investors, then the acceptance by Secured Party of the highest offer
obtained from any of them shall be deemed to be a commercially reasonable method
of disposition of the Collateral.
4.10. RIGHTS AND REMEDIES CUMULATIVE. The rights provided for in this
Agreement and the other Loan Documents are cumulative and are not exclusive of
any other rights, powers or privileges or remedies provided by law or in equity,
or under any other instrument, document or agreement. Secured Party may exercise
and enforce each right and remedy available to it either before or concurrently
with or after, and independently of, any exercise or enforcement of any other
right or remedy of Secured Party or any Holder of any Secured Obligation against
any Person or property. All such rights and remedies shall be cumulative, and no
one of them shall exclude or preclude any other.
4.11. NO DIRECT ENFORCEMENT BY BENEFICIARIES. Secured Party may freely
exercise and enforce any and all of its rights and remedies hereunder, for the
benefit of the Beneficiaries. No Beneficiary, other than Secured Party, shall
have any independent right to collect, take possession of, foreclose against or
otherwise enforce the security interests granted hereby.
SECTION V.
CONCERNING THE SECURED PARTY
5.1. AGENT FOR HOLDERS. Secured Party is executing and delivering this
Agreement, and accepting the security interests, rights, remedies, powers and
benefits conferred upon Secured Party hereby, both for its own benefit and as
agent for all present and future Holders of Secured Obligations. The provisions
of the Term Loan Agreement and all rights,
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powers, immunities and indemnities granted to Secured Party under the Term Loan
Agreement or any other Loan Document, or under any separate agreement made by or
otherwise binding upon any Holder of Secured Obligations, shall apply in respect
of such execution, delivery and acceptance and in respect of any and all actions
taken or omitted by Secured Party under, in connection with or in respect of
this Agreement.
5.2. AGENT SHALL BE THE SECURED PARTY. Secured Party shall at all
times be the same Person that is the Agent under the Term Loan Agreement.
Written notice of resignation by the Agent pursuant to subsection 10.9 of the
Term Loan Agreement shall also constitute notice of resignation as Secured Party
under this Agreement; and appointment of a successor Agent pursuant to
subsection 10.9 of the Term Loan Agreement shall also constitute appointment of
a successor Secured Party under this Agreement. Upon the acceptance of any
appointment as Agent under subsection 10.9 of the Term Loan Agreement by a
successor Agent, the successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring
Secured Party under this Agreement, and the retiring Secured Party under this
Agreement shall promptly (a) transfer to such successor Secured Party all sums,
securities and other items of Collateral held hereunder, together with all
records and other documents necessary or appropriate in connection with the
performance of the duties of the successor Secured Party under this Agreement,
and (b) execute and deliver to such successor Secured Party such amendments to
financing statements, and take such other actions, as may be necessary or
appropriate in connection with the assignment to such successor Secured Party of
the security interests created hereunder, whereupon such retiring Secured Party
shall be discharged from its duties and obligations under this Agreement. After
any retiring Agent's resignation hereunder as Secured Party, the provisions of
this Agreement shall inure to its benefit as to any actions taken or omitted to
be taken by it under this Agreement while it was Secured Party hereunder.
5.3. NO ASSURANCES OR LIABILITY. Secured Party makes no statement,
promise, representation or warranty whatsoever, and shall have no liability
whatsoever, to any Holder of any Secured Obligations as to the authorization,
execution, delivery, legality, enforceability or sufficiency of this Agreement
or as to the creation, Perfection, priority, or enforceability of any security
interests granted hereunder or as to existence, ownership, quality, condition,
value or sufficiency of any Collateral or as to any other matter whatsoever.
5.4. HOLDERS BOUND. Except where the consent of others may be required
pursuant to the express provisions of subsection 11.3 of the Term Loan
Agreement, any modification, amendment, waiver, release, termination or
discharge of any security interest, right, remedy, power or benefit conferred
upon Secured Party that is effectuated in a writing signed by Secured Party
shall be binding upon all Holders of Secured Obligations if it is (i) authorized
pursuant to any provision of the Term Loan Agreement or any other Loan Document,
(ii) required by law or (iii) authorized or ratified either (A) by the Majority
Lenders or (B) by the Holders of at least a majority in outstanding principal
amount of the Secured Obligations (other than contingent or unliquidated Secured
Obligations).
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SECTION VI.
MISCELLANEOUS PROVISIONS
6.1. CONTINUING SECURITY INTERESTS; RELEASE. This Agreement creates
continuing security interests in the Collateral and shall (a) remain in full
force and effect until the Discharge of the Obligations, (b) be binding upon
each Grantor and its successors and assigns, and (c) inure, together with the
rights and remedies of Secured Party hereunder, to the benefit of and be
enforceable by Secured Party and its successors, transferees and assigns acting
in the capacity of Agent under the Term Loan Agreement. Subject to and upon
Discharge of the Obligations or in connection with a sale or other disposition
of any Collateral permitted under the Term Loan Agreement, Secured Party shall
(as soon as reasonably practicable after it receives from Grantors a written
request for release of the Collateral) execute and deliver to Grantors an
instrument in form and substance satisfactory to Secured Party releasing (on a
quitclaim basis, without recourse, without warranty, and without any liability
whatsoever) any security interest Secured Party may then hold in the Collateral
and thereupon Secured Party shall, at Grantors' expense, execute and deliver to
Grantors such Uniform Commercial Code termination statements and other like
documents as Grantors may reasonably request to evidence such release.
6.2. AMENDMENTS; ETC. Except with respect to any Joinder Agreement
referred to in Section 6.10, no amendment or waiver of any provision of this
Agreement, or consent to any departure by any Grantor herefrom, shall in any
event be effective unless the same shall be in writing and signed by Secured
Party, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which it was given.
6.3. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure
or delay on the part of Secured Party in the exercise of any power, right or
privilege hereunder shall impair such power, right or privilege or be construed
to be a waiver of any default or acquiescence therein, nor shall any single or
partial exercise of any such power, right or privilege preclude any other or
further exercise thereof or of any other power, right or privilege. All rights
and remedies existing under this Agreement are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
6.4. NOTICES. Any and all notices and communications to be given to
any Grantor or Secured Party shall be given in accordance with subsection 11.2
of the Term Loan Agreement, and shall be effective as provided therein.
6.5. SEVERABILITY. In case any provision in or obligation under this
Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.
6.6. HEADINGS. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
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6.7. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS
THEREOF EXCEPT TO THE EXTENT THAT THE NEW YORK UNIFORM COMMERCIAL CODE PROVIDES
THAT THE PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER,
IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
Notwithstanding the foregoing, the creation, Perfection, priority and
enforcement of a security interest in any deposit account shall be governed by
the laws of the state in which the depositary bank, or branch bank, maintaining
such deposit account is located.
6.8. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. Each Grantor
hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which it
is a party, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the courts of the State of
New York, the courts of the United States of America for the Southern District
of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the venue
of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to it at its address
set forth in subsection 10.2 of the Term Loan Agreement or at such other address
of which the Secured Party shall have been notified pursuant thereto, such
service being hereby acknowledged by such Grantor to be sufficient for personal
jurisdiction in any action against such Grantor in any such court and to be
otherwise effective and binding service in every respect;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may -have to claim or recover in any legal action or proceeding referred to in
this subsection any special, exemplary, punitive or consequential damages.
6.9. WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED
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UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to
be all-encompassing of any and all disputes that may be filed in any court and
that relate to the subject matter of this transaction, including without
limitation contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. Grantors and Secured Party each acknowledge
that this waiver is a material inducement for Grantors and Secured Party to
enter into a business relationship, that Grantors and Secured Party have already
relied on this waiver in entering into this Agreement and that each will
continue to rely on this waiver in their related future dealings. Each party
hereto further warrants and represents that it has reviewed this waiver with its
legal counsel and that it knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING
THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a
written consent to a trial by the court.
6.10. ADDITIONAL GRANTORS. The initial Grantors hereunder shall be
Marketing and Telecom. From time to time subsequent to the date hereof,
additional Subsidiaries of the Borrower may become party hereto, as additional
Grantors (each an "ADDITIONAL GRANTOR"), by executing a Joinder Agreement
substantially in the form attached hereto as EXHIBIT A. Upon delivery of any
Joinder Agreement to the Agent, notice of which is hereby waived by each
Grantor, each such Additional Grantor shall be a Grantor and shall be as fully a
party hereto as if such Additional Grantor were an original signatory hereof.
Each Grantor expressly agrees that its obligations arising hereunder shall not
be affected or diminished by the addition or release of any other Grantor
hereunder, nor by any election of any Beneficiary not to cause any Subsidiary of
Borrower to become an Additional Grantor hereunder. This Agreement shall be
fully effective as to any Grantor that is or becomes a party hereto regardless
of whether any other Person becomes or fails to become or ceases to be a Grantor
hereunder.
6.11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, Grantors and Secured Party have executed this
Subsidiary Pledge and Security Agreement as of the day and year first above
written.
GRANTORS
FLASHNET MARKETING, INC.,
a Texas corporation
By: /s/ M. Scott Leslie
----------------------------
Name: M. Scott Leslie
Title: President & Treasurer
FLASHNET TELECOM, INC.,
a Texas corporation
By: /s/ M. Scott Leslie
----------------------------
Name: M. Scott Leslie
Title: President
SECURED PARTY
Accepted and agreed as of
the day and year first above written:
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as Agent
By: /s/ Richard Katz
--------------------------------------
Name: Richard Katz
Title: Authorized Signatory
<PAGE>
EXECUTION COPY
TRADEMARK SECURITY AGREEMENT
TRADEMARK SECURITY AGREEMENT, dated as of January 15, 1999, by
FLASHNET COMMUNICATIONS, INC., a Texas corporation ("GRANTOR"), in favor of
GOLDMAN SACHS CREDIT PARTNERS L.P., in its capacity as Agent for Lenders.
W I T N E S S E T H:
WHEREAS, pursuant to that certain Term Loan Agreement dated as of the
date hereof by and among Grantor, the Persons named therein as Guarantors, the
Administrative Agent and the Persons signatory thereto from time to time as
Lenders (including all annexes, exhibits or schedules thereto, as from time to
time amended, restated, supplemented or otherwise modified, the "LOAN
AGREEMENT"), Borrower has requested that Term Loans be made to the Borrower by
the Agent and the Lenders; and
WHEREAS, Agent and Lenders are willing to make the Term Loans as
provided for in the Loan Agreement, but only upon the condition, among others,
that Grantor shall have executed and delivered to Agent, for itself and the
ratable benefit of Lenders, that certain Borrower Pledge and Security Agreement
dated as of the date herewith (including all annexes, exhibits or schedules
thereto, as from time to time amended, restated, supplemented or otherwise
modified, the "SECURITY AGREEMENT"); and
WHEREAS, pursuant to the Security Agreement, Grantor is required to
execute and deliver to Agent, for itself and the ratable benefit of Lenders,
this Trademark Security Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor hereby agrees as follows:
1. DEFINED TERMS. All capitalized terms used but not otherwise defined
herein have the meanings given to them in the Loan Agreement.
2. GRANT OF SECURITY INTEREST IN TRADEMARK COLLATERAL. Grantor hereby
grants to Agent, on behalf of itself and Lenders, a continuing first priority
security interest in all of Grantor's right, title and interest in, to and under
the following, whether presently existing or hereafter created or acquired
(collectively, the "TRADEMARK COLLATERAL"):
(a) all of its Trademarks and Trademark Licenses to which it is a
party including those referred to on Schedule I hereto;
(b) all reissues, continuations or extensions of the foregoing;
<PAGE>
(c) all goodwill of the business connected with the use of, and
symbolized by, each Trademark and each Trademark License; and
(d) all products and proceeds of the foregoing, including,
without limitation, any claim by Grantor against third parties for past,
present or future (i) infringement or dilution of any Trademark or
Trademark licensed under any Trademark License or (ii) injury to the
goodwill associated with any Trademark or any Trademark licensed under any
Trademark License.
3. SECURITY AGREEMENT. The security interests granted pursuant to this
Trademark Security Agreement are granted in conjunction with the security
interests granted to Agent, on behalf of itself and Lenders, pursuant to the
Security Agreement. Grantor hereby acknowledges and affirms that the rights and
remedies of Agent with respect to the security interest in the Trademark
Collateral made and granted hereby are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated by reference
herein as if fully set forth herein.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, Grantor has caused this Trademark Security
Agreement to be executed and delivered by its duly authorized officer as of the
date first set forth above.
FLASHNET COMMUNICATIONS, INC.
By: /s/ M. Scott Leslie
---------------------------
Name: M. Scott Leslie
-------------------------
Title President & Secretary
-------------------------
ACCEPTED AND ACKNOWLEDGED BY:
GOLDMAN SACHS CREDIT PARTNERS L.P.
By: /s/ Richard Katz
-------------------------------
Name: Richard Katz
Title: Authorized Signatory
ACKNOWLEDGMENT OF GRANTOR
STATE OF TEXAS )
------------
) ss.
COUNTY OF TARRANT )
------------
On this 21st day of January, 1999 before me personally appeared
M. Scott Leslie, proved to me on the basis of satisfactory evidence to be
the person who executed the foregoing instrument on behalf of FlashNet
Communications, who being by me duly sworn did depose and say that he is
an authorized officer of said corporation, that the said instrument was signed
on behalf of said corporation as authorized by its Board of Directors and that
he acknowledged said instrument to be the free act and deed of said corporation.
/s/ Molly M. Smith
-------------------------------------
Notary Public
{seal}
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SCHEDULE I
to
TRADEMARK SECURITY AGREEMENT
TRADEMARK APPLICATIONS
Mark: F FLASHNET
Application No.: 75062450 File Date: 2/23/96
4
<PAGE>
EXECUTION COPY
THE SECURITY EVIDENCED OR CONSTITUTED HEREBY HAS BEEN ACQUIRED FOR INVESTMENT
AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
SECURITY MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE
REGISTRATION PROVISIONS OF SAID ACT (OR AN EXEMPTION THEREFROM) HAVE BEEN
COMPLIED WITH.
COMMON STOCK PURCHASE OPTION
This Common Stock Purchase Option (this "AGREEMENT"), dated as of January
15, 1999, is entered into by and between GOLDMAN SACHS CREDIT PARTNERS L.P., a
Bermuda limited partnership (the "PURCHASER"), and FLASHNET COMMUNICATIONS,
INC., a Texas corporation (the "COMPANY").
The Company desires to provide the Purchaser with the unilateral right to
subscribe for and purchase from the Company shares of the Company's common
stock, no par value per share (the "SHARES"), under certain circumstances. This
Agreement is the Common Stock Purchase Option contemplated by that certain Term
Loan Agreement dated as of the date hereof by and among the Company, the
Guarantors named therein, the Lenders named therein and the Purchaser as
administrative agent (the "TERM LOAN AGREEMENT"). Capitalized terms used herein
without definitions have the meanings assigned to them in the Term Loan
Agreement. The Company and the Purchaser hereby agree as follows:
1. OPTION TO PURCHASE SHARES. Subject to the terms and conditions set forth
herein, the Company grants to the Purchaser an option to purchase up to the
Specified Number of Shares at the Applicable Price (the "OPTION") on one or more
Closing Dates as described below by giving notice to the Company at any time or
times during the Option Period referred to in Section 6 below. The Option may be
exercised in whole or in part solely at the discretion of the Purchaser. The
Company agrees that under no circumstance will the Purchaser be obligated to
purchase any Shares pursuant to this Agreement. On the date hereof, the
Purchaser hereby assigns all of its rights hereunder to Goldman, Sachs & Co. who
shall be deemed the "PURCHASER" for all purposes hereunder. The Company hereby
agrees and consents to such assignment to Goldman, Sachs & Co. In connection
with such assignment, Goldman, Sachs & Co. has delivered to the Company a
written representation to the effect that Goldman, Sachs & Co. is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act.
The "APPLICABLE PRICE" for the Shares purchased under this Agreement shall
be the price per share equal to the price per share at which Shares are first
sold to the public (prior to any underwriting discounts or commissions) in the
initial public offering ("IPO") of the Company; PROVIDED, HOWEVER that in no
event shall the Applicable Price be less than $8.00 per Share, subject to
appropriate adjustments in the event of stock
<PAGE>
splits, recombinations, reclassifications, distributions or stock dividends, or
other similar capital adjustments. The "SPECIFIED NUMBER" of Shares subject to
the Option granted pursuant to this Agreement shall be determined by dividing
$5.0 million by the Applicable Price. Payment of the Applicable Price may be
made either in cash (in next day funds) or by surrendering Term Notes valued at
the Original Principal Amount thereof. The "ORIGINAL PRINCIPAL AMOUNT" of any
Term Note shall be the original principal amount thereof as of the date hereof,
without giving effect to any subsequent Capitalized Interest or accrual of
interest. In the event that any Shares purchased pursuant to this Agreement are
paid for in cash after the Term Loans and all Obligations with respect thereto
have been repaid in full but prior to the date that is the sixth month
anniversary of the date of the execution of the Term Loan Agreement, Goldman
Sachs Credit Partners L.P. will refund a pro rata portion of the Applicable
Repayment Fees based on the actual Specified Number of Shares paid for in cash.
In the event Shares are purchased by surrendering the Term Notes, the Company
shall pay to Goldman Sachs Credit Partners L.P., by wire transfer of immediately
available funds to an account designated by Goldman Sachs Credit Partners L.P.,
an amount equal to the Capitalized Interest thereon plus accrued and unpaid
interest thereon, plus, on and after the date that is the sixth month
anniversary of the date of execution of the Term Loan Agreement, the Applicable
Repayment Fee to the Closing Date.
2. CLOSING. Each election to purchase Shares pursuant to this Option shall
take place within 180 days after the consummation of the IPO of the Company (the
"CLOSING DATE") and such Shares shall be purchased at such time as the Purchaser
shall direct on at least three Business Days' prior notice to the Company. The
Closing shall occur at the offices of Latham & Watkins, 885 Third Avenue, New
York, New York 10022, or at such other place as the parties may mutually agree.
Upon payment of the Applicable Price in full as provided above, the Company will
deliver to the Purchaser, a certificate or certificates representing the Shares
to be purchased, in such denominations and registered in such names as the
Purchaser shall request, subject to Section 4(b) below.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Purchaser as follows:
(a) CORPORATE ORGANIZATION AND AUTHORITY. The Company: (a) is a corporation
duly organized, validly existing, authorized to exercise all its corporate
powers, rights and privileges, and is in good standing in the State of Texas;
(b) has the corporate power and corporate authority to own and operate its
properties and to carry on its business as now conducted and as proposed to be
conducted; and (c) is qualified as a foreign corporation in all jurisdictions in
which such qualification is required.
(b) AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and shareholders necessary for the authorization, execution,
delivery and performance of all obligations under this Agreement and for the
issuance and delivery of the Shares has been taken, and this Agreement
constitutes a legally binding
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and valid obligation of the Company enforceable in accordance with its terms.
(c) VALID ISSUANCE OF SECURITIES The Shares when issued in accordance with
the terms hereof will be duly and validly issued, fully paid and nonassessable
and free of preemptive or similar rights and, will be issued in compliance with
all applicable federal and state securities laws regarding registration or
qualification. The Shares have been duly authorized and validly reserved for
issuance.
(d) NO CONFLICT. The execution, delivery and performance of this Agreement
will not result in any violation of, be in conflict with, or constitute a
default under, with or without the passage of time or the giving of notice: (i)
any provision of the Company's Articles of Incorporation or Bylaws; (ii) any
provision of any judgment, decree or order to which the Company or any of its
subsidiaries is a party or by which it is bound; (iii) any mortgage, indenture,
contract or other material agreement, obligation or commitment to which the
Company or its subsidiaries is a party or by which any of them is bound; or (iv)
any law, statute, rule or regulation applicable to the Company.
4. COVENANTS AND AGREEMENTS OF THE COMPANY AND THE PURCHASER
The Company and the Purchaser, each covenants and agrees as follows:
(a) OPINION OF COUNSEL. On each Closing Date, the Company shall arrange to
deliver to the Purchaser an opinion of its counsel, dated such Closing Date and
addressed to the Purchaser and in form and substance satisfactory to the
Purchaser, confirming the representations and warranties stated in Sections
3(a)-(d).
(b) PRIVATE PLACEMENT EXEMPTION. The Purchaser shall deliver to the
Company, prior to the exercise of the Option, such information, representations,
and warranties as the Company may reasonably request in order for the Company to
be able to satisfy itself that the Shares to be acquired pursuant to the
exercise of the Option are being acquired in accordance with the terms of an
applicable exemption from the securities registration requirements of applicable
federal and state laws.
(c) FURTHER ASSURANCES. The Company shall use its best efforts to take all
actions and to do all things necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement and to cause its
representations and warranties contained in Section 3 of this Agreement to be
true as of each Closing Date, as if made on and as of such date.
(d) INFORMATION AND REPORTS. During the Option Period, whether or not the
Term Loans are outstanding, the Company shall provide to the Purchaser all
information, reports and other such documents that it would have had to provide
to the Lenders under Section 4.4 of the Term Loan Agreement had it still been
effective.
5. CONDITIONS TO CLOSING. The obligations of the Company hereunder shall be
conditioned upon the Purchaser's payment in full of the Applicable Price and
the
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<PAGE>
Purchaser's compliance with all of its obligations hereunder.
6. TERM AND TERMINATION OF OPTION. The term of the Option (the "OPTION
PERIOD") shall terminate at 5:00 p.m. Eastern time on the date of the first
to occur of the following events:
(a) Expiration of the 180 day period immediately following the IPO of the
Company.
(b) The later to occur of (i) the second anniversary of the date hereof and
(ii) the date that is 180 days immediately succeeding the date that the
principal of, the Applicable Repayment Fee and accrued and unpaid interest on
the Term Loans and all other Obligations are paid in full.
(c) On and after the date of the IPO of the Company, the day immediately
preceding the consummation of a: (i) dissolution or liquidation of the Company;
(ii) merger of the Company into another corporation, or any consolidation, share
exchange, combination, reorganization, or like transaction in which the Company
is not the survivor; (iii) sale or transfer (other than as security for the
Company's obligations) of at least a majority of the assets of the Company, or
(iv) sale or transfer of 50% or more of the issued and outstanding common stock
by the holders thereof in a single transaction or in a series of related
transactions, PROVIDED, HOWEVER, that with respect to clauses (ii), (iii) and
(iv) the Purchaser shall have been given reasonable notice by the Company of the
event specified in such clauses, the Purchaser shall have received from the
Company all information reasonably requested with respect to the event specified
in such clauses, and the Purchaser shall have had a reasonable opportunity to
exercise the Option prior to the date of the occurrence of the event specified
in clauses (ii), (iii) and (iv). The Company shall use its best efforts to
provide written notice to the Purchaser of such dissolution, liquidation,
merger, consolidation, share exchange, combination, reorganization, sale,
transfer, or like transaction, at least thirty (30) days prior to the closing of
such transaction to permit the Purchaser to exercise the Option to the extent it
is then exercisable.
(d) If an IPO of the Company has not occurred, the day immediately
preceding the consummation of a: (i) dissolution or liquidation of the Company;
(ii) merger of the Company into another corporation, or any consolidation, share
exchange, combination, reorganization, or like transaction in which the Company
is not the survivor; provided, however, that this clause (ii) shall not be
applicable with respect to any such merger, consolidation, share exchange,
combination, reorganization or like transaction between the Company and a Person
more than 50% of whose outstanding voting securities, or any general
partnership, joint venture, or similar entity more than 50% of whose total
equity interests is owned, directly or indirectly, by the Borrower, any
Subsidiary of the Borrower or any of the holders of the corporate stock of the
Borrower, or any limited partnership of which the Borrower or any Subsidiary of
the Borrower or any holder of the corporate stock of the Borrower is a general
partner; (iii) sale or transfer
4
<PAGE>
(other than as security for the Company's obligations) of at least a majority of
the assets of the Company, or (iv) sale or transfer of 50% or more of the issued
and outstanding Common Stock by the holders thereof in a single transaction or
in a series of related transactions.
Upon the expiration of the Option Period, this Option, and all unexercised
rights granted to the Purchaser hereunder shall terminate and thereafter be null
and void. The Company shall continue to be obligated to issue any Shares as to
which notice of exercise of this Option was given prior to the expiration of the
Option Period and all other actions with regard to those Shares required by this
Agreement.
7. RIGHTS AS STOCKHOLDER. The Purchaser shall have no rights as a
stockholder with respect to any Shares covered by the Option until the date of
any notice of exercise is given pursuant to Section 1 hereof and the Purchaser's
fulfillment of all obligations hereunder. No adjustment to the Option shall be
made pursuant to Section 9 hereof for dividends paid or declared on or with
respect to the Company's common stock in cash, securities other than common
stock, or other property, for which the record date is prior to the date of
exercise hereof. However, the Purchaser shall have all rights of a stockholder
with respect to any Shares covered by the Option from the date of any notice of
exercise given pursuant to Section 1 hereof and the Purchaser's fulfillment of
all obligations hereunder.
8. LOCK-UP PERIOD. The Purchaser hereby agrees that in connection with the
IPO of the Company, the Purchaser shall not sell or otherwise transfer any
Shares or other securities of the Company during the 180-day period following
the effective date of the IPO registration statement of the Company or for a
60-day period following the date of the exercise of the Option pursuant to
Section 1 hereof, whichever period expires later (the "Market Standoff Period").
The Company may impose stop-transfer instructions with respect to securities
subject to the foregoing restrictions until the end of such Market Standoff
Period. Notwithstanding any other provision in this Agreement to the contrary,
during the Market Standoff Period, the Purchaser shall have the right to
participate in any registration under the Securities Act by the Company of any
common stock or securities of the Company as set forth in the Equity
Registration Rights Agreement.
9. CHANGE IN CAPITALIZATION. If the number of outstanding shares of the
Company's common stock shall be increased or decreased by a change in par value,
split-up, stock split, reclassification, distribution or common stock dividend,
or other similar capital adjustment, an appropriate adjustment shall be made by
the Board of Directors of the Company in the number and kind of shares as to
which the Option, or the portion thereof then unexercised, shall be or become
exercisable. The adjustment shall be made without change in the total price
applicable to the unexercised portion of the Option and with a corresponding
adjustment in the Applicable Price. No fractional shares shall be issued or made
subject to the Option in making such adjustment. All adjustments made by the
Board of Directors of the Company under this Section 9 shall be final, binding,
and conclusive.
10. LEGENDS. Each certificate representing the Shares purchased upon
exercise of this
5
<PAGE>
Option shall be endorsed with a legend substantially similar to the following
legend and the Purchaser shall not make any transfer of the Shares without first
complying with the restrictions on transfer described in such legend:
TRANSFER IS RESTRICTED
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, OR HYPOTHECATED UNLESS (1) THERE IS AN EFFECTIVE
REGISTRATION UNDER THE ACT COVERING SUCH SECURITIES, (2) THE TRANSFER IS
MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER THE ACT, OR (3) THE
ISSUER RECEIVES AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
ISSUER, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT.
The Purchaser agrees that the Company may also endorse any other
legends required by applicable federal or state securities laws.
The Company need not register a transfer of the Shares, and may also
instruct its transfer agent, if any, not to register the transfer of the
Shares unless the conditions specified in the foregoing legends are
satisfied.
11. MISCELLANEOUS.
(a) This Agreement may be executed in one or more counterparts, and
such counterparts shall constitute but one and the same agreement.
(b) The Company may not assign any of its rights nor be relieved of
its obligations hereunder without the prior written consent of the
Purchaser. The Purchaser may assign any of its rights hereunder in
accordance with applicable law and the restrictions on transfer described
in the legend endorsed hereon.
(c) The Company acknowledges the existence of that certain
Registration Rights Agreement dated as of May 7, 1998, as amended, by and
between the Company and the Purchaser and certain other holders of the
Company's common stock named therein.
12. CHOICE OF LAW; VENUE. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York without
regard to principles of conflicts of laws. The parties hereto waive any
trial by jury with respect to any action or proceeding arising in
connection with or as a result of this Agreement. The Company agrees that
any suit or proceeding arising in respect to this Agreement will be tried
exclusively in the U.S. District Court for the Southern District of New
York or, if that court does not have subject matter jurisdiction, in any
state court located in the City of
6
<PAGE>
New York and the Company agrees to submit to the jurisdiction of, and venue
in, such courts.
SIGNATURE PAGE FOLLOWS
7
<PAGE>
13. Notice. All notices or communications provided for hereunder shall be
duly given if in writing and delivered in person or mailed by first class
mail (registered or certified, return receipt requested), telecopier or
overnight air courier guaranteeing next day delivery, to the other Person.
All notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five Business Days
after being deposited in the mail, postage prepaid, if mailed; when receipt
acknowledged, if telecopied; and the next Business Day after timely
delivery to the courier, if sent by overnight air courier guaranteeing
next-day delivery. If a notice or communication is mailed in the manner
provided herein within the time prescribed, it is duly given, whether or
not the addressee receives it.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the day and year first above written.
GOLDMAN SACHS CREDIT PARTNERS L.P., as
Purchaser
By: /s/ Richard Katz
-------------------------
Name: Richard Katz
Title: Authorized Signatory
GOLDMAN, SACHS & Co., as authorized assignee of the
Purchaser
By: /s/ Goldman, Sachs & Co.
--------------------------
(Goldman, Sachs & Co.)
FLASHNET COMMUNICATIONS, INC., as the
Company
By: /s/ M. Scott Leslie
----------------------------
Name: M. Scott Leslie
Title: President & Secretary
<PAGE>
EXECUTION COPY
SECOND AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THIS SECOND AMENDMENT TO REGISTRATION RIGHTS AGREEMENT (this
"AGREEMENT"), is made and entered into as of January 15, 1999, by and among: (i)
FlashNet Communications, Inc., a Texas corporation (the "COMPANY"); (ii) Apogee
Fund LP, a Delaware limited partnership ("APOGEE"); (iii) Emmett M. Murphy
("MURPHY"); (iv) ISP Investors, L.P., a Texas limited partnership ("ISP"); (v)
Scott & Julie Kleberg Investment Partnership, Ltd., a Texas limited partnership
("KLEBERG PARTNERS"); (vi) J. Luther King, Jr. ("KING"); (vii) Scot C. Hollmann
("HOLLMANN"); (viii) Fourteen Hill Capital, LP, a Delaware limited partnership
("FHC"); (ix) Applied Telecommunications Technologies, Inc., a Delaware
corporation ("ATTI"); (x) Paul Castro ("CASTRO"); (xi) UD Donna Manning IRA
("MANNING"); (xii) Faith Griffin ("GRIFFIN"); (xiii) Youssef Squali ("SQUALI");
(xiv) Jeffrey N. Wilkes ("WILKES"); (xv) George P. Jenkins Insurance Trust, U/A
6/28/91, James P. Jenkins, Robert N. Jenkins and Richard G. Jenkins, Trustees
("JENKINS TRUST"); (xvi) James P. Jenkins ("JENKINS"); (xvii) Frank A. Klepetko
("KLEPETKO"); (xviii) Q Ventures, L.P., a Texas limited partnership ("Q
VENTURES"); (xix) The R. Denny Alexander Family Limited Partnership, a Texas
limited partnership ("ALEXANDER PARTNERSHIP"); and (xx) Goldman Sachs Credit
Partners L.P. ("GSCP").
W I T N E S S E T H:
WHEREAS, the Company, Apogee, Murphy, ISP, Scott M. Kleberg, King,
Hollmann and FHC (Apogee, Murphy, ISP, Scott M. Kleberg, King, Hollmann and FHC
being collectively referred to hereinafter as the "FIRST ROUND BUYERS") entered
into that certain Stock Purchase Agreement, dated as of May 7, 1998 (the
"PURCHASE AGREEMENT"), pursuant to which the First Round Buyers purchased an
aggregate of 749,587 shares (the "FIRST ROUND SHARES") of the Series A
Convertible Preferred Stock, $1.00 par value per share, of the Company ("SERIES
A PREFERRED"); and
WHEREAS, the Company and the First Round Buyers entered into that certain
Registration Rights Agreement, dated as of May 7, 1998 (the "REGISTRATION
AGREEMENT"); and
WHEREAS, on August 3, 1998, the Company, the First Round Buyers, ATTI,
Castro, Manning, Griffin, Squali, Wilkes, Jenkins Trust, Jenkins, Klepetko and Q
Ventures (ATTI, Castro, FHC, ISP, Manning, Griffin, Squali, Wilkes, Jenkins
Trust, Jenkins, Klepetko, Scott M. Kleberg, King, Hollmann and Q Ventures being
collectively referred to herein as the "SECOND ROUND BUYERS") entered into that
certain First Amendment to Stock Purchase Agreement and, pursuant to the
Purchase Agreement, as amended, the Company issued and sold to the Second Round
Buyers, and the Second Round Buyers purchased from the Company, an aggregate of
614,498 shares (the "SECOND ROUND SHARES") of the Series A Preferred; and
WHEREAS, in connection therewith, pursuant to that certain First
Amendment to Registration Rights Agreement dated as of August 3, 1998, the
Second Round Buyers became parties to the Registration Agreement; and
<PAGE>
WHEREAS, on September 2, 1998, Scott M. Kleberg transferred 28,829 shares
of the Series A Preferred to the Kleberg Partnership and 4,119 shares of the
Series A Preferred to the Alexander Partnership, and in connection therewith
assigned his rights and obligations under the Registration Agreement, as
amended, to such entities; and
WHEREAS, simultaneously with the execution of this Agreement, the Company
and GSCP have entered into that certain Term Loan Agreement dated as of the date
hereof by and among the Company, the guarantors named therein, the lenders named
therein and GSCP as administrative agent (the "TERM LOAN AGREEMENT"); and
WHEREAS, in connection with the Term Loan Agreement, the Company and GSCP
have entered into that certain Common Stock Purchase Option dated as of the date
hereof (the "COMMON STOCK PURCHASE OPTION"), pursuant to which the Company has
granted to GSCP the option to purchase shares of the Company's common stock
under certain circumstances (such shares, the "OPTION SHARES"); and
WHEREAS, the parties hereto desire that GSCP become party to the
Registration Agreement and that certain provisions in the Registration Agreement
be amended to provide GSCP with additional rights hereunder;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereby agree as follows:
SECTION 1
AMENDMENTS TO REGISTRATION AGREEMENT
1.01. DEFINITION OF INVESTORS. The Registration Agreement is hereby
amended such that the defined terms "INVESTOR" and "INVESTORS" in the
Registration Agreement shall in all cases include GSCP and each other holder of
Option Shares or the right to acquire Option Shares, and GSCP, by its execution
of this Agreement, shall: (i) be deemed to have executed and delivered the
Registration Agreement; and (ii) have all the rights, benefits and obligations
of the Registration Agreement as if they were original signatories thereof.
1.02. SECTION 2.1(a). Section 2.1(a) of the Registration Agreement is
hereby amended and restated to read in full as follows:
2.1. REGISTRATION ON REQUEST.
(a) From time to time after the
Initial Registration Date, upon the written request of the Class A
Requisite Holders or the Class B Requisite Holders that the
Company effect the registration under the Securities Act of all or
a portion (but not less than $1,000,000 in aggregate offering
price) of such holders' Registrable Securities and specifying the
intended method of disposition thereof and whether or not such
requested registration is to be an underwritten offering, the
parties hereto agree as follows:
(i) The Company will
promptly give written notice of such requested registration
to all other holders of Registrable Securities, if any;
(ii) Promptly after the
performance of any obligations imposed under clause (i) of this
Section 2.1(a), and subject to the limitations set forth in
subsection (e) of this Section 2.1, the Company will use its best
efforts to effect the registration under the Securities Act of the
Registrable Securities that the Company has been requested to
register by the Class A Requisite Holders or Class B Requisite
Holders, as applicable, and the other holders of Registrable
Securities by written request given to the Company within thirty
(30) days after the giving of such written notice by the Company
(which request shall specify the intended method of disposition of
such Registrable Securities), all to the extent requisite to
permit the disposition (in accordance with the intended methods
thereof as aforesaid) of the Registrable Securities so to be
registered;
Notwithstanding anything to the contrary set forth in this Section
2.1(a), the Company shall not be obligated to take any action to
notify holders or to effect any registration or qualification
pursuant to this Section 2.1(a) if the Company shall have
furnished to the holders requesting registration a certificate
signed by both the President and the Chief Financial Officer of
the Company stating that, in the good faith judgment of the Board
of Directors of the Company, it would be seriously detrimental to
the Company (with a brief explanation for the basis for such
conclusion) for a registration statement to be filed within the
ninety (90) day period following receipt of the request for
registration and that it is therefore essential and in the best
interests of the Company and its shareholders to defer the filing
of such registration statement, provided that such filing shall
not be deferred beyond the earlier to occur of ninety (90) days
after receipt of the request notice or the discontinuance of the
perceived detriment to the Company.
1.03. SECTIONS 2.1(c), 2.1(f), 2.1(g) AND 2.3(xi). Sections 2.1(c),
2.1(f), 2.1(g) and 2.3(xi) of the Registration Agreement are hereby amended by
deleting the term "Requisite Holders" and by replacing it with the phrase
"Applicable Requisite Holders" each time such term appears in such Section.
1.04. SECTION 2.1(e). Section 2.1(e) of the Registration Agreement is
hereby amended and restated to read in full as follows:
(e) LIMITATIONS ON REQUESTED REGISTRATIONS. The Company's
obligation to take or continue any action to effect a requested
registration under this Section 2.1 shall be subject to the
proviso that the Company
<PAGE>
shall not be required to effect: (i) more than two (2)
registrations requested pursuant to this Section 2.1 by the Class
A Requisite Holders or more than one (1) registration pursuant to
this Clause (i) within any six (6) month period; (ii) more than
two (2) registrations requested pursuant to this Section 2.1 by
the Class B Requisite Holders or more than one (1) registration
pursuant to this Clause (ii) within any six (6) month period;
PROVIDED that, a registration requested pursuant to this Section
2.1 shall not be deemed to have been effected (A) unless a
registration statement with respect thereto has been declared
effective for a period of at least ninety (90) days, (B) if after
a registration statement has become effective, such registration
is interfered with by any stop order, injunction or other order or
requirement of the Commission or other governmental agency or
court for any reason, or (C) if the conditions to closing
specified in the purchase agreement or underwriting agreement
entered into in connection with such registration are not
satisfied, other than as a result of the voluntary termination of
such offering by the class of Requisite Holders that initiated the
registration request (which shall include the failure of the class
of Requisite Holders that initiated the registration request to
take action or to refrain from taking action necessary for the
conditions to closing to be satisfied) and; PROVIDED FURTHER, that
if the Class B Requisite Holders shall have been given the
opportunity to sell at least fifty percent (50%) of the Class B
Registrable Securities in any registration effected by the
Company, then one (1) of the two (2) registrations that may be
requested under this Section 2.1 by the Class B Requisite Holders
shall be deemed to have been satisfied. The Class B Requisite
Holders further agree that the Company shall not be required to
file any registration statement under this Section 2.1 in their
favor while in the process of effecting a registration requested
by the Class A Requisite Holders or within the ninety (90) day
period immediately succeeding the date that a registration
statement has been declared effective pursuant to a registration
request made by the Class A Requisite Holders.
1.05. SECTION 3. Section 3 of the Registration Agreement is hereby
amended by effecting the following changes to the Definitions:
(a) By amending and restating the definition of "Registrable
Securities" to read as follows:
REGISTRABLE SECURITIES: All of the Class A Registrable
Securities and the Class B Registrable Securities taken
together as a whole.
<PAGE>
(b) By amending and restating the definition of "Requisite
Holders" to read as follows:
REQUISITE HOLDERS: All of the Class A Requisite Holders
and the Class B Requisite Holders taken together as a
group.
(c) By adding the following definitions:
APPLICABLE REQUISITE HOLDERS: Either the Class A Requisite
Holders or the Class B Requisite Holders, as applicable,
that have made a request to effect a registration under
Section 2.1(a)
CLASS A REGISTRABLE SECURITIES: All common stock of the Company
that is either: (i) issued by the Company (or a successor thereto)
in redemption or conversion of, or otherwise on account of or in
exchange for, the Preferred Stock issued pursuant to the Proposed
Transaction, or (ii) purchased from time to time by any Investor
other than GSCP prior to the time the common stock is registered
under the Exchange Act, together with any securities issued or
issuable with respect to the foregoing by way of distribution or
in connection with any reorganization or other recapitalization,
merger, consolidation or otherwise. As to any particular
Registrable Securities, once issued such securities shall cease to
be Registrable Securities when (a) a registration statement with
respect to the sale of such securities shall have become effective
under the Securities Act and such securities shall have been
disposed of in accordance with such registration statement, (b)
they shall have been distributed to the public pursuant to Rule
144 or Rule 144A or so long as they are distributable pursuant to
Rule 144k (or any successor provisions) under the Securities Act,
(c) they shall have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent disposition of
them shall not require registration or qualification of them under
the Securities Act or any similar state law then in force, or (d)
they shall have ceased to be outstanding.
CLASS B REGISTRABLE SECURITIES: All common stock of the Company
that is either: (i) issued by the Company (or a successor thereto)
pursuant to the Common Stock Purchase Option, or (ii) purchased
from time to time by GSCP or its assignee prior to the time the
common stock is registered under the Exchange Act, together with
any securities issued or issuable with respect to the foregoing by
way of distribution or in connection with any reorganization or
other recapitalization, merger, consolidation or otherwise. As to
any particular Registrable Securities, once issued such securities
shall cease to be Registrable Securities when (a) a registration
statement with respect to the sale of such securities shall have
become
<PAGE>
effective under the Securities Act and such securities shall have
been disposed of in accordance with such registration statement,
(b) they shall have been distributed to the public pursuant to
Rule 144 or so long as they are distributable pursuant to Rule
144k (or any successor provisions) under the Securities Act, (c)
they shall have been otherwise transferred, new certificates for
them not bearing a legend restricting further transfer shall have
been delivered by the Company and subsequent disposition of them
shall not require registration or qualification of them under the
Securities Act or any similar state law then in force, or (d) they
shall have ceased to be outstanding.
CLASS A REQUISITE HOLDERS: Any holder or holders of more
than thirty (30%) of the Class A Registrable Securities.
CLASS B REQUISITE HOLDERS: Any holder or holders of more
than thirty (30%) of the Class B Registrable Securities.
COMMON STOCK PURCHASE OPTION: That certain Common Stock Purchase
Option dated as of January 15, 1999, by and between the Company,
GSCP and Goldman, Sachs & Co., as amended, modified or
supplemented from time to time.
1.06. SECTION 5. Section 5 of the Registration Statement is hereby
amended by adding the following phrase to the end of the first sentence thereof:
; PROVIDED, HOWEVER, no such amendment shall adversely affect the
right of the holders of the Class B Registrable Securities
hereunder without the prior written consent of the holders of at
least a majority of the Class B Registrable Securities.
1.07. NOTICES. The Registration Agreement is hereby amended by deleting
the Scott M. Kleberg address therefrom and adding the following addresses to the
list of Investor addresses under Section 7 thereof:
SCOTT & JULIE KLEBERG INVESTMENT PARTNERSHIP, LTD.
C/O SMK INVESTMENT TRUST
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TX 76102
TELEFAX: 817-336-7523
THE R. DENNY ALEXANDER FAMILY LIMITED PARTNERSHIP
C/O RDA FAMILY PARTNERSHIP TRUST
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
TELEFAX: 817-336-7523
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.
85 BROAD STREET -- 14TH FLOOR
NEW YORK, NEW YORK 10004
ATTENTION: RICHARD KATZ
TELEPHONE: 212-902-5492
TELEFAX: 212-357-4451
GOLDMAN SACHS CREDIT PARTNERS L.P.
85 BROAD STREET -- 14TH FLOOR
NEW YORK, NEW YORK 10004
ATTENTION: MELISSA FISHER
TELEPHONE: 212-902-6525
TELEFAX: 212-357-4451
GOLDMAN SACHS CREDIT PARTNERS L.P.
85 BROAD STREET -- 6TH FLOOR
NEW YORK, NEW YORK 10004
ATTENTION: LOLA SMALL
TELEPHONE: 212-902-4599
TELEFAX: 212-357-4597
WITH A COPY TO:
LATHAM & WATKINS
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
ATTENTION: KIRK A. DAVENPORT
TELEPHONE: 212-906-1200
TELEFAX: 212-751-4864
SECTION 2
MISCELLANEOUS
2.01. SUCCESSORS AND ASSIGNS. All covenants and agreements contained in
this Agreement by or on behalf of the parties hereto shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto whether
so expressed or not.
2.02. LAW GOVERNING. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
2.03. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter hereof and may not be modified
or amended except in accordance with Section 5 of the Registration Agreement.
<PAGE>
2.04. NO OTHER AMENDMENTS. Except as expressly amended hereby, the
Registration Agreement shall continue in full force and effect in accordance
with the terms and provisions thereof.
SIGNATURE PAGE FOLLOWS
<PAGE>
2.05. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
FLASHNET COMMUNICATIONS, INC.
By: /s/ M. Scott Leslie
----------------------------------
Name: M. Scott Leslie
Title: President & Secretary
APOGEE FUND LP
By: ,
---------------------------------
its General Partner
By:
---------------------------------
Name:
Title:
---------------------------------
Emmett M. Murphy
ISP INVESTORS, L.P.
By: Kleinheinz Capital Partners, LLC,
its General Partner
By: /s/ John Kleinheinz
-----------------------------
Name: John Kleinheinz
Title: G.P.
SCOTT & JULIE KLEBERG INVESTMENT
PARTNERSHIP, LTD
By: SMK Development Trust,
its General Partner
By:
-----------------------------
Scott M. Kleberg
<PAGE>
---------------------------------------
J. Luther King, Jr.
---------------------------------------
Scot C. Hollmann
FOURTEEN HILL CAPITAL, LP
By: Fourteen Hill Management, LLC,
its General Partner
By: Point West Capital Corporation,
its General Partner
By:
-----------------------------
Name:
Title:
APPLIED TELECOMMUNICATIONS
TECHNOLOGIES, INC.
By: /s/ Kevin Stadtler
---------------------------------
Name: Kevin Stadtler
Title: Vice President
---------------------------------------
Paul Castro
UD DONNA MANNING IRA
By:
------------------------------------
Donna (Manning) Horner
<PAGE>
---------------------------------------
Faith Griffin
---------------------------------------
Youssef Squali
---------------------------------------
Jeffrey N. Wilkes
GEORGE P. JENKINS INSURANCE TRUST,
U/A 6/28/91
By:
-----------------------------------
James P. Jenkins, Trustee
---------------------------------------
James P. Jenkins
---------------------------------------
Frank A. Klepetko
Q VENTURES, L.P.
By: Acme Widget, L.P.,
its General Partner
By: Scepter Holdings, Inc.,
its General Partner
By:
-----------------------------------
Name:
Title:
<PAGE>
THE R. DENNY ALEXANDER FAMILY
LIMITED PARTNERSHIP
By: RDA Family Partnership Trust,
its General Partner
By:
-------------------------------
R. Jeffrey Alexander, Trustee
GOLDMAN SACHS CREDIT PARTNERS
L.P.
By: /s/ Richard Katz
-------------------------------
Richard Katz
(Authorized Signatory)
<PAGE>
March 23, 1998
Mr. Todd Wallace
FlashNet Communications
1812 N. Forest Park Blvd.
Ft. Worth, Texas 76102
RE: Offer
Dear Todd:
I look forward to the valuable contribution you will make to the success of
FlashNet Communications in the coming months. A large measure of our future
success will depend upon your work here with our company, and in this regard I
would like to offer the following compensation plan to you:
Position: Director of Information Systems
Base Salary: $4,615.39 per pay period (bi-weekly), which calculates
to $120,000 on an annual basis.
Bonus: To be determined during the next twelve months, however
management must establish proper goals and apply
consistent measurement to determine pay out of bonus
dollars. Up to 15% of annual salary is expected to be
allocated.
Common Stock: Subject to the terms and conditions of Website
Management Company's Non-Qualified Stock Option
Agreement (which agreement is a part of the 1997 Stock
Incentive Plan), and full execution of such agreement,
options to acquire 11,000 shares, to be fully vested in
stages over sixty (60) months, according to the
following vesting schedule:
1,666 shares at $8.00 per share to vest by 5/1/99
1,666 shares at $8.00 per share to vest by 5/1/00
1,666 shares at $8.00 per share to vest by 5/1/01
1,666 shares at $8.00 per share to vest by 5/1/02
1,666 shares at $8.00 per share to vest by 5/1/03
1,666 shares at $8.00 per share to vest by 5/1/04
This shall not serve to limit the number of shares that
may be awarded to you, as adjustments based upon annual
performance reviews will determine additional options
or awards.
Severance: A severance amount equal to four months' salary would
be paid if your employment
<PAGE>
is terminated without cause within twelve months after
a Change In Control. This severance provision shall
expire if a Change In Control has not occurred within
three (3) years of the date of this letter.
Vacation: 3 weeks per 12 month period of employment beginning on
the original hiring date. Notice for days taken must
be in accordance with FlashNet company policy.
Health Benefits: The Company will cover, at no charge to you, the
premium portion of the health plan for you, your family
under the Company's existing HMO/PPO policy with Aetna.
Under the Company's "key employee" provision, we will
waive the 90 day waiting period for your participation
in the plan, and make your instatement effective upon
proper application.
Start Date: The date at which your resignation from your existing
position becomes effective, however not later than May
18, 1998. We require your presence at the earliest
possible date.
I hope that this compensation structure is acceptable to you. If so, please
acknowledge the same by signing below in the space indicated. I look forward to
our success here at FlashNet Communications and to your valued involvement to
make it happen.
Sincerely,
/s/ M. Scott Leslie
- -----------------------
Scott Leslie
President
AGREED AND ACCEPTED this 23rd day of March, 1998
---- -----
BY: /s/ Todd Wallace
----------------------------------
Todd Wallace
<PAGE>
May 27, 1998
Mr. Ed Mayhugh
4749 Chandler Court
Iowa City, IA 52245
RE: Offer
Dear Ed:
FlashNet Communications, Inc. is excited to be making this offer of employment.
We feel that your skills and experience coupled with FlashNet's unique market
position and exciting future represent a dynamic opportunity for us both. To
that end we would like to provide the following offer
Start Date: Not later than June 22, 1998, but possibly sooner
depending upon the response of your current employer
to your notice.
Position: Director of Network Services
General Job Duties: As with most senior management positions, you will be
largely responsible for writing your job description.
In a general sense, you will be responsible for
helping FlashNet build a top-notch network with which
we can achieve our goal of becoming a premium provider
of data services to the residential and commercial
markets. Once you have arrived you will be expected
to assist in formulating a comprehensive departmental
strategic plan.
Base Salary: $3,846.15 per pay period (bi-weekly), which calculates
to $100,000 on an annual basis.
Bonus: During the next three months management must establish
proper goals and apply consistent measurement to
determine pay out of bonus dollars. Up to 20% of
annual salary is to be allocated. Bonus computation
shall be quarterly, based upon pro-rata completion of
goals.
Sign On Bonus: Upon your arrival to work, FlashNet will provide a
one-time signing bonus of $20,000. Such bonus shall
be payable immediately, but shall be considered to
vest over your first year of employment so that in the
event that you separate voluntarily from the Company,
you shall be required to repay the Company a prorated
amount based upon the number of months actually
worked. In no event shall you be
<PAGE>
required to repay more than actually received (i.e.
net of withholding taxes).
Temporary Living: Temporary living expense reimbursements will be made
to you for up to $10,000 in actual expenses incurred
during the time prior to your move to the Dallas/Ft.
Worth area. Such reimbursement will be made on a
bi-weekly basis according to the appropriated expenses
submitted.
Common Stock: The Company will provide pre-IPO stock options,
subject to the terms and conditions of Website
Management Company's Non-Qualified Stock Option
Agreement (which agreement is a part of the 1997 Stock
Incentive Plan), and full execution of such agreement,
options to acquire 11,000 shares, to be fully vested
in stages over sixty (60) months, according to the
following vesting schedule:
3,000 shares at $8.00 per share to vest by 6/22/99
2,000 shares at $8.33 per share to vest by 6/22/00
2,000 shares at $8.33 per share to vest by 6/22/01
2,000 shares at $8.33 per share to vest by 6/22/02
2,000 shares at $8.33 per share to vest by 6/22/03
This shall not serve to limit the number of shares that
may be awarded to you, as adjustments based upon annual
performance reviews will determine additional options
or awards. All shares shall fully vest upon any Change
in Control. Further, shares will fully vest AND SHALL
BE EXERCISABLE IMMEDIATELY if you are terminated
without Cause after your first twelve months of
employment.
For purposes of this provision, Cause shall mean by
reason of any of the following: (A) Employee's
conviction of, plea of nolo contendere to, any felony,
or to any crime or offense causing substantial harm to
the Company or any of its affiliates (whether or not
for personal gain), or involving acts of theft, fraud
embezzlement, moral turpitude or similar conduct, (B)
Employee's violation of the Company's substance abuse
policy, if any, as such may apply from time to time,
(C) failure to perform Employee's job responsibilities
or malfeasance in the conduct of Employee's duties,
including, but not limited to, (1) willful and
intentional misuse or diversion of the Company's or any
of its affiliates funds, (2) fraudulent, willful or
material misrepresentations or concealment on any
written reports submitted to the Company or any of its
affiliates, (D) the occurrence of an event or series
of events that lead the senior management or the Board
of Directors of the Company to the reasonable
conclusion that Employee has materially breached or
damaged their trust in his character and integrity
sufficiently to impair his standing with the Company,
(E) material failure to follow or comply with the
reasonable and lawful directives of the chief executive
officer, president or the Board of Directors of the
Company, (F) mental or physical incapacity or
inability of the Employee to perform his duties for a
consecutive period of ninety (90) days or a
non-consecutive period of one hundred twenty (120) days
during a twelve month period.
Severance: A severance amount equal to four months' salary would
be paid if your employment is terminated without cause
within twelve months after a Change In Control. This
severance provision shall expire if a Change In Control
has not occurred within three (3) years of the date of
this letter.
<PAGE>
Vacation: 3 weeks per 12 month period of employment beginning on
the original hiring date. Notice for days taken must
be in accordance with FlashNet company policy.
Health Benefits: The Company will cover, at no charge to you, the
premium portion of the health plan for you, your family
under the Company's existing HMO/PPO policy with Aetna.
Under the Company's "key employee" provision, we will
waive the 90 day waiting period for your participation
in the plan, and make your instatement effective upon
proper application.
This offer shall expire in the event it has not been accepted on or before ten
(10) days for the date above. I hope that this compensation structure is
acceptable to you. If so, please acknowledge the same by signing below in the
space indicated. I look forward to our success here at FlashNet Communications
and to your valued involvement to make it happen.
Sincerely,
/s/ M. Scott Leslie
- ------------------------
Scott Leslie
President
AGREED AND ACCEPTED this 27th day of May, 1998
---- ---
BY: /s/ Ed Mayhugh
----------------------------------
Ed Mayhugh
<PAGE>
January 7, 1999
Mr. Russell A. Wiseman
225 Creekway Bend
Southlake, Texas 76092
RE: Employment Offer
Dear Russ:
FlashNet Communications, Inc. is excited to be making this offer of employment
to you. We believe that your skills and experience coupled with FlashNet's
unique market position and exciting future represent a dynamic opportunity for
us both. To that end we would like to provide the following offer:
Position: Executive Vice President and Chief Sales and
Marketing Officer
General Job Duties: As with most senior management positions, you will be
largely responsible for writing your job
description. In a general sense, you will be
responsible for helping FlashNet build industry
prominence and attract new customers by conducting
business development and implementing marketing
programs and brand awareness campaigns. You will
be responsible for all aspects of our sales and
marketing. This includes branding, product
management, research, marketing communications and
business development as well as development and
management of a staff that will assist you in
these activities. You will also be responsible
for developing new distribution channels and
strategic relationships. FlashNet's revenue goals
for the years ending 1999 and 2000 are $40.6MM and
$66MM, respectively.
Base Salary: $5,384.61 per pay period (bi-weekly), which
calculates to $140,000 on an annual basis.
Automatic Adjustment: In the event that the Company has hit its cumulative
Y-T-D Revenue target by the end of Q3'99, your
base salary shall automatically be adjusted to
$180,000 on an annualized basis. The cumulative
Y-T-D Revenue target for the end of Q3'99 is
$28,074,000.
Common Stock: Subject to the terms and conditions of an Incentive
Stock Option Agreement (which will be prepared in
accordance with the Company's 1997 Stock
<PAGE>
Incentive Plan), and your execution of such
agreement, you will receive options to acquire
37,645 shares of the Company's Common Stock at a
strike price of $20.00 per share to be fully
vested in stages over sixty (60) months according
to the following vesting schedule:
Immediate vesting: An amount of shares, which
shall be determined by
dividing $40,000 by the price
set at FlashNet's Initial
Public Offering.
Vesting 24 months
From your start date: 15,058 shares
Vesting 36 months
From your start date: 7,529 shares
Vesting 48 months
From your start date: 7,529 shares
Vesting 60 months
From your start date: the balance of the shares
noted above
This shall not serve to limit the number of shares
that may be awarded to you, as adjustments based
upon annual performance reviews will determine
additional options or awards.
Severance: If your employment is terminated by the Company
without Cause following your acceptance of
employment, or if, upon a Change in Control, you
resign for Good Reason, one the following
severance amounts will be paid to you by the
Company as an additional element of your
employment compensation:
<TABLE>
<CAPTION>
Timing of Termination Severance Amount
--------------------- ----------------
<S> <C>
Prior to completing the first 6 months of employment $180,000
After 6 months and before 12 months of employment $150,000
After 12 months and before 24 months of employment $100,000
</TABLE>
This severance provision shall expire after 24 months
of employment. For purposes of this document,
"Cause" shall mean, based upon a reasonable
determination by the Company's Board of Directors
or management, that one or more of the following
events has occurred:
(A) Your conviction of, or plea of NOLO CONTENDERE
to, any felony, or to any crime or offense causing
substantial harm to the Company or any of its
affiliates (whether or not for personal gain) or
involving acts of theft, fraud, embezzlement,
moral turpitude or similar conduct, (B) Your
violation of the Company's substance abuse policy,
if any, as such may apply from time to time, (C)
Your malfeasance in the conduct of your duties,
including, but not limited to, (1) willful and
intentional misuse or diversion of the Company's
or any of its affiliate's funds, (2) embezzlement,
and/or (3) fraudulent, willful or material
misrepresentations or concealment on any written
reports submitted to the Company or any of its
affiliates, (D) Your negligence,
<PAGE>
insubordination, or dereliction of responsibility,
(E)Your failure to follow or comply with the
reasonable and lawful directives of the president
or Board of Directors of the Company or failure to
meet performance goals and objectives, (F)Your
breach of any agreement between you and the
Company, (G)Your mental or physical incapacity or
inability of you to perform your duties for a
consecutive period of forty five (45) days or a
non-consecutive period of ninety (90) days during
any twelve month period, or (H) Your death.
"Good Reason" shall mean a significant and material change in the
nature or scope of your duties to duties that are,
taken as a whole, inconsistent with the position in
the Company then occupied by you or inconsistent with
your range and duration of experience.
Non-Compete: At the time of your voluntary departure from the
Company, or upon your termination for Cause, and
for a period of one year thereafter, you agree
that you will refrain, within the markets then
served by the Company, from either directly or
indirectly, on your own behalf, or in the service
or on behalf of others as a principal, partner,
officer, director, manager, supervisor,
administrator, consultant or employee, engage in
any Business competing with the core business or
businesses of the Company. For this purpose, the
core business or businesses of the Company shall
have the meaning which is considered customary for
companies engaged in the Internet services
industry at the time of termination of your
employment.
Confidentiality: You shall enter into the Company's standard
Confidentiality Agreement on the date of your hiring.
Precedence: In any areas of conflict, this document shall take
precedence over the Company's customary Incentive
Stock Option Agreement, which is utilized under the
Company's 1997 Stock Incentive Plan).
Strategic Planning: The Company will begin a regular schedule of a
Strategic Planning Council, which will require
your participation. The timing of the meetings
will most likely be quarterly but should be held
monthly in the beginning.
Vacation: 3 weeks per 12 month period of employment beginning
on the original hiring date. Notice for days taken
must be in accordance with FlashNet company policy.
Equipment/Travel: You will be provided with a PC and a Company LD Phone
Card for Company usage only. You will receive
reimbursement from the Company for company use of
your Cell Phone based upon itemized billing
records. You will be provided with private office
space. Air travel will be in coach class. If
upgrades are purchased, FlashNet will compensate
you for 50% of the cost of upgrades. Auto rentals
will be
<PAGE>
mid-size to full-size cars such as Ford Taurus.
Upgrades to luxury cars will not be reimbursed.
Health Benefits The Company will cover, at no charge to you, the
premium portion of a health plan for you and your
family under the Company's existing HMO/PPO policy
with Aetna. Under the Company's "key employee"
provision, we will waive the 90 day waiting period
for your participation in the plan, and make your
instatement effective upon your proper application.
Start Date: Not later than January 27, 1999, but possibly sooner
depending upon how your current commitments work out.
This offer shall expire in the event it has not been accepted on or before five
(5) days from the date first written above. I hope that this compensation
structure is acceptable to you. If so, please acknowledge the same by signing
below in the space indicated. I look forward to our success here at FlashNet
and to your valued involvement to make it happen.
Sincerely,
/s/ M. Scott Leslie
- -----------------------
M. Scott Leslie
President
AGREED AND ACCEPTED this 7th day of January, 1999
BY: /s/ Russ A. Wiseman
----------------------------------
Russ A. Wiseman
<PAGE>
March 31, 1999
Mr. Russell A. Wiseman
225 Creekway Bend
Southlake, Texas 76092
Dear Russ:
I would like to offer the following terms as an amendment to our employment
offer dated January 6, 1999.
Separation Adjustment: In the event that you separate from the Company
for any reason, your base salary shall be adjusted
with a "true up," which shall have the effect of
adjusting your annualized base salary to $180,000.
Bonus: Beginning at the expiration of the first quarter
of 1999, you will be eligible for participation in
a quarterly bonus plan that will enable you to
earn an amount necessary for your base salary to
"true up" to an annualized $180,000. Your bonus
under this plan will be based upon meeting
specific goals and metrics, which will be mutually
agreed upon between you and Scott Leslie. If no
written mutually agreeable goals and metrics are
in-place, you will receive your bonus if the
Company reaches its company-wide revenue goal for
the quarter.
I hope these adjustments to your compensation package are acceptable to you. In
the event that you have any comments or questions, please don't hesitate to
contact me.
Sincerely,
/s/ M. Scott Leslie
- -----------------------
M. Scott Leslie
President
