<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------- ----------
COMMISSION FILE NUMBER 000-25477
FLASHNET COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2614852
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3001 MEACHAM BLVD., SUITE 100, FORT WORTH, TX 76137
(Address of principal executive offices) (Zip Code)
(817) 820-0068
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports),
Yes (X) No ( )
and (2) has been subject to such filing requirements for the past 90 days.
Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 2000
Common Stock, No Par Value 14,321,221
<PAGE>
FLASHNET COMMUNICATIONS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED BALANCE SHEETS -
March 31, 2000 and December 31, 1999................................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS -
Three months ended March 31, 2000 and 1999.......................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Three months ended March 31, 2000 and 1999.......................... 5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY -
Three months ended March 31, 2000................................... 6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. 7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 8
ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK......................................................... 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... N/A
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... N/A
ITEM 5. OTHER INFORMATION........................................... N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits.............................................. 14
(b). Reports on Form 8-K................................... N/A
SIGNATURES............................................................ 15
2
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 231,000 $ 7,045,000
Notes receivable 700,000 700,000
Accounts receivable, net 3,852,000 4,393,000
Prepaid expenses 2,125,000 2,661,000
Other current assets 770,000 904,000
---------------- ----------------
Total current assets 7,678,000 15,703,000
PROPERTY AND EQUIPMENT, net 17,182,000 17,783,000
SOFTWARE LICENSES, net 248,000 338,000
CUSTOMER HARDWARE 4,734,000 5,579,000
OTHER ASSETS 159,000 182,000
---------------- ----------------
TOTAL $ 30,001,000 $ 39,585,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 6,288,000 $ 8,162,000
Accrued payroll and related expenses 645,000 913,000
Other accrued expenses 532,000 1,100,000
Current portion of capital lease obligations 4,196,000 4,129,000
Deferred revenue 8,999,000 10,215,000
---------------- ----------------
Total current liabilities 20,660,000 24,519,000
CAPITAL LEASE OBLIGATIONS, net of current portion 4,415,000 5,410,000
---------------- ----------------
Total liabilities 25,075,000 29,929,000
REDEEMABLE SERIES A PREFERRED STOCK, $1.00 par value;
1,375,000 shares authorized, none issued and outstanding - -
SHAREHOLDERS' EQUITY:
Common stock, no par value, 50,000,000 shares authorized,
14,321,221 and 14,307,694 issued and outstanding, respectively 68,789,000 68,776,000
Additional paid-in capital, stock options 2,039,000 1,909,000
Unearned compensation (1,338,000) (1,427,000)
Warrants to purchase common stock 3,330,000 3,330,000
Accumulated deficit (67,894,000) (62,932,000)
---------------- ----------------
Total shareholders' equity 4,926,000 9,656,000
---------------- ----------------
TOTAL $ 30,001,000 $ 39,585,000
================ ================
</TABLE>
See Condensed Notes to Consolidated Financial Statements
3
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
REVENUES:
Consumer access services $ 9,150,000 $ 7,150,000
Business services 413,000 466,000
Set-up fees and other 918,000 473,000
-------------------- --------------------
Total 10,481,000 8,089,000
-------------------- --------------------
OPERATING COSTS AND EXPENSES:
Cost of services (includes amortization of and loss on customer hardware
of $817,000 for the three months ended March 31, 2000) 5,613,000 3,417,000
Cost of other revenues 308,000 119,000
Sales and marketing 2,671,000 2,553,000
General and administrative 2,477,000 1,961,000
Operations and customer support 2,437,000 1,981,000
Depreciation and amortization 1,746,000 889,000
-------------------- --------------------
Total 15,252,000 10,920,000
-------------------- --------------------
LOSS FROM OPERATIONS (4,771,000) (2,831,000)
INTEREST EXPENSE (254,000) (712,000)
INTEREST AND OTHER INCOME 63,000 44,000
-------------------- --------------------
LOSS BEFORE EXTRAORDINARY ITEM (4,962,000) (3,499,000)
EXTRAORDINARY ITEM - LOSS ON
EARLY EXTINGUISHMENT OF DEBT - (1,656,000)
-------------------- --------------------
NET LOSS (4,962,000) (5,155,000)
ACCRETION ON REDEEMABLE PREFERRED STOCK - (48,000)
-------------------- --------------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (4,962,000) $ (5,203,000)
==================== ====================
NET LOSS PER SHARE, BASIC AND DILUTED:
Loss before extraordinary item $ (0.35) $ (0.51)
Extraordinary item - (0.24)
-------------------- --------------------
$ (0.35) $ (0.75)
==================== ====================
WEIGHTED AVERAGE SHARES, BASIC AND DILUTED 14,316,000 7,018,000
==================== ====================
</TABLE>
See Condensed Notes to Consolidated Financial Statements
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,962,000) $ (5,155,000)
Adjustments to reconcile net loss to net cash used by
operating activities:
Extraordinary losses - 1,656,000
Depreciation 1,583,000 878,000
Amortization of and loss on customer hardware 817,000 -
Amortization of debt discount and other 163,000 340,000
Stock based compensation expense and other 219,000 95,000
Provision for allowance for uncollectible accounts - (44,000)
Changes in assets and liabilities:
Decrease in accounts receivable 541,000 262,000
Decrease in prepaid expenses and other current assets 690,000 135,000
Increase (decrease) in accounts payable and accrued liabilities (2,710,000) 660,000
Increase (decrease) in deferred revenue (1,216,000) 239,000
------------------ ------------------
Net cash used by operating activities (4,875,000) (934,000)
------------------ ------------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (982,000) (3,158,000)
Purchases of software and other assets (42,000) (84,000)
------------------ ------------------
Net cash used in investing activities (1,024,000) (3,242,000)
------------------ ------------------
FINANCING ACTIVITIES:
Proceeds from initial public offering, net - 56,337,000
Proceeds from issuance of note payable - 5,000,000
Proceeds from exercise of stock options 13,000 -
Principal payments under notes payable - (11,500,000)
Principal payments under capital lease obligations (928,000) (897,000)
------------------ ------------------
Net cash provided (used) by financing activities (915,000) 48,940,000
------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,814,000) 44,764,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,045,000 1,038,000
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 231,000 $ 45,802,000
================== ==================
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 254,000 $ 384,000
Equipment acquired under capital leases - 2,197,000
Additional common stock issued upon conversion of debt $ - $ 40,000
</TABLE>
See Condensed Notes to Consolidated Financial Statements
5
<PAGE>
FLASHNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Paid in Warrants to
Common Stock Capital- Purchase
----------------------- Stock Unearned Common Accumulated Shareholders'
Shares Amount Options Compensation Stock Deficit Equity
---------- ----------- ---------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 14,307,694 $68,776,000 $1,909,000 $(1,427,000) $3,330,000 $(62,932,000) $ 9,656,000
Employee stock purchase plan
and exercise of stock options 13,527 13,000 - - - - 13,000
Amortization of compensatory
stock option grants and other - - 130,000 89,000 - - 219,000
Net loss - - - - - (4,962,000) (4,962,000)
---------- ----------- ---------- ----------- ---------- ------------ -------------
BALANCE, March 31, 2000 14,321,221 $68,789,000 $2,039,000 $(1,338,000) $3,330,000 $(67,894,000) $ 4,926,000
========== =========== ========== =========== ========== ============ =============
</TABLE>
See Condensed Notes to Consolidated Financial Statements
6
<PAGE>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management of FlashNet Communications, Inc. ("FlashNet"),
the accompanying consolidated financial statements, which have not been audited
by independent public accountants, contain all adjustments, consisting of normal
recurring adjustments, considered necessary to present fairly FlashNet's
consolidated financial position, the results of its operations and its cash
flows for the periods reported. The consolidated financial statements include
the accounts of FlashNet and its subsidiaries. All significant intercompany
balances and transactions are eliminated. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to Article 10 of Regulation S-X of the Securities and Exchange
Commission. These condensed financial statements should be read in conjunction
with the financial statements and notes thereto included in FlashNet's Form 10-K
for the fiscal year ended December 31, 1999. The results of operations for the
three months ended March 31, 2000 and 1999 are not necessarily indicative of the
results to be expected for a full year.
2. ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those amounts.
3. REVENUE RECOGNITION
Amounts received upon the sale or renewal of prepaid annual and monthly
business and consumer subscriptions are recorded as deferred revenue through a
30-day money back cancellation period and then amortized over the remaining
period in which service is provided. Annual business and consumer subscribers
canceling after the initial 30-day period are assessed a $50 cancellation fee.
Distributor sign-up and renewal fees are also recorded as deferred revenue and
amortized over the life of the related agreements. Revenue from the sale of
merchandise and hardware without bundled Internet access is recognized
immediately upon the shipment of the merchandise. 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.
Advertising revenues, all of which must be paid in cash by the customer, are
recognized as advertising services are provided. During the quarter ended June
30, 1999, FlashNet began providing subscribers a bundled service offering
combining Internet access with a computer in exchange for a 2 or 3 year
contractual commitment payable on a monthly basis. Related revenue is recognized
on a monthly basis subject to deferral through a 30-day money back cancellation
period.
4. CUSTOMER HARDWARE
In connection with the bundled service offering, FlashNet contracted with
vendors for the purchase of both new and refurbished personal computers
("PCs"). The costs of the PCs are capitalized as customer hardware and
amortized over the term of the contracts, with the amortization rate adjusted
for estimates for non-recoverability of equipment and uncollectible balances on
cancelled contracts. Net capitalized costs are reviewed periodically for
recoverability of balances on cancelled contracts.
7
<PAGE>
5. 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.
6. PENDING MERGER WITH PRODIGY COMMUNICATIONS CORPORATION
On November 5, 1999, FlashNet and Prodigy Communications Corporation
("Prodigy'') entered into a definitive agreement whereby Prodigy will acquire
FlashNet in a stock-for-stock merger. Under the terms of the merger agreement,
Prodigy will issue 0.35 shares of Prodigy common stock for each share of
FlashNet's common stock outstanding on the closing date of the transaction.
The Boards of Directors of both Prodigy and FlashNet unanimously approved the
merger; however, the merger is also subject to approval by FlashNet's
shareholders and to customary regulatory approvals. Closing of the merger is
expected to occur on May 31, 2000. In connection with the merger agreement,
FlashNet has granted Prodigy an option to purchase up to 19.9% of the
outstanding shares of FlashNet's common stock at $8.66 per share, which may be
exercised in certain circumstances. Based on the number of shares of FlashNet
and Prodigy currently outstanding, Prodigy will issue approximately 5.0 million
shares to complete the merger.
7. PRODIGY LOAN COMMITMENT
On April 26, 2000, Prodigy agreed to loan FlashNet up to $2.0 million to fund
operations. Advances will be unsecured, bear interest at an annual rate of 12%
and are due October 26, 2000. As of May 4, 2000, no advance had been made under
these arrangements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain forward-looking statements with respect to
FlashNet's operations, industry, financial condition and liquidity. These
statements reflect management's best current assessment of a number of risks and
uncertainties. FlashNet's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
factors described in this report and other risks indicated in FlashNet's other
filings with the Securities and Exchange Commission.
OVERVIEW
FlashNet is a nationwide provider of consumer Internet access and business
services. FlashNet provides its Internet access services in approximately 900
cities throughout the United States. As of March 31, 2000, FlashNet had a
subscriber base of approximately 231,000 users, including approximately 3,200
customers for its business services.
In addition to access services as a national Internet service provider,
FlashNet offers a broad range of business services that enable businesses to
outsource their Internet and electronic commerce activities. FlashNet believes
that attracting additional business customers will result in a more stable,
higher quality customer base. FlashNet further believes that its business
services enable it to acquire new corporate customers more effectively and
provide many cross-selling opportunities.
During the quarter ended June 30, 1999, FlashNet contracted with several
vendors for the purchase of both new and refurbished personal computers.
FlashNet began reselling the personal computers through a bundled service
offering combining Internet access with a computer in exchange for a two or
three year contractual commitment for Internet service. In addition, FlashNet
also resold personal computers without Internet access. On September 30, 1999,
FlashNet discontinued its program of reselling refurbished personal computers
with bundled Internet service due to operational and cash considerations.
However,
8
<PAGE>
FlashNet expects to continue to sell new personal computers with bundled
Internet service on a limited basis.
REVENUES.
FlashNet's revenues generally are composed of:
. consumer access services;
. business services;
. set-up fees and other revenues.
Consumer access services revenues are composed of annual prepaid and monthly
subscriptions for consumer dial-up access to the Internet. FlashNet offers
prepaid and monthly subscribers a full money-back guarantee on cancellation of
their service if made within 30 days of initiating service. Amounts received on
the sale or renewal of prepaid annual and monthly subscriptions are recorded as
deferred revenue through the 30-day money-back cancellation period and then
amortized over the remaining period in which service is provided. Subscribers
may cancel their subscriptions at any time following the initial 30-day period,
in which case FlashNet charges the subscriber a $50 cancellation fee and refunds
any remaining prepaid amounts after the charge. Cash received from subscribers
is applied to working capital when received, and no cash reserves are maintained
for potential refund obligations.
Business services consisting of dedicated access services also are offered on
a prepaid annual and monthly subscription basis. The revenue recognition
policies and customer guarantee practices described above for consumer access
services also apply to dedicated access business services. Revenues from the
sale of business services involve set-up fees, which are included in set-up fees
and other revenues in the consolidated statement of operations, and a service
contract that provides for monthly billing. These business services revenues are
recognized as services are provided.
FlashNet derives set-up fees and other revenues through a variety of sources,
including set-up fees for subscribers to its consumer access services and
business services, sales of merchandise and hardware, sign-up and renewal fees
for independent representatives in its network marketing program and advertising
revenues. Set-up fees are charged to all new customers of consumer access and to
business services customers. These one-time set-up fees are non-refundable and
are deferred and amortized over a one-year period. Sales of merchandise and
hardware without bundled Internet access and associated non-refundable shipping
fees are recognized as earned. 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 FlashNet's network marketing
program at the commencement of participation in the program and for renewal of
participation on each anniversary of the representative's commencement date.
These fees are deferred and amortized over a one-year period following the month
of initial sign-up or renewal, as the case may be. Advertising revenues are
recognized as advertising services are provided.
COSTS AND EXPENSES.
FlashNet's costs include:
. cost of services that are primarily related to the number of subscribers;
. costs related to merchandise and hardware sold and cost of material for
FlashNet's network marketing program;
. amortization of and loss on personal computers issued to customers;
. selling, customer support and general and administrative expenses that are
associated more generally with operations; and
. depreciation and amortization, which are related to the size of FlashNet's
network and capital lease obligations.
9
<PAGE>
Cost of services 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 company-owned point of presence, the use of
third-party networks and the use of leased lines to connect each company-owned
point of presence and third-party point of presence to its hub and to connect
its hub to the Internet backbone.
Cost of other revenues consists of costs of installation software, premium
support costs, cost of merchandise and hardware sold and the cost of user guides
and other materials for representatives and distributors involved in FlashNet's
network marketing program.
Amortization of customer hardware is the result of amortizing the cost of
capitalized personal computers issued to customers, over the life of the
subscriber contract, with the amortization rate adjusted for estimates for
non-recoverability of equipment and uncollectible balances on cancelled
contracts. Loss on customer hardware resulted from personal computers returned
by customers, which FlashNet was unable to recover from its vendors.
Selling, general and administrative costs are incurred in the areas of sales
and marketing, customer support, network operations and maintenance,
engineering, accounting and administration. Sales and marketing expenses consist
primarily of media and production costs, commissions and expenses related to
FlashNet's network marketing program, sales and marketing overhead, and
personnel costs. General and administrative expenses consist of personnel and
related costs associated with FlashNet's executive and administrative functions
and other miscellaneous expenses. Operations and customer support expenses
consist primarily of expenses associated with daily support of FlashNet's
subscriber base, including customer service and technical support.
FlashNet has experienced operating losses since its inception as a result of
efforts to build its network infrastructure, customer base and internal
staffing, develop its systems and expand into new markets.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial data for the
quarters ended March 31, 2000 and 1999. Operating results for any period are
not necessarily indicative of results for any future period. Dollar amounts are
shown in thousands.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------------------ --------------------------
% of % of
(000's) Revenues (000's) Revenues
------------- ------------- ------------- ---------
REVENUES:
<S> <C> <C> <C> <C>
Consumer access services $ 9,150 87% $ 7,150 88%
Business services 413 4 466 6
Set-up fees and other 918 9 473 6
------------- ------------- ------------- ---------
Total 10,481 100 8,089 100
------------- ------------- ------------- ---------
OPERATING COSTS AND EXPENSES:
Cost of services (including amortization of and
loss on customer hardware) 5,613 54 3,417 42
Cost of other revenues 308 3 119 1
Sales and marketing 2,671 25 2,553 32
General and administrative 2,477 24 1,961 24
Operations and customer support 2,437 23 1,981 25
Depreciation and amortization 1,746 17 889 11
------------- ------------- ------------- ---------
Total 15,252 146 10,920 135
------------- ------------- ------------- ---------
LOSS FROM OPERATIONS (4,771) (46) (2,831) (35)
INTEREST EXPENSE (254) (2) (712) (9)
INTEREST AND OTHER INCOME 63 1 44 1
------------- ------------- ------------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (4,962) (47) (3,499) (43)
EXTRAORDINARY ITEM - LOSS ON EARLY
EXTINGUISHMENT OF DEBT - - (1,656) (20)
------------- ------------- ------------- ---------
NET LOSS (4,962) (47) (5,155) (63)
ACCRETION ON REDEEMABLE
PREFERRED STOCK - - (48) (1)
------------- ------------- ------------- ---------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $(4,962) (47)% $(5,203) (64)%
============= ============= ============= =========
</TABLE>
11
<PAGE>
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
REVENUES.
FlashNet experienced substantial growth in revenues in 2000 as compared to
1999. Total revenues increased 30% to $10.5 million in 2000 from $8.1 million in
1999. As reflected by the increase in consumer access services revenues,
subscriptions and renewals increased 28% to $9.2 million in 2000 from $7.2
million in 1999. The increase in access service revenues was primarily due to an
increase in FlashNet's subscriber base of 22% to 231,000 at March 31, 2000 from
190,000 at March 31, 1999, and an increase in the number of monthly accounts
which generally result in higher revenue per subscriber.
Subscriber set-up fees and other revenues increased 94% to $0.9 million in
2000 from $0.5 million in 1999. The increase was primarily the result of the
reintroduction of set-up fees on most products, which took place in the second
quarter of 1999.
COST OF SERVICES
Cost of services increased 64% to $5.6 million in 2000 from $3.4 million in
1999, primarily due to an increase in dial tone costs associated with a higher
level of subscribers on FlashNet's network and amortization of and loss on
customer hardware of $0.8 million, as described below. Cost of services as a
percentage of total revenues increased to 54% from 42% during 2000 and 1999,
respectively, primarily due to amortization of and loss on customer hardware.
AMORTIZATION OF AND LOSS ON CUSTOMER HARDWARE
In June 1999, FlashNet began reselling personal computers through a bundled
service offering. The costs of the personal computers have been capitalized and
are being amortized over the life of the subscriber contract with the
amortization term adjusted for estimates for the non-recoverability of equipment
and uncollectible balances on cancelled contracts.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased 5% to $2.7 million in 2000 from $2.6
million in 1999. Sales and marketing expenses as a percentage of total revenues
decreased to 25% in 2000 from 32% in 1999. Since the fourth quarter of 1999 and
thereafter, FlashNet has reduced its cash expenditures in its sales and
marketing efforts. The reduction in these efforts was mainly accomplished by
reducing its advertising and media expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 20% to $2.3 million in 2000 from
$2.0 million in 1999. General and administrative expenses as a percentage of
total revenues decreased to 22% from 24% during 2000 and 1999, respectively. The
increase was primarily due to increases in support and maintenance agreements,
and spending on facilities. Costs related to support and maintenance agreements
increased $0.2 million in 2000 versus 1999, as a result of agreements that were
entered into during the third and fourth quarters of 1999. The costs of these
contracts are amortized over the term of the agreement. Facility costs
increased $0.1 million in 2000 versus 1999, as a result of FlashNet relocating
to new office facilities.
OPERATIONS AND CUSTOMER SUPPORT EXPENSES
Operations and customer support expenses increased 23% to $2.4 million in 2000
from $2.0 million in 1999, primarily due to increased labor costs. The number
of full-time and contract employees in the customer care and technical support
departments increased to approximately 255 personnel in 2000 from 218 personnel
in 1999, to support the larger subscriber base. Operations and customer support
expenses as a percentage of total revenues decreased to 23% from 25% during 2000
and 1999, respectively, mainly due to the leveraging of FlashNet's fixed costs
over a larger subscriber base.
12
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 96% to $1.7 million in 2000
from $0.9 million in 1999. The increase primarily resulted from additional
purchases of equipment and software and equipment acquired under capital leases
needed to support FlashNet's expanding network. Depreciation and amortization
expense as a percentage of total revenues increased to 17% for 2000 from 11% in
1999.
INTEREST EXPENSE
Interest expense decreased to $0.3 million in 2000 from $0.7 million in 1999.
During March 1999, all of FlashNet's outstanding debt was retired. The
remaining interest expense relates to outstanding capital lease obligations.
EXTRAORDINARY LOSS
The extraordinary loss on early extinquishment of debt represents the write-
off of unamortized debt discount costs and other costs related to the repayment
of FlashNet's outstanding debt in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
The capital needs of FlashNet have historically been met, in large part, by
receipts from its prepaid subscriber customer base, which, in turn, increased
its deferred revenue liability. Commencing in 1996, as FlashNet placed greater
emphasis on developing and expanding its network infrastructure, it sought
additional capital from other sources, including vendor capital leases and other
vendor financing arrangements and through private placements of its securities.
The Company's IPO, completed in March 1999, provided FlashNet with additional
capital of $56.3 million.
The Company's operating activities used net cash of approximately $4.9 million
and $0.9 million during the quarters ended March 31, 2000 and 1999,
respectively. During the quarter ended March 31, 2000, net cash used in
operations resulted from net losses, adjusted for depreciation and amortization
expense and decreases in liabilities. During the quarter ended March 31, 1999,
net cash used in operations resulted primarily from net losses, adjusted for the
extraordinary losses, depreciation and amortization expense and increases in
trade accounts payable.
Cash used by investing activities has consisted primarily of leasehold
improvements to FlashNet's new facility in 2000 and equipment purchases for POP
and network expansion in 1999 and 2000. For the quarters ended March 31, 2000
and 1999, capital expenditures amounted to approximately $1.0 million and $3.2
million, respectively. In addition, FlashNet incurred approximately $2.2
million for equipment acquired under capital leases in 1999. At March 31, 2000,
FlashNet had no material commitments for capital expenditures.
Cash used in and provided by financing activities was approximately $0.9
million and $48.9 million during the quarters ended March 31, 2000 and 1999,
respectively. Cash used for financing activities was $0.9 million for principal
payments under capital lease obligations during the quarter ended March 31,
2000. During January 1999, FlashNet received proceeds of $5.0 million from a
term loan. During March 1999, FlashNet effected its IPO. Net proceeds to
FlashNet were approximately $56.3 million. Cash used for financing activities
during the quarter ended March 31, 1999, included $11.5 million for the
repayment of FlashNet's outstanding debt, plus $0.9 million for principal
payments under capital lease obligations.
Since the fourth quarter of 1999 and thereafter, FlashNet was forced to make
reductions in its cash expenditures in several operational areas and
discontinued the "Free PC" program, which bundled Internet access with a
refurbished computer in exchange for a two or three year contractual commitment
for Internet service, to preserve its cash resources. FlashNet identified its
sales and marketing efforts as the primary area to reduce its expenditures. The
reduction in these efforts, which was mainly accomplished by reducing its
advertising and media expenditures, has resulted in a decrease in new
subscribers and cash receipts from revenue- generating activities. The selling
of new personal computers with bundled Internet service could
13
<PAGE>
require additional cash commitments. However, sales of new computers with
bundled Internet service have not been and are not expected to be significant.
Because the pending merger with Prodigy requires FlashNet to maintain its basic
infrastructure, FlashNet continues to conduct its operations in a manner
generally consistent with its historical practices (except curtailing certain
aspects of its sales and marketing as described above) and has not sought
additional financing nor has any commitments for financing at March 31, 2000.
FlashNet will be required to seek additional financing sufficient to meet its
working capital needs for fiscal 2000 if the merger with Prodigy is not
consummated. Based on FlashNet's recent efforts to raise capital, management has
determined that it most likely cannot raise additional capital or financing on
reasonable terms. The Report of Independent Auditors dated March 3, 2000 with
respect to FlashNet's consolidated financial statements for the year ended
December 31, 1999, contains an explanatory paragraph regarding FlashNet's
ability to continue as a going concern. FlashNet's only plan at this time with
respect to the going concern is the merger with Prodigy and FlashNet has no
contingency plans presently in place should the merger with Prodigy fail to
occur. If the merger is not consummated, management could be forced to make
significant reductions in its headcount and expenditure levels, and would most
likely be forced to raise capital, if obtainable, on unfavorable terms. FlashNet
does not believe that its current cash and cash equivalents are sufficient to
meet its working capital needs for the next 12 months.
On April 26, 2000, Prodigy agreed to loan FlashNet up to $2.0 million to fund
operations. Advances will be unsecured, bear interest at an annual rate of 12%
and are due October 26, 2000. As of May 4, 2000, no advance had been made under
these arrangements. As of May 4, 2000, FlashNet had cash and cash equivalents of
approximately $1 million. However, in the judgment of FlashNet's management,
Prodigy's loan commitment coupled with FlashNet's cash on hand, should be
sufficient to finance its operations until the closing of the merger.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
FlashNet is subject to interest rate risk on its capital lease obligations.
However, as such obligations have fixed interest rates, FlashNet does not
believe interest rate risks are material.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
27.1 Financial Data Schedule
(b). Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLASHNET COMMUNICATIONS, INC.
-----------------------------
(Registrant)
Date: May 12, 2000 /s/ ANDREW N. JENT
------------------ -------------------------------
Andrew N. Jent
Executive Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FLASHNET COMMUNICATIONS, INC. FOR THE THREE MONTHS ENED
MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 231
<SECURITIES> 0
<RECEIVABLES> 4,033
<ALLOWANCES> (181)
<INVENTORY> 0
<CURRENT-ASSETS> 7,678
<PP&E> 28,608
<DEPRECIATION> (11,424)
<TOTAL-ASSETS> 30,001
<CURRENT-LIABILITIES> 20,660
<BONDS> 0
0
0
<COMMON> 68,789
<OTHER-SE> (63,863)
<TOTAL-LIABILITY-AND-EQUITY> 30,001
<SALES> 0
<TOTAL-REVENUES> 10,481
<CGS> 0
<TOTAL-COSTS> 5,921
<OTHER-EXPENSES> 4,183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> (4,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,962)
<EPS-BASIC> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
