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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. (Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[NO FEE REQUIRED] for the fiscal year ended September 30, 1998.
/ / Transitional report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[NO FEE REQUIRED] for the transition period from ___________ to
____________.
COMMISSION FILE NUMBER: 0-24953
FIRSTWORLD COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0521976
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7100 E. BELLEVIEW AVENUE, SUITE 210, GREENWOOD VILLAGE, COLORADO 80111
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (303) 874-8010
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
SERIES B COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 30, 1998 was approximately $46,338,420.
As of November 30, 1998, 10,135,164 shares of Series A Common Stock and
16,137,958 shares of Series B Common Stock were outstanding.
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TABLE OF CONTENTS
PAGE
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Market Segmentation Approach. . . . . . . . . . . . . . . . . . . . . .4
Products and Services . . . . . . . . . . . . . . . . . . . . . . . . .4
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . .6
Strategic Relationships . . . . . . . . . . . . . . . . . . . . . . . .8
Network Architecture and Technology . . . . . . . . . . . . . . . . . .9
Information Technology and Support Systems. . . . . . . . . . . . . . .9
Network Status and Proposed Expansion . . . . . . . . . . . . . . . . 10
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Agreements with the City of Anaheim and The Irvine Company. . . . . . 17
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 32
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 32
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 33
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 35
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . 38
Impact of the Year 2000 . . . . . . . . . . . . . . . . . . . . . . . 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . 40
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . 40
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 41
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 42
Retention of New Chief Executive Officer and President. . . . . . . . 45
Committees of the Board of Directors. . . . . . . . . . . . . . . . . 47
Compliance With Section 16(a) of the Securities Exchange Act. . . . . 48
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 48
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . 48
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . 48
Item 12. Security Ownership of Certain Beneficial Owners and Management . 54
Item 13. Certain Relationships and Related Transactions . . . . . . . . . 57
Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 62
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
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PART I
ITEM 1. BUSINESS
The following discussion includes forward-looking statements that involve
risks and uncertainties. All statements other than statements of historical
facts included in this Form 10-K, including without limitation, certain
statements under the captions "Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and located elsewhere herein
regarding the financial position and operating strategy of FirstWorld
Communications, Inc. ("FirstWorld" or the "Company"), may constitute
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations ("cautionary statements") include, without limitation, those
described under the caption "--Risk Factors."
INTRODUCTION
FirstWorld is a facilities-based integrated communications provider
("ICP"). The key to the Company's business plan is a data-centric focus, with
service offerings strategically bundled to address the increasingly complex
data and voice communications needs of small and medium businesses. The
Company uses a combination of both owned and managed facilities, with a
digital network and related provisioning, billing and customer care
applications. With targeted marketing and a consultative sales approach, the
Company provides its customers with advanced, integrated data and voice
communications solutions. Services offered include data connectivity, high
speed Internet access, local and wide area network ("LAN/WAN") connectivity,
web hosting, e-commerce and system integration services, as well as
switch-based local and long distance telephone services.
The Company began network operations in August 1997 and began providing
services to commercial customers in November 1997. As of November 30, 1998, the
Company had approximately 400 active customers. One of the Company's significant
early customers, the City of Anaheim, relies on the Company to supply local dial
tone, long distance, dedicated facilities and Internet service to substantially
all of its municipal facilities.
The Company is implementing advanced digital networks and related
support systems that combine advanced hardware and software from leading
vendors with its own proprietary systems. With a combination of both owned
and managed network facilities, the Company provides its customers with an
integrated approach to enhanced data and voice network services. The Company
has designed its core processes to streamline provisioning, billing, network
management and customer service, and has incorporated operational support
systems that implement such processes into its network offerings. Among other
things, these systems provide single-point-of-contact customer service and
facilitate electronic exchanges of information with other network providers
where possible. The Company is designing its systems to be compatible with
voice over packet technologies such as voice over IP as such technologies are
refined in the industry.
The Company employs a demand-driven approach to network deployment. This
approach is intended to minimize capital expenditures and to maximize
flexibility to serve the higher margin data market as demand for high speed data
communication services grows. The Company connects customers to its networks
through direct fiber connections, digital subscriber lines ("DSL") or unbundled
network
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elements licensed from the incumbent local exchange carrier ("ILEC"),
depending on the most cost-effective connection that will support the bundle of
services provided to the customer.
The Company believes that the market segments within its target markets
have different customer buying patterns, are subject to different competitive
factors and can best be served by different sales and marketing initiatives. For
prime commercial customers (businesses with sophisticated communications needs),
the Company utilizes a consultative selling approach that involves a systematic
assessment of each customer's data communications, telephony, Internet and video
applications needs. For basic commercial customers (businesses with primarily
voice and Internet needs), the Company uses direct mail, telemarketing and
targeted advertising and offers standardized product bundles consisting of
switch-based local and long distance telephony and high speed Internet access.
The Company also offers use of its network capabilities on a wholesale basis to
other local exchange carriers ("LECs"), including competitive local exchange
carriers ("CLECs"), inter-exchange carriers ("IXCs"), Internet service providers
("ISPs") and other communications providers. The following chart outlines the
principal components of this approach:
<TABLE>
<CAPTION>
MARKET SEGMENTS PRODUCT CATEGORIES SALES & MARKETING NETWORK ELEMENTS
- --------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Prime Commercial Data, switch-based Consultative Fiber, DSL and
voice, Internet, sales approach by unbundled loops
e-commerce and direct account
systems integration teams and agents
Basic Commercial Voice and Internet Direct mail and DSL and unbundled
telemarketing loops
Wholesale Dedicated access Direct sales to Central office
(DS-1, DS-3, OC-1 other service services and
and OC-3), DSL and providers, IXCs, unbundled loops
IP-based services ISPs, resellers
and CLECs
</TABLE>
The Company uses strategic relationships with property developers, service
providers and others that provide the Company with brand identity, physical
assets, new products or technologies, joint marketing synergies or other
support. The Company believes its existing relationships with these entities
provide the Company with significant advantages in marketing and network
deployment.
The Company intends to generate near-term revenue by replacing basic
services currently provided by ILECs, IXCs and CLECs, including local, long
distance and other voice services, dedicated access lines and commercial
Internet access, as well as from advanced network services provided to select
customers. The Company believes that it is positioned to generate additional
revenue by providing advanced network services to a broader market as the demand
for such services grows.
BUSINESS STRATEGY
The Company's strategy is designed to exploit a number of trends
reshaping the $180 billion telecommunications industry, including: (i)
increasing customer demand for high speed, broadband services, such as the
Internet, data networks and video conferencing; (ii) integration of the
markets for local exchange and long distance services; (iii) decreased cost
of high bandwidth connectivity over the wide area; (iv) technical and product
innovation associated with the Internet, transmission control
protocol/Internet protocol ("TCP/IP") and voice over Internet technologies;
(v) the further development of
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server-based applications; (vi) the migration of existing business processes to
electronic formats; and (vii) the erosion of margins and the commodity pricing
of long distance services.
The Company's goal is to become the premier ICP in the markets that it
serves. The Company seeks to achieve a high degree of market penetration,
focusing on high-margin services, forming long-term customer relationships and
establishing a diversified revenue base. The principal elements of the Company's
business strategy include:
TAILOR SERVICE OFFERINGS AND SALES TECHNIQUES TO MARKET SEGMENTS. The
Company employs a market segmentation strategy, which involves tailoring service
offerings, sales and marketing techniques and network deployment to meet the
different needs of prime commercial, basic commercial, and wholesale customers.
The Company believes these market segments have different customer buying
patterns, are subject to different competitive factors and can best be served by
different sales and marketing initiatives.
DEPLOY FLEXIBLE NETWORKS TO PROVIDE VOICE AND DATA SOLUTIONS. The Company
deploys sophisticated switch-based networks capable of providing integrated
data, voice, Internet and video solutions. The Company has designed its
networks, including its central office service platform, to support a wide array
of telecommunications services and to be compatible with technologies still
under development in the industry, including server-based applications, such as
virtual LANs, e-commerce and voice over Internet.
PURSUE DEMAND-DRIVEN NETWORK DEPLOYMENT. The Company utilizes a
demand-driven approach to network deployment. The Company markets its services
to a geographically targeted cluster of businesses before committing to
implementation of a new network. In addition, the Company connects customers to
its networks through direct fiber connections, DSL, unbundled loops or T1s,
depending on the product set and anticipated revenue and margin from the
customers.
GAIN EFFICIENCY THROUGH REGIONAL CONCENTRATION. The Company has adopted a
targeted geographic approach to network deployment. The Company believes the
benefits of implementing networks in areas with high business densities include
(i) increased market penetration due to increased focus on management of market
activities, support of sales activities and leverage of advertising or other
brand equity, (ii) enhanced operating margin from a higher proportion of calls
that both originate and terminate on the Company's network, (iii) increased
leverage of centralized assets such as a central office or product platforms and
(iv) reduced travel, regulatory and administrative expenses.
EXPLOIT INTERNAL ENGINEERING AND PRODUCT EXPERTISE. The Company intends to
leverage its substantial internal engineering and product expertise to enhance
and expand the services it offers, decrease network costs, achieve a high degree
of scalability, reduce operating costs, increase reliability and facilitate
migration to new technologies over time.
SELECTIVE ACQUISITION STRATEGY. The Company intends to aggressively pursue
a strategy of selectively acquiring data and voice telecommunications companies
that expand FirstWorld's marketing and service footprint, and its ability to
serve additional customers. In particular, the Company seeks opportunities that
provide synergies and strategic assets relating to products, services,
demographics and technology which would enhance the value of existing assets and
customer relationships.
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MARKET SEGMENTATION APPROACH
The Company believes that the segments within its target markets have
different customer buying patterns, are subject to different competitive factors
and can best be served by different sales and marketing initiatives. The Company
tailors its data, Internet, voice and video offerings, sales and marketing
approach and network development to provide cost-effective service to prime
commercial, basic commercial and wholesale customers that it targets.
PRIME COMMERCIAL. Prime commercial customers are large and medium sized
businesses that demand a range of sophisticated data, Internet, voice and video
services. Within the prime customer segment, the Company has chosen to focus on
medium-sized businesses because the Company believes that such businesses
generally are underinvested in LANs and computer systems and that their
information technology needs are being undersupported by traditional
telecommunications companies. The Company also has found that medium-sized
businesses have not been aggressively targeted by the Company's competitors,
which have tended to target large businesses.
The Company believes that its consultative selling approach, diverse
service offerings and customer service will offer prime customers integrated
solutions to their telecommunications and information problems. The Company
believes it adds significant value for prime customers by offering them a unique
bundle of a broad array of advanced data, Internet, voice and video services.
Moreover, the Company believes its ability to diagnose prime customers' needs
through consultative sales efforts and to meet those needs through bundled
service offerings will enhance the Company's reputation for value and build
additional revenues.
BASIC COMMERCIAL. Basic commercial customers typically are small to medium
sized businesses with minimal demand for data services. The Company believes
that it can best serve basic customers by providing service offerings limited to
dial tone and high-speed Internet access and by using telemarketing, direct mail
or indirect channels to minimize sales costs. In addition, the Company believes
that by offering low-cost, limited service offerings to basic customers, it will
establish relationships upon which the Company can base future efforts to sell
more advanced services. The Company intends to rely primarily upon unbundled
loops and T1s to connect basic customers to its network.
WHOLESALE. The Company's wholesale sales force markets dedicated access
and other connectivity services to other service providers such as out-of-region
LECs, IXCs, other CLECs, ISPs and resellers. The primary services are DS-1,
DS-3, OC-n and dedicated Internet and voice services.
PRODUCTS AND SERVICES
The Company currently offers a wide variety of data and voice services,
including dedicated/high speed access service, application support services,
Internet, switch-based local and long distance telephone service, video
conferencing and basic information technology services, including system
integration services and transparent LAN. The Company works with its prime
commercial customers to develop integrated bundles of services to best meet
their needs. For basic commercial customers, the Company typically offers a
standardized bundle of local and long distance telephone service and Internet
access service.
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TELEPHONY
The Company currently provides switch-based local and long distance
telephone service and a full range of other narrowband telecommunications
services.
LOCAL EXCHANGE. The Company offers switch-based local exchange services,
including local dial tone, with such features as call forwarding, call waiting
and voice mail. These services are offered at highly competitive terms and rates
packaged with other high margin products.
CENTREX/PBX. The Company provides flexible solutions to customers with
multiple telephones. The Company's Centrex services provide call forwarding,
call waiting, line hunting, station conferencing, automatic call-back and call
account tracking. The Company minimizes Centrex customers' capital expenditures
by providing such services through Company-owned equipment housed at the central
office. For large customers or customers with special needs, the Company
integrates customer-owned private branch exchange ("PBX") systems with digital
PBX trunks.
LONG DISTANCE, TOLL FREE AND CALLING CARD SERVICES. The Company provides a
complete suite of domestic and international switch-based long distance service,
including advanced 8XX toll free services, enhanced call routing, operator
services, conference calling, travel card services and debit/pre-paid calling
cards.
DEDICATED/HIGH SPEED ACCESS. The Company offers transport and
protocol-specific services which allow customers to connect their facilities
with their regional offices, customers, vendors or remote service providers. The
Company offers a range of dedicated access services, including DS-1(T1) and DS-3
digital channels and optical carrier services up to and including OC-48. The
Company also implements numerous transmission protocols, including Integrated
Services Digital Network ("ISDN"), Asynchronous Transfer Mode ("ATM"), frame
relay, DSL, native speed Ethernet (10Mbps) and private IP.
APPLICATION SUPPORT SERVICES
INTERNET. The Company currently provides high-speed Internet access at
speeds ranging from 128Kbps to 10Mbps, allowing customers to select the access
speed that best meets their needs. The Company allows customers to choose to pay
based on a flat monthly rate or based upon the bandwidth used.
VALUE-ADDED INTERNET SERVICES. The Company augments its Internet access
services with e-mail, Web hosting (shared & dedicated server), file transfer and
user-on-the-road support services.
VIRTUAL PRIVATE NETWORK. The Company offers its Internet access customers
a virtual private network service, which uses authentication and encryption
software to provide a secure means of accessing corporate information using
dial-up remote access.
VIDEO CONFERENCING. The Company currently offers video conferencing
services and tailors video quality and cost to meet customers' needs.
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INFORMATION TECHNOLOGY SERVICES
SYSTEMS INTEGRATION, INTRANET AND SERVER-BASED PRODUCTS. The Company
offers systems integration services, including design, implementation and
support of customer networks. The Company strives to improve functionality of
customers' LANs and reduce their expenditures on LANs by utilizing elements of
the Company's networks and central office. The Company's initial focus has been
on bandwidth management, local area/wide area integration, voice and data
integration and formation of intranets.
TRANSPARENT LAN. The Company currently offers transparent LAN services
that allow customers to interconnect LANs and support corporate intranets in
metropolitan area networks ("MANs") while maintaining the functionality and, in
many cases, the speed of a LAN. In most cases, the Company provides the
customer-located equipment ("CLE") to make such interconnection possible.
SALES AND MARKETING
Consistent with its market segmentation strategy, the Company uses
different sales channels to target customers within the three market segments
identified by the Company. The Company uses direct sales efforts and a
consultative selling approach with prime commercial customers, direct sales
efforts for wholesale customers and more economical methods such as direct mail
and telemarketing to target basic commercial customers. The Company has
allocated responsibilities for such selling efforts among four different
positions within its sales force structure: strategic account manager, wholesale
account manager, inside sales representative and building entry manager.
Strategic account managers are primarily responsible for selling a complete line
of products and services to prime customers in their assigned territories.
Wholesale account managers sell dedicated transport facilities, among other
services, to wholesale customers. Inside sales representatives are responsible
for telemarketing to potential customers on an ongoing basis to create
appointments for strategic account managers and assisting with sales proposals.
The Company's building entry manager is responsible for establishing
relationships with property owners and building managers to gain introduction to
their tenants.
DIRECT SALES
The Company uses direct sales efforts to make retail sales to prime
commercial customers and to make wholesale sales of transport and central office
functionality to IXCs, ISPs, other CLECs and resellers.
PRIME COMMERCIAL. The Company bases its direct sales efforts to prime
commercial customers on a consultative selling approach, which involves a
systematic assessment of customers' telephony usage, their satisfaction with
their existing LANs, if any, and their general communications needs. Strategic
account managers work closely with customers and the Company's own systems
engineers to develop and implement integrated telecommunications solutions. The
Company attempts to position itself as a long-term business partner able to
solve customers' problems by providing access to current and emerging
technologies through the Company's networks and systems. The Company believes
that this process results in the sale of value-added products in addition to
commodity-like services such as local and long distance services. Moreover, the
Company believes that this approach ultimately reduces customer turnover and
differs from the approach adopted by many of the Company's competitors whose
sales are based primarily on price discounting of basic dial tone services.
The Company believes that its consultative sales approach will be
particularly successful with respect to sales of the Company's value-added
Internet, e-commerce and transparent LAN services.
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WHOLESALE CUSTOMERS. The Company's wholesale account managers offer
wholesale customers, such as IXCs, ISPs, CLECs, and resellers, a variety of
services ranging from dedicated access to complete local service. Such sales
allow the Company to earn incremental revenue while limiting the associated
sales and marketing expenses. The Company's wholesale sales objective is to
utilize third party sales channels and existing customer relationships.
DIRECT MARKETING
The Company uses direct mail and telemarketing to sell the Company's
services to basic customers and to generate leads for sales to prime customers.
Strategic account managers build upon such marketing efforts to close sales to
basic customers. The Company typically offers basic customers a bundle of
standard services at a competitive price. For example, the Company recently has
offered basic customers one free year of Internet access service for entering
into two-year contracts for switch-based local and long distance services. The
Company believes that when it gains a sale through such methods, it not only
generates revenue from the new customer but also establishes a relationship upon
which the Company may base future add-on sales efforts to sell higher margin
applications.
MARKETING SUPPORT AND COMMUNICATIONS POLICY
The Company supports its direct sales and marketing efforts through the use
of targeted direct mail, targeted advertising and its Internet web page. The
Company targets businesses for direct mail efforts through careful demographic
analyses. The Company classifies and prioritizes customers on the basis of their
standard industry classification ("SIC") codes, estimates of their
telecommunications spending and their number of employees. The Company then uses
databases to identify businesses' addresses and decision makers and mapping
tools to pinpoint their locations. By targeting customers in this way, the
Company believes that it can use direct mail in a cost-effective manner to
promote understanding of the Company and its services and to stimulate qualified
leads for the Company's retail sales force. The Company augments its direct mail
efforts through the use of advertising aimed at the business community. Such
advertising is designed to create a FirstWorld brand "umbrella" that reinforces
sales efforts by generating additional leads, establishing brand awareness and
differentiating the Company from its competitors. The Company also uses public
relations to support the launch of new services as they are introduced to the
marketplace.
As of November 30, 1998, the Company employed 66 persons in sales and
marketing. The Company is in the process of expanding its sales and marketing
staff but intends to continue to be selective in its recruiting, requiring
prospective salespeople to have demonstrated success in telecommunications or
data communications sales.
CUSTOMER RELATIONSHIPS
The Company's goal is to become the premier ICP in the areas it serves,
and to create service offerings that appeal to customers of varying sizes and
in a variety of industries. Management believes that the customer's service
purchase decision is based primarily on the strength of the value proposition
offered, customer service and support, coupled with a price advantage for
properly-designed Company services, relative to the customer's current
installed service.
The Company builds its customer relationships around its data-centric
service focus, which represent higher year-over-year growth, lower churn and
greater revenue per customer, than those of
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traditional voice telecommunications services. In addition, the Company uses
its high-touch customer service approach to create more value and to
increase retention and add-on sales opportunities.
STRATEGIC RELATIONSHIPS
The Company actively pursues strategic relationships with property
developers and service providers as part of its core business strategy. The
Company believes that these relationships can provide enhanced brand identity,
access to physical assets, new products and technologies, joint marketing
synergies and other benefits, thereby accelerating market rollout and reducing
asset deployment, sales costs and customer turnover.
DEVELOPER RELATIONSHIPS
The Company pursues relationships with property developers in order to
gain access to prime commercial customers and to facilitate marketing of the
Company's products and services. An example of this is the preferred provider
relationship recently established with Orange City Mills Limited Partnership
(a subsidiary of Mills Corporation) in Orange, California. This relationship
with the Mills Corporation grants FirstWorld (through one of its wholly owned
subsidiaries) the right to provide telecommunications services to the tenants
of a retail development for a five year period, along with the ability to
market services directly to the retail development's tenants. Prior to the
expiration of the initial five year term, the parties have agreed to
negotiate regarding an extension of the term. If the parties do not reach
agreement during this exclusive negotiation period, FirstWorld retains a
right of first refusal to match a proposal the Mills Corporation receives
from any other service provider.
SERVICE PROVIDER RELATIONSHIPS
The Company has established and will continue to build relationships
with service providers in complementary industries to create competitive or
innovative products. The Company expects these service providers to
contribute wholesale products, licenses of proprietary technologies,
specialized knowledge, sales and technical support or uniquely situated fixed
assets. In return, the Company will contribute its network platform, sales
force channels, operational support, engineering expertise and wholesale
purchases.
ENRON. The Company and Enron Capital & Trade Resources Corp. ("Enron"),
a subsidiary of Enron Corp., one of the world's leading integrated natural
gas and electricity companies, have an informal collaborative relationship to
jointly market telecommunications and utility services. The Company believes
that this relationship can provide it with access to new markets, sales
synergies and product development opportunities. In this regard, Enron has
commenced a major initiative in California to compete with incumbent electric
utilities to sell wholesale electricity and utilities management services.
Neither the Company nor Enron is, however, obligated to pursue any
opportunity or provide any service to customers. The Company, however, has
granted Enron exclusive rights to pursue jointly with the Company any
business opportunity with both telecommunications applications and utility
applications, and has agreed not to pursue any such joint opportunity with
any person other than Enron. See "Certain Relationships and Related
Transactions--Equity Investment."
NAVINET. The Company has entered into an agreement with Navi-Net
Internet Services Corporation (formerly a division of Navi-Site Internet
Services Corporation and a wholly owned subsidiary of College Marketing Group
Incorporated), a national Internet protocol network ("NaviNet"), calling for
the two companies to establish a remote access MegaPOP at the Company's
Anaheim central office. The MegaPOP allows ISPs to provide local dial-up
numbers to customers located within the Southern California area. Under the
agreement, the Company provides power and space to NaviNet in the co-location
room in the Company's Anaheim central office and helps manage and provision
elements of network connectivity. In return, NaviNet has granted
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the Company the right to resell NaviNet's "GeoDial" service to ISPs
throughout California and has granted the Company "most favored purchaser"
status, meaning that no other similarly situated LEC will receive better
GeoDial pricing than the Company.
NETWORK ARCHITECTURE AND TECHNOLOGY
The Company has leveraged its substantial internal expertise with respect
to engineering, network creation and business processes to design and construct
a network architecture that it believes will result in enhanced product
offerings and enable the Company to improve scalability, reduce operating cost
and improve network profitability. The Company believes such expertise also will
facilitate the Company's implementation of new technologies.
CENTRAL OFFICE. The Company's central office in Anaheim is an integrated
computer/telephony facility which serves as the network operating center. The
facility houses a Nortel DMS-500 voice switch, the Company's Internet platform,
product servers primarily related to the Company's data products and co-located
equipment of strategic vendors. The facility has numerous elements of
redundancy, disaster recovery and remote recovery in order to meet or exceed
industry standards of reliability and best practices. The facility operates
24-hours a day and seven days a week. The Company believes the central office
will be sufficient to support its operations throughout Orange County.
Additional central office facilities are anticipated for Los Angeles/San Gabriel
Valley, San Diego, the San Francisco bay area and other areas to support the
Company's geographic expansion plans.
TRANSPORT. The Company's networks are built and operated using various
transmission technologies and topologies including fiber optics, leased
transport and unbundled network elements procured from the ILEC. The Company
targets areas with (i) high concentrations of customers with sophisticated
communications needs and (ii) large numbers of smaller customers that can be
aggregated to reduce the Company's cost of service.
The Company leases unbundled loops from Pacific Bell and GTE Corporation
("GTE") pursuant to interconnection agreements. The interconnection agreements
allow the parties to complete local and intraLATA toll calls on each other's
network and establish rates, terms and conditions for access to unbundled
network elements, resale of local exchange services, service provider number
portability and access to operator service, directory service and 911 service.
The Company currently is implementing direct interconnection with the major
CLECs in Orange County, including MFS Communications ("MFS"), and the major
IXCs.
INFORMATION TECHNOLOGY AND SUPPORT SYSTEMS
The Company currently has in place all the necessary systems to provide
support for customer management. FirstWorld has deployed a sales force
automation system and prospect database tools, an order entry, billing and
customer care application and an internally-developed network management and
interface application that allows the Company to remotely monitor customer
circuits. Although the Company believes that its existing systems adequately
support its service offerings, the Company is committed to developing and
implementing fully integrated advanced internal information systems because
it believes that such systems are crucial to support integrated
communications services.
Although no single solution currently exists for seamless, end-to-end
handling of all aspects of customer service (i.e., from initial contact with
a potential customer to service activation and finally to customer billing),
FirstWorld believes that the development and implementation of an advanced
single-source management system will further differentiate it from its
competitors and will result in significant benefits to its customers. The
overall aim is to create the necessary back-office integration to
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allow FirstWorld to provide its customers with single-source service
management. To achieve this end, the Company has embarked on an extensive
evaluation of available systems, using a combination of existing legacy
applications and newly-developed systems that are currently used by other
integrated telecommunications providers. Particular emphasis is being placed
on enhancing access through the Internet, so both Company field personnel and
end user customers will have access to vital information quickly and easily.
NETWORK STATUS AND PROPOSED EXPANSION
LOS ANGELES BASIN/ORANGE COUNTY
The Company currently provides on-fiber services to specific customers
connected to fiber clusters in Anaheim and Irvine. In addition, the company
continues to expand its network within the area of Irvine known as the Irvine
Spectrum (the "Irvine Spectrum") area and has begun offering services to
buildings in the Irvine Spectrum.
The Company also currently provides service to customers located around
several Pacific Bell central offices located in Los Angeles County and Orange
County through Pacific Bell unbundled copper loops. The Company has applied
for interconnections with additional Pacific Bell central offices in these
areas by co-locating the Company's equipment at such central offices in order
to expand the areas in which it can offer services. These interconnections,
which the Company began establishing during the third quarter of 1998, will
allow the Company to offer services through Pacific Bell unbundled loops to
businesses in most parts of Los Angeles County and Orange County.
PLANNED EXPANSION
In addition to its networks in the Los Angeles basin and Orange County,
the Company intends to expand into San Diego and the San Francisco bay area
by replicating the primary tenets of its business plan. The Company will
target future expansion based on analysis of the number and density of
businesses with heavy telecommunications usage in a given area and current
and anticipated competition from other telecommunications providers. The
Company has identified additional cities which it believes would be
attractive markets for future expansion. These target areas and their
priority for expansion are subject to continual re-evaluation in response to
refinements in the Company's expansion criteria and changes in the
communications industry and in general economic conditions.
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ACQUISITIONS
One of the major tenets of FirstWorld's business plan is to selectively
acquire companies that expand the Company's marketing and service footprint
and its ability to serve additional customers. In November 1998, the Company
completed the acquisition of Optec, Inc. ("Optec"), from Enron
Communications, Inc. ("ECI"). Optec is a systems integrator with operations
in Oregon and Washington and has approximately 90 employees in engineering,
sales and operations. The Company also purchased from ECI an indefeasible
right of use to fiber optic cable in a MAN serving Portland with routes
connecting Beaverton and Hillsboro, Oregon. In addition, the Company obtained
rights to OC-3 level capacity on a WAN being developed by ECI that will
connect up to 15 cities nationwide. The Company has selected the first eight
cities for WAN deployment (Portland, Los Angeles, the San Francisco Bay area,
Salt Lake City, Denver, Dallas, Houston and Miami) and will select additional
cities in 1999. The Company intends to complement this and other acquisitions
with its existing capabilities to provide a highly competitive product bundle
aimed at business customers.
COMPETITION
In each market area in which the Company is authorized to provide services,
the Company competes or will compete with several other service providers and
technologies. Most of the Company's competitors, particularly ILECs, have
long-standing relationships with customers and suppliers in their respective
industries, greater name recognition and significantly greater financial,
technical, marketing and other resources than the Company. The Company expects
to compete on the basis of service features, quality, price, reliability,
customer service and rapid response to customer needs.
TELEPHONY. The telephony services offered by the Company compete
principally with the services offered by ILECs in the areas served by the
Company's networks. The Company also competes with various CLECs in its
target markets, including MFS, NEXTLINK Communications, Inc. ("NEXTLINK"),
ICG Communications, Inc. ("ICG"), GST Telecommunications, Inc. ("GST") and
Teleport Communications Group, Inc. ("Teleport"). The ILEC dominates each of
the markets targeted by the Company. ILECs possess ubiquitous infrastructure
and the financial wherewithal to subsidize unprofitable deals to maintain key
customers. The Company competes with ILECs on the basis of price, customer
support and the ability to offer and provide value-added, integrated service
bundles. The Company has found that its CLEC competitors, unlike the ILEC,
tend to focus on particular segments within the market. The Company competes
with CLECs and ICPs by providing a variety of voice, data and Internet
services in different combinations to address the needs of different market
segments.
The Company also faces, and expects to continue to face, competition
from other current and potential market entrants, including AT&T Corp.
("AT&T"), MCI/WorldCom, Sprint and other IXCs, wireless telephone system
operators and private networks built by large end users. AT&T has indicated
its intention to offer local telecommunications services in certain U.S.
markets, either directly or in conjunction with CLECs or cable operators.
AT&T has acquired Teleport and plans to merge with Tele-Communications, Inc.
("TCI"), the nation's largest operator of cable television systems, and to
provide telephone services over the TCI cable plant. Sprint has announced
plans to deploy an advanced telecommunications network intended to boost
speed and capacity, cut costs and provide an integrated platform to enter
local markets, and has signed access agreements with a number of regional
bell operating companies ("RBOCs") and GTE. WorldCom has acquired MFS (one of
the company's CLEC competitors) and Brooks Fiber Properties, Inc., both major
CLECs, and, most recently, MCI. Ameritech Corp. ("Ameritech") and US West,
Inc. ("US West") have also announced
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plans to enter the long distance market by forming joint sales ventures with
Qwest Communications International Corp. ("Qwest"), a growing provider of
fiber optic-based telecommunications services. Although these particular
deals with Qwest have been declared unlawful by the Federal Communications
Commission ("FCC") as a result of actions brought by AT&T and MCI/WorldCom,
they remain subject to ongoing judicial and FCC review, and a continuing
trend toward combinations and strategic alliances in the telecommunications
industry, including combinations or potential consolidations among RBOCs or
CLECs, or between IXCs and CLECs, could give rise to significant competitors
for the Company. The Company also expects increased competition from ILECs
operating outside of their current local service areas, cable television
systems, electric utilities, microwave and other wireless carriers and
satellite licensees. In addition, sweeping changes mandated by the
Telecommunications Act of 1996 (the "Telecommunications Act") will facilitate
entry by new competitors into local exchange and exchange access markets,
including requirements that ILECs make available interconnection and
unbundled network elements at cost-based rates, and resell their services to
requesting competitors at wholesale discounts.
INTERNET SERVICES. The Internet services market is extremely competitive,
and the Company expects competition in this market to intensify in the future.
The Company's current and prospective competitors include many large companies
that have substantially greater market presence and financial, technical,
marketing and other resources than the Company. The Company competes (or in the
future is expected to compete) directly or indirectly with the following
categories of companies: (i) national and regional ISPs; (ii) established
on-line services; (iii) computer software and technology companies;
(iv) national telecommunications companies; (v) RBOCs; (vi) cable operators; and
(vii) nonprofit or educational ISPs. The entry of new participants from these
categories and the potential entry of competitors from other categories (such as
computer hardware manufacturers) would result in substantially greater
competition for the Company.
ADVANCED NETWORK SERVICES. In the markets for data services and other
advanced network services, the Company will face competition from a number of
companies focused on the LAN and WAN market, including companies with
significantly greater financial resources, more extensive business experience,
and greater market and service capabilities than the Company. In particular, the
Company will be required to compete with companies that design and manufacture
products for the LAN and WAN markets and large system integrators.
Substantially all of the Company's current and prospective competitors in
the markets for advanced networking services have substantially greater market
presence and financial, technical, marketing and other resources than the
Company. See "--Risk Factors--Competition."
REGULATION
OVERVIEW
The Company's services are subject to regulation by federal, state and
local governmental agencies. The Company has obtained all authorizations and
approvals necessary to conduct its operations as currently structured and
believes that it is in compliance with all laws, rules and regulations governing
its current operations. Nevertheless, changes in existing laws and regulations
or any failure or significant delay in obtaining necessary future regulatory
approvals, could have a material adverse effect on the Company's business,
financial condition and results of operations.
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At the federal level, the FCC has jurisdiction over interstate and
international telecommunications services. State regulatory commissions have
jurisdiction over intrastate communications. Municipalities and other local
jurisdictions may regulate limited aspects of the Company's business by, for
example, regulating the use of rights-of-way, imposing zoning and franchise
requirements, and requiring installation permits. The Company also is subject to
taxation at the federal and state levels and may be subject to varying taxes and
fees from local jurisdictions.
FEDERAL LEGISLATION
THE TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act, enacted on
February 8, 1996, substantially departs from prior legislation in the
telecommunications industry by establishing local exchange competition as a
national policy through the removal of state regulatory barriers to competition
and the preemption of laws restricting competition in the local exchange market.
The Telecommunications Act, among other things, mandates that (i) ILECs permit
resale of their services and facilities on reasonable and nondiscriminatory
terms and at wholesale rates, (ii) all LECs (including the Company) allow
customers to retain the same telephone number ("number portability") when they
switch local service providers, (iii) ILECs permit interconnection by
competitors to an ILEC's network at any technically feasible point that is at
least equal in quality to that which the ILEC provides to itself and pursuant to
reasonable and nondiscriminatory terms and cost-based rates, (iv) ILECs unbundle
their network services and facilities at any technically feasible point and
permit competitors and others to use these facilities at cost-based, reasonable
and nondiscriminatory rates, (v) all LECs ensure that an end user does not have
to dial any more digits to reach customers of local competitors than to reach
the ILEC's customers to the extent technically feasible ("dialing parity") and
(vi) all LECs must establish reciprocal compensation arrangements for the
transport and termination of telecommunications traffic.
The Telecommunications Act permits RBOCs to provide out-of-region interLATA
long distance services immediately, and also allows RBOCs to provide in-region
interLATA services on a state-by-state basis once certain market-opening
requirements are implemented and entry is determined to be in the public
interest. The RBOCs, but not other ILECs, have an added incentive to open their
local exchange networks to facilities-based competition because Section 271 of
the Telecommunications Act provides for the removal of the current ban on RBOC
provision of in-region interLATA toll service only after meeting certain
requirements. The FCC, in consultation with the United States Department of
Justice and the states, is given jurisdiction to determine whether to approve
applications for RBOC entry into long distance. These provisions of the
Telecommunications Act are designed in part to ensure that RBOCs take
affirmative steps to level the playing field for their competitors so that
others can compete effectively before the RBOC secures in-region long-distance
entry. To date, three RBOCs have filed applications with the FCC for "in-region"
long distance authority. The FCC denied the application of SBC Communications,
Inc. ("SBC") with respect to Oklahoma in June 1997; denied the application of
Ameritech in August 1997 with respect to Michigan; and denied applications filed
by BellSouth for South Carolina and Louisiana in December 1997 and February
1998, respectively. Another application filed by BellSouth for Louisiana was
denied by the FCC in October 1998, and the California Public Utilities
Commission ("CPUC") determined that a draft application submitted to the CPUC by
Pacific Bell in anticipation of its own FCC application did not satisfy Section
271 requirements. Several entities have sought reconsideration of the FCC's
decisions and some have initiated litigation claiming, among other things, that
Section 271 of the Telecommunications Act is unconstitutional, that the FCC has
exceeded its jurisdiction, and that the FCC has violated the Eighth Circuit's
ruling on the Interconnection Orders (discussed below) in several respects,
e.g., by effectively promulgating national pricing standards. In addition,
certain aspects of the Section 271 RBOC entry requirements remain subject to FCC
review. See "--Federal Regulation."
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RBOC entry into long distance services under Section 271 of the
Telecommunications Act has, over the past year, also become a contentious
political issue. Several ranking members of Congress, including Rep. John
Dingell (D-MI) and Rep. W.J. "Billy" Tauzin (R-LA), have voiced strong
frustration at what they allege is an unwillingness by the FCC to grant RBOC
applications for long distance authority. In response, William Kennard, Chairman
of the FCC, announced in early 1998 that the FCC will, in the future, take a
more "cooperative" position with respect to RBOC applications under Section 271
of the Telecommunications Act and work closely with each RBOC to identify and
resolve issues arising in connection with RBOC entry into the long distance
service market. It is not certain at this time whether Chairman Kennard's
announcement indicates that, in the future, the FCC is prepared to grant RBOC
applications for in-region provision of interLATA long distance services.
The U.S. District Court for the Northern District of Texas declared
Section 271 unconstitutional in late December 1997. The district court's
decision was reversed by the United States Court of Appeals for the Fifth
Circuit in September 1997. However, if any subsequent United States Supreme
Court review affirms the district court's ruling, Pacific Bell, among other
RBOCs, will be able to provide more services to customers, making it an even
more formidable competitor for the Company. See "--Risk Factors--Competition."
Under the Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine whether it is economically attractive to use these elements.
FEDERAL REGULATION
THE TELECOMMUNICATIONS ACT REGULATIONS. The Telecommunications Act in some
sections is self-executing, but in most cases the FCC must issue regulations
that identify specific requirements before the Company and its competitors can
proceed to implement the changes the Telecommunications Act prescribes. The
Company actively monitors pertinent FCC proceedings and has participated in some
of these proceedings (including the restructuring of access charges, the
application of access charges to Internet traffic and RBOC petitions for the
deregulation of ILEC-provided DSL services). The outcome of these various
ongoing FCC rulemaking proceedings or judicial appeals of such proceedings could
materially affect the Company's business, financial condition and results of
operations.
As required by the Telecommunications Act, in July and August 1996 the FCC
adopted orders issuing new rules to implement the interconnection and resale
provisions of the Telecommunications Act (the "Interconnection Orders") which
are intended to remove or minimize regulatory, economic and operational
impediments to full competition for local services, including switched local
exchange service. A number of parties filed petitions for review of the
Interconnection Orders in Federal court seeking to vacate certain of the rules
adopted therein. In a July 18, 1997 decision, the United States Court of Appeals
for the Eighth Circuit vacated significant portions of the Interconnection
Orders, including its provisions governing the pricing of local
telecommunications services and unbundled network elements, its unbundling
requirements and its "pick and choose" rule (which enabled a telecommunications
carrier to demand any individual term of an ILEC's interconnection contract with
another carrier). Another Eighth Circuit decision issued on October 14, 1997
vacated an FCC rule that obligated ILECs, under certain circumstances, to
provide combinations of network elements, rather than provide them individually.
This decision may make it more difficult or expensive for competitors to use
combinations of ILEC unbundled elements. On August 22, 1997, the Eighth Circuit
vacated the FCC's interconnection rules implementing the Telecommunications Act
dialing parity requirement for LECs. In November 1997, the FCC, AT&T,
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MCI/WorldCom, and a number of CLECs sought review of the Eighth Circuit's
decisions by the Supreme Court. The RBOCs and GTE also cross-petitioned for
Supreme Court review of several aspects of the Interconnection Orders that
were upheld by the Eighth Circuit in the event Supreme Court review was
granted. While these petitions were pending, the Eighth Circuit on January
23, 1998, found that the FCC had violated the terms of its July decision, and
ordered the FCC to cease imposing its local pricing rules on RBOCs attempting
to enter the long distance market under Section 271 of the Act. Cross-appeals
were argued before the Supreme Court in October 1998. A Supreme Court
decision in the cases is not expected until some time in 1999.
The Eighth Circuit and Supreme Court decisions create uncertainty about
individual state rules governing pricing and other terms and conditions of
interconnection agreements and could make negotiating and enforcing such
agreements in the future more difficult and protracted. They also could
require renegotiation of relevant provisions of existing interconnection
agreements, or subject them to additional court or regulatory proceedings.
Although the Company generally believes that the outcome of these judicial
proceedings will not have a material adverse effect on its business and
operations, there can be no assurance that this will be the case.
In July 1996, the FCC mandated that over the course of the next year
responsibility for administering and assigning local telephone numbers be
transferred from the RBOCs and a few other ILECs to a neutral entity. In
August 1996, the FCC issued regulations which addressed certain of these
issues, but left others for decision by the states and the neutral numbering
plan administrator, Lockheed-Martin IMS, which in August 1997 was designated
by the FCC. The FCC numbering decisions, among other things, (a) prohibit
states from creating new area codes that could unfairly hinder LEC
competitors (including the Company) by requiring their customers to use 10
digit dialing while existing ILEC customers use 7 digit dialing and (b)
prohibit ILECs (which in many cases are still administering central office
numbers pending an operational transition to the neutral administrator) from
charging "code opening" fees to competitors (such as the Company) unless they
charge the same fee to all carriers including themselves. In addition, each
carrier is required to contribute to the cost of numbering administration
through a formula based on net telecommunications revenues. In July 1996, the
FCC released rules to permit both residential and business customers to
retain their telephone numbers when switching from one local service provider
to another (known as "number portability"). RBOCs were required to implement
number portability in the top 100 markets in five phases beginning no later
than March 31, 1998 and to complete it no later than December 1998, although
the FCC has granted numerous waivers of these implementation deadlines. In
smaller markets, RBOCs must implement number portability within six months of
a request therefore commencing December 31, 1998. Non-RBOC ILECs are not
required to implement number portability in any additional markets until
December 31, 1998, and then only in markets where the feature is requested by
another ILEC.
In addition, pursuant to the Telecommunications Act, the FCC issued new
regulations in 1997 regarding the implementation of the universal service
program and the assessment of charges on carriers obtaining access to local
exchange networks. Both the access charge and universal service regimes were
substantially revised. As a result of these changes, the costs of business
and multiple residential lines are expected to increase. The FCC is currently
examining whether IXCs and CLECs will be permitted, and if so in what manner
and to what extent, to pass through universal service charges to end users as
line item surcharges on bills for telecommunications services. In addition,
in June 1998 the FCC announced that it was restructuring and narrowing
universal support for provision of Internet services to schools, libraries
and rural health care providers. As a result of this rapidly changing
environment, the Company is unable to predict how the
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FCC's universal service and access charge reforms will be finally implemented or
enforced, or what effect they will have on competition within the
telecommunications industry, generally, or on the competitive position of the
Company, specifically. The Company also is unable to accurately predict the
final formula for universal service contribution or its own level of
contribution in 1999 and beyond.
The Telecommunications Act requires the FCC to streamline its regulation of
ILECs and permits the FCC to forbear from regulating particular classes of
telecommunications services or providers. Since the Company is a non-dominant
carrier and, therefore, is not heavily regulated by the FCC, the potential for
regulatory forbearance likely will be more beneficial to ILECs than the Company
in the long run. In June 1997, the FCC granted the request of a CLEC that the
FCC forbear from imposing tariff filing requirements on exchange access services
provided by carriers other than ILECs. The FCC has sought further comment on
whether to mandate the detariffing of exchange access services. The proceeding
remains pending, and there can be no assurance how the FCC will rule on this
issue, or what effect any such ruling may have on competition within the
telecommunications industry generally, or on the competitive position of the
Company specifically.
There also is a risk that Telecommunications Act requirements that
currently work in the Company's favor may be implemented differently in the
future depending on marketplace developments. For example, many CLECs such as
the Company have begun to acquire an increasing number of ISP customers. This
development in turn has resulted in a rapid increase in Telecommunications
Act-mandated reciprocal compensation charges paid by ILECs to CLECs to terminate
the calls of ILEC customers to CLEC ISP customers. ILECs led by the RBOCs
currently are pursuing action in the courts and before state PUCs and the FCC to
address this issue. The outcome of such actions is uncertain, but could have a
material adverse effect on the Company.
Section 706 of the Telecommunications Act requires the FCC to initiate a
proceeding to address the provision of "advanced telecommunications services"
to all Americans. In early 1998, several RBOCs (Bell Atlantic, Ameritech,
BellSouth and SBC) filed petitions with the FCC seeking forbearance from FCC
and state regulation of their DSL high-speed data services. The RBOCs also
seek an FCC ruling under Section 706 that elements of their DSL services are
not subject to the interconnection, unbundling and resale requirements of the
Telecommunications Act. In response to these petitions, the FCC on August 6,
1998 proposed that RBOCs be permitted to offer DSL services on an unregulated
basis if certain separate subsidiary and interconnection requirements are
met. Along with other significant DSL based CLECs, the Company participated
in the DSL Access Telecomunications Alliance to support this FCC proposal. A
final FCC decision is expected in January 1999. There can be no assurance
that these or similar RBOC regulatory initiatives regarding broadband service
provision would not have a material adverse effect on the Company's business,
financial condition and results of operations.
STATE REGULATION
Many of the Company's services will be classified as intrastate services
subject to state regulation. All of the states where the Company operates, or
will operate, require some degree of state regulatory commission approval to
provide certain intrastate services. In most states, intrastate tariffs are also
required for various intrastate services, although the Company is not typically
subject to price or rate of return regulation for tariffed intrastate services.
The Company may also be subject to a variety of other state regulatory
requirements, including interconnection, universal service, reporting and
customer service requirements.
The Telecommunications Act requires each state to remove barriers to entry
and barriers to competition for ILEC competitors. While no assurance can be
given as to how quickly and how effectively each state will act to implement
this legislation, many state authorization processes are being streamlined
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and the authorization time frames shortened considerably. Several states have
allowed ILECs rate, special contract (selective discounting) and tariff
flexibility, particularly for services deemed subject to completion. Such
pricing flexibility increases the ability of the ILEC to compete with the
Company and constrains the rates that the Company may charge for its
services. In view of the additional competition expected to result from the
Telecommunications Act, states may grant ILECs additional pricing
flexibility. At the same time, some ILECs may request increases in local
exchange rates to offset revenue losses due to competition.
Under the Telecommunications Act, if a request is made by the Company,
ILECs generally have a statutory duty to negotiate interconnection and access
arrangements in good faith for the Company's provision of local service (unless
they are exempted from such requirement as small or rural ILECs). The Company
has completed interconnection agreements with Pacific Bell and GTE for
California. During these negotiations, the Company or the ILEC may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period set forth in the
Telecommunications Act, the parties may submit outstanding disputes to the
states for arbitration. To date the Company has not submitted any disputes to
the states for mediation or arbitration.
LOCAL REGULATION
The Company will need to interact with local governments in a variety of
ways, and may be required to obtain various permits and authorizations from
municipalities in which it operates. How diverse local governments will
exercise traditional functions, including zoning, permitting and management
of rights-of-ways, and address the expansion of telecommunications
competition and varying means of entry in particular, is uncertain. The kinds
and timing of approvals required to conduct aspects of the Company's business
varies among local governments and may also vary with the specific technology
or equipment configuration used by the Company.
While the Telecommunications Act permits local governments to manage
rights-of-way, the scope of that authority, including the circumstances when
fees can be charged and the amount of such charges, has already been the
subject of numerous disputes between telecommunications carriers and such
local governments. In addition, some local governments have been requiring
substantial filings and review before telecommunications carriers can operate
in their licensed areas and have also required the payment of significant
franchise fees or taxes. Some of these disputes involving licensing of
telecommunications carriers and rights-of-way are in litigation and more
administrative and court litigation is likely. The prohibition of entry
barriers set forth in the Telecommunications Act and the FCC's power to
preempt such barriers have been addressed in these cases, which to date have
rejected local government efforts to impose "franchise" or tax obligations on
CLECs and other telecommunications carriers. The FCC has recently preempted,
and thereby prevented enforcement of, certain state and local regulations
that had the effect of inhibiting local competition. Any inability or
unwillingness by the FCC to preempt additional state and local regulations in
a timely fashion could have a material adverse impact on the Company.
AGREEMENTS WITH THE CITY OF ANAHEIM AND THE IRVINE COMPANY
THE CITY OF ANAHEIM
The Company, its wholly owned subsidiary, FirstWorld Anaheim ("FWA"), and
the City of Anaheim (the "City") entered into a series of agreements in February
1997 regarding development of the first portion of the Company's initial network
located within the City (the "Anaheim Network").
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AGREEMENT FOR USE OF OPERATING PROPERTY. Pursuant to an Agreement For
Use of Operating Property (the "Operating Property Agreement"), FWA leases
from the City 60 of 96 fiber strands contained in an approximately 50 mile
long loop of fiber optic cable owned by the City, together with related
facilities and rights. The term of the agreement runs through December 31,
2027, and during calendar year 2011 the parties are obligated to negotiate in
good faith concerning a possible 15-year extension of the term (through
December 31, 2042).
The remaining 36 fiber strands within the cable (the "Reserved Fibers") are
reserved by the City for its own use in providing municipal services (i.e., uses
that are not competitive with FWA's commercial uses). If the City determines
from time to time that some portion of the Reserved Fibers is not required for
municipal services, then the City and FWA are to negotiate in good faith the
terms and conditions on which that portion of the Reserved Fibers will be leased
to FWA. In any event, the City can use the Reserved Fibers only for municipal
services unless FWA fails to proceed with development of the third phase of the
Anaheim Network (as described below) and the City proceeds with the development
of the third phase of the Anaheim Network for its own account, as described
below.
As rent for the 60 strands of fiber, FWA is obligated to make quarterly
payments to the City of approximately $114,000. In addition, FWA is obligated to
pay all costs associated with operating and maintaining the leased property,
including maintenance expenses, taxes, insurance premiums and pole usage fees.
FWA also is obligated to maintain and insure the leased property and the City's
Reserved Fibers (except to the extent the Reserved Fibers are located on certain
identified City-owned premises, such as electrical substations), subject to the
City's obligation to reimburse FWA for a pro rata share of maintenance and
insurance costs (computed based on the number of Reserved Fibers relative to the
total of 96 fibers).
FWA has the right to assign its rights under the Operating Property
Agreement, but will not be released from liability unless the City expressly
consents. FWA also has the right to encumber its interest in the leased
property. FWA's interest in the leased property is not currently encumbered.
UNIVERSAL TELECOMMUNICATIONS SYSTEM PARTICIPATION AGREEMENT.
Concurrently with the execution of the Operating Property Agreement, the
City, FWA and the Company executed the Universal Telecommunications System
Participation Agreement (as amended, the "UTS Agreement") which sets forth
guidelines for FWA's development and operation of the Anaheim Network and
compensation payable to the City by FWA. The term of the UTS Agreement runs
through December 31, 2027, and during calendar year 2011 the parties are
obligated to negotiate in good faith concerning a possible 15-year extension
of the term (through December 31, 2042).
The UTS Agreement provides that FWA will construct the Anaheim Network in
three phases. The first phase extended service to identified municipal
facilities and was substantially completed in October 1997. The second phase
requires service to be extended in the ordinary course of business (i.e., within
six months following execution of a customer service agreement) to commercial,
industrial and governmental customers within certain defined service areas. The
Company was required to complete 44% of the first and second phases by April 1,
1998 and is further required to complete 90% of the first and second phases by
December 31, 1998, plus a 180-day cure period in each case. The Company
constructed and installed sufficient fiber to satisfy the 44% completion
requirement and expects completion of the fiber clusters currently under
construction and approved for construction to satisfy the 90% completion
requirement in a timely manner.
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The third phase of the Anaheim Network requires that service be extended in
the ordinary course of business to all customers within Anaheim, including
residential customers. This phase will be commenced only after the economic
feasibility of the third phase is validated by an independent consultant's
report and financing is arranged. FWA has agreed to cause a feasibility study
with respect to the third phase to be completed by no later than January 1,
2000, and thereafter to prepare annual updates of the study if necessary. If FWA
determines not to proceed with the development of the third phase of the Anaheim
Network, or if for any reason the principal financing for the third phase is not
funded or construction of the third phase is not commenced by December 31, 2002,
then the City may pursue development of the third phase on its own (including in
a business arrangement with third parties). If the City closes the principal
financing for or commences construction of the third phase, then the provisions
of the Operating Property Agreement prohibiting the City from using the Reserved
Fibers for other than municipal services terminate.
Under the UTS Agreement, the City is obligated, with specified exceptions,
to utilize FWA as the provider of all of the City's telecommunications services,
and to provide FWA with certain rights-of-way. The UTS Agreement requires FWA to
pay to the City (i) an annual payment in lieu of a franchise fee based on a
percentage of FWA's "adjusted gross revenues," as defined, related to the
Anaheim Network, subject to a minimum annual payment of $1,000,000 for periods
after June 30, 1999, (ii) a percentage of FWA's "net revenues," as defined,
derived from the Anaheim Network, (iii) certain of the City's annual operating
costs associated with the UTS Agreement, not to exceed $175,000 per year prior
to the commencement of the third phase of the Anaheim Network, and not to exceed
$350,000 per year thereafter (as adjusted annually to reflect changes in the
cost of living) and (iv) $20,000 per year (adjusted annually to reflect changes
in the cost of living) to support the City's presence on the Internet. The UTS
Agreement also requires the Company to deposit an amount equal to up to 15% of
"net revenues" derived from the Anaheim Network to maintain a $6,000,000 reserve
account for debt service and capital improvements.
The UTS Agreement requires FWA to commence construction of a
demonstration center in the City's downtown area by November 30, 1998, and to
complete the demonstration center by June 30, 1999. However, as a result of a
change in the proposed scope of the project, FWA now contemplates leasing
additional office space in the downtown area of Anaheim and housing a
demonstration center in the leased facilities. The Company expects the
demonstration center to be operational in the first quarter of 1999. Although
the Company believes that it is in compliance with its obligations with
respect to the demonstration center, the City has asserted its belief that
the Company is not satisfying its obligations vis-a-vis the demonstration
center. The parties are currently in the process of attempting to resolve
these issues.
The City has an option to purchase all of the issued and outstanding stock
of FWA for appraised value (i) at any time after July 1, 2012 or (ii) if FWA
fails to meet the specified performance deadlines related to completion of the
first and second phases of the Anaheim Network as described above. Any sale or
issuance of FWA stock can only be made if such sale or issuance is expressly
made subject to the City's purchase option. Moreover, any sale of the Anaheim
Network or other sale of substantially all of FWA's assets can only be made if
the City is equitably compensated for the loss of its future income stream under
the UTS Agreement or the buyer expressly assumes the obligations of FWA under
the UTS Agreement.
DEVELOPMENT FEE AGREEMENT. Pursuant to a Development Fee Agreement between
the Company and the City, for a period of five years commencing with the earlier
to occur of the closing of the financing for, or the commencement of,
construction of the first Additional Network (as defined below), the Company
must pay to the City a lump sum fee for each Additional Network that the Company
develops ($300,000 for each Additional Network financed in the first year;
$200,000 for each Additional Network
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financed in the second year; and $100,000 for each Additional Network
financed in the third, fourth and fifth years) (each, a "Development Fee").
Each Development Fee must be paid within 30 days after the closing of the
principal financing for an Additional Network or the commencement of
construction of such Additional Network, whichever occurs first. "Additional
Network" means (a) any expansion of the Anaheim Network into one or more
adjacent or nearby cities where FWA enters into a revenue sharing agreement
with any such city and (b) any separate communications system developed by
any other subsidiary of the Company that holds a Certificate of Public
Convenience and Necessity issued by the CPUC and enters into a revenue
sharing agreement with one or more public entities. No such fee is due,
however, with respect to the Company's relationship with The Irvine Company
because it is not a public entity.
THE IRVINE COMPANY
FirstWorld Orange Coast ("FWOC"), a wholly-owned subsidiary of the Company,
and The Irvine Company entered into two agreements in February 1998 regarding
FWOC's development of a network to serve certain areas that have been or are
planned to be developed by The Irvine Company (the "Irvine Network").
AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT. Pursuant to an
Agreement for Lease of Telecommunications Conduit dated as of March 5, 1998 (the
"Conduit Lease"), FWOC leases from The Irvine Company space within two
underground telecommunications tubes (the "Conduit"), and, in connection
therewith, has received the non-exclusive right to use undivided space within
the pull boxes serving such Conduit (collectively, the "Leased Premises"). The
Conduit Lease applies to (i) an existing Conduit system within certain
already-developed areas in the Irvine Spectrum and (ii) Conduit to be
constructed in the future in the as yet undeveloped areas of the Irvine
Spectrum. The Irvine Company may also install Conduit in other areas it may
develop in the cities of Irvine, Newport Beach and Tustin, and in unincorporated
areas of Orange County, and such areas may in the future be incorporated into
the Conduit Lease upon the mutual agreement of the parties ("Additional Areas").
The term of the Conduit Lease runs through December 31, 2027.
The Conduit Lease obligates FWOC to install fiber optic cable ("Cable") in
the Conduit pursuant to a phasing plan. A phase is completed when sufficient
Cable has been installed to enable FWOC to connect and provide service (for that
portion of the Irvine Network) to property abutting the Conduit. Upon
termination of the Conduit Lease, the Cable will be owned by The Irvine Company.
If FWOC fails to complete installation of the required Cable within 18 months,
The Irvine Company may, until such installation is completed, terminate the
Conduit Lease.
FWOC is obligated to make quarterly rent payments to The Irvine Company
based upon the "adjusted gross revenue" (as defined) from the Irvine Network. In
addition, FWOC is obligated to pay all costs associated with its lease,
operation, maintenance, repair and use of the Leased Premises, including
maintenance expenses, taxes and insurance premiums. Any assignment of FWOC's
rights under the Conduit Lease and any sale of a controlling interest in FWOC
require The Irvine Company's prior approval, and The Irvine Company has a right
of first refusal in the event of any such proposed sale.
TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT. Concurrently with the
execution of the Conduit Lease, FWOC and The Irvine Company executed a
Telecommunications System License Agreement (the "License Agreement"), which
provides FWOC, with some exceptions, with the right and obligation to provide
telecommunications services to (i) the 106 buildings currently owned by The
Irvine Company in the Irvine Spectrum area, (ii) commercial, industrial and
retail buildings in the future owned by The Irvine
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Company in the Irvine Spectrum and (iii) under certain circumstances in The
Irvine Company's discretion, similar buildings located in the Additional
Areas and other locations in California.
The License Agreement requires FWOC to pay The Irvine Company a license fee
each calendar quarter, subject to an annual CPI increase that will not be less
than 2% or greater than 6%. The license fee will increase or decrease in the
future based on the rentable square footage of the buildings that are from time
to time subject to the License Agreement.
The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment
("Equipment") in, as well as access rights to, such buildings, subject to the
rights of The Irvine Company's tenants and to reasonable requirements and
procedures imposed by The Irvine Company. Except with respect to buildings that
are leased to a single tenant, The Irvine Company is required to provide FWOC
with a reasonable amount of equipment room space in each building, sufficient to
enable FWOC to install Cable and Equipment and deliver services. FWOC's rights
to a building are non-exclusive, meaning that The Irvine Company can grant
similar licenses to other service providers. Although all the Cable becomes the
property of The Irvine Company upon termination of the License Agreement, FWOC
has the right to remove and retain ownership of the Equipment, subject to The
Irvine Company's election to purchase the Equipment at a price to be negotiated
by the parties.
Subject to certain qualifications, FWOC will have the obligation to provide
telecommunications services to any tenant who wishes to subscribe with FWOC for
those services, and FWOC is required to install Cable and Equipment in that
tenant's building if FWOC owns or leases Conduit located within 1,000 feet of
that building. Under certain circumstances, FWOC may be required to provide
completion and performance bonds to The Irvine Company in connection with that
work.
To the extent that FWOC provides fiber optic service to a building, it is
required to achieve and maintain standards of minimum reliability. Subject to
force majeure, if there is a system-wide failure to provide such service that
exceeds five consecutive days, The Irvine Company has the right to use the
network (and if necessary bring in an alternative service provider) and to
charge its costs to FWOC.
Whenever FWOC is the first competitive access provider to a building, it is
required to install a building entrance conduit system (which connects the
building to the street access point) (a "BECS"), with a capacity equal to 200%
of the capacity required by FWOC to service the building. The Irvine Company can
grant other providers the right to use that BECS, but must pay or cause that
provider to pay FWOC 50% of FWOC's cost of installing the BECS, which costs are
subject to increase based on a CPI calculation. Where a BECS already exists, The
Irvine Company must make any excess capacity therein available to FWOC.
The Conduit Lease and the License Agreement both require FWOC to maintain
certain minimum amounts of insurance coverage throughout the term of such
agreements. The Company has guaranteed the payment obligations of FWOC under The
Irvine Company agreements.
EMPLOYEES
As of November 30, 1998, the Company had 176 employees (not including
employees related to the recently acquired business of Optec), of whom 65 were
in network operations and development, 66 were in sales, marketing and product
development and 45 were in administration. The Company believes that its future
success will depend in part on its continued ability to attract, hire and retain
qualified personnel.
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Competition for such personnel is intense, and there can be no assurance that
the Company will be able to identify, attract and retain such personnel in
the future. None of the Company's employees are represented by a labor union
or are the subject of a collective bargaining agreement. The Company has
never experienced a work stoppage and believes that its employee relations
are good.
RISK FACTORS
LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES
The Company was incorporated in July 1992, commenced operations in
September 1993 and commenced commercial operation of its current network
business in November 1997. The Company has provided services to customers for
slightly more than one year, and as of November 30, 1998 had approximately 400
commercial customers under contract. The Company has generated substantial
operating losses and negative cash flow from operating activities since its
inception and expects that operating and net losses and negative operating cash
flow will continue for at least the next several years and will increase
significantly as the Company implements its growth strategy of expanding into
other cities. To date, the Company has focused primarily on the development of
its product line, the development and construction of its networks, the hiring
of management and other key personnel, the raising of capital, the acquisition
of equipment, the implementation of its sales and marketing strategy and the
development of operating systems. The Company has a very limited operating
history upon which to base estimates of the number of customers, the reliability
of its network or the amount of revenues the Company's current and planned
operations will generate. Given the Company's limited operating history, there
can be no assurance that it will be able to achieve its goals or compete
successfully in the telecommunications industry.
The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, attract
and retain customers, increase awareness of the Company's services, respond to
competitive developments, continue to attract, retain and motivate qualified
persons and continue to upgrade its technologies and commercialize its network
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks and the failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's business strategy is unproved
and, to be successful, the Company must, among other things, develop and market
services that are widely accepted by customers at prices that will yield a
profit. There can be no assurance that the Company and its services will achieve
broad customer or commercial acceptance when compared to alternative
telecommunications services. Given the dynamic nature of the marketplace for
telecommunications services, the prices the Company charges for some or all of
its services may from time to time be higher than those charged by providers for
some competing services. Additionally, prices for telecommunications services
have fallen historically, and prices in the industry in general, and for the
services the Company offers and plans to offer in particular, are expected to
continue to fall. Accordingly, it is difficult to predict whether the Company's
pricing model will prove to be viable, whether demand for the Company's services
will materialize at the prices it expects to charge or whether current or future
pricing levels will be sustainable. The failure to achieve or sustain projected
pricing levels or to achieve or sustain broad market acceptance could result in
a material adverse effect on the Company's business, financial condition and
results of operations. Because of the foregoing factors, among others, the
Company may not be able to forecast its revenues or the rate at which it will
add new customers or end-users with any degree of accuracy. The Company's annual
and quarterly operating results may fluctuate significantly in the future as a
result of numerous factors, many of which are outside the Company's control.
Factors that may affect the Company's operating results include the
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amount and timing of capital expenditures and other costs relating to the
expansion of the Company's network, the introduction of new services by the
Company or its competitors, price competition by competitors, technical
difficulties or network downtime, general economic conditions and economic
conditions specific to the Company's industry.
The development of the Company's business and the deployment of its
services and systems will require significant additional capital expenditures, a
substantial portion of which will need to be incurred before the realization of
significant revenues. Together with associated start-up operating expenses,
these capital expenditures will result in substantial negative cash flow until
an adequate revenue-generating customer base is established. The Company has
incurred net losses in each quarter since it commenced operations in September
1993, with cumulative losses totaling approximately $48.1 million through
September 30, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company expects to continue to
generate significant operating and net losses for at least the next several
years. There can be no assurance that the Company will achieve or sustain
profitability or generate sufficient positive cash flow to meet its working
capital requirements. See "--Substantial Leverage; Ability to Service
Indebtedness."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged. As of September 30, 1998, the Company
had approximately $256.7 million of outstanding indebtedness, the Company's
total debt as a percentage of capitalization was approximately 90% as of
September 30, 1998 and the Company had a deficiency of earnings to fixed
charges of $29.1 million for the year ended September 30, 1998. The Company's
high degree of leverage could have material and adverse consequences,
including, but not limited to, the following: (i) a substantial portion of
the Company's sources of capital and cash flow from operations must be
dedicated to debt service payments, thereby reducing the funds available to
the Company for other purposes; (ii) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures, acquisitions, repayment of indebtedness or other purposes may
be impaired, whether as a result of the covenants and other terms of its debt
instruments or otherwise; (iii) the Company will be substantially more
leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage; (iv) the Company's high degree of leverage may
limit its ability to expand capacity and otherwise meet its growth
objectives; and (v) the Company's high degree of leverage may hinder its
ability to adjust rapidly to changing market conditions and could make it
more vulnerable than its less leveraged competitors in the event of a
downturn in general economic conditions or its business. In addition,
pursuant to the terms of the indenture (the "Indenture") entered into in
connection with the April 1998 debt offering, the Company is only permitted
to incur additional indebtedness under certain conditions, and the Company
expects that as it expands its networks beyond the areas currently designated
for expansion, its capital requirements will require it to secure additional
financing, including additional indebtedness. See "--Significant Capital
Requirements."
The Company's ability to make principal and interest payments on its
indebtedness will depend upon, among other things, its ability to complete the
roll-out of its networks on a timely and cost-effective basis, the market
acceptance of, and the utilization, pricing and consumer demand for its
services, its future operating performance and cash flow and its ability to
obtain additional debt or equity financing, which are themselves dependent upon
a number of economic, financial, competitive and regulatory conditions and other
factors, many of which the Company is unable to control. There can be no
assurance that the Company will have adequate sources of liquidity to make
required payments of principal and interest on its indebtedness, whether at or
prior to maturity, to finance anticipated capital expenditures and to fund
working capital requirements. If the Company does not have sufficient available
resources to repay
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its outstanding indebtedness when it becomes due and payable, the Company may
find it necessary to refinance such indebtedness, and there can be no
assurance that refinancing will be available or that it will be available on
favorable terms. Any failure by the Company to satisfy its obligations with
respect to its indebtedness at maturity or prior thereto would constitute a
default under such indebtedness and could cause a default under agreements
governing other indebtedness, if any, of the Company.
BUSINESS DEVELOPMENT AND EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE
GROWTH
The Company's business plan will, if successfully implemented, result in
rapid expansion of its operations. Rapid expansion of the Company's operations
may place a significant strain on the Company's management, financial and other
resources. The Company's ability to manage future growth, should it occur, will
depend upon its ability to attract, train, assimilate and retain additional
qualified personnel, to monitor operations, control costs, maintain regulatory
compliance, maintain effective quality controls and significantly expand the
Company's internal management, technical, information and accounting systems.
There can be no assurance that the Company will successfully implement and
maintain such operational and financial systems or that it will successfully
obtain, integrate and utilize the management, operational and financial
resources necessary to manage a developing and expanding business in an
evolving, highly regulated and increasingly competitive industry. Any failure to
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the business,
financial condition and results of operations of the Company.
If the Company were unable to hire and train staff, purchase adequate
supplies of equipment, increase the capacity of its operational and accounting
information systems or successfully manage and integrate such additional
resources, customers could experience delays in connection of service and lower
levels of customer service. Failure by the Company to meet the demands of
customers and to manage the expansion of its business and operations could have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON NETWORK INFRASTRUCTURE
The Company's success will depend upon the capacity, reliability and
security of its networks. The Company expects that a substantial portion of its
future revenues will be derived from the provision of tailored value-added
network services to its customers. The Company must continue to expand and adapt
its network infrastructure as the number of users and the amount of information
they wish to transfer increase and as customer requirements change. There can be
no assurance that the Company will be able to expand or adapt its network
infrastructure to meet additional demand or its customers' changing requirements
on a timely basis, at a commercially reasonable cost, or at all. Any failure of
the Company to expand its network infrastructure on a timely basis or adapt it
to either changing customer requirements or evolving industry standards could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The backbone of the Company's network within Anaheim, California is a
50-mile fiber loop owned by the City and leased and operated by the Company.
Under the Operating Property Agreement between the City and FWA, the Company's
lease of the loop is subject to termination upon customary default provisions,
including failure to pay rent within the required time period or a breach of its
other material duties or obligations thereunder. In addition, the UTS Agreement
requires FWA to complete 90% of a designated portion of the Anaheim network by
December 31, 1998, plus a 180 day cure period. The Company already has satisfied
a requirement to complete 44% of such work by April 1, 1998. If FWA
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fails to meet the 90% deadline, then the City may elect to terminate the
Operating Property Agreement and the UTS Agreement, or, in the alternative,
exercise its right to purchase all of FWA's outstanding stock. See
"--Agreements with the City of Anaheim and The Irvine Company--The City of
Anaheim." Any termination of the Operating Property Agreement or the UTS
Agreement, or the exercise by the City of its right to purchase all of FWA's
outstanding stock, would have a material adverse effect on the Company's
business, financial condition and results of operations.
RELIANCE ON THIRD PARTIES FOR ACCESS TO TELEPHONY SERVICES
Because the Company expects to provide certain services through connections
supplied by ILECs and other providers, it is dependent upon the cooperation of
third party telecommunications providers, including certain of the Company's
major competitors, such as Pacific Bell, in providing access to their services.
The Company has entered into interconnection agreements with Pacific Bell and
GTE, which, among other things, establish the terms and conditions for access to
such networks for origination and termination of calls and set pricing for
unbundled network elements. The Company will need to enter into similar
agreements as it expands to areas where neither Pacific Bell nor GTE is the
ILEC. There can be no assurance that the Company will be able to enter into
additional interconnection agreements on favorable terms or at all. Even when
the Company has entered into an interconnection agreement, there can be no
assurance that the Company's orders for additional unbundled loops or other
services will be fulfilled in a timely manner. Failure of other parties to
interconnection agreements to maintain equipment and provide service in a
reliable and timely manner may result in interrupted service to the Company's
customers and risk of loss of business. In addition, there can be no assurance
that the rates charged to the Company under interconnection agreements will
continue to allow the Company to offer its services at competitive prices.
The Company provides long distance service, operator services, directory
assistance and calling card services under its own name pursuant to agreements
with Sprint. The Company has obtained volume discounts for a variety of services
the Company purchases from Sprint (including long distance), based on estimates
of the Company's monthly usage of such services. If the Company fails to meet
targeted usage (or in certain instances, exceeds targeted usage) the Company
must pay Sprint various monthly surcharges with respect to such services. The
most significant of these monthly surcharges relates to the required amount of
long distance service the Company purchases from Sprint. Beginning in August
1998, the Company was required to purchase certain minimum monthly amounts of
long distance service (which minimum requirements increase over time) or pay
Sprint a penalty equal to a percentage of the Company's shortfall. To date, the
Company has not purchased in any one month the amount of long distance service
that the Company was required to purchase beginning in August 1998. The Company
expects that its exposure to shortfall liabilities will be reduced throughout
1999 and nearly eliminated by the end of the third quarter of 1999 as a result
of increased use of Sprint's services by its customers. However, there can be no
assurance that this projected usage will be realized or when or if the Company
will purchase the required amount of long distance service thereunder.
RISKS OF IMPLEMENTATION, SITES, EQUIPMENT AND SUITABLE INTERCONNECT
ARRANGEMENTS
The Company intends to develop and expand the Company's business and
enter new markets as described under the caption "--Network Status and
Proposed Expansion." There can be no assurance the Company will be able to
complete network deployment on the timetable and in the manner currently
planned or that it will be able to expand to new areas in the manner
currently contemplated. The development and expansion of the Company's
business into new markets will be dependent, among other things, upon the
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Company's ability to lease or purchase suitable sites for its equipment, its
ability to negotiate suitable interconnection and co-location agreements with
ILECs on satisfactory terms and conditions and its ability to finance such
expansion. The failure by the Company to expand or enter new markets in
accordance with its plans would have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The telecommunications and Internet services industries are highly
competitive. The Company has not obtained significant market share in any of
the areas where it offers or intends to offer services, nor does it expect to
do so in the near future given the size of the local telecommunications
market, the intense competition therein and the diversity of customer
requirements. In each market area in which the Company is authorized to
provide services, the Company competes or will compete with several other
service providers and technologies. Certain bases of competition in the
Company's markets include price, performance, reliability of service, ease of
access and use, services offered, product bundling, customer support, brand
recognition and operating experience. Most of the Company's competitors,
particularly the applicable ILEC, have longer operating histories,
long-standing relationships with customers and suppliers in their respective
industries, greater name recognition and significantly greater financial,
technical and marketing resources than the Company. The Company faces intense
competition with respect to each of the services it offers. The Company
cannot predict the number of competitors that will emerge as a result of
existing or new federal and state legislative actions. See "--Regulation."
TELEPHONY. The Company's principal telephony competitors are the ILECs
in the areas served by the Company's networks. While the Interconnection
Orders of the FCC and the Telecommunications Act provide increased
business opportunities to CLECs and ICPs such as the Company, they also
provide the ILECs with increased pricing flexibility for their services and
other regulatory relief, which could have a material adverse effect on CLECs
and ICPs, including the Company. If the ILECs are allowed by regulators to
lower their rates for their services, engage in substantial volume and term
discount pricing practices for their customers, or seek to charge CLECs and
ICPs substantial fees for interconnection to the ILECs' networks, the results
of operations of CLECs and ICPs, including the Company, could be materially
adversely affected. The legal framework governing competition in telephony
has also been heavily impacted in recent years by a shifting series of judicial
and administrative decisions. See "Regulation."
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The Company also competes for telephony services with various CLECs in
its target markets, including MFS, NEXTLINK, ICG, GST and Teleport. To date,
the Company has not encountered a high level of competition from CLECs or
ICPs for its targeted customers in its initial markets. The Company expects
the level of such competition to increase substantially in the future, and
there can be no assurance that the Company will be able to expand
successfully, retain its existing customers or price its products profitably
in the presence of such increased competition. The Company also faces, and
expects to continue to face, competition from other current and potential
market entrants, including AT&T, Sprint, MCI/WorldCom and other IXCs,
wireless telephone system operators and private networks built by large end
users. AT&T has indicated its intention to offer local telecommunications
services in certain U.S. markets, either directly or in conjunction with
CLECs or cable operators. AT&T has acquired Teleport and plans to merge with
TCI, the nation's largest operator of cable television systems, and to
provide telephone services over the TCI cable plant. Sprint has announced
plans to deploy an advanced telecommunications network intended to boost
speed and capacity, cut costs and provide an integrated platform to enter
local markets, and has signed access agreements with a number of RBOCs and
GTE. The Company expects additional competition from (i) industry
consolidation and joint ventures, (ii) ILECs operating outside of their
current local service areas, (iii) cable television systems, (iv) electric
utilities, (v) microwave and other wireless carriers and (vi) satellite
licensees. See "Competition--Telephony."
INTERNET SERVICES. The Internet services market is extremely
competitive, and the Company expects competition in this market to intensify
in the future. The Company's current and prospective competitors include many
large companies that have substantially greater market presence and
financial, technical, marketing and other resources than the Company. The
Company competes (or in the future is expected to compete) directly or
indirectly with the following categories of companies: (i) national and
regional ISPs; (ii) established on-line services; (iii) computer software and
technology companies; (iv) national telecommunications companies; (v) RBOCs;
(vi) cable operators; and (vii) nonprofit or educational ISPs. The entry of
new participants from these categories and the potential entry of competitors
from other categories (such as computer hardware manufacturers) would result
in substantially greater competition for the Company.
ADVANCED NETWORK SERVICES. In the markets for LAN/WAN services and
other advanced network services, the Company will face competition from a
number of companies focused on the LAN and WAN market, including companies
with significantly greater financial resources, more extensive business
experience and greater market and service capabilities than the Company. In
particular, the Company will be required to compete with companies that
design and manufacture products for the LAN and WAN markets and large system
integrators. The Company also competes with the ILEC for data connectivity
services. Pacific Bell, for example, introduced DSL services over its
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existing networks. Substantially all of the Company's current and prospective
competitors in the markets for advanced network services have greater market
presence and financial, technical, marketing and other resources than the
Company.
RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to business customers
requires the Company to provide reliable service. The Company's networks are
subject to physical damage, power loss, capacity limitations, software defects,
breaches of security (by computer virus, break-ins or otherwise) and other
factors which may cause interruptions in service or reduced capacity for the
Company's customers. FirstWorld utilizes various procedures to minimize security
risks. The Company currently provides its customers their own physical and
permanent virtual circuits throughout the FirstWorld network. The Company also
utilizes a Fire Wall to protect its Internet customers. In addition, the
Company's own fiber network is inaccessible, in that it has no electrical
interfaces that allow the possibility of monitoring. All termination points and
manholes within FirstWorld's own fiber network are locked and secured. There can
be no assurance, however, that these security procedures will prove to be
adequate. Moreover, the Company's current, and certain of its planned networks,
are located in an area prone to earthquakes. An earthquake or other natural
disaster affecting the normal operations of the Company or the ILECs with which
the Company does business could seriously impair the Company's ability to
provide service to customers. Interruptions in service, capacity limitations or
security breaches could have a material adverse effect on customer acceptance
and, therefore, on the Company's business. Certain aspects of the Company's
network architecture involve new applications of equipment which may result in
technical issues that may not be easily resolved. Although the Company generally
seeks to limit its liability through its contracts with customers, there can be
no assurance that the Company will not be held liable for damages resulting from
service failures. Lapses in service or reliability also could lead to a loss of
customers, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, while the Company
believes it has insurance comparable to that maintained by other companies in
the industry, the Company's central office facility is not fully insured
against, and the Anaheim fiber loop is not insured against, earthquake loss.
CHANGES IN TECHNOLOGY, SERVICES AND INDUSTRY STANDARDS
The telecommunications industry has been characterized by rapid
technological advances, changes in end user requirements, frequent new service
introductions, evolving industry standards and decreases in the cost of
equipment and the pricing of services. The Company expects these changes to
continue, and believes that its long-term success will increasingly depend on
its ability to offer services that exploit advanced technologies and anticipate
or adapt to evolving industry standards. There can be no assurance that the
Company's services will not become economically or technically outmoded by
technology or services now existing or developed and implemented in the future
or that the Company will have sufficient resources to develop or acquire new
technologies or to introduce new services capable of competing with future
technologies or service offerings. The effect on the Company of technological
changes cannot be predicted and could be material and adverse to the Company's
business, financial condition and results of operations.
SIGNIFICANT CAPITAL REQUIREMENTS
The development of the Company's business and deployment of its services
and systems will require significant additional capital to fund capital
expenditures, working capital, debt service and operating losses. The Company's
principal capital expenditure requirements involve the purchase,
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installation and construction of network operations centers, other network
infrastructure and CLE. The Company believes that the proceeds from the Debt
Offering (as defined below) and the Additional Equity Investment (as defined
below) will be sufficient to fund the Company's aggregate capital
expenditures and working capital requirements, including operating losses,
associated with its planned network roll-out throughout California. The Company
expects that as it expands its networks beyond these areas, its capital
requirements will require it to obtain additional financing, which may
include commercial bank borrowings, vendor financing or the sale or issuance
of equity and debt securities either through one or more offerings or to one
or more strategic investors. There can be no assurance that the Company will
be successful in raising additional capital in sufficient amounts to fund its
strategic objectives, or that such funds, if available, will be available on
terms that the Company will consider acceptable. Failure to raise sufficient
funds may require the Company to modify, delay or abandon some of its planned
future expansion or expenditures, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." In addition, the Indenture
imposes operating and financial restrictions on the Company and its
subsidiaries. These restrictions affect, and in certain cases significantly
limit or prohibit, among other things, the ability of the Company and its
subsidiaries to incur additional indebtedness, pay dividends or make
distributions in respect of the Company's or such subsidiaries' capital
stock, make other restricted payments, enter into sale and leaseback
transactions, create liens upon assets, enter into transactions with
affiliates or related persons, sell assets, or consolidate, merge or sell all
or substantially all of their assets. There can be no assurance that such
covenants will not adversely affect the Company's ability to finance its
future operations or capital needs or to engage in other business activities
that may be in the Company's interest.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends, in large part, upon the continuing
contributions of its key technical, marketing, sales and management personnel.
The loss of the services of one or more key people could have a material adverse
effect upon the business, financial condition and results of operations of the
Company. The Company has employment agreements with a limited number of its
officers or employees, and does not maintain any key man life insurance. The
Company's future success also is dependent upon its continuing ability to
attract and retain additional highly qualified personnel. The Company currently
is seeking to hire a number of additional senior management personnel.
Competition for such personnel is intense, and the Company's inability to
attract and retain additional key employees could have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company's existing personnel will continue to be
employed by the Company or that the Company will be able to attract and retain
qualified personnel in the future.
GOVERNMENT REGULATION
The Company is subject to regulation by the FCC and by state public service
and public utility commissions as a provider of telecommunications services.
Changes in existing policies or regulations in the state and localities served
by the Company or by the FCC could materially and adversely affect the Company's
business, financial condition and results of operations, particularly if those
regulatory or policy changes make it more difficult to obtain unbundled network
elements from ILECs or other telecommunications services at competitive prices
or otherwise increase the cost and regulatory burdens of providing services.
There can be no assurance that regulatory authorities in the areas served by the
Company or the FCC will refrain from taking actions having an adverse effect on
the business or financial condition or results of operations of the Company. The
Telecommunications Act has significantly altered regulation of the
telecommunications industry by preempting state and local laws to the extent
that they
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prevent competition and by imposing a variety of new duties on LECs and ILECs
in order to promote competition in local exchange and access services.
Although the Company believes that the Telecommunications Act and other
trends in federal and state legislation and regulation that favor increased
competition are to the Company's advantage, there can be no assurance that
the increased competitive opportunities or other changes in current
regulations or future regulations at the federal or state level will not have
a material adverse effect on the Company's business, financial condition and
results of operations or its ability to make principal and interest payments
on its indebtedness. See "--Regulation."
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to the liability of on-line service providers, private
network operators and ISPs for information carried on or disseminated through
the facilities of their networks is currently unsettled. Several lawsuits
seeking a judgment of such liability are pending. While such claims have not
been asserted against the Company, there can be no assurance that such claims
will not be asserted in the future, or if asserted, will not be successful. The
Telecommunications Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting certain
types of information and content, such as obscene communications. Numerous
states have adopted or are currently considering similar types of legislation.
The imposition upon the Company, ISPs or Web server hosts of potential liability
for materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings. Further, the costs incurred in defending
against any such claims and potential adverse outcomes of such claims could have
a material adverse effect on the Company's financial condition and results of
operations. The Company believes that it is currently unclear whether the
Telecommunications Act prohibits or imposes liability for any services provided
by the Company should the content of information transmitted be subject to the
statute.
CONTROL BY PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST
As of November 30, 1998, Spectra 1, LLC, a Colorado limited liability
company controlled by Donald L. Sturm ("Spectra 1"), Colorado Spectra 2, LLC,
a Colorado limited liability company controlled by Donald L. Sturm ("Spectra
2"), and Colorado Spectra 3, LLC, a Colorado limited liability company
controlled by Donald L. Sturm ("Spectra 3," and together with Spectra 1 and
Spectra 2, the "Sturm Entities") beneficially owned approximately 37.0% of
the Company's outstanding common stock, including 49.3% of the Company's
outstanding Series A Common Stock, which possesses super-voting rights. By
virtue of the super-voting rights of the Series A Common Stock, the Sturm
Entities control approximately 46.6% of the voting power of the Company's
outstanding common stock. As of November 30, 1998, Enron beneficially owned
approximately 31.7% of the Company's outstanding common stock, including
49.3% of the Company's Series A Common Stock. By virtue of the super-voting
rights of the Series A Common Stock, Enron controls approximately 45.4% of
the outstanding voting power of the Company's common stock. In addition, the
Sturm Entities are entitled to appoint three directors and Enron is entitled
to appoint two directors of the Company's seven-person Board of Directors
pursuant to a Securityholders Agreement (the "Securityholders Agreement")
among the Sturm Entities, Enron and the Company, and Donald L. Sturm is the
Company's Chairman of the Board. As a result of their respective ownership
interests and Board designees, the Sturm Entities and Enron control the
Company. The Sturm Entities and Enron have the ability to control the
election of at least a majority of the directors of the Company and any other
major decisions involving the Company or its assets. The ownership and voting
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interests possessed by the Sturm Entities and Enron make it impossible for a
third party to acquire control of the Company without the consent of the
Sturm Entities and Enron.
In addition to their investments in the Company, the Sturm Entities and
Enron have investments, and may in the future make investments, in other
telecommunications companies and ventures, including competitors of the Company.
As a result, conflicts may arise in the negotiation and enforcement of
arrangements entered into by the Company and entities in which the Sturm
Entities or Enron have an interest. In addition, the Company, the Sturm Entities
and Enron have agreed that the Sturm Entities and Enron are under no obligation
to bring to the Company any investment or business opportunities of which they
become aware, even if such opportunities are within the scope and objectives of
the Company. See "Certain Relationships and Related Transactions."
YEAR 2000 ISSUES
The Company is continuing to determine whether its systems and its
vendors' systems will require updating to continue to function properly
beyond 1999. As the Company adds new features to its network it will continue
to evaluate the functionality of such features beyond 1999. The Company
believes that its Year 2000 problems will be less significant than competing
telecommunications providers with a longer history. In other words, the
Company's limited history of operations means that some of its systems are
already Year 2000 compliant and are not subject to remediation.
Notwithstanding this fact, the Company has made Year 2000 compliance a
priority and has established a Year 2000 Project Team and a Year 2000
Executive Committee to assess and evaluate its potential Year 2000 problems.
In January 1999 additional dedicated full time resources will be procured and
assigned to the Year 2000 compliance project in order to complete the
evaluation process and accelerate the Company's remediation efforts. Even
though the Company has not yet instituted a comprehensive testing and
implementation program, management believes that such a program will be
implemented prior to the end of March 1999 and completed by the end of June
1999. The Company believes that its Year 2000 program will cost less than an
aggregate of $1,000,000 (inclusive of internal labor, external consulting and
software and hardware related costs) and will be completed in a timely
manner. However, the Company's Year 2000 readiness program is an ongoing
process and the estimate of costs and completion dates described above are
subject to change.
Although the Company does not expect to incur significant expenditures to
upgrade its network to address Year 2000 problems, there can be no assurance
that the Company will be able to identify all Year 2000 problems in its
systems in advance of their occurrence or that the Company will be able to
successfully remedy any problems. In addition, to the extent that the
Company's suppliers, including the ILECs, IXCs and other service providers and
carriers over whose networks the Company provides certain of its services, or
customers fail to address Year 2000 issues in a timely and effective manner,
the Company's ability to provide uninterrupted, reliable service to customers
serviced through such networks may be adversely affected. Moreover, the
profitability and stability of the Company's customers may be adversely
affected by Year 2000 problems not related to their relationships with the
Company. The expenses associated with the Company's efforts to remedy any
Year 2000 problems, the expenses or liabilities to which the Company may
become subject as a result of such problems or the impact of Year 2000
problems on the ability of existing or future customers to do business with
the Company could have a material adverse effect on the Company's business,
prospects, operating results and financial condition.
RISKS REGARDING FORWARD LOOKING STATEMENTS
The statements contained herein that are not historical facts are
forward-looking statements, which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks
and uncertainties. The Company wishes to caution the reader that these
forward-looking statements, such as those relating to the Company's plans to
build networks in new areas, its anticipation of revenues from designated
markets and statements regarding the development of the Company's business,
the markets for the Company's services and products, the Company's
anticipated capital expenditures, regulatory reform and other statements
contained herein regarding matters that are not historical facts, are only
predictions. No assurance can be given that the expected future results will
be achieved; actual events or results may differ materially as a result of
risks facing the Company or other external events or due to decisions made by
the Company in the future. The risks facing the Company include, but are not
limited to, those relating to the Company's ability to successfully market
its services to current and new customers, access markets, install cable and
facilities, including switching electronics, and obtain rights-of-way,
building access rights and any required governmental authorizations and
permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as regulatory,
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legislative and judicial developments that could cause actual results to
differ materially from the future results indicated, expressed or implied, in
such forward-looking statements.
ITEM 2. PROPERTIES
The Company's headquarters are located in a suburb of Denver, Colorado and
consist of approximately 7,100 square feet under a lease that expires on
November 30, 1999. The Company has an option to renew the lease for an
additional one year term and a right of first refusal with respect to two suites
located in the same building which would give the Company access to an
additional 28,575 square feet.
In addition, the Company maintains administrative and sales offices
consisting of approximately 35,000 square feet in San Diego, California,
which the Company occupies under a lease that expires on August 31, 2002. The
Company has a central office switch in Anaheim, California that occupies
approximately 8,900 square feet of space under a lease expiring on October
31, 2001. In addition, pursuant to its agreement with the lessor of the
Anaheim central office, the Company has a right of first refusal to purchase
the central office during the term of the lease and any extensions thereof.
The Company also leases offices and space in a number of other locations for
sales offices and network equipment installations.
ITEM 3. LEGAL PROCEEDINGS
On October 16, 1998, FirstWorld filed a declaratory relief action in San
Diego Superior Court, asking the Court to find that FirstWorld is not
obligated to offer stock to Dina Partners L.P. ("Dina") with respect to the
December 1997 equity investment by Enron and Spectra 3. Dina had previously
indicated in conversations with FirstWorld officers and counsel and in
writing that it believed FirstWorld had breached that certain Amended and
Restated Investor Rights Agreement to which FirstWorld and Dina were parties
by refusing to allow Dina to purchase additional stock in FirstWorld. On
December 3, 1998, in answer to FirstWorld's complaint, Dina filed a general
denial with the court. Although the ultimate resolution of this dispute is
subject to the uncertainties inherent in litigation, the Company does not
believe that the resolution of the declaratory relief action will have a
material adverse effect on the Company's results of operations, liquidity or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 28, 1998, the Company obtained the written consent of a
majority of its stockholders to the terms of the Employment Agreement between
the Company and Mr. Ohringer, by which Mr. Ohringer joined the Company as its
new Chief Executive Officer and President. See "Directors and Executive
Officers of the Registrant--Retention of New Chief Executive Officer and
President."
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not Applicable.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from
the Company's audited financial statements. Consolidated balance sheets at
September 30, 1998 and 1997 and the related consolidated statements of
operations and of cash flows for the three years in the period ended
September 30, 1998 and notes thereto appear elsewhere herein. The data should
be read in conjunction with the annual financial statements, related notes
and other financial information appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1994 1995 1996 1997 1998
----- ----- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue $ 85 $ 57 $ 279 $ 75 $ 1,078
Other revenue - 40 75 96 12
Costs and expenses:
Network development and operations - 188 1,708 3,170 6,501
Selling, general and administrative 429 740 2,409 4,725 10,641
Depreciation and amortization 21 39 75 501 2,424
----- ----- ------- -------- --------
Loss from operations (365) (870) (3,838) (8,225) (18,476)
Other income (expense):
Interest expense (53) (38) (27) (1,372) (16,898)
Interest income - - 9 149 6,749
----- ----- ------- -------- --------
Loss before extraordinary item (418) (908) (3,856) (9,448) (28,625)
Extraordinary item-extinguishment of debt - - - (105) (4,731)
----- ----- ------- -------- --------
Net loss $(418) $(908) $(3,856) $ (9,553) $(33,356)
----- ----- ------- -------- --------
----- ----- ------- -------- --------
OTHER DATA:
EBITDA(1) $(344) $(831) $(3,763) $ (7,829) $(20,783)
Net cash used in operating activities 416 781 2,168 7,446 10,133
Net cash used in investing activities 18 45 923 12,647 191,659
Net cash provided by financing activities 425 827 3,156 20,557 273,295
Capital expenditures 6 25 908 12,637 26,068
Deficiency of earnings to cover fixed charges(2) 418 908 3,856 9,500 29,075
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 536 $ 72,039
Working capital (deficit) (3,319) 232,565
Total assets 25,321 294,105
Long-term debt 18,964 255,840
Total stockholders' equity 2,265 29,373
</TABLE>
- ------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. EBITDA is not a measurement of financial performance
under generally accepted accounting principles, is not intended to
represent cash flow from operations, and should not be considered as an
alternative to net loss as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company
believes that EBITDA is widely used by analysts, investors and other
interested parties in the telecommunications industry. The Company's
computation of EBITDA may not be comparable to similarly titled measures
for other companies.
(2) For purposes of calculating the ratio of earnings to fixed charges,
earnings is defined as net loss plus fixed charges (other than
capitalized interest). Fixed charges consist of interest and
amortization of debt discount and debt issuance costs, whether expensed
or capitalized, and that portion of rental expense deemed to represent
interest (estimated to be one-third of such expense). For the periods
presented, earnings were insufficient to cover fixed charges by the
amounts disclosed.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements of the Company,
including the notes related thereto, and other financial data appearing
elsewhere in this Form 10-K. Certain statements set forth below constitute
"forward-looking statements." Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the
captions "Business" and "Business--Risk Factors."
OVERVIEW
The Company is a facilities-based ICP. The key to the Company's business
plan is a data-centric focus, with service offerings strategically bundled to
address the increasingly complex data and voice communications needs of small
and medium businesses. The Company uses a combination of both owned and
managed facilities, with a digital network and related provisioning, billing
and customer care applications. With targeted marketing and a consultative
sales approach, the Company provides its customers with advanced, integrated
data and voice communications solutions. Services offered include data
connectivity, high speed Internet access, LAN/WAN connectivity, web hosting,
e-commerce and system integration services, as well as switch-based local and
long distance telephone services.
The Company is implementing advanced digital networks and related
support systems that combine advanced hardware and software from leading
vendors with its own proprietary systems. With a combination of both owned
and managed network facilities, the Company provides its customers with an
integrated approach to enhanced data and voice network services. The Company
has designed its core processes to streamline provisioning, billing, network
management and customer service, and has incorporated operational support
systems that implement such processes into its network offerings. Among other
things, these systems provide single-point-of-contact customer service and
facilitate electronic exchanges of information with other network providers
where possible. The Company is designing its systems to be compatible with
voice over packet technologies such as voice over IP as such technologies are
refined in the industry.
To date, the Company has experienced significant operating and net
losses and negative cash flow from operations and expects that operating and
net losses and negative operating cash flow will continue for at least the
next several years and will increase significantly as the Company implements
its growth strategy of expanding into other cities. See "Risk Factors--
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Limited History of Operations; Negative Cash Flow and Operating Losses,"
"--Substantial Leverage; Ability to Service Indebtedness" and "--Significant
Capital Requirements." The Company expects to achieve positive operating
margins over time by increasing the number of customers and increasing the
products and services it can provide its customers. The Company expects that
operating and net losses and negative operating cash flow will increase
significantly as the Company implements its growth strategy of expanding its
operations. See "--Liquidity and Capital Resources."
REVENUE
The Company currently offers a broad array of telecommunications
services, including data connectivity, high speed Internet access, LAN/WAN
connectivity, web hosting, e-commerce and system integration services, as
well as switch-based local and long distance telephone services. The Company
intends to generate near-term revenue by replacing basic services currently
provided by ILECs, IXCs and CLECs, including local, long distance and other
voice services, dedicated access lines and commercial Internet access, as
well as from advanced network services provided to select customers. The
Company believes that it is positioned to generate additional revenue by
providing advanced network services to a broader market as the demand for
such services grows. The Company currently prices services, such as local and
long distance services, which are directly comparable to its competitors'
offerings, below prevailing market rates to build market share. The Company
believes that its initial networks in Orange County and Los Angeles County
will allow it to provide services to a market that includes approximately one
million commercial access lines.
The Company employs a market segmentation strategy, which involves
tailoring service offerings, sales and marketing techniques and network
deployment to meet the different needs of prime commercial, basic commercial and
wholesale customers. For prime commercial customers (businesses with
sophisticated communications needs), the Company utilizes a consultative selling
approach that involves a systematic assessment of each customer's telephony,
Internet, data communications and video applications needs. For basic commercial
customers (businesses with primarily voice and Internet needs), the Company uses
direct mail, telemarketing and advertising and offers standardized product
bundles consisting of local and long distance telephony and high speed Internet
access. The Company also offers use of its network elements and central office
functionality on a wholesale basis to other LECs, including CLECs, IXCs, ISPs
and other communications providers.
COSTS AND EXPENSES
NETWORK DEVELOPMENT AND OPERATIONS. As the Company continues to operate
and maintain its existing network and deploy additional networks, it will incur
network development and operations expenses related to network central office
operations and customer service, including salaries of the employees, real
estate leases for central offices, access offices, co-location and other sites,
costs to interconnect and terminate traffic with other network providers and
network design, planning and internal project management costs.
The Company has leveraged its substantial internal expertise with respect
to engineering, network creation and business processes to design and construct
a network architecture that it believes will result in enhanced product
offerings and enable the Company to improve scalability, reduce operating costs
and improve network profitability.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses are expected to consist primarily of product marketing, sales staff and
sales support expenses,
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general management and administrative overhead expenses and office leases.
Management has developed the Company's business processes with respect to
customer service, billing, provisioning and network management systems based on
extensive industry and engineering expertise within the Company. The Company has
developed operational support systems, incorporated systems from existing
external sources and retained third parties to produce systems meeting the
Company's specifications to create systems that implement the Company's
business processes. As with its network architecture described above, the
Company believes that its systems exhibit a high degree of scalability to
support network growth, flexibility to support product or technical
innovation, increased reliability and reduced operational cost.
The Company uses different sales channels to target customers within the
three market segments identified by the Company. The Company uses direct sales
efforts in a consultative selling approach with prime commercial customers,
direct sales efforts for wholesale customers and more economical methods such as
direct mail and telemarketing to target basic commercial customers. The Company
is in the process of significantly expanding its sales and marketing staff.
CAPITAL EXPENDITURES. The Company employs a demand-driven approach to
network deployment. This approach is intended to minimize capital expenditure
and maximize flexibility to serve the higher margin data market as demand for
high speed data communication services grows. The Company connects customers
to its networks through direct fiber connections, DSL or unbundled network
elements licensed from the ILEC, depending on the most cost-effective
connection that will support the bundle of services provided to the customer.
Results of Operations
YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH THE YEAR ENDED
SEPTEMBER 30, 1997
Service revenue increased from $75,000 for the fiscal year ended
September 30, 1997 to $1,078,000 for the fiscal year ended September 30,
1998, an increase of $1,003,000 or 1,337%. The increase reflects the Company's
first full year of network operations. Prior to the commencement of
operations of the Company's Orange County network, the Company's service
revenue consisted principally of reimbursable engineering, design and
construction costs associated with the design of fiber optic communications
networks on a contract basis for the cities of Lakeland, Florida and Santa
Clara, California. Other revenue represents royalties from the license of the
Company's patent for fiber optic connectors. Royalty revenue decreased from
$96,000 for the fiscal year ended September 30, 1997 to $12,000 for the
fiscal year ended September 30, 1998, a decrease of $84,000 or approximately
88%. Going forward, the Company expects that revenue from sales of telephony
and data products and services in Orange County and in other areas targeted
for network deployment will account for substantially all of the Company's
total revenue. The Company does not expect that royalty revenue from the
patent license will constitute a significant portion of total revenue in the
future as the Company expands its initial network rollout.
Network development and operations expenses increased from $3,170,000 for
the fiscal year ended September 30, 1997 to $6,501,000 for the fiscal year ended
September 30, 1998, an increase of
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$3,331,000 or approximately 105%. This increase is principally comprised of
an increase of $1,740,000 in personnel costs associated with the operations
and network deployment groups and increased operating costs relating to the
Company's Orange County operations, $932,000 of which relates to an increase
in insurance, supplies, license agreements and executory costs associated
with the Anaheim agreements.
Selling, general and administrative expenses increased from $4,725,000
for the fiscal year ended September 30, 1997 to $10,641,000 for the fiscal
year ended September 30, 1998, an increase of $5,916,000 or approximately
125%. During fiscal 1998, the Company entered into separate management
consulting agreements with each of Corporate Managers, LLC, an affiliate of
Spectra 3, and Enron, pursuant to which the Company incurred and paid
consulting fees totaling $840,000 during fiscal 1998. See "Certain
Relationships and Related Transactions--Equity Investment--Management
Services Agreements." Other significant factors contributing to the overall
increase in selling, general and administrative expenses included an increase
of approximately $1,683,000 in personnel costs associated with marketing,
sales and administrative functions, an increase of approximately $1,044,000
relating to liability insurance, consulting, legal, acccounting and travel
expenditures, an increase of approximately $925,000 relating to marketing and
public relations expenditures and an increase of approximately $600,000 in
employee recruitment and relocation costs.
Depreciation and amortization expenses increased from $501,000 for the
fiscal year ended September 30, 1997 to $2,424,000 for the fiscal year ended
September 30, 1998, an increase of $1,923,000 or approximately 384%. This
increase primarily relates to depreciation expense associated with equipment
purchased for the Anaheim central office as well as the built and leased
elements of the Company's fiber optic network and office and other equipment
associated with the Company's general operations.
Interest expense increased from $1,372,000 for the fiscal year ended
September 30, 1997 to $16,898,000 for the fiscal year ended September 30,
1998, an increase of $15,526,000 or approximately 1,131%. $14,758,000 of the
increase relates to interest expense associated with the Senior Notes (as
defined below), inclusive of the amortization of related debt discount and
deferred financing costs. The remainder of the increase relates to interest
expense associated with a revolving credit facility which was terminated in
April 1998 (the "Credit Facility"), inclusive of the amortization of related
debt discount and deferred financing costs, and to interest expense
associated with other short-term borrowings and capital leases. Interest
expense incurred during fiscal 1998 and fiscal 1997 was offset by approximately
$450,000 and $52,000, respectively, of capitalized interest.
Interest income increased from $149,000 for the fiscal year ended
September 30, 1997 to $6,749,000 for the fiscal year ended September 30,
1998, an increase of $6,600,000 or approximately 4,430%. The increase is
attributable to the availability of additional funds from the sale of the
Senior Notes, which funds have been invested in marketable securities and
cash equivalents. Marketable securities consist of commercial paper with
original maturities of beyond three months but less than six months. The
Company has classified its marketable securities as "held to maturity," as
management has the intent and ability to hold these securities to maturity.
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YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
Service revenue decreased from $279,000 in the fiscal year ended September
30, 1996 to $75,000 in the fiscal year ended September 30, 1997, a decrease of
$204,000. This decrease reflects the Company's transition from performing
engineering and consulting contracts to developing its own telecommunications
network. Prior to the commencement of operations of the Company's Orange County
network, the Company's service revenue consisted principally of reimbursable
engineering, design and construction costs associated with the design of fiber
optic communications networks on a contract basis for the cities of Lakeland,
Florida and Santa Clara, California. These engineering contracts were
substantially complete in 1996, with only $55,000 of engineering and consulting
revenue recognized in 1997, and the Company stopped bidding on new engineering
contracts in order to focus on design and construction of its Orange County
network. The Company's first customer for its Orange County network was brought
on line in August 1997, and the Company recognized service revenue from its
network operations of $20,000 in the fiscal year ended September 30, 1997. Other
revenue represents royalties from the license of the Company's patent for fiber
optic connectors. Royalty revenue increased from $75,000 in the fiscal year
ended September 30, 1996 to $96,000 in the fiscal year ended September 30, 1997.
Going forward, the Company expects that revenue from sales of telephony and data
products and services in Orange County and in other areas targeted for network
construction will account for substantially all of the Company's total revenue.
The Company does not expect that royalty revenue from the patent license will
constitute a significant portion of total revenue in the future as the Company
expands its Orange County network.
Network development and operations expenses increased from $1,708,000 in
the fiscal year ended September 30, 1996 to $3,170,000 in the fiscal year ended
September 30, 1997, an increase of $1,462,000 or 86%. This increase was
principally comprised of increased personnel costs in the operations and
engineering groups, increased operating costs for the Company's Anaheim central
office and costs for equipment needed to finish a 1996 engineering project.
Selling, general and administrative expenses increased from $2,409,000 in
the fiscal year ended September 30, 1996 to $4,725,000 in the fiscal year ended
September 30, 1997, an increase of $2,316,000 or 96%. This increase was
principally due to increased personnel costs of sales and marketing and
administrative personnel and an increase in administration expense related to
rent, insurance and telephone.
Depreciation and amortization expenses increased from $75,000 in the fiscal
year ended September 30, 1996 to $501,000 in the fiscal year ended September 30,
1997, an increase of $426,000. This increase consists principally of
depreciation related to the Anaheim central office and built and leased elements
of the fiber optic network in Anaheim and depreciation related to office and
other equipment associated with the Company's general operations.
Interest expense increased from $27,000 in the fiscal year ended September
30, 1996 to $1,372,000 in the fiscal year ended September 30, 1997. $997,000 of
the increase relates to interest expense associated with the Company's
arrangements with the City of Anaheim. See "Business--Agreements with the City
of Anaheim and The Irvine Company." The other principal reasons for the increase
are interest expense under the Credit Facility and other short-term loans and
interest expense associated with the Company's capitalized leases.
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Interest income increased from $9,000 in the fiscal year ended September
30, to $149,000 in the fiscal year ended September 30, 1997. The increase of
$140,000 is a result of an increase in funds available for short-term investment
as a result of funds raised from sales of preferred stock in January 1997.
LIQUIDITY AND CAPITAL RESOURCES
The telecommunications service business is a capital intensive business.
The Company's existing operations have required and will continue to require
substantial capital investment for the installation of fiber, electronics and
related equipment in order to provide switched services in the Company's
networks and the funding of operating losses during the start-up phase of each
market. In addition, the Company's strategic plan calls for expansion into
additional market areas. Such expansion will require significant additional
capital for the design, development and construction of new networks and the
funding of operating losses during the start-up phase of each market. The
Company used $10,133,000 in cash for operating activities for the fiscal year
ended September 30, 1998, compared to $7,446,000 for the fiscal year ended
September 30, 1997. The increase was primarily due to an increase in the
Company's activities
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associated with the development and initiation of switched local services in
the City of Anaheim. The Company invested an additional $26,068,000 of cash
in property and equipment for the fiscal year ended September 30, 1998,
compared to $12,637,000 for the fiscal year ended September 30, 1997. The
Company has funded substantially all of these expenditures through the
private sale of equity securities, capital leases, and short and long-term
debt financing.
From its inception through September 30, 1998, the Company raised
approximately $67 million from the private sale of stock. On December 30, 1997,
the Company consummated a private placement of equity securities to Spectra 3
and Enron. Aggregate proceeds from this offering, exclusive of the conversion of
the bridge notes, totaled approximately $26,136,000, net of offering commissions
and certain other advisory fees, and were received on January 6, 1998. See
"Certain Relationships and Related Transactions." The Company used $16.9 million
of the net proceeds to repay amounts outstanding under the Credit Facility and
other short-term debt. On April 13, 1998, the Company completed an offering of
debt securities (the "Debt Offering") pursuant to Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"). In the Debt Offering, the
Company sold 470,000 units consisting of 13% Senior Discount Notes due 2008 (the
"Senior Notes") and warrants to purchase an aggregate of 3,713,094 shares of the
Company's Series B Common Stock. On April 13, 1998, the Company also completed a
$20 million private placement to Spectra 3 and Enron (the "Additional Equity
Investment"), pursuant to the exercise of an existing option held by Spectra 3
and Enron. The aggregate net proceeds of the Debt Offering and the Additional
Equity Investment were $260.7 million. The Company terminated the Credit
Facility concurrently with the closing of the Debt Offering and paid the
$1,000,000 termination fee pursuant to the terms thereof.
On October 8, 1998, the Company commenced an offer to exchange (the
"Exchange Offer") the Senior Notes for a new issue of 13% Senior Discount
Notes due 2008, which were registered with the Securities and Exchange
Commission pursuant to a Registration Statement on Form S-4 (the "Exchange
Notes"). The Exchange Offer expired on November 9, 1998. Under the terms of
the Exchange Offer, the Company accepted for exchange all $470,000,000 in
aggregate principal amount at maturity of Senior Notes and caused the
cancellation of the Senior Notes and the issuance of the Exchange Notes.
On November 24, 1998, FirstWorld purchased all of the outstanding capital
stock of Optec from ECI. Optec is a systems integrator with operations in Oregon
and Washington and has approximately 90 employees in engineering, sales and
operations. The Company also purchased from ECI an indefeasible right of use
to fiber optic cable in a MAN serving Portland with routes connecting
Beaverton and Hillsboro, Oregon. In addition, the Company obtained rights to
OC-3 level capacity on a WAN being developed by ECI that will connect up to
15 cities nationwide. The Company paid an aggregate of $18,000,000 in cash
for the Optec capital stock, the indefeasible rights of use and the WAN
rights. The Company also repaid at closing approximately $4,000,000 of
Optec's indebtedness to ECI. FirstWorld used available cash to fund the
acquisition.
The substantial capital investment required to initiate the Company's
services and the funding of the Company's initial operations has resulted in
negative cash flow since the Company's inception. This negative cash flow is the
result of the requirement to construct the Company's central office in Anaheim
and the construction of fiber-to-the-curb clusters in anticipation of connecting
revenue generating customers. The Company expects to continue to experience
negative cash flow for the foreseeable future due to expansion activities
associated with the development of the Company's markets. There can be no
assurance that the Company will attain break-even cash flow in subsequent
periods. Until sufficient cash
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flow is generated, the Company will be required to utilize its current and
future capital resources to meet its cash flow requirements and may be
required to issue additional debt and/or equity securities.
The Company expects that its available cash will be sufficient to fund
its capital plan and operations through the expansion of its planned networks
throughout California, which are expected to be substantially complete by the
end of 1999. As the Company pursues expansion of its network to additional
areas or if the Company's available cash resources are not sufficient to fund
all of the Company's operating expenses and capital expenditures, the Company
will require additional capital. In addition, depending on market conditions,
the Company may determine to raise additional capital from time to time. The
Company may obtain additional funding through the public or private sale of
debt and/or equity securities or through securing a bank credit facility.
IMPACT OF THE YEAR 2000
The Company is continuing to determine whether its systems and its
vendors' systems will require updating to continue to function properly
beyond 1999. As the Company adds new features to its network it will continue
to evaluate the functionality of such features beyond 1999. The Company
believes that its Year 2000 problems will be less significant than competing
telecommunications providers with a longer history. In other words, the
Company's limited history of operations means that some of its systems are
already Year 2000 compliant and are not subject to remediation.
Notwithstanding this fact, the Company has made Year 2000 compliance a
priority and has established a Year 2000 Project Team and a Year 2000
Executive Committee to assess and evaluate its potential Year 2000 problems.
In January 1999 additional dedicated full time resources will be procured and
assigned to the Year 2000 compliance project in order to complete the
evaluation process and accelerate the Company's remediation efforts. Even
though the Company has not yet instituted a comprehensive testing and
implementation program, management believes that such a program will be
implemented prior to the end of March 1999 and completed by the end of June
1999. The Company believes that its Year 2000 program will cost less than an
aggregate of $1,000,000 (inclusive of internal labor, external consulting and
software and hardware related costs) and will be completed in a timely
manner. However, the Company's Year 2000 readiness program is an ongoing
process and the estimate of costs and completion dates described above are
subject to change.
Although the Company does not expect to incur significant expenditures to
upgrade its network to address Year 2000 problems, there can be no assurance
that the Company will be able to identify all Year 2000 problems in its
systems in advance of their occurrence or that the Company will be able to
successfully remedy any problems. In addition, to the extent that the
Company's suppliers, including the ILECs, IXCs and other service providers and
carriers over whose networks the Company provides certain of its services, or
customers fail to address Year 2000 issues in a timely and effective manner,
the Company's ability to provide uninterrupted, reliable service to customers
serviced through such networks may be adversely affected. Moreover, the
profitability and stability of the Company's customers may be adversely
affected by Year 2000 problems not related to their relationships with the
Company. The expenses associated with the Company's efforts to remedy any
Year 2000 problems, the expenses or liabilities to which the Company may
become subject as a result of such problems or the impact of Year 2000
problems on the ability of existing or future customers to do business with
the Company could have a material adverse effect on the Company's business,
prospects, operating results and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements at September 30,
1998 and 1997, and for each of the three years in the period ended September 30,
1998, are included in this report on Form 10-K as set forth on page F-1.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective November 1996, the Company engaged Price Waterhouse LLP as the
Company's independent accountants and dismissed Coopers & Lybrand L.L.P. as
its independent accountants. The decision to change independent accountants
was approved by the Company's Board of Directors. The reports of Coopers &
Lybrand L.L.P. on the Company's financial statements for the two years ended
September 30, 1995, and for the period from September 1, 1993 (inception)
through September 30, 1995, did not contain an adverse opinion or disclaimer
of opinion and were not qualified or modified as to audit scope or accounting
principles. There were no disagreements with Coopers & Lybrand L.L.P. on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures during the two years ended September 30,
1995, and for the period from September 1, 1993 (inception) through September
30, 1995, and through the date of their dismissal. Coopers & Lybrand L.L.P.
has not audited or reported on any financial statements subsequent to
September 30, 1995. Prior to November 1996, the Company had not consulted
with Price Waterhouse LLP on items which involved the Company's accounting
principles or the form of audit opinion to be issued on the Company's
financial statements.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their ages as of
December 15, 1998 are as follows:
NAME AGE POSITION
Donald L. Sturm. . . . . . . 66 Chairman of the Board(1)(3)
Sheldon S. Ohringer. . . . . 41 President, Chief Executive Officer and
Director(2)(3)
David Gandini. . . . . . . . 40 Executive Vice President
Marion K. Jenkins. . . . . . 45 Senior Vice President, Information
Technology and Chief Information Officer
Douglas L. Kramer. . . . . . 44 Senior Vice President and Chief
Technical Officer
John Lewis . . . . . . . . . 60 Senior Vice President, Network and
Operations
Eric Hyde. . . . . . . . . . 41 Senior Vice President, Sales and Product
Marketing
Scott M. Chase . . . . . . . 30 Senior Vice President, Corporate and
Government Affairs
Dennis Mulroy. . . . . . . . 43 Vice President, Finance and
Administration and Secretary
C. Kevin Garland . . . . . . 30 Director(3)(4)
Rodney Malcolm . . . . . . . 34 Director
James O. Spitzenberger . . . 54 Director(5)
John C. Stiska . . . . . . . 56 Director
Melanie Sturm. . . . . . . . 37 Director(4)
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(1) Mr. Sturm resigned as President and Chief Executive Officer of the Company
at the close of business on September 30, 1998 in order to allow Mr.
Ohringer to assume such positions.
(2) Effective October 1, 1998, Mr. Ohringer became the Company's President and
Chief Executive Officer and also became a Director of the Company. See
"--Retention of New Chief Executive Officer and President."
(3) Member of Chairman's Committee
(4) Member of Compensation Committee
(5) Member of Audit Committee
DONALD L. STURM joined the Company as Chairman of the Board and President
of the Company in January 1998 and served as Chief Executive Officer of
FirstWorld from March 1998 through September 1998. Since December 1991,
Mr. Sturm has been a private equity investor, with interests in the
telecommunications, banking and healthcare industries, among others. Mr. Sturm
currently serves as chairman of the board of nine banks that he owns in the
Rocky Mountain area and the midwest. Mr. Sturm was a member of the group that
bought Continental Airlines ("Continental") out of bankruptcy in 1993, and
currently is a significant stockholder and director of Continental. Prior to
December 1991, Mr. Sturm served as Vice Chairman of Peter Kiewit Sons' Inc.
("PKS"), a construction, coal mining and telecommunications company that has
made significant investments in other industries. In 1984, Mr. Sturm led PKS's
$3.5 billion acquisition of The Continental Group Inc. (the "Group") and became
the Group's chairman and chief executive officer, positions he held until PKS
sold the Group in 1991.
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While Vice Chairman of PKS, Mr. Sturm participated in decisions to invest in
MFS Communications which was taken public in 1993 and sold to WorldCom in
1996 for approximately $14.4 billion. Mr. Sturm owns significant ownership
interests in WorldCom and Level 3 Communications, Inc.
SHELDON S. OHRINGER joined FirstWorld as its Chief Executive Officer and
President on October 1, 1998. Prior to this time, Mr. Ohringer served in
various capacities for ICG from November 1994 to September 1998, most
recently as Executive Vice President-Telecom of ICG and President of ICG
Telecom Group, Inc. Before working for ICG, Mr. Ohringer was Senior Vice
President of Sales and Business Development for US Long Distance from May
1991 until October 1994. From May 1984 until August 1990, Mr. Ohringer held
key management and executive positions with Telecom* USA, a major long
distance carrier which was acquired by MCI in 1990.
DAVID GANDINI joined FirstWorld in November 1998 as an Executive Vice
President. Mr. Gandini is a 16-year telecommunications industry veteran with
extensive experience building and growing young companies. Prior to joining
the Company, Mr. Gandini served in various capacities at ICG Communications
from February 1997 to November 1998, most recently as Senior Vice President
of Wholesale Services, ICG Telecom, Inc. Mr. Gandini also served as President
of ICG's long distance and IP telephony. While at ICG, he directed the build
of a 166-node network, representing the largest voice/data/Internet Protocol
(IP) domestic network. Prior to joining ICG, Mr. Gandini was President of
Pace Net Services from December 1995 to February 1997. Mr. Gandini was
recently ranked among the top 50 most influential people in competitive long
distance by Phone+, an industry trade publication.
MARION K. JENKINS, Ph.D., joined the Company in November of 1998 as
Senior Vice President of Information Technology and Chief Information
Officer. Dr. Jenkins has over a decade of executive management experience in
competitive telecommunications, overseeing broad operations in information
systems, strategic planning, integration, sales and marketing and customer
operations. His background includes positions as Vice President of Strategic
Client Applications at Qwest Communications from June 1998 to November 1998,
Vice President of Sales Operations at LCI International from March 1998 to
June 1998, Chief Information Officer at USLD Communications from November
1996 to February 1998 and Vice President of Sales for American Telco
Incorporated from January 1986 to July 1996. Prior to that Dr. Jenkins was a
Senior Research Engineer at Exxon Production Research Company.
DOUGLAS L. KRAMER joined FirstWorld in December 1998 as a Senior Vice
President and Chief Technical Officer after serving in various capacities for
ICG Communications' Telecom Group for the previous six years, most recently
as Vice President of Network Planning. While at ICG, Mr. Kramer directed
integrated planning; network, switch, Signaling System 7 ("SS7") and data
planning and engineering; switch provisioning; and industry code compliance.
In addition, he was responsible for developing and deploying ICG's 3,000 mile
fiber based network throughout nine states and was credited with deploying
the nation's largest IP network. Prior to working at ICG, Mr. Kramer directed
network services for MidAmerican Communications, acquired by WorldCom in
1991. Mr. Kramer also served as a consultant for WilTel, in connection with
the design and negotiation of initial SS7 network deployment with the RBOCs.
JOHN LEWIS joined the Company in June of 1996 and has served as Senior Vice
President, Network and Operations of the Company since April 1997. Prior to
joining the Company, Mr. Lewis amassed significant experience in the
telecommunications industry, primarily in the areas of network design,
maintenance and administration. From July 1991 to September 1995, Mr. Lewis
served as Executive Director of the INFOTEL project at Pacific Bell, which
focused on designing Pacific Bell's future telephone operations model. Prior to
joining Pacific Bell, Mr. Lewis served as General Manager of Technical
Operations & Maintenance Support at AT&T Network Systems from 1984 to 1988, as
General
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Manager of Switching at Pacific Telephone from 1981 to 1983 and as Division
Manager of Performance at New York Telephone from 1975 to 1980.
ERIC HYDE joined the Company as Senior Vice President, Sales & Product
Marketing in June 1998. Mr. Hyde has 15 years experience in product marketing,
strategic planning and sales. From March 1997 to June 1998, Mr. Hyde served as
Director of Customer Marketing in the Business Communications Systems Division
at Lucent Technologies where he was responsible for the implementation of
marketing programs for call center, telephony, video and messaging applications.
From January 1994 to March 1997, Mr. Hyde served in various capacities at
Ameritech, including Senior Director of Product Marketing and Integrated
Solutions where he was responsible for launching wireless transport, data and
voice CPE products to key accounts. From January 1983 to December 1993, Mr. Hyde
held various positions with General Motors Corporation, including Director of
Strategic Marketing of the North American Export Sales Division.
SCOTT M. CHASE joined the Company in October 1998 as Senior Vice President,
Corporate and Government Affairs. Prior to joining the Company, Mr. Chase worked
in various capacities for ICG from March 1997 to September 1998, most recently
as Vice President, Corporate Communications and Government Affairs. After
graduating from the University of Colorado in 1990 and until he joined ICG in
March 1997, Mr. Chase was actively involved in a number of local, state and
federal electoral campaigns, including serving as the Deputy Political Director
for the Colorado campaign to elect Clinton/Gore in 1992. In addition during this
period, Mr. Chase also served as a senior policy and political advisor for
several public officials, including U.S. Senator Tim Wirth and Roy Romer,
Governor of Colorado.
DENNIS MULROY joined the Company as Vice President, Finance and
Administration in January 1997 and has served as Secretary since January 1998.
From November 1993 to December 1996, Mr. Mulroy held the position of Chief
Financial Officer and Vice President of Administration for River Medical Inc., a
medical device company. From April 1983 to October 1993, Mr. Mulroy served as
Vice President of Finance and Administration for Spectragraphics Corporation, an
international computer technology company. Mr. Mulroy is a Certified Public
Accountant and previously worked in that capacity for Ernst & Young.
C. KEVIN GARLAND joined the Company as a director in January 1998. Mr.
Garland has worked for Enron since January 1995. He currently serves as Vice
President of Equity Investments for Enron and is responsible for overseeing
minority and control investments. From June 1993 to December 1994, Mr.
Garland served as senior associate in mergers and acquisitions for Parker &
Parsley, an independent oil and gas company. From 1992 to April 1993, Mr.
Garland worked as an analyst with Stephens Inc., an investment banking firm
in Little Rock, Arkansas.
RODNEY MALCOLM joined the Company as a director in January 1998. Mr.
Malcolm has worked for Enron in Houston, Texas since September 1994 and
currently serves as a Vice President with responsibilities for public power
and finance. Prior to joining Enron, Mr. Malcom was a project finance banking
officer at the Bank of Tokyo.
JAMES O. SPITZENBERGER joined the Company as a director in January 1998.
Since July 1996, Mr. Spitzenberger has been a private equity investor. Prior to
July 1996, Mr. Spitzenberger was a Vice President of PKS, which he joined in
February 1981. While at PKS, Mr. Spitzenberger served as Director of Taxation.
Prior to joining PKS, Mr. Spitzenberger was a tax manager with Arthur Andersen &
Co.
JOHN C. STISKA joined the Company as a director in September 1997.
Mr. Stiska currently is Chairman of Commercial Bridge Capital, LLC, a newly
formed company which will provide "bridge"
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financing to businesses requiring funds on a short-term basis. Mr. Stiska serves
on the board of directors of several companies, including Laser Power
Corporation, a publicly traded company. From February 1996 to February 1998, he
served as Corporate Senior Vice President and General Manager of the Technology
Applications Division of QUALCOMM Incorporated, a leading developer and
manufacturer of telecommunications technology. Prior to joining QUALCOMM, he was
President and then Chairman and Chief Executive Officer of Triton Group Ltd.
from 1990 to 1996. Previously, Mr. Stiska practiced law for 20 years,
specializing in corporate law, mergers and acquisitions and securities law. In
July 1998, Mr. Stiska joined the law firm of Latham & Watkins in an of-counsel
capacity.
MELANIE STURM joined the Company as a director in January 1998. Ms. Sturm
is a private equity investor and currently serves on the board of directors of
MD Network, a private healthcare concern. From 1990 to 1996, Ms. Sturm served as
an Investment Officer at International Finance Corporation, the private sector
affiliate of the World Bank. From 1984 to 1988, Ms. Sturm worked in the Mergers
& Acquisitions departments of Drexel, Burnham Lambert and Morgan Stanley.
Ms. Sturm is Donald L. Sturm's daughter.
Donald L. Sturm, James O. Spitzenberger and Melanie Sturm were appointed to
the Board of Directors as the three directors the Sturm Entities are entitled to
appoint pursuant to the Securityholders Agreement. Likewise, C. Kevin Garland
and Rodney Malcolm were appointed to the Board of Directors as the two directors
Enron is entitled to appoint pursuant to the Securityholders Agreement.
Retention of New Chief Executive Officer and President
The Company entered into an employment agreement on September 28, 1998
with Sheldon S. Ohringer (the "Employment Agreement"), pursuant to which Mr.
Ohringer agreed to join FirstWorld as its President and Chief Executive
Officer on October 1, 1998 (the "Commencement Date"). The Employment
Agreement has a three year term ending on the close of business on September
30, 2001, unless terminated earlier by either party. The Employment Agreement
also provides that Mr. Ohringer will be nominated to serve as a director of
the Company during the term of the agreement. The Employment Agreement
provides for an initial annual base salary of $200,000 and an annual cash
bonus not to exceed 50% of Mr. Ohringer's base salary. In addition, to
compensate Mr. Ohringer for certain benefits that he would have received from
his previous employer, FirstWorld has agreed to pay Mr. Ohringer a cash
payment of $4,000,000 (the "Equalization Payment") in three separate
installments. The first installment of the Equalization Payment in the amount
of $2,000,000 was paid on the Commencement Date, the second installment of
the Equalization Payment in the amount of $1,000,000 is due and payable on
October 1, 1999 and the final installment of the Equalization Payment in the
amount of $1,000,000 is due and payable on October 1, 2000. Mr. Ohringer must
be employed by the Company on the date an installment becomes due to be
eligible to receive the installment payment unless the Company terminates Mr.
Ohringer's employment other than for cause or Mr. Ohringer terminates his own
employment for good reason (as defined in the Employment Agreement) prior to
the installment date. In addition, Mr. Ohringer may elect to receive all or
any portion of the second and third installment payments in the form of
FirstWorld Series B Common Stock. If Mr. Ohringer elects to receive any of
the second or third installment payments in Series B Common Stock, such stock
will be valued at $5.00 and $7.50 per share, respectively.
In addition, under the Employment Agreement, Mr. Ohringer also will be
eligible for the following performance based bonuses:
IPO BONUS. If the Company consummates a Qualified Initial Public Offering
(as defined below) with a price of at least $10.00 per share (subject to
adjustment upon a subdivision or combination or other
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adjustment in the number of outstanding shares of the Company made without the
receipt of consideration to the Company after the Commencement Date) within the
first 18 months after the Commencement Date, the Company will pay Mr. Ohringer a
$1,000,000 cash bonus (the "IPO Bonus"). For purposes of the Employment
Agreement, the term "Qualified Initial Public Offering" shall mean the Company's
first underwritten initial public offering of common equity securities under the
Securities Act, after the date of the Employment Agreement, with gross proceeds
to the Company of at least $20,000,000, that results in such common equity
securities being listed for trading on a national securities exchange or being
authorized for trading on the Nasdaq National Market at such time.
DEFERRED CASH BONUS. In addition to the IPO Bonus, Mr. Ohringer also would
be entitled to receive the following additional compensation:
(i) If the Company consummates a Qualified Initial Public Offering
with a price of at least $10.00 per share (subject to adjustment upon a
subdivision or combination or other adjustment in the number of outstanding
shares of the Company made without the receipt of consideration to the
Company after the Commencement Date) within the first 12 months after the
Commencement Date, the Company will pay Mr. Ohringer a $4,207,500 cash
bonus on September 30, 2001;
(ii) If the Company consummates a Qualified Initial Public Offering
with a price of at least $12.50 per share (subject to adjustment upon a
subdivision or combination or other adjustment in the number of outstanding
shares of the Company made without the receipt of consideration to the
Company after the Commencement Date) within the first 24 months after the
Commencement Date, the Company will pay Mr. Ohringer a $8,415,000 cash
bonus on September 30, 2001; provided that if Mr. Ohringer earns the
payment described in this paragraph (ii) he will not be entitled to receive
the payment described in paragraph (i) above; and
(iii) If the Company has a market capitalization of at least $1.2
billion (as adjusted as described below) for a period of 20 consecutive
trading days during a three-year period beginning on the Commencement Date,
the Company will pay Mr. Ohringer a cash payment equal to $16,830,000 minus
any amounts he receives pursuant to paragraph (i) or (ii) above on
September 30, 2001. Market capitalization of $1.2 billion assumes
60,000,000 fully diluted shares of Series B Common Stock and a market price
of $20.00 per share, subject to adjustment. If the number of fully diluted
shares of Series B Common Stock is greater than or less than 60,000,000
shares of Series B Common Stock, the target market capitalization will be
proportionately adjusted; provided that the $20.00 per share market price
would not be so adjusted, except to the extent required to appropriately
reflect any subdivision (by any stock split, stock dividend,
recapitalization or otherwise), combination (by reverse stock split or
otherwise) or other adjustment in the number of outstanding shares of the
Company made without the receipt of consideration to the Company after the
Commencement Date.
The foregoing payments described in paragraph (i), (ii) and (iii) above are
referred to herein individually or collectively, as the "Deferred Cash Bonus."
Notwithstanding the foregoing, upon a change of control (as defined in the
Employment Agreement) or the termination of Mr. Ohringer's employment upon his
death, by the Company without cause or voluntarily by Mr. Ohringer for good
reason, any Deferred Cash Bonus previously earned by Mr. Ohringer that has not
yet been paid shall be paid within 30 days of the date of termination (as
defined in the Employment Agreement). In no event will the termination of Mr.
Ohringer's employment (including, without limitation, termination by the Company
for cause or disability (as defined in the Employment Agreement) or Mr.
Ohringer's voluntary termination of his
46
<PAGE>
employment without good reason) affect Mr. Ohringer's right to receive the
Deferred Cash Bonus earned prior to such termination.
Mr. Ohringer also has been granted an option to purchase 2,805,000 shares
of Series B Common Stock (representing an approximate 5% equity interest in the
Company on a fully diluted basis) at an exercise price of $6.00 per share
(subject to anti-dilution protections set forth in the Employment Agreement).
The option vests (i) with respect to one-third of the shares covered by the
option on the Commencement Date, (ii) with respect to one-third of the shares
covered by the option on the first anniversary of the Commencement Date and
(iii) with respect to the remaining one-third of the shares covered by the
option on the second anniversary of the Commencement Date. Notwithstanding the
foregoing, all of the shares subject to the option shall immediately vest (i)
immediately prior to a change of control, (ii) if the Company has a market
capitalization of at least $1.2 billion for a period of 20 consecutive trading
days during a three-year period starting on the Commencement Date or (iii) if
Mr. Ohringer is terminated by the Company without cause or Mr. Ohringer
voluntarily terminates his employment with the Company for good reason. Subject
to certain exceptions, Mr. Ohringer has agreed to hold 40% of the shares he
acquires upon exercise of the option for at least one year from the date of
exercise.
Mr. Ohringer also has been granted a right of first refusal which allows
him to maintain his percentage ownership interest (assuming the exercise in full
of the option described above) in the Company with respect to certain future
equity issuances. This right of first refusal terminates on the earlier to occur
of (i) January 31, 2004, (ii) the day immediately prior to the closing of a
Qualified Initial Public Offering or (iii) the date of termination. Mr. Ohringer
may also participate in the employee benefit plans generally available to
FirstWorld's senior executives according to the plans' terms and conditions.
Depending on how Mr. Ohringer's employment with FirstWorld terminates, Mr.
Ohringer (or his estate) may be eligible to receive certain termination payments
and Mr. Ohringer (or his family and dependents) would also be entitled to
continuation of certain benefits for a specified period of time.
Mr. Ohringer is subject to a one year covenant not to compete if his
employment is terminated by the Company for cause or for disability or if Mr.
Ohringer voluntarily terminates his employment without good reason.
COMMITTEES OF THE BOARD OF DIRECTORS
CHAIRMAN'S COMMITTEE. The Board of Directors has established the
Chairman's Committee consisting of Messrs. Sturm, Ohringer and Garland. The
Chairman's Committee is empowered to conduct all activities that may be
conducted by the Board of Directors, subject only to limitations imposed by
applicable corporation law.
COMPENSATION COMMITTEE. The Board of Directors has established a
Compensation Committee consisting of Mr. Garland and Ms. Sturm. The Compensation
Committee determines compensation for the Company's senior executive officers
and administers the 1995 Stock Option Plan (as defined) and the 1997 Stock
Option Plan (as defined).
AUDIT COMMITTEE. The Board of Directors has established an Audit Committee
with Mr. Spitzenberger as its sole member. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public
47
<PAGE>
accountants, reviews the independence of the independent public accountants,
considers the range of audit and non-audit fees and reviews the adequacy of the
Company's internal accounting controls.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
The Company was not subject to Section 16(a) of the Exchange Act during the
fiscal year ended September 30, 1998. The Company became subject to Section
16(a) of the Exchange Act on October 8, 1998, when the Company filed a
Registration Statement on Form 8-A, with respect to its Series B Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors of the Company who are also employees of the Company receive no
directors' fees. One of the Company's non-employee directors, John C. Stiska,
receives a retainer of $1,000 per month. All non-employee directors are
reimbursed for their reasonable out-of-pocket travel expenditures. Directors of
the Company are also eligible to receive grants of stock options under the
Company's 1997 Stock Option Plan. Corporate Managers, LLC, a Colorado limited
liability company and an affiliate of the Sturm Entities (all of which are
controlled by Donald L. Sturm and in which James O. Spitzenberger and Melanie
Sturm own membership interests), receives an annual management fee of $500,000
plus out of pocket expenses. C. Kevin Garland and Rodney Malcolm are officers of
Enron, which receives an annual management fee of $500,000 plus out of pocket
expenses. Corporate Managers, LLC and Enron receive such management fees
pursuant to three-year Management Consulting Services Agreements. See "Certain
Relationships and Related Transactions."
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the cash and
non-cash compensation during the periods indicated earned by or awarded to the
Chief Executive Officer and to the four other most highly compensated executive
officers of the Company whose combined salary and bonus exceeded $100,000 during
the fiscal year ended September 30, 1998 (the "Named Executive Officers").
48
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------------- --------------------------------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
SALARY BONUS OTHER ANNUAL STOCK AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) COMPENSATION ($) (#) ($)
- --------------------------- ------ ----- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald L. Sturm(1) ............................... 0(2) -- -- -- -- --
Former Chief Executive Officer
Renney Senn ...................................... 26,667 -- -- -- 16,417 72,442(3)
Former Chief Executive Officer
Robert E. Randall(4) ............................. 176,667 -- -- -- 116,417 --
Former Executive Vice President, and former
acting Chief Financial Officer
John Lewis ....................................... 139,167 2,000 -- -- 56,417 --
Senior Vice President, Network and Operations
Andrew B. Taubman(5) ............................. 139,167 -- -- -- 46,417 --
Former Senior Vice President, Corporate
Finance and Development
G. Bradford Saunders(6) .......................... 139,167 -- -- -- 16,417 --
Former Senior Vice President, Project
Development
</TABLE>
(1) Mr. Sturm served as the Company's Chief Executive Officer from March 1998
through September 30, 1998. Effective with the close of business on
September 30, 1998, Mr. Sturm resigned his position as Chief Executive
Officer of the Company in order to allow Mr. Ohringer to assume such
position.
(2) The Company pays annual management fees to Corporate Managers LLC, an
affiliate of Mr. Sturm, pursuant to the Management Consulting Services
Agreement between the Company and Corporate Managers, LLC, as amended. See
"Certain Relationships and Related Transactions--Equity
Investment--Management Services Agreements."
(3) Mr. Senn resigned from the Company in January 1998 and in connection
with such resignation received $12,231 less applicable federal and state
taxes for accrued vacation days. In addition, pursuant to an employee
severance program adopted in connection with the Equity Investment (as
defined below), the Company paid severance payments to Mr. Senn in an
aggregate amount of $60,211. See "Certain Relationships and Related
Transactions--Equity Investment--Employee Severance Program"
(4) Mr. Randall resigned in December 1998.
49
<PAGE>
(5) Mr. Taubman resigned in December 1998.
(6) Mr. Saunders resigned in October 1998.
OPTION GRANTS DURING FISCAL 1998
The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during the fiscal year ended
September 30, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATE
SECURITIES OPTIONS GRANTED OF STOCK PRICE
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE OR APPRECIATION FOR OPTION
GRANTED FISCAL YEAR BASE PRICE TERM(1)
NAME (#) (%) ($/SH) EXPIRATION DATE 5% 10%
- ---- ------------------ --------------- ------------ --------------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Donald L. Sturm................... -- -- -- -- -- --
Renney Senn(2).................... 16,417 1.16 3.00 4/6/98 0 0
Robert E. Randall(3).............. 16,417 1.16 3.00 3/31/99 2,463 4,925
100,000 7.04 4.50 3/31/99 22,500 45,000
John Lewis........................ 6,000 .42 3.00 10/2/07 11,320 28,687
10,417 .73 3.00 12/16/07 19,654 49,806
40,000 2.82 4.50 6/2/08 113,201 286,874
Andrew B. Taubman(4).............. 16,417 1.16 3.00 3/11/99 2,463 4,925
30,000 2.11 4.50 3/11/99 6,750 13,500
G. Bradford Saunders(5)........... 16,417 1.16 3.00 1/2/99 2,463 4,925
</TABLE>
- ---------------
(1) The 5% and 10% assumed annual rate of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price appreciation over the ten year
option term will be at the assumed 5% or 10% levels or at any other defined
level.
(2) Mr. Senn exercised the options to purchase 16,417 shares of Series B Common
Stock on April 6, 1998.
(3) Mr. Randall resigned from the Company in December 1998. Pursuant to the
provisions of the SpectraNet International 1997 Stock Plan, Mr. Randall has
until March 31, 1999 to exercise the vested portion of the options
described above.
(4) Mr. Taubman resigned from the Company in December 1998. Pursuant to the
provisions of the SpectraNet International 1997 Stock Plan, Mr. Taubman has
until March 11, 1999 to exercise the vested portion of the options
described above.
(5) Mr. Saunders resigned from the Company in October 1998. Pursuant to the
provisions of the SpectraNet International 1997 Stock Plan, Mr. Saunders
has until January 2, 1999 to exercise the vested portion of the options
described above.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1998
and unexercised options held as of September 30, 1998.
50
<PAGE>
OPTIONS EXERCISED DURING FISCAL 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SHARES ACQUIRED ON VALUE UNDERLYING UNEXERCISED MONEY OPTIONS
EXERCISE REALIZED OPTIONS AT FY-END (#) AT FY-END ($)(1)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------ -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Donald L. Sturm......... -- -- -- --
Renney Senn............. 16,417 0 0/0 0/0
Robert E. Randall....... -- -- 16,417/100,000 49,251/150,000
John Lewis.............. -- -- 43,617/62,800 190,251/168,000
Andrew B. Taubman....... -- -- 36,417/60,000 159,251/210,000
G. Bradford Saunders.... -- -- 91,417/50,000 469,251/280,000
</TABLE>
- ---------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at September 30, 1998 ($6.00 per
share as determined by the Board of Directors) and the exercise price of
the options.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Sheldon S. Ohringer,
David Gandini, Marion K. Jenkins, Douglas L. Kramer and Scott M. Chase.
For a description of the Company's Employment Agreement with Sheldon S.
Ohringer see "Directors and Executive Officers of the Registrant--Retention of
New Chief Executive Officer and President."
The Company's employment agreement with David Gandini provides for a
term of three years from November 30, 1998 through November 29, 2001. Mr.
Gandini receives a base salary of $185,000 and is eligible to receive an
annual bonus of up to 40% of his base salary pursuant to the Company's Annual
Bonus Plan. In addition, to compensate Mr. Gandini for certain benefits that
he would have received from his previous employer, FirstWorld has agreed to
pay Mr. Gandini a cash payment of $500,000 (the "Equalization Payment") in
three separate installments. The first installment in the amount of $100,000
is due and payable on January 1, 1999, the second installment in the amount
of $200,000 is due and payable on January 1, 2000, and the third installment
in the amount of $200,000 is due and payable on January 1, 2001. Mr. Gandini
must be employed by the Company on the date an installment becomes due to be
eligible to receive the installment payment unless the Company terminates Mr.
Gandini's employment other than for cause or Mr. Gandini terminates his own
employment for good reason (as defined in the Employment Agreement) prior to
the installment date. Pursuant to the terms of the employment agreement, the
Company granted Mr. Gandini an option to purchase 500,000 shares of Series B
Common Stock. The shares subject to the option vest in four equal increments
of 125,000 shares on the first, second, third and fourth anniversaries of Mr.
Gandini's start date with the Company. The shares in the first such increment
have an exercise price of $6.00 per share, shares in the second such
increment have an exercise price of $6.50 per share, shares in the third such
increment have an exercise price of $7.00 per share and shares in the fourth
such increment have an exercise price of $7.50 per share. If the Company
terminates Mr. Gandini's employment during his first three years of
employment without "cause" or Mr. Gandini terminates his employment with the
Company for "good reason" (as each such term is defined in the employment
agreement), the Company must make a severance payment to Mr.
51
<PAGE>
Gandini equal to the base salary he would have received had he remained employed
with the Company for the remainder of his employment term.
The Company's employment agreement with Marion K. Jenkins provides for a
term that commenced on November 9, 1998 and ends on October 31, 2000. Mr.
Jenkins receives a base salary of $160,000 per year and is eligible to receive a
bonus of up to 50% of his base salary under the Company's Annual Bonus Plan.
Pursuant to the terms of the employment agreement, the Company granted Mr.
Jenkins an option to purchase 250,000 shares of Series B Common Stock. The
shares subject to the option vest in four equal increments of 62,500 shares on
the first, second, third and fourth anniversaries of Mr. Jenkins' start date
with the Company. The shares in the first such increment have an exercise price
of $6.00 per share, shares in the second such increment have an exercise price
of $6.50 per share, shares in the third such increment have an exercise price of
$7.00 per share and shares in the fourth such increment have an exercise price
of $7.50 per share. If the Company terminates Mr. Jenkins' employment prior to
October 31, 2000 without "cause" or Mr. Jenkins terminates his employment with
the Company for "good reason" (as each such term is defined in the employment
agreement), the Company must make a severance payment to Mr. Jenkins equal to
the base salary he would have received had he remained employed with the Company
for the remainder of his employment term.
The Company's employment agreement with Douglas L. Kramer provides for a
term that commenced on December 7, 1998 and ends on December 13, 2000. Mr.
Kramer receives a base salary of $135,000 per year and is eligible to receive a
bonus of up to 35% of his base salary under the Company's Annual Bonus Plan. In
addition, to compensate Mr. Kramer for certain benefits that he would have
received from his previous employer, FirstWorld has agreed to pay Mr. Kramer a
cash payment of $30,000 payable in January 1999. Pursuant to the terms of the
employment agreement, the Company granted Mr. Kramer an option to purchase
100,000 shares of Series B Common Stock. The shares subject to the option vest
in four equal increments of 25,000 shares on the first, second, third and fourth
anniversaries of Mr. Kramer's start date with the Company. The shares in the
first such increment have an exercise price of $6.00 per share, shares in the
second such increment have an exercise price of $6.50 per share, shares in the
third such increment have an exercise price of $7.00 per share and shares in the
fourth such increment have an exercise price of $7.50 per share. If the Company
terminates Mr. Kramer's employment prior to October 31, 2000 without "cause" or
Mr. Kramer terminates his employment with the Company for "good reason" (as each
such term is defined in the employment agreement), the Company must make a
severance payment to Mr. Kramer equal to the base salary he would have received
had he remained employed with the Company for the remainder of his employment
term.
The Company's employment agreement with Scott M. Chase provides for a
term of two years from October 1, 1998 through September 30, 2000. Mr. Chase
receives a base salary of $125,000 per year and is eligible to receive a
bonus as determined by the Compensation Committee of the Board of Directors.
In addition, to compensate Mr. Chase for certain benefits that he would have
received from his previous employer, FirstWorld paid Mr. Chase a cash payment
of $20,000 in October 1998. Mr. Chase was granted an option to purchase
100,000 shares of Series B Common Stock at an exercise price of $4.50 per
share. The vesting schedule and other terms and conditions of the option are
as set forth in the applicable option plan of the Company. If the Company
terminates Mr. Chase's employment prior to September 30, 2000 without "cause"
or Mr. Chase terminates his employment with the Company for "good reason" (as
each such term is defined in the employment agreement), the Company must make
a severance payment to Mr. Chase equal to the amount of base salary he would
have received had he remained an employee of the Company through September
30, 2000 less any base salary paid to Mr. Chase prior to the termination of
his employment for the 12 month period ending on the last day of the month
preceding the month Mr. Chase's employment with the Company is terminated
(or, if Mr. Chase is terminated without cause or he terminates his
52
<PAGE>
employment for good reason prior to October 1, 1999, the entire period of his
employment).
STOCK OPTION PLANS AND STOCK PURCHASE PLANS
STOCK OPTION PLANS
The Company has two stock option plans currently in place: the 1995 Stock
Option Plan and the 1997 Stock Option Plan.
1995 STOCK OPTION PLAN. Under the SpectraNet International 1995 Incentive
Stock Option Plan (the "1995 Stock Option Plan") the Company is authorized to
issue incentive stock options ("ISOs") to acquire up to an aggregate of
1,500,000 shares of Series B Common Stock. Subject to the limitations set forth
in the 1995 Stock Option Plan, the Board of Directors or a committee thereof
comprised of at least three directors has the authority, subject to certain
limitations, to select the employees of the Company or its subsidiaries to whom
grants are made, to designate the number of shares to be covered by each option,
to establish vesting schedules, and to specify other terms of the options.
Generally, options vest over a four and one half year period and expire ten
years from the date of grant. Options granted under the 1995 Stock Option Plan
are nontransferable and expire 90 days after the termination of an optionee's
employment with the Company, unless such optionee's service with the Company is
terminated by death or disability, in which case such options expire six months
and one year, respectively, after the optionee's employment with the Company is
terminated. As of November 30, 1998, options to purchase an aggregate of 533,700
shares of Series B Common Stock at prices ranging from $.15 to $.50 were
outstanding under the 1995 Stock Option Plan.
1997 STOCK OPTION PLAN. Under the SpectraNet International 1997 Stock Plan
(the "1997 Stock Option Plan") the Company is authorized to issue an aggregate
of 1,500,000 options to purchase Series B Common Stock. The 1997 Stock Option
Plan provides for the grants of ISOs and nonqualified stock options ("NQSOs")
and the award of stock purchase rights. Subject to the terms and conditions of
the 1997 Stock Option Plan and applicable law, the Board of Directors or a duly
appointed committee thereof (the "Administrator") has the authority to
determine, among other things, which employees, directors or consultants should
be awarded options, the type of options to be awarded, the number of shares
covered by option awards, the exercise price applicable to options awarded and
the vesting schedule of such options. Options awarded under the 1997 Stock
Option Plan are nontransferable and generally expire ten years from the date of
grant. Unless otherwise indicated in the applicable stock option agreement, the
vested portion of options awarded pursuant to the 1997 Stock Option Plan
generally remain exercisable for three months after the termination of the
optionee's service to the Company. However, if the optionee's service to the
Company ends because of death or disability, unless otherwise indicated in the
Stock Option Agreement, such optionee has 12 months to exercise the vested
portion of his or her options. As of November 30, 1998, options to purchase an
aggregate of 1,385,603 shares of Series B Common Stock at exercise prices
ranging from $3.00 to $4.50 were outstanding under the 1997 Stock Option Plan.
STOCK PURCHASE PLAN
In September 1998, the Company adopted the 1998 Stock Purchase Plan of
FirstWorld Communications (the "Stock Purchase Plan"). Under the Stock Purchase
Plan, the Company may grant rights to purchase (each, a "Stock Purchase Right")
an aggregate of 500,000 shares of Series B Common Stock to employees or
directors of the Company. The Stock Purchase Plan allows for up to 50% of the
purchase price of any stock purchased thereunder to be paid in the form of a
promissory note. If the
53
<PAGE>
offeree elects to pay a portion of the purchase price with a promissory note,
such offeree must also pledge the shares acquired with the proceeds of the
promissory note to secure the promissory note. The Board or a duly appointed
committee thereof has the authority under the Stock Purchase Plan to determine,
among other things, the number of shares of stock that each offeree shall be
entitled to purchase, the price to be paid and the period during which such
offer must be accepted. In September 1998, the Company offered Stock Purchase
Rights to purchase an aggregate of 300,000 shares of Series B Common Stock to 17
offerees. Prior to the stated expiration of the Stock Purchase Rights in
November 1998, five employees purchased 42,250 shares of Series B Common Stock
at a price of $4.50 per share. Subject to applicable laws, the Stock Purchase
Plan is subject to approval of the stockholders within 12 months of its
adoption.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of October 1, 1998, by (i) each
of the Company's named executive officers and directors; (ii) the Company's
executive officers and directors as a group; and (iii) stockholders known by the
Company to beneficially own more than 5% of any class of the Company's voting
securities. For purposes of this Form 10-K, beneficial ownership of securities
is defined in accordance with the rules of the Securities and Exchange
Commission and means generally the power to vote or exercise investment
discretion with respect to securities, regardless of any economic interests
therein. Except as otherwise indicated, the Company believes that the beneficial
owners of the securities listed below have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Unless otherwise indicated, the business address for each of the individuals or
entities listed below is c/o FirstWorld Communications, Inc., 7100 E. Belleview
Avenue, Suite 210, Greenwood Village, Colorado 80111.
54
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SERIES B
SERIES A COMMON COMMON SHARES
SHARES BENEFICIALLY BENEFICIALLY
NAME OWNED(1)(2) OWNED(1)(2) PERCENT OF CLASS(1)
- ---- ------------------ --------------- -----------------------
<S> <C> <C> <C>
Donald L. Sturm(3) .......................... 5,000,000 15,452,849 55.57% of Common Stock
51.13% of Voting Stock
Enron Capital & Trade Resources Corp.(4) .... 5,000,000 11,666,666 48.43% of Common Stock
49.09% of Voting Stock
Kevin Garland(5) ............................ 0 0 *% of Common Stock
*% of Voting Stock
Rodney Malcolm(6) ........................... 0 0 *% of Common Stock
*% of Voting Stock
Robert E. Randall(7) ........................ 0 489,748 1.87% of Common Stock
*% of Voting Stock
James O. Spitzenberger(8) ................... 0 0 *% of Common Stock
*% of Voting Stock
John C. Stiska(9) ........................... 0 30,000 *% of Common Stock
*% of Voting Stock
Melanie Sturm(10) ........................... 0 0 *% of Common Stock
*% of Voting Stock
John Lewis(11) .............................. 0 56,969 *% of Common Stock
*% of Voting Stock
G. Bradford Saunders(12) .................... 0 136,417 *% of Common Stock
*% of Voting Stock
Renney Senn(13) ............................. 0 882,274 3.38% of Common Stock
*% of Voting Stock
Sheldon S. Ohringer(14) ..................... 0 935,000 3.45% of Common Stock
*% of Voting Stock
Andrew B. Taubman(15) ....................... 0 69,938 *% of Common Stock
*% of Voting Stock
All directors and executive officers as a 5,000,000 17,237,338 58.42% of Common Stock
group (14 persons)(16) ...................... 52.01% of Voting Stock
</TABLE>
- --------------------
* Less than one percent beneficially owned
(1) In accordance with Rule 13d-3 under the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), a person is deemed to be a
"beneficial owner" of a security if he or she has or shares the power to
vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner o any securities of which that person has the right to
acquire beneficial ownership within 60 days. More than one person may be
deemed to be a beneficial owner of the same securities. The percentage
ownership of each stockholder is calculated based on the total number of
outstanding shares of Series A Common Stock and Series B Common Stock as of
October 1, 1998 and those shares of Series A Common Stock or Series B
Common Stock that may be acquired by such stockholder within 60 days of
such date. Consequently, the denominator for calculating such percentage
may be different for each stockholder.
(2) This table is based upon information supplied by directors, executive
officers and principal stockholders. Unless otherwise indicated in the
footnotes to this table, each of the stockholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned.
55
<PAGE>
(3) Shares listed include: (a) 5,000,000 shares of Series A Common Stock held
of record by Spectra 3; (b) 1,392,757 shares of Series B Common Stock held
of record by Spectra 1; (c) 3,333,333 shares of Series B Common Stock held
of record by Spectra 3; and (d) 10,726,759 shares of Series B Common Stock
subject to currently exercisable warrants held of record by Spectra 1,
Spectra 2 and Spectra 3. Beneficial ownership of the foregoing shares is
attributable to Mr. Sturm because he is the managing member of Spectra 1,
Spectra 2 and Spectra 3 and is therefore deemed to exercise voting power
and investment authority with respect to the shares.
(4) Shares listed include: (a) 5,000,000 shares of Series A Common Stock held
of record by Enron; (b) 3,333,333 shares of Series B Common Stock held of
record by Enron; and (c) 8,333,333 shares of Series B Common Stock subject
to currently exercisable warrants held of record by Enron.
(5) Excludes the securities owned by Enron described in Footnote (4) above. Mr.
Garland is an officer of Enron, but disclaims beneficial ownership of the
shares owned by Enron.
(6) Excludes the securities owned by Enron described in Footnote (4) above. Mr.
Malcolm is an officer of Enron, but disclaims beneficial ownership of the
shares owned by Enron.
(7) Shares listed include: (a) 149,999 shares of Series B Common Stock held of
record by Randall Lamb Associates Profit Sharing Plan and 33,332 shares of
Series B Common Stock subject to currently exercisable warrants held by
Randall Lamb Associates Profit Sharing Plan; beneficial ownership of such
shares is attributable to Mr. Randall because he has the power to direct
the voting and investment of such shares; (b) 5,000 shares of Series B
Common Stock held of record by Robert E. and Dianne Randall as custodians
for Natalie Marie Ray under the California Uniform Transfers to Minors Act
("CUTMA") and 5,000 shares of Series B Common Stock held of record by
Robert E. and Dianne M. Randall as custodians for Alexandra Dianne Ray
under CUTMA; beneficial ownership of such shares is attributable to
Mr. Randall because he is a custodian of the minor children and is
therefore deemed to exercise voting power and investment authority with
respect to the shares; (c) 280,000 shares of Series B Common Stock held of
record by Robert E. and Dianne M. Randall as trustees of the Robert E. and
Dianne M. Randall Family Trust, dated 2/3/97; beneficial ownership of such
shares is attributable to Mr. Randall because he is a trustee of the
Robert E. and Dianne M. Randall Family Trust and is therefore deemed to
exercise voting power and investment authority with respect to the shares;
and (d) 16,417 shares of Series B Common Stock subject to currently
exercisable options held by Mr. Randall at an exercise price of $3.00.
(8) Excludes shares of Series A Common Stock and Series B Common Stock
beneficially owned by the Sturm Entities. Mr. Spitzenberger owns 10.0%,
10.0% and 6.67% of the membership interests in Spectra 1, Spectra 2 and
Spectra 3, respectively. Mr. Spitzenberger disclaims beneficial ownership
of such shares.
(9) Shares listed include 15,000 shares of Series B Common Stock subject to
currently exercisable options held by Mr. Stiska at an exercise price of
$3.00, 5,000 shares of Series B Common Stock subject to options held by Mr.
Stiska at an exercise price of $3.00 exercisable within 60 days of October
1, 1998 and 10,000 shares of Series B Common Stock held jointly by Mr.
Stiska and his wife.
(10) Excludes shares of Series A Common Stock and Series B Common Stock
beneficially owned by the Sturm Entities. Ms. Sturm owns 17.0%, 17.0% and
20.0% of the membership interests in Spectra 1, Spectra 2 and Spectra 3,
respectively, through a revocable trust of which she is a co-trustee. Ms.
Sturm disclaims beneficial ownership of such shares.
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(11) Shares listed include: (a) 10,000 shares of Series B Common Stock held of
record by John W. and Dorothy M. Lewis Family Trust; beneficial ownership
of such shares is attributable to Mr. Lewis because he is a trustee of the
John W. and Dorothy M. Lewis Family Trust and is therefore deemed to
exercise voting power and investment authority with respect to the shares;
(b) 567 shares of Series B Common Stock subject to currently exercisable
warrants held by Mr. Lewis at an exercise price of $3.53; (c) 22,017 shares
of Series B Common Stock subject to currently exercisable options held by
Mr. Lewis at an exercise price of $3.00; and (d) 21,600 shares of Series B
Common Stock subject to currently exercisable options held by Mr. Lewis at
an exercise price of $.25.
(12) Shares listed include 20,000 shares of Series B Common Stock held of record
by United Brice Group Ltd., a California corporation. Mr. Saunders is an
officer of such corporation and has voting power and investment authority
with respect to the shares. Accordingly, he may be deemed to beneficially
own the shares held by such corporation. Shares listed also include 16,417
shares of Series B Common Stock subject to currently exercisable options
held by Mr. Saunders at an exercise price of $3.00; 45,000 shares of Series
B Common Stock subject to currently exercisable options held by Mr.
Saunders at an exercise price of $.50; 30,000 shares of Series B Common
Stock subject to currently exercisable options held by Mr. Saunders at an
exercise price of $.25; and 10,000 shares of Series B Common Stock subject
to options held by Mr. Saunders at an exercise price of $.25 exercisable
within 60 days of October 1, 1998.
(13) Shares listed include 865,856 shares of Series B Common Stock held of
record jointly by Mr. Senn and his wife.
(14) Shares listed include 935,000 shares of Series B Common Stock subject to
currently exercisable options held by Mr. Ohringer at an exercise price of
$6.00.
(15) Shares listed include: (a) 5,666 shares of Series B Common Stock subject to
currently exercisable warrants held by Mr. Taubman at an exercise price of
$3.53; (b) 20,000 shares of Series B Common Stock subject to currently
exercisable options held by Mr. Taubman at an exercise price of $.50; and
(c) 16,417 shares of Series B Common Stock subject to currently exercisable
options held by Mr. Taubman at an exercise price of $3.00.
(16) Excludes shares held by Enron Capital & Trade Resources Corp. and Renney
Senn. See notes 3, 5-12, 14 and 15.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EQUITY INVESTMENT
GENERAL. On December 30, 1997, the Company completed a private placement of
equity securities to Spectra 3 and Enron (the "Equity Investment"). The Company
issued 5,000,000 shares of newly created Series A Common Stock to each of
Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a Common
Stock Purchase Agreement dated as of December 30, 1997 (the "Stock Purchase
Agreement") by and among the Company, Enron, Spectra 3 and the holders of
$405,500 in principal amount of the Company's convertible subordinated
promissory notes. In addition, the Company issued an aggregate of 135,164 shares
of Series A Common Stock to the holders of the convertible subordinated
promissory notes upon the automatic conversion of the convertible subordinated
promissory notes pursuant to the terms thereof at a conversion price of $3.00
per share. The Company also issued for no additional consideration warrants to
purchase 5,000,000 shares of Series B Common Stock at $3.00 per share to each of
Spectra 3 and Enron and warrants to purchase an aggregate of 135,164 shares of
Series B Common Stock to the holders of the convertible subordinated promissory
notes (collectively, the "Recent Equity Warrants"). Spectra 3, an entity
controlled by Donald L. Sturm, was formed for the purpose of participating in
the Equity Investment. Spectra 3 is an affiliate of Colorado Spectra 1, LLC
("Spectra 1") and Colorado Spectra 2, LLC ("Spectra 2"), entities that owned
equity securities of the Company prior to the Equity Investment. See "Principal
Stockholders." Spectra 1, Spectra 2 and Spectra 3 are referred to
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herein as the "Sturm Entities" and Spectra 3, Enron and the holders of the
convertible subordinated promissory notes are referred to herein as the
"Purchasers."
The Stock Purchase Agreement also granted Spectra 3 and Enron, for a period
of 45 days following the closing of the Equity Investment, the right to invest
an additional $20,000,000 in the aggregate on the same terms and conditions
applicable to their purchases of Series A Common Stock, except that any
additional shares of Common Stock to be acquired would be Series B Common Stock.
This option was later extended by action of a special committee of the Company's
Board of Directors. Spectra 3 and Enron fully exercised their option to make an
additional $20,000,000 investment concurrently with the closing of the Debt
Offering.
Substantially concurrently with the Equity Investment, the Company (i)
converted the three existing classes of preferred stock into Series B Common
Stock in accordance with the automatic conversion provision of its existing
charter in order to simplify the Company's capital structure and eliminate the
rights, preferences and privileges of the preferred stock; (ii) amended its
Articles of Incorporation to substantially increase the Company's authorized
capital to allow for the Equity Investment and to provide flexibility for future
financings; and (iii) amended its Articles of Incorporation to designate two
series of Common Stock, with the investors in the Equity Investment to receive
Series A Common Stock and all existing Common Stock (including Common Stock
issued upon conversion of the existing preferred stock) designated as Series B
Common Stock. The Series A Common Stock and Series B Common Stock are identical
in all material respects, except that the Series A Common Stock possess ten
votes per share on all matters subject to a vote of stockholders while the
Series B Common Stock possess one vote per share.
The Recent Equity Warrants are exercisable by the holder thereof in whole
or in part at an exercise price of $3.00 per share at any time following
issuance through the first to occur of (i) the seventh anniversary of the date
of issuance, (ii) the merger of the Company following which the Company's
stockholders own less than 50% of the surviving entity, and (iii) the sale of
all or substantially all of the Company's assets. The exercise price and number
of shares subject to the Recent Equity Warrants are subject to customary
anti-dilution adjustments in the event of a stock split, subdivision,
combination of shares, reorganization or reclassification or in the event that
dividends are paid on the Company's common stock in other securities or assets.
INVESTOR RIGHTS AGREEMENT. In connection with the closing of the Equity
Investment, the Company entered into an Amended and Restated Investor Rights
Agreement which entitles the Purchasers and certain other prior investors to
certain demand and piggyback registration rights. In addition, the Sturm
Entities and Enron were granted rights of first refusal that permit them to
maintain their respective percentage ownership interest in the Company with
respect to future equity issuances. Mr. Ohringer (pursuant to the terms of his
Employment Agreement), the Sturm Entities and Enron are the only entities having
a right of first refusal or other preemptive right on future equity financing
transactions. See "Directors and Executive Offices of the Registrant--Retention
of New Chief Executive Officer and President."
In connection with the Additional Equity Investment, the Company further
amended and restated the Amended and Restated Investor Rights Agreement in order
to (i) allow for, and coordinate with, the registration rights granted to the
Initial Purchasers pursuant to that certain Warrant Registration Rights
Agreement dated as of April 13, 1998 by and between the Company and the Initial
Purchasers and (ii) to make certain other revisions to the previous iteration of
the Amended and Restated Investor Rights Agreement.
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AMENDMENT TO STURM WARRANT. In connection with the Company's Series C
preferred stock financing, the Company and Spectra 1 and Spectra 2 entered into
a Warrant Purchase/Right to Maintain Agreement pursuant to which the Company
issued and sold to Spectra 2 a warrant (the "Sturm Warrant") that was initially
exercisable for 800,000 shares of Common Stock at an aggregate exercise price of
$3,800,000. The Sturm Warrant contained a complex anti-dilution provision
pursuant to which the number of shares purchasable could be increased
significantly based upon the weighted average issuance price of equity
securities issued by the Company prior to the earliest of (i) April 1, 1999,
(ii) the death of Donald L. Sturm and (iii) a public offering of securities by
the Company (the "Adjustment Date"). Based upon those existing provisions, upon
the closing of the Equity Investment, the Sturm Warrant would have been
exercisable for approximately 2,250,000 shares of Common Stock at an aggregate
exercise price of $3,800,000, and assuming exercise of the right of Spectra 3
and Enron to increase their investment by $20 million as described above would
have been exercisable for approximately 2,800,000 shares of Common Stock at an
aggregate exercise price of $3,800,000. The Sturm Warrant would also have
continued to adjust upon future equity issuances through the Adjustment Date.
In connection with the Equity Investment, in order to eliminate the
uncertainty regarding the number of shares purchasable under the Sturm Warrant,
the Company and Spectra 1 and Spectra 2 set the number of shares purchasable
under the Sturm Warrant at 2,110,140 shares of Series B Common Stock with an
exercise price of $1.80 per share (aggregate exercise price of approximately
$3,800,000). The Sturm Warrant, as amended, is subject to customary adjustment
on stock splits, stock dividends, subdivisions or combinations, but would not
otherwise be subject to adjustment. In addition, Spectra 1 and Spectra 2 waived
their maintenance rights provided under the Warrant Purchase/Right to Maintain
Agreement. The Sturm Entities, however, continue to have a right of first
refusal under the Amended and Restated Investor Rights Agreement as described
above.
BOARD OF DIRECTORS. Upon the closing of the Equity Investment, the
Company's Board of Directors was reconstituted with seven directors as follows:
three designees of the Sturm Entities -Donald L. Sturm, Melanie Sturm and James
O. Spitzenberger; two designees of Enron - C. Kevin Garland and Rodney Malcolm;
one management representative - Robert E. Randall; and John C. Stiska, an
existing director, as an independent member of the Board. Renney Senn and Robert
Cerasoli resigned from the Board at this time. In addition, pursuant to the
Stock Purchase Agreement within six months following the closing of the Equity
Investment, the Board would be further reconstituted to consist of seven
directors, three of whom would be designated by the Sturm Entities, two of whom
would be designated by Enron, one of whom would be designated by the holders of
Series B Common Stock and one of whom would be an independent director. The
right of the Series B stockholders to elect a director is set forth in the
Company's Certificate of Incorporation.
WAIVER OF BUSINESS OPPORTUNITIES. In an effort to alleviate possible
conflicts of interest among Enron, the Sturm Entities and the Company (and each
of their respective affiliates) with respect to their existing and prospective
businesses, the Company revised its purpose clause in Article II of its
Certificate of Incorporation to provide that the Company generally may not
engage in oil, natural gas, electricity, water and other energy-related
business, in lieu of the general purpose clause that previously had been
applicable.
In addition to the restriction on business, the Company, the Sturm Entities
and Enron entered into a Business Opportunity Agreement to address the fact that
Enron and the Sturm Entities or their affiliates own, have agreements with and
otherwise participate in, telecommunications businesses, and may develop,
finance, acquire, enter into agreements with or otherwise participate in, such
businesses in the future, including businesses that are or may become
competitive with the business of the Company. In this regard,
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Enron advised the Company and the Sturm Entities that (a) FirstPoint
Communications, Inc. and its affiliates ("FirstPoint"), which are Enron
affiliates, are engaged in the business of providing telecommunications
services, and have or may from time to time develop, finance, acquire, or
acquire interests in, telecommunications and related service and product
companies that compete with the Company (including, without limitation, those
that compete in the Company's markets in California) and (b) FirstPoint was at
the time of the investment by Enron in the Company pursuing a financing,
acquisition or investment opportunity in a competitor or potential competitor of
the Company.
The Business Opportunity Agreement generally provides, except to the extent
expressly agreed by the parties and set forth therein, that (i) neither Enron,
the Sturm Entities nor any of their respective affiliates would have any
obligation to pursue any business opportunity jointly with the Company or to
offer any business opportunity to the Company, and any Enron or Sturm Entity
representative on the Board of Directors of the Company would have no obligation
to offer any business opportunity to the Company; (ii) Enron, the Sturm Entities
and their respective affiliates would be free to pursue business opportunities
jointly with parties other than the Company, including opportunities that had
telecommunications applications; and (iii) Enron, the Sturm Entities and their
respective affiliates would be free to compete with the Company and would have
no obligation to the Company to refrain from engaging in any business.
GRANT OF EXCLUSIVE RIGHTS TO ENRON. The Business Opportunity Agreement also
provides that the Company would, during an "Exclusivity Period" (as defined
below), grant Enron and its affiliates the exclusive right to pursue jointly
with the Company any business opportunity that includes both telecommunications
and utility applications (i.e., the marketing of one or more of natural gas,
electricity or water and the provision of related services, including provision
of the commodity, provision of transmission, transportation or distribution,
provision of financial and risk management services and products, and provision
of customer care functions (e.g., meter, billing and collection functions) (the
"Joint Application Opportunity")). The Exclusivity Period began on the closing
of the Equity Investment and continues until the earlier of (x) the third
anniversary of the date of closing of the Equity Investment or (y) the date upon
which Enron and any of its affiliates hold less than 5% of the capital stock or
warrants of the Company (determined on a fully-diluted basis as if all warrants
or rights to acquire capital stock were exercised, and determined without
reference to any voting rights). During the Exclusivity Period, the Company is
obligated to provide Enron notice of any Joint Application Opportunity that the
Company desires to pursue anywhere in the United States. If Enron notifies the
Company that it desires to participate in the Joint Application Opportunity,
then the Company cannot pursue the Joint Application Opportunity without the
participation of Enron. If Enron elects not to participate in the Joint
Application Opportunity, then the Company is free to pursue independently the
telecommunications portion of such Joint Application Opportunity without the
participation of Enron, but cannot pursue the Joint Application Opportunity with
any other person (except for provision of the telecommunications portion thereof
on a subcontract basis only), and Enron is free to pursue the Joint Application
Opportunity (including the utility applications and/or the telecommunications
applications) on its own or with any party other than the Company.
SECURITYHOLDERS AGREEMENT. The Sturm Entities and Enron entered into a
Securityholders Agreement, to which the Company is also a party, in connection
with the closing of the Equity Investment. The Securityholders Agreement
contains agreements among the Sturm Entities and Enron with respect to the
designation, election, removal and replacement of the members of the Board of
Directors of the Company other than those elected by the holders of the
Company's Series B Common Stock. The Securityholders Agreement also contains
agreements among the Sturm Entities and Enron (i) providing for rights of first
offer with respect to certain proposed transfers of Common Stock or warrants of
the
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Company by any of the Sturm Entities or Enron, (ii) providing for rights to
purchase the Common Stock and warrants held by a party to the Securityholders
Agreement (other than the Company) that experiences a change of control or other
triggering event and (iii) providing for rights to participate in certain
proposed dispositions of Common Stock or warrants by any of the Sturm Entities
or Enron.
EMPLOYEE SEVERANCE PROGRAM. In connection with the Equity Investment,
the Company established an employee severance program applicable to any
person who was a full time employee of the Company as of December 1, 1997.
The program provided that if any eligible employee was terminated by the
Company without "cause" (as defined) before June 30, 1998, such employee
would receive severance pay in an amount equal to (i) six months base salary
for employees with the title of director, vice-president or higher, and (ii)
two weeks base salary plus one week base salary for each full year of
employment with the Company (with a minimum of four weeks base salary) for
all other eligible employees. The Company would also pay the base share
toward a terminated employee's COBRA benefits, until the employee accepts
other employment for a period of up to nine months following termination.
With respect to such employees with the title of director, vice-president or
higher, the severance payments are subject to a payment schedule and are
conditioned upon execution of a non-competition agreement. Prior to the
expiration of the employee severance program on June 30, 1998, one employee
received payments thereunder totaling approximately $60,000.
TRANSACTION FEES AND EXPENSES. The Company paid the Sturm Entities and
Enron a transaction fee equal to six percent of the gross amount invested by
them in the Equity Investment (based upon the $30 million invested, $900,000 for
the Sturm Entities and $900,000 for Enron). Spectra 3 and Enron also received
the six percent transaction fee on the $20 million invested in the Additional
Equity Investment ($600,000 for the Sturm Entities and $600,000 for Enron). In
addition, the Company reimbursed all reasonable costs and expenses of the Sturm
Entities and Enron incurred in connection with the Stock Purchase Agreement, up
to a maximum of $50,000 for the Sturm Entities and $50,000 for Enron, plus the
$90,000 of required filing fees under the Hart-Scott-Rodino Act.
MANAGEMENT SERVICES AGREEMENTS. The Company executed Management
Consulting Services Agreements with Corporate Managers, LLC, a Colorado
limited liability company and an affiliate of the Sturm Entities, and Enron
pursuant to which they will provide management services to the Company for
three years following the closing of the Equity Investment for an annual
management fee. Both Management Services Agreements initially provided for
annual management fees of $500,000 plus out of pocket expenses. The Company
amended the Management Consulting Services Agreement with Corporate Managers,
LLC in March 1998 to provide for an annual management fee of $620,000 plus
out of pocket expenses because Mr. Sturm had taken a more active management
role with the Company than originally anticipated. On October 1, 1998, the
Company further amended the Management Consulting Services Agreement to
reduce the compensation payable to Corporate Mangers, LLC thereunder to
$500,000 per year. This reduction was intended to reflect the reduced role
Mr. Sturm is expected to take effective with the retention of Mr. Ohringer as
the Company's new Chief Executive Officer and President. Corporate Managers,
LLC and Enron each has the right in its discretion to terminate its
Management Consulting Services Agreement with the Company.
LEGAL MATTERS
John C. Stiska, one of the Company's directors, accepted an of-counsel
position with Latham & Watkins in July 1998. Latham & Watkins provides legal
services to the Company.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
(a) DOCUMENTS FILED AS PART OF THE REPORT:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 . F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 . F-6
Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
</TABLE>
Financial statement schedules other than those listed above have been
omitted because they are either not required, not applicable or the information
is otherwise included herein.
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(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------
<S> <C>
3.1 Form of Certificate of Incorporation, as amended. (2)
3.2 Form of Bylaws, as amended. (2)
4.1 Indenture dated as of April 13, 1998 between the Registrant
and The Bank of New York. (1)
4.2 Form of 13% Senior Discount Notes due 2008 and schedule of 13%
Senior Discount Notes due 2008. (1)
4.3 Registration Rights Agreement dated as of April 13, 1998 among
the Registrant and the Initial Purchasers. (1)
10.1 Form of Indemnification Agreement entered into by the
Registrant and each of its executive officers and directors
and schedule listing all executive officers and directors who
have executed an Indemnification Agreement. (2)
10.2 1995 Stock Option Plan and related form of option agreement.
(1)
10.3 1997 Stock Option Plan and related form of option agreement.
(1)
10.4 Warrant Agreement dated as of April 13, 1998 among the
Registrant and the Initial Purchasers and related form of
warrant attached thereto. (1)
10.5 Warrant Registration Rights Agreement dated as of April 13,
1998 among the Registrant and the Initial Purchasers. (1)
10.6 Common Stock Purchase Agreement dated as of December 30, 1997
among the Registrant, Colorado Spectra 3, LLC, Enron Capital &
Trade Resources Corp. and the holders of $405,000 in principal
amount of the Company's convertible subordinated promissory
notes. (1)
10.7 First Amendment to Common Stock Purchase Agreement dated as of
February 9, 1998 among the Registrant, Colorado Spectra 3, LLC
and Enron Capital & Trade Resources Corp. (1)
10.8 Amended and Restated Investor Rights Agreement dated as of
April 13, 1998 among the Registrant and the Investors set
forth therein. (1)
10.9 Securityholders Agreement dated as of December 30, 1997 among
the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado
Spectra 3, LLC. (1)
10.10 Business Opportunity Agreement dated as of December 30, 1997
among the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado
Spectra 3, LLC. (1)
10.11 Management Consulting Services Agreement dated as of December
30, 1997, as amended by that First Amendment to Management
Consulting Services Agreement dated as of March 17, 1998,
between the Registrant and Corporate Managers, LLC. (1)
10.12 Management Consulting Services Agreement dated as of December
30, 1997 between the Registrant and Enron Trade & Capital
Resources Corp. (1)
10.13 Form of Warrant to Purchase Series B Common Stock and schedule
listing all holders of such warrants entitled to purchase a
number of shares of Series B Common Stock equal to or greater
than 1% of the Company's common stock outstanding as of May
31, 1998. (1)
10.14 Warrant to Purchase 2,110,140 shares of Series B Common Stock
issued to Colorado Spectra 2, LLC on December 30, 1997 (1)
10.15 Agreement for Use of Operating Property dated as of February
25, 1997 between FirstWorld Anaheim and the City of Anaheim.
(1)
10.16 Universal Telecommunications System Participation Agreement
dated as of February 25, 1997
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------
<S> <C>
among the Registrant, FirstWorld Anaheim and the City of
Anaheim. (1)
10.17 Development Fee Agreement dated as of February 25, 1997
between the Registrant and the City of Anaheim. (1)
*10.18 Agreement for Lease of Telecommunications Conduit dated as
of March 5, 1998 between FirstWorld Orange Coast and The
Irvine Company. (3)
*10.19 Telecommunications System License Agreement dated as of
March 5, 1998 between FirstWorld Orange Coast and The Irvine
Company. (3)
10.20 Office Lease for Genesee Executive Plaza dated as of September
4, 1996 between Talcott Realty I Limited Partnership and the
Registrant. (1)
10.21 Standard Industrial/Commercial Single-Tenant Lease-Gross dated
as of August 26, 1996 between Scope Development and FirstWorld
Anaheim. (1)
10.22 SpectraNet International Founders' Sale Agreement. (2)
10.23 System Acquisition Agreement. (2)
10.24 Employment Agreement between the Registrant and Sheldon S.
Ohringer. (3)
10.25 Stock Option Agreement between the Registrant and Sheldon S.
Ohringer.
10.26 Employment Agreement between the Registrant and Scott Chase.
10.27 Employment Agreement between the Registrant and Marion K.
Jenkins.
10.28 Employment Agreement between the Registrant and David Gandini.
10.29 Employment Agreement between the Registrant and Doug Kramer.
10.30 Lease between the Registrant and The Prudential Insurance
Company of America.
10.31 First Amendment to Lease (Genesee Executive Plaza) dated as of
July 31, 1998 between Arden Realty Limited Partnership
(successor in interest to Talcott Realty I Limited
Partnership) and the Registrant.
10.32 Second Amendment to Management Consulting Services Agreement,
dated as of October 1, 1998, by and between the Registrant and
Corporate Managers, LLC.
10.33 First Amendment to Amended and Restated Investor Rights
Agreement, dated as of September 28, 1998, among the
Registrant, Enron Capital & Trade Resources Corp., Colorado
Spectra 1, LLC, Colorado Spectra 2, LCC and Colorado
Spectra 3, LLC.
12.1 Computation of Ratio of Earnings to Fixed Charges.
16.1 Letter Regarding Change in Certifying Accountant. (2)
21.1 Subsidiaries of the Registrant. (2)
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on signature page hereof).
27.1 Financial Data Schedule.
</TABLE>
- ----------------
* Portions of this exhibit have been omitted pursuant to an order granting
confidential treatment filed with the Securities and Exchange Commission
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-4 (No. 333-57829) filed with the Securities and Exchange
Commission on June 26, 1998.
(2) Incorporated herein by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on August 24, 1998.
(3) Incorporated herein by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on October 8, 1998.
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(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of the fiscal year ended September 30, 1998.
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this Item are
listed under Item 14(a)(2).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: December 22, 1998 FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ SHELDON S. OHRINGER
-----------------------
Name: Sheldon S. Ohringer
Title: President, Chief Executive Officer,
acting Chief Financial Officer and Director
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears
below constitutes and appoints Sheldon S. Ohringer, as his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent,
or his substitute, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ SHELDON S. OHRINGER President, Chief Executive December 22, 1998
- ----------------------- Officer, acting Chief Financial
Sheldon S. Ohringer Officer and Director (Principal
Executive Officer and Principal
Financial Officer)
/s/ DENNIS M. MULROY Vice President, Finance and December 22, 1998
- -------------------- Administration (Principal
Dennis M. Mulroy Accounting Officer)
/s/ DONALD L. STURM Chairman of the Board of December 22, 1998
- ------------------- Directors
Donald L. Sturm
/s/ C. KEVIN GARLAND Director December 22, 1998
- --------------------
C. Kevin Garland
/s/ RODNEY MALCOLM Director December 22, 1998
- ------------------
Rodney Malcolm
/s/ JAMES O. SPITZENBERGER Director December 22, 1998
- --------------------------
James O. Spitzenberger
/s/ MELANIE STURM Director December 22, 1998
- -----------------
Melanie Sturm
/s/ JOHN C. STISKA Director December 22, 1998
- ------------------
John C. Stiska
</TABLE>
66
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 . F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 . F-6
Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FirstWorld Communications, Inc.
(formerly SpectraNet International)
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of FirstWorld Communications, Inc. (formerly SpectraNet International)
and its subsidiaries at September 30, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
December 11, 1998
F-2
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $72,039,498 $536,275
Restricted cash - 50,000
Marketable securities 165,591,010 -
Interest receivable 3,016,623 -
Accounts receivable, net of allowance for doubtful accounts of
$9,765 and $0 493,393 72,567
Prepaid expenses 305,834 100,442
Other current assets 10,453 14,709
----------------- ------------------
Total current assets 241,456,811 773,993
Property and equipment, net 44,020,418 20,331,353
Deferred financing costs, net of accumulated amortization
of $429,818 and $60,872 8,217,102 4,067,932
Other assets 411,026 147,812
----------------- ------------------
$ 294,105,357 $ 25,321,090
----------------- ------------------
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,611,380 $2,483,793
Accrued interest 546,416 569,816
Accrued employee costs 221,785 205,012
Other accrued expenses 694,398 113,266
Short-term borrowings, net of discount - 401,262
Current portion of long-term debt 30,070 8,446
Current portion of capital lease obligations 787,874 311,166
----------------- ------------------
Total current liabilities 8,891,923 4,092,761
Long-term debt, net of discount 249,725,538 11,756,283
Convertible bridge notes - 405,500
Capital lease obligations 6,114,509 6,801,926
----------------- ------------------
Total liabilities 264,731,970 23,056,470
----------------- ------------------
Commitments (Notes 7, 8 and 14) - -
Stockholders' equity:
Preferred stock, no par value, 5,160,335 shares authorized at September 30,
1997:
Series C, convertible, voting, 2,600,000 shares issued and
outstanding - 12,279,362
Series B, convertible, voting, 2,016,638 shares issued and
outstanding - 3,670,060
Series A, convertible, non-voting, 118,667 shares issued and
outstanding - 395,162
Preferred stock, $.0001 par value, 10,000,000 shares authorized at
September 30, 1998; no shares designated, issued or outstanding - -
Common stock, voting, no par value, 15,000,000 shares authorized
at September 30, 1997; 3,262,900 shares issued and outstanding - (226,984)
Common stock, voting, $.0001 par value, 100,000,000 shares authorized
at September 30, 1998:
Series A, 10,135,164 shares designated; 10,135,164 shares
issued and outstanding 1,014 -
Series B, 89,864,836 shares designated; 15,929,708 shares
issued and outstanding 1,591 -
Additional paid-in capital 45,617,220 -
Warrants 31,963,295 1,000,960
Stockholder receivables (96,500) (96,500)
Accumulated deficit (48,113,233) (14,757,440)
----------------- ------------------
Total stockholders' equity 29,373,387 2,264,620
----------------- ------------------
$ 294,105,357 $ 25,321,090
----------------- ------------------
----------------- ------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Service revenue $1,078,288 $ 75,118 $279,483
Other revenue 12,373 95,715 75,000
---------------- ---------------- ----------------
1,090,661 170,833 354,483
---------------- ---------------- ----------------
Costs and expenses:
Network development and operations 6,501,105 3,169,854 1,708,416
Selling, general and administrative expenses 10,641,312 4,724,649 2,409,442
Depreciation and amortization 2,424,466 501,354 75,258
---------------- ---------------- ----------------
19,566,883 8,395,857 4,193,116
---------------- ---------------- ----------------
Loss from operations (18,476,222) (8,225,024) (3,838,633)
Other income (expense):
Interest expense (16,898,271) (1,372,377) (26,517)
Interest income 6,749,367 149,243 8,958
---------------- ---------------- ----------------
Loss before extraordinary item (28,625,126) (9,448,158) (3,856,192)
Extraordinary item - extinguishment of debt
(Notes 4 and 5) (4,730,667) (104,680) -
---------------- ---------------- ----------------
Net loss $(33,355,793) $ (9,552,838) $ (3,856,192)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK COMMON STOCK ADDITIONAL
------------------------------ ------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 1, 1995 - $ - - $ - $ -
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable
Exercise of options to purchase common stock for
shareholder notes receivable
Net loss for 1996
------------- -------------- ------------- -------------- ---------------
BALANCE AT SEPTEMBER 30, 1996 - - - - -
Cancellation of shareholder notes receivable for
common stock repurchase
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt
Net loss for 1997
------------- -------------- ------------- -------------- ---------------
BALANCE AT SEPTEMBER 30, 1997 - - - - -
Exercise of options to purchase common stock -
October 1997 to December 1997 - - - - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 10,135,164 16,913,809 - - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - - 3,621,120 12,279,362 -
Series B preferred stock and common stock;
conversion ratio of 1:1 - - 5,545,638 3,486,426 -
Series A preferred stock; conversion ratio
of 1:10 - - 11,867 395,162 -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares of
Series B common stock, net of offering costs of
$1,800,000 - - 6,666,666 12,466,665 -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - - - - -
Exercise of options to purchase Series B common
stock - - 67,917 55,901 -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - (16,912,795) - (28,681,925) 45,594,720
Exercise of options to purchase Series B common 16,500 - 22,500
stock - post Delaware reincorporation
Net loss for 1998 - - - - -
------------- -------------- ------------- -------------- ---------------
BALANCE AT SEPTEMBER 30, 1998 10,135,164 $ 1,014 15,929,708 $ 1,591 $ 45,617,220
------------- -------------- ------------- -------------- ---------------
------------- -------------- ------------- -------------- ---------------
SERIES C
CONVERTIBLE
PREFERRED STOCK
------------------------------
SHARES AMOUNT
------------- --------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 - -
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable
Exercise of options to purchase common stock for
shareholder notes receivable
Net loss for 1996
------------- --------------
BALANCE AT SEPTEMBER 30, 1996 - -
Cancellation of shareholder notes receivable for
common stock repurchase
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638 2,600,000 12,279,362
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt
Net loss for 1997
------------- --------------
BALANCE AT SEPTEMBER 30, 1997 2,600,000 12,279,362
Exercise of options to purchase common stock -
October 1997 to December 1997 - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments (2,600,000) (12,279,362)
Series B preferred stock and common stock;
conversion ratio of 1:1 - -
Series A preferred stock; conversion ratio
of 1:10 - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - -
Exercise of options to purchase Series B common
stock - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - -
------------- --------------
BALANCE AT SEPTEMBER 30, 1998 - $ -
------------- --------------
------------- --------------
SERIES B
CONVERTIBLE
PREFERRED STOCK
------------------------------
SHARES AMOUNT
------------- --------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 837,667 $1,256,502
Issuance of Series B preferred stock 1,142,304 2,355,226
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services 33,334 50,000
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment 3,333 8,332
Issuance of common stock for notes receivable
Exercise of options to purchase common stock for
shareholder notes receivable
Net loss for 1996
------------- --------------
BALANCE AT SEPTEMBER 30, 1996 2,016,638 3,670,060
Cancellation of shareholder notes receivable for
common stock repurchase
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt
Net loss for 1997
------------- --------------
BALANCE AT SEPTEMBER 30, 1997 2,016,638 3,670,060
Exercise of options to purchase common stock -
October 1997 to December 1997 - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - -
Series B preferred stock and common stock;
conversion ratio of 1:1 (2,016,638) (3,670,060)
Series A preferred stock; conversion ratio
of 1:10 - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - -
Exercise of options to purchase Series B common
stock - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - -
------------- --------------
BALANCE AT SEPTEMBER 30, 1998 - $ -
------------- --------------
------------- --------------
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE AT OCTOBER 1, 1995 127,601 $ 424,912 2,520,000 $ (402,101)
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable 396,000 99,000
Exercise of options to purchase common stock for
shareholder notes receivable 330,000 74,167
Net loss for 1996
----------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 1996 118,667 395,162 3,246,000 (228,934)
Cancellation of shareholder notes receivable for
common stock repurchase (90,000) (22,500)
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock 106,900 24,450
Issuance of common stock warrants with debt
Net loss for 1997
----------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 1997 118,667 395,162 3,262,900 (226,984)
Exercise of options to purchase common stock -
October 1997 to December 1997 - - 266,100 43,350
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 - - - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - - - -
Series B preferred stock and common stock;
conversion ratio of 1:1 - - (3,529,000) 183,634
Series A preferred stock; conversion ratio
of 1:10 (118,667) (395,162) - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - - - -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - - - -
Exercise of options to purchase Series B common
stock - - - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - - - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - - - -
----------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 1998 - $ - - $ -
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
Shareholder
Warrants Receivables
-------------- ------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 $ - $ -
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable (99,000)
Exercise of options to purchase common stock for
shareholder notes receivable (74,167)
Net loss for 1996
-------------- ------------
BALANCE AT SEPTEMBER 30, 1996 - (173,167)
Cancellation of shareholder notes receivable for
common stock repurchase 22,500
Repayment of shareholder notes receivable 54,167
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638 16,000
Issuance of common stock warrants as finders fees 37,200
Issuance of common stock warrant for cash 200,000
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt 747,760
Net loss for 1997
-------------- ------------
BALANCE AT SEPTEMBER 30, 1997 1,000,960 (96,500)
Exercise of options to purchase common stock -
October 1997 to December 1997 - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 9,628,000 -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of - -
1.39:1, including anti-dilutive adjustments
Series B preferred stock and common stock;
conversion ratio of 1:1 - -
Series A preferred stock; conversion ratio
of 1:10 - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 6,333,335 -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes 15,001,000 -
Exercise of options to purchase Series B common
stock - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - -
-------------- ------------
BALANCE AT SEPTEMBER 30, 1998 $31,963,295 $ (96,500)
-------------- ------------
-------------- ------------
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
----------------- --------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 $ (1,348,410) $ (69,097)
Issuance of Series B preferred stock 2,355,226
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services 50,000
Repurchase of Series A preferred stock (29,750)
Issuance of Series B preferred stock for property
and equipment 8,332
Issuance of common stock for notes receivable -
Exercise of options to purchase common stock for
shareholder notes receivable -
Net loss for 1996 (3,856,192) (3,856,192)
----------------- --------------
BALANCE AT SEPTEMBER 30, 1996 (5,204,602) (1,541,481)
Cancellation of shareholder notes receivable for
common stock repurchase -
Repayment of shareholder notes receivable 54,167
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638 12,295,362
Issuance of common stock warrants as finders fees 37,200
Issuance of common stock warrant for cash 200,000
Exercise of options and warrants to purchase
common stock 24,450
Issuance of common stock warrants with debt 747,760
Net loss for 1997 (9,552,838) (9,552,838)
----------------- --------------
BALANCE AT SEPTEMBER 30, 1997 (14,757,440) 2,264,620
Exercise of options to purchase common stock -
October 1997 to December 1997 - 43,350
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of $3,863,691
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - -
Series B preferred stock and common stock;
conversion ratio of 1:1 - -
Series A preferred stock; conversion ratio
of 1:10
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - 18,800,000
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - 15,001,000
Exercise of options to purchase Series B common
stock - 55,901
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common 22,500
stock - post Delaware reincorporation
Net loss for 1998 (33,355,793) (33,355,793)
----------------- --------------
BALANCE AT SEPTEMBER 30, 1998 $ (48,113,233) $ 29,373,387
----------------- --------------
----------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (33,355,793) $(9,552,838) $ (3,856,192)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,424,466 501,354 75,258
Amortization of deferred financing costs 1,203,452 60,872 -
Amortization of debt discount 14,571,093 58,242 -
Non-cash interest expense 293,264 37,782 -
Extraordinary loss on extinguishment of debt 3,730,667 104,680 -
Changes in assets and liabilities:
Restricted cash related to operating activities 50,000 (50,000) -
Accounts receivable (420,826) 29,954 (101,771)
Interest receivable (3,016,623) - -
Other assets (314,350) (98,219) (116,117)
Accounts payable and accrued expenses 4,702,092 1,462,457 1,830,947
----------------- ----------------- --------------
Net cash used in operating activities (10,132,558) (7,445,716) (2,167,875)
----------------- ----------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (26,068,310) (12,636,918) (908,120)
Purchases of held-to-maturity marketable securities (236,701,191) - -
Maturities of held-to-maturity marketable securities 71,110,181 - -
Procurement of patents - (9,827) (15,317)
----------------- ----------------- --------------
Net cash used in investing activities (191,659,320) (12,646,745) (923,437)
----------------- ----------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Senior Discount Notes and
related warrants 250,205,000 - -
Proceeds from issuance of Series A common stock and
related warrants, net of offering costs 26,136,309 - -
Proceeds from issuance of Series B common stock and
related
warrants, net of offering costs 18,800,000 - -
Proceeds from stock option and warrant exercises 121,751 24,450 -
Proceeds from issuance of Series B preferred stock - - 2,355,226
Proceeds from issuance of Series C preferred stock
and related common stock warrants, net of
offering costs - 4,528,862 -
Proceeds from issuance of commons stock warrants - 200,000 -
Proceeds from collection of stockholder receivables - 54,167 -
Principal payments on capital leases (255,930) (114,197) (34,371)
Proceeds from issuance of convertible bridge notes - 7,347,000 835,000
Proceeds from draws under revolving credit facility and
related warrants 3,796,262 12,172,592 -
Proceeds from short-term borrowings and related warrants - 1,000,000 -
Principal payments on short-term borrowings (550,000) (500,000) -
Proceeds from other long-term debt - - 27,510
Principal payments on other long-term debt (11,471) (26,643) (26,934)
Principal payments on revolving credit facility (16,299,900) -
Payment of deferred financing costs (8,646,920) (4,129,017) -
----------------- ----------------- --------------
Net cash provided by financing activities 273,295,101 20,557,214 3,156,431
----------------- ----------------- --------------
Net increase in cash and cash equivalents 71,503,223 464,753 65,119
Cash and cash equivalents at beginning of period 536,275 71,522 6,403
----------------- ----------------- --------------
Cash and cash equivalents at end of period $ 72,039,498 $ 536,275 $ 71,522
----------------- ----------------- --------------
----------------- ----------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the period for interest $ 1,292,511 $ 440,178 $ 14,142
NON-CASH TRANSACTIONS:
Property and equipment purchased under capitalized leases 45,221 7,097,437 105,808
Issuance of Series B preferred stock for settlement of
note payable, for consulting services received,
and for procurement of property and equipment - - 58,332
Issuance of common stock for stockholder receivables - - 173,167
Issuance of note payable to repurchase Series A
preferred stock - - 29,750
Conversion of convertible bridge notes into Series C
preferred stock and related warrants - 7,776,500 -
Conversion of convertible bridge notes into Series A
common stock and related warrants 405,000 - -
Issuance of common stock warrants as finders fees - 10,000 -
Non-cash deferred financing costs - 27,200 -
Issuance of note payable to vendor for up-front service 150,000 - -
fees
Issuance of note payable for consulting services received - 50,000 -
Cancellation of stockholder receivable for stock - 22,500 -
repurchase
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 1 - THE COMPANY
FirstWorld Communications, Inc. (the Company) commenced operations on September
1, 1993 under the name SpectraNet International. On January 29, 1998, the
Company changed its name to FirstWorld Communications, Inc. Effective June 26,
1998, the Company changed its state of incorporation from California to Delaware
(Note 9). Prior to fiscal 1998, the Company was considered a development stage
enterprise, as defined in Statement of Financial Accounting Standards No. 7.
The Company is a facilities-based integrated communications provider. The
Company has a data-centric focus, with service offerings bundled to address the
data and voice communications needs of emerging businesses. The Company's
service offerings include data connectivity, high speed Internet access, local
and wide area network (LAN/WAN) connectivity, web hosting, video communications
and system integration services, as well as switch-based local and long distance
telephone services.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the financial statement date,
as well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. The Company
invests primarily in high-grade short-term investments which consist of money
market instruments and commercial paper.
MARKETABLE SECURITIES
Marketable securities consist principally of commercial paper with original
maturities of beyond three months but less than six months. The Company has
classified its marketable securities as held to maturity as management has the
intent and ability to hold those securities to maturity. Such securities are
recorded at cost, which approximates fair value.
RESTRICTED CASH
Restricted cash in support of outstanding letters of credit totaled $50,000 at
September 30, 1997. No restricted cash exists at September 30, 1998.
F-8
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
REVENUE RECOGNITION
The Company recognizes service revenue on local competitive access services in
the month such services are provided. Billings to customers for services in
advance of providing such services are deferred and recognized as revenue when
earned. Other revenues consist primarily of royalties earned under a certain
patent licensing agreement and are recorded when earned and when payment is
reasonably assured.
During fiscal 1998, approximately 25% of the Company's service revenue was
derived from a single telecommunications customer. During fiscal 1997,
approximately 73% of the Company's service revenue was derived under
non-recurring service contracts with two governmental entities.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist principally of cash equivalents, marketable securities and accounts
receivable. The Company places its short-term cash investments with high
credit-quality financial institutions while commercial paper investments are
placed with high credit-caliber corporate issuers. The Company limits the amount
of credit exposure in any one institution or type of investment instrument.
Credit risk with respect to accounts receivable is minimized because of the
diversification of the Company's commercial telecommunications customer base.
Credit is extended to commercial customers based on an evaluation of the
customer's financial condition and generally collateral is not required.
The Company maintains reserves for potential credit losses from such customers.
As of September 30, 1998 and 1997, approximately 25% and 70% of accounts
receivable, respectively, was due from a single customer.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. Costs
capitalized in connection with the development of communication networks include
expenses associated with network engineering, design and construction.
Depreciation of communications networks and related infrastructure commences
when the applicable network becomes commercially operational.
The estimated useful lives of the Company's principal classes of assets are as
follows:
<TABLE>
<S> <C>
Network infrastructure 20 years
Telecommunications 5 - 7 years
Building and improvements 30 years
Furniture, office equipment and other 3 - 7 years
Leasehold improvements Shorter of estimated useful life or lease term
</TABLE>
CAPITALIZATION OF INTEREST
Interest costs incurred during the period of time that internally constructed
assets are being made ready for their intended use are capitalized as part of
acquiring such assets to the extent that these interest costs relate to
financing obtained in order to prepare such assets for use. During fiscal 1998
and 1997, the Company capitalized approximately $450,000 and $52,000,
respectively, in interest costs associated with the development of the Company's
telecommunications networks.
F-9
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
DEFERRED FINANCING COSTS
Deferred financing costs include commitment fees and other costs related to
certain debt financing transactions and are being amortized over the term of the
related debt using the interest method.
DEBT DISCOUNT
Discounts recorded in connection with the issuance of debt financing are
deferred and amortized over the term of the related debt using the interest
method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
With the exception of the Company's Senior Discount Notes, management believes
that the carrying amounts shown for the Company's financial instruments
reasonably approximate their fair values. The fair value of the Company's Senior
Discount Notes, determined based on quoted high-yield market bid prices,
approximates $141,000,000 at September 30, 1998. The carrying amount of such
Senior Discount Notes at September 30, 1998 is $249,596,346.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. Potential impairment associated with network
infrastructure costs is measured on the basis of specific network projects. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. No such impairment losses
have been identified by the Company during the fiscal years presented.
STOCK-BASED COMPENSATION ACCOUNTING
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had been applied in
measuring compensation expense. Compensation charges for non-employee
stock-based compensation is measured using fair value-based methods.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred tax asset or liability is computed for both the
expected future impact of differences between the financial statement and tax
bases of assets and liabilities and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in future tax returns. Tax rate changes
are reflected in the statement of operations in the period such changes are
enacted.
F-10
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
Network infrastructure $19,758,122 $12,636,955
Telecommunications equipment 8,971,835 5,048,156
Building and improvements 1,328,237 1,328,237
Furniture, office equipment and other 4,447,438 976,341
Leasehold improvements 633,175 507,573
Construction in process 11,881,300 427,986
----------- -----------
47,020,107 20,925,248
Accumulated depreciation (2,999,689) (593,895)
----------- -----------
$44,020,418 $20,331,353
----------- -----------
----------- -----------
</TABLE>
The following is a summary of property and equipment acquired under capital
leases, included in the above:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
Network infrastructure $ 6,000,000 $ 6,000,000
Telecommunications equipment 218,747 218,747
Building and improvements 557,612 557,612
Furniture, office equipment and other 519,761 474,540
----------- -----------
7,296,120 7,250,899
Accumulated depreciation (613,035) (191,847)
----------- -----------
$ 6,683,085 $ 7,059,052
----------- -----------
----------- -----------
</TABLE>
NOTE 4 - SHORT-TERM BORROWINGS
On August 29, 1997, the Company obtained a $1,000,000, 18% per annum, short-term
bridge loan with an institutional lender which was due on October 15, 1997. On
September 17, 1997, the Company repaid $500,000 of the outstanding principal
balance associated with this loan, plus accrued interest thereon, and extended
the maturity date of the remaining principal balance of $500,000 to March 16,
1998 through the consummation of a new loan agreement with the lender.
Simultaneous to the execution of the new loan agreement on September 17, 1997,
which was considered to be a substantial modification of the original loan
agreement which it superseded, the Company recognized an extraordinary charge on
debt extinguishment totaling $104,680. The extraordinary charge consisted of the
write-off of unamortized debt discount and deferred financing costs associated
with the original bridge loan. The remaining $500,000 bridge loan balance was
repaid during January 1998.
On September 2, 1997, the Company issued a $50,000, 10% per annum, unsecured
promissory note to a financial adviser of the Company as payment for services
performed in connection with the attainment of debt financing.
The note was repaid on October 2, 1997.
F-11
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
13% senior Discount Notes, net of unamortized discount totaling
$220,403,654 at September 30, 1998 $249,596,346 $ -
14% Revolving Credit Facility, net of unamortized discount totaling
$463,513 at September 30, 1997 - 11,746,861
14% unsecured term note with a vendor; monthly installments of
principal and interest payable through December 2000 150,000 -
Other 9,262 17,868
------------ -----------
249,755,608 11,764,729
Less current portion (30,070) (8,446)
------------ -----------
$249,725,538 $11,756,283
------------ -----------
------------ -----------
</TABLE>
Aggregate principal maturities of long-term debt are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
1999 $ 30,070
2000 88,514
2001 40,678
2002 -
2003 -
Thereafter 470,000,000
-------------
470,159,262
Less unamortized discount on the 13% Senior Discount Notes (220,403,654)
-------------
$ 249,755,608
-------------
-------------
</TABLE>
SENIOR DISCOUNT NOTES
On April 13, 1998, the Company completed an offering of debt securities pursuant
to Rule 144A under the Securities Act of 1933, as amended (the Act), for gross
proceeds of $250,205,000 (the High Yield Debt Offering). In the High Yield Debt
Offering, the Company sold 470,000 units consisting of 13% Senior Discount Notes
due 2008 (the Notes) and warrants to purchase an aggregate of 3,713,094 shares
of the Company's Series B common stock (Note 10). The Company allocated
$235,204,000 of the proceeds to the Notes and $15,001,000 to the warrants,
representing their estimated fair value at the date of issuance as determined
via an independent valuation.
F-12
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Notes will accrete in value through April 15, 2003 at a rate of 13% per
annum, compounded semi-annually, at which time $470,000,000 in aggregate
principal amount at maturity will be outstanding. Cash interest will neither
accrue nor be payable prior to April 15, 2003. Thereafter, cash interest on
the Notes will accrue and will be payable semiannually in arrears on each
April 15 and October 15, commencing October 15, 2003, at a rate of 13% per
annum. The Company is not required to make mandatory redemption or sinking
fund payments with respect to the Notes prior to maturity. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2003, at a premium declining to par on April 15, 2006,
plus accrued and unpaid interest through the date of redemption. In the event
of a change in control, as defined in the indenture governing the Notes, the
holders of the Notes will have the right to require the Company to purchase
their Notes in an amount equal to 101% of the aggregate principal amount at
maturity or accreted value thereof, as applicable, plus accrued and unpaid
interest to the date of purchase.
The indenture pursuant to which the Notes are issued contains certain
covenants which, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness, issue stock in subsidiaries,
pay dividends or make other distributions, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company and its subsidiaries, and enter into
certain mergers and consolidations. The Company is in compliance with such
covenants at September 30, 1998.
REVOLVING CREDIT FACILITY
On September 16, 1997, the Company entered into a five-year $23,000,000
revolving credit facility (the Credit Facility) with a syndicate of lenders
(the Lenders) to provide financing for the construction of telecommunication
networks and for general working capital purposes. The Company terminated
this facility April 13, 1998, concurrent with the closing of the High Yield
Debt Offering, and paid the Lenders a $1,000,000 termination fee pursuant to
the terms thereof. The Company has recorded an extraordinary loss of
$4,730,667 associated with such debt extinguishment, which loss is inclusive
of the aforementioned termination fee and the write-off of unamortized debt
discount and deferred financing costs associated with the Credit Facility.
NOTE 6 - CONVERTIBLE BRIDGE NOTES
Convertible bridge notes outstanding at September 30, 1997 consist of
$405,500 in principal funding received through the issuance of 8%
subordinated, convertible bridge notes pursuant to a private placement in
fiscal 1997. On December 30, 1997, such convertible bridge notes were
converted into shares of the Company's Series A common stock and related
warrants at the conversion rate of $3.00 per share (Note 9).
NOTE 7 - COMMITMENTS
LEASE COMMITMENTS
The Company leases its office space, certain network access facilities and
fiber transport, and automobiles under noncancelable operating lease
arrangements which expire on varying dates through fiscal 2008. Rent expense
under noncancelable operating leases totaled $549,400, $361,156, and
$108,429, during each of fiscal 1998, 1997 and 1996, respectively.
The Company has procured certain of its property and equipment, including its
Anaheim network central office switching facility, through capital leases
which expire through fiscal 2001. Additionally, the Company has accounted for
certain agreements with the City of Anaheim, as more fully described below
and which extend through fiscal 2027, as both capital leases and executory
contracts in the accompanying financial statements.
F-13
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Future minimum payments under capital leases (inclusive of the minimum
payments allocated from the agreements with the City of Anaheim) and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1999 $1,539,459 $1,206,955
2000 1,396,141 1,190,403
2001 1,289,953 1,205,561
2002 1,277,226 1,112,133
2003 1,277,226 223,713
Thereafter 30,014,822 462,916
---------------- ----------------
Total minimum lease payments 36,794,827 $5,401,681
---------------- ----------------
----------------
Amount representing interest (29,892,444)
----------------
Present value of minimum lease payments $6,902,383
----------------
----------------
</TABLE>
COMMITMENTS RELATING TO AGREEMENTS WITH THE CITY OF ANAHEIM
During February 1997, the Company and its wholly-owned subsidiary FirstWorld
Anaheim (FWA) entered into a 30-year Universal Telecommunications System
Participation Agreement (as amended, the UTS Agreement) with the City of
Anaheim, California (the City), under which FWA has agreed to design, construct
and operate a fiber-optic telecommunications network in cooperation with the
City. The UTS Agreement requires FWA to pay to the City (i) an annual payment
in lieu of a franchise fee based on a percentage of FWA's "adjusted gross
revenues," as defined, related to the Anaheim network, subject to a minimum
annual payment of $1,000,000 for periods after June 30, 1999 through the term
of the agreement, (ii) a percentage of FWA's "net revenues," as defined,
derived from the Anaheim network, (iii) certain of the City's annual
operating costs associated with the UTS Agreement, not to exceed $175,000 per
year prior to the commencement of the third phase of the Anaheim network (as
discussed below), and not to exceed $350,000 per year thereafter, subject to
inflationary adjustments, and (iv) $20,000 per year to support the City's
presence on the Internet, subject to inflationary adjustments. The UTS
Agreement also requires the Company to deposit an amount equal to up to 15%
of "net revenues" derived from the Anaheim network, as defined, to fund and
maintain a $6,000,000 reserve account for debt service and capital
improvements. As of September 30, 1998, no amounts have been deposited into
such reserve account as "net revenues" have not yet been generated from the
Anaheim network. Pursuant to the UTS Agreement, the City has been granted an
irrevocable option to purchase all of the issued and outstanding stock of FWA
at anytime after July 1, 2012 for its then current appraised fair value, the
determination of which is to be derived by qualified independent appraisers
selected by both the Company and the City, as more specifically defined
within the UTS Agreement. Any sale or issuance of FWA stock can only be made
if such sale or issuance is expressly made subject to the City's purchase
option. Moreover, any sale of the Anaheim network or other sale of
substantially all of FWA's assets can only be made if the City is equitably
compensated for the loss of its future income stream under the UTS Agreement
or the buyer expressly assumes the obligations of FWA under the UTS Agreement.
Simultaneous to the execution of the UTS Agreement, FWA entered into a
30-year Agreement for Use of Operating Property (the Operating Property
Agreement) with the City under which FWA has been granted the exclusive right
to lease 60 of 96 fiber strands contained in an approximate 50 mile loop of
fiber optic cable owned by the City,
F-14
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
together with related facilities and rights. Under the terms of the Operating
Property Agreement, the Company is obligated to make quarterly payments to
the City in the amount of $113,862. In addition, the Company is obligated to
pay all costs associated with operating and maintaining the leased property,
including maintenance expenses, taxes, insurance premiums and pole usage
fees. FWA has the right to assign its rights under the Operating Property
Agreement, but will not be released from liability unless the City expressly
consents. FWA also has the right to encumber its interest in the leased
property.
Although the Company considers the Operating Property Agreement to be a
capital lease and the UTS Agreement to be an executory contract, certain of
the minimum payments prescribed by the UTS Agreement have been accounted for
as additional minimum capital lease payments. The Operating Property
Agreement and the UTS Agreement were bid, negotiated and consummated
simultaneously with each other. In addition, both agreements have identical
30-year terms and include certain cross-default provisions. Moreover, the
Operating Property Agreement contains payment terms which are below the fair
value of the benefits conferred by such agreement; whereas, the UTS Agreement
contains payment terms which are above the fair value of the benefits
conferred by such agreement. Accordingly, the Company has allocated the
collective payments prescribed by the agreements between the two contracts
based upon the estimated fair value of the benefits the Company receives
under each of the two agreements. Future minimum payments prescribed by the
UTS Agreement and not allocated to the capital lease total $239,555,
$373,220, $373,220, $373,220, $373,220 and $8,770,670 during each of fiscal
1999, 2000, 2001, 2002, 2003 and thereafter, respectively.
Pursuant to the UTS Agreement, FWA is required to meet certain future
performance requirements for the completion of network design and the
commencement of network construction related to certain phases of the
city-wide network. The first phase, which extended service to identified
municipal facilities, was substantially completed in October 1997. The second
phase requires service to be extended in the ordinary course of business
(i.e., within six months following execution of a customer service agreement)
to commercial, industrial and governmental customers within certain defined
service areas. The Company was required to complete 44% of the first and
second phases by April 1, 1998 and is further required to complete 90% of the
first and second phases by December 31, 1998, plus a 180-day cure period in
each case. The Company has constructed and installed the necessary
infrastructure to satisfy the 44% completion requirement and expects that the
completion of infrastructure currently under construction and approved for
construction will satisfy the 90% completion requirement in a timely manner.
In the event that FWA does not meet the specified performance deadlines
related to completion of the first and second phases of the Anaheim network
due to financial or other reasons, the City may elect to either terminate the
Operating Property Agreement or to immediately exercise its option to
purchase all of the issued and outstanding stock of FWA under the same option
terms, as defined within the UTS Agreement, which otherwise do not become
effective until after July 1, 2012. Any termination of the Operating
Property Agreement would have a material adverse effect on the Company's
business, financial condition and results of operations.
Under the UTS Agreement, the third phase of the Anaheim network, which allows
service to be extended in the ordinary course of business to all customers
within the city, including residential customers, will be commenced only
after the economic feasibility of the third phase is validated by an
independent consultant's report and financing is arranged. FWA has agreed to
cause a feasibility study with respect to the third phase to be completed no
later than January 1, 2000, and thereafter to provide annual updates to the
study if necessary. If the Company determines not to proceed with the
development of the third phase of the Anaheim network, or if for any reason
the principal financing for the third phase is not funded or construction of
the third phase is not commenced by December 31, 2002, then the City may
pursue development of the third phase on its own.
The UTS Agreement also requires FWA to commence construction of a
demonstration center in the City's downtown area by November 30, 1998, and to
complete such demonstration center by June 30, 1999. However, as a result of
a change in the proposed scope of the project, FWA now contemplates leasing
additional office space in the downtown area of Anaheim and housing a
demonstration center in the leased facilities. The Company expects the
demonstration center to be operational prior to March 31, 1999. Although
the Company believes that it is in compliance with its obligations with
respect to the demonstration center, the City has asserted its belief that
the Company is not satisfying such obligations. The parties are currently in
the process of attempting to resolve these issues. The Company does not
believe that the ultimate resolution will have a material adverse effect on
the Company's results of operations, liquidity or financial position.
Pursuant to a Development Fee Arrangement dated simultaneous to the
aforementioned City agreements, for a period of five years, commencing with
the earlier to occur of the closing of the financing for or the commencement
of construction of the first Additional Network (as defined below), the
Company must pay to the City a lump sum development fee for each Additional
Network which the Company develops ($300,000 for each Additional Network
financed in the first year; $200,000 for each Additional Network financed in
the second year; and $100,000 for each Additional Network financed in the
third, fourth and fifth years, which amounts must be paid within thirty days
F-15
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
following the closing of the principal financing for an Additional Network or
the commencement of construction of such Additional Network, whichever occurs
first). "Additional Network" means (a) any expansion of the Anaheim network
into one or more adjacent or nearby cities where FWA enters into a revenue
sharing agreement with any such city, and (b) any separate communications
system developed by any other subsidiary of the Company that holds a
Certificate of Public Convenience and Necessity issued by the Public
Utilities Commission and enters into a revenue sharing agreement with one or
more public entities.
COMMITMENTS RELATING TO AGREEMENTS WITH THE IRVINE COMPANY
On March 5, 1998, FirstWorld Orange Coast (FWOC), a wholly-owned subsidiary
of the Company, and The Irvine Company entered into two agreements regarding
FWOC's development of a network to serve certain areas that have been or are
planned to be developed by The Irvine Company (the Irvine Network). The
Company has guaranteed the payment obligations of FWOC under each of such
agreements.
Pursuant to an Agreement for Lease of Telecommunications Conduit dated as of
March 5, 1998 (the Conduit Lease), FWOC leases from The Irvine Company space
within two underground telecommunications tubes (the Conduit), and, in
connection therewith, has received the non-exclusive right to use undivided
space within the pull boxes serving such Conduit (collectively, the Leased
Premises). The Conduit Lease applies to (i) an existing Conduit system within
certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be
constructed in the future in the as yet undeveloped areas of the Irvine
Spectrum. The Irvine Company may also install Conduit in other areas it may
develop in the cities of Irvine, Newport Beach and Tustin, and in
unincorporated areas of Orange County, and such areas may in the future be
incorporated into the Conduit Lease upon the mutual agreement of the parties
(Additional Areas). The term of the Conduit Lease runs through December 31,
2027.
The Conduit Lease obligates FWOC to install fiber optic cable (Cable) in the
Conduit pursuant to a phasing plan. A phase is completed when sufficient
Cable has been installed to enable FWOC to connect and provide service (for
that portion of the Irvine Network) to property abutting the Conduit. Upon
termination of the agreement, the Cable will be owned by The Irvine Company.
If FWOC fails to complete installation of the required Conduit within 18
months following March 5, 1998, The Irvine Company may, until such
installation is completed, terminate the Conduit Lease.
The Conduit Lease obligates FWOC to make quarterly rent payments to The
Irvine Company based upon its "adjusted gross revenue", as defined, from the
Irvine Network. In addition, FWOC is obligated to pay all costs associated
with its lease, operation, maintenance, repair and use of the Leased
Premises, including maintenance expenses, taxes and insurance premiums. Any
assignment of FWOC's rights under the Conduit Lease and any sale of a
controlling interest in FWOC require The Irvine Company's prior approval, and
The Irvine Company has a right of first refusal in the event of any such
proposed sale.
Based upon its term, the Conduit Lease is a capital lease. However, as such
lease does not prescribe any fixed rental payments and as it is not
practicable for the Company to estimate any future probable contingent rental
payments associated with such lease, no amount has been capitalized in the
accompanying Consolidated Financial Statements. Contingent rental payments
associated with this lease are recorded as additional operating expenditures
when they become due pursuant to the lease.
Concurrently with the execution of the Conduit Lease, FWOC and The Irvine
Company executed a Telecommunications System License Agreement (the License
Agreement) which provides FWOC, with some exceptions, with the right and
obligation to provide telecommunications services to (i) the 106 buildings
currently owned by The Irvine Company in the Irvine Spectrum area, (ii)
commercial, industrial and retail buildings in the future owned by The Irvine
Company in the Irvine Spectrum, and (iii) under certain circumstances in The
Irvine Company's discretion, similar buildings located in the Additional
Areas and other locations in California.
F-16
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The License Agreement requires FWOC to pay The Irvine Company a license fee
each calendar quarter, subject to an annual CPI increase that will not be
less than 2% or greater than 6%. The base license fee was initially $62,500
for the buildings owned by Irvine in the Irvine Spectrum area at the time
that the License Agreement was consummated. Pursuant to the License
Agreement, such fee is increased or decreased over its term based on the
rentable square footage of the buildings that are from time to time subject
to the License Agreement. As of September 30, 1998, such fee totals $88,000
per calendar quarter. Future minimum payments prescribed by the License
Agreement, based upon this current fee and assuming a 2% per annum upward CPI
adjustment over its term, total approximately $359,000, $366,000, $374,000,
$381,000, $389,000 and $11,747,000 during each of fiscal 1999, 2000, 2001,
2002, 2003 and thereafter, respectively.
The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment
(Equipment) in, as well as access rights to, such buildings, subject to the
rights of The Irvine Company's tenants and to reasonable requirements and
procedures imposed by The Irvine Company. Except with respect to buildings
that are leased to a single tenant, The Irvine Company is required to provide
FWOC with a reasonable amount of equipment room space in each building,
sufficient to enable FWOC to install Cable and Equipment and deliver
services. FWOC's rights to a building are non-exclusive, meaning that The
Irvine Company can grant similar licenses to other service providers.
Although all the Cable becomes the property of The Irvine Company upon
termination of the License Agreement, FWOC has the right to remove and retain
ownership of the Equipment, subject to The Irvine Company's election to
purchase the Equipment at a price to be negotiated by the parties.
Subject to certain qualifications, FWOC will have the obligation to provide
telecommunications services to any tenant who wishes to subscribe with FWOC
for those services, and FWOC is required to install Cable and Equipment in
that tenant's building if FWOC owns or leases Conduit located within 1,000
feet of that building. Under certain circumstances, FWOC may be required to
provide completion and performance bonds to The Irvine Company in connection
with that work. To the extent that FWOC provides fiber optic service to a
building, it is required to achieve and maintain standards of minimum
reliability. Subject to force majeure, if there is a system-wide failure to
provide such service that exceeds five consecutive days, The Irvine Company
has the right to use the network (and if necessary bring in an alternative
service provider) and to charge its costs to FWOC.
Whenever FWOC is the first competitive access provider to a building, it is
required to install a building entrance conduit system (which connects the
building to the street access point) (a BECS), with a capacity equal to 200%
of the capacity required by FWOC to service the building. The Irvine Company
can grant other providers the right to use that BECS, but must pay or cause
that provider to pay FWOC 50% of FWOC's cost of installing the BECS, which
costs are subject to increase based on a CPI calculation. Where a BECS
already exists, The Irvine Company must make any excess capacity therein
available to FWOC.
OTHER COMMITMENTS
The Company is party to a contract with a long distance carrier pursuant to
which the Company is committed to minimum service fees. Such minimum fees
aggregate $487,500 and $1,437,500 during fiscal 1999 and 2000, respectively.
The Company is party to a network services agreement with a provider of
voicemail and data services under which future minimum payments aggregate
$239,040, $286,560 and $23,880 during fiscal 1999, 2000 and 2001,
respectively. Additionally, the Company is party to an agreement with a
provider of data processing and billing services under which future minimum
payments aggregate $150,000 during each of fiscal 1999, 2000 and 2001.
During fiscal 1998, the Company entered into separate management consulting
service agreements with its two majority shareholders (or affiliates thereof)
whereby such parties will provide general management consulting services to
the Company for a period of three years commencing January 1, 1998. Pursuant
to such agreements, as
F-17
<PAGE>
amended, the Company is required to pay to the related parties aggregate
consulting fees totaling $500,000 per annum. Related party consulting fees
recorded by the Company during fiscal 1998 totaled $840,000. Future minimum
consulting fees under these agreements aggregate $1,000,000, $1,000,000 and
$250,000 during each of fiscal 1999, 2000 and 2001, respectively.
The Company is party to an arrangement with the owner of a retail development
located in Orange County, California, whereby it is required to remit to the
owner of such development a percentage of "adjusted gross revenues", as
defined, derived from serving tenant customers located within such
development.
NOTE 8 - CEO EMPLOYMENT AGREEMENT
On September 28, 1998, the Company entered into an Employment Agreement (the
Employment Agreement) pursuant to which the Company retained the services of
a new President and Chief Executive Officer (the CEO) effective October 1,
1998 (the Commencement Date). The Employment Agreement has a three-year term
ending on the close of business on September 30, 2001, unless terminated
earlier by either party, and provides an initial annual base salary of
$200,000 per annum. Additionally, the Employment Agreement granted the CEO an
Equalization Payment (as defined within the Employment Agreement) in the
amount of $4,000,000, payable in three separate installments. The first
$2,000,000 installment became due and was paid on October 1, 1998, the
employment Commencement Date, while the second and third $1,000,000
installments are due and payable on October 1, 1999 and October 1, 2000,
respectively. The CEO must be employed by the Company on the date that the
second and third installments become due to be eligible to receive such
payments unless the Company terminates the CEO's employment other than for
cause or the CEO terminates his own employment for good reason (as defined in
the Employment Agreement) prior to the installment date. In addition, the CEO
may elect to receive all or any portion of the second and third installment
payments in the form of the Company's Series B common stock. If the CEO
elects to receive any of the second or third installment payments in Series B
common stock, such stock shall be valued at $5.00 and $7.50 per share,
respectively.
The Employment Agreement stipulates that the CEO will also be eligible for
the following performance-based bonuses: (i) if the Company consummates a
Qualified Initial Public Offering (as defined in the Employment Agreement)
with a price of at least $10.00 per share (subject to adjustment as set forth
in the Employment Agreement) within the first 18 months after the
Commencement Date, the Company will pay the CEO a $1,000,000 cash bonus; (ii)
if the Company consummates a Qualified Initial Public Offering with a price
of at least $10.00 per share (subject to adjustment as set forth in the
Employment Agreement) within the first 12 months after the Commencement Date,
the Company will be obligated to pay the CEO a $4,207,500 cash bonus on
September 30, 2001 (unless otherwise accelerated as described in the
Employment Agreement); (iii) if the Company consummates a Qualified Initial
Public Offering with a price of at least $12.50 per share (subject to
adjustment as set forth in the Employment Agreement) within the first 24
months after the Commencement Date, the Company will be obligated to pay the
CEO a $8,415,000 cash bonus on September 30, 2001 (unless otherwise
accelerated as described in the Employment Agreement); provided that if the
CEO earns the payment described in this clause (iii) he will not be entitled
to receive the payment described in clause (ii) above; and (iv) if the
Company has a market capitalization of at least $1.2 billion (as adjusted as
described in the Employment Agreement) for a period of 20 consecutive trading
days during a three-year period beginning on the Commencement Date, the
Company will be obligated to pay the CEO a cash payment equal to $16,830,000
minus any amounts he receives pursuant to clause (ii) or (iii) above on
September 30, 2001 (unless otherwise accelerated as described in the
Employment Agreement).
The Employment Agreement also granted the CEO on October 1, 1998 an option to
purchase 2,805,000 shares of Series B common stock at an exercise price of
$6.00 per share (subject to anti-dilution protections set forth in the
Employment Agreement). The option vests (i) with respect to 1/3 of the shares
covered by the option on the Commencement Date, (ii) with respect to 1/3 of
the shares covered by the option on the first anniversary of the Commencement
Date and (iii) with respect to the remaining 1/3 of the shares covered by the
option on the second anniversary of the Commencement Date (unless otherwise
accelerated in accordance with the terms of the Employment Agreement).
F-18
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS' EQUITY
EQUITY RECAPITALIZATION
On December 30, 1997, the Company (i) converted its three existing classes of
preferred stock into common stock in accordance with the automatic conversion
provision of its then existing charter in order to simplify the Company's
capital structure and to eliminate the rights, preferences and privileges of
the preferred stock; (ii) amended its Articles of Incorporation to
substantially increase the Company's authorized capital; and (iii) amended
its Articles of Incorporation to designate two series of common stock, with
the investors in the below-referenced private placement occurring on December
30, 1997 receiving Series A common stock and all then existing shares of
common stock (including common stock issued upon conversion of the then
existing preferred stock) being designated as Series B common stock. The
Series A common stock and Series B common stock are identical in all material
respects, except that the holders of Series A common stock possess ten votes
per share on all matters subject to a vote of shareholders while the holders
of Series B common stock possess one vote per share. Pursuant to the amended
Articles of Incorporation, the Company may also issue Preferred stock from
time to time in one or more series. As of September 30, 1998, no such
preferred stock has been issued.
PRIVATE PLACEMENTS
On April 13, 1998, the Company consummated a private placement of equity
securities with Spectra 3 and Enron (the Additional Equity Investment)
pursuant to the exercise of an existing option held by Spectra 3 and Enron.
Pursuant to the Additional Equity Investment, the Company sold to each of
Spectra 3 and Enron 3,333,333 shares of Series B common stock, resulting in
aggregate offering proceeds totaling $18,800,000, net of offering
commissions. In connection with this private placement, the Company also
issued to Spectra 3 and Enron warrants to purchase an additional 3,333,333
shares of Series B common stock (Note 10).
On December 30, 1997, the Company consummated a private placement of equity
securities with Colorado Spectra 3, LLC (Spectra 3) and Enron Capital & Trade
Resources Corp. (Enron). In connection with this placement, the Company
issued 5,000,000 shares of newly created Series A common stock to each of
Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a common
stock purchase agreement by and among the Company, Enron, Spectra 3 and the
holders (the Noteholders) of $405,500 in principal amount of the Company's
convertible subordinated bridge notes (Note 6). The Company also issued an
aggregate of 135,164 shares of Series A common stock to the Noteholders upon
the automatic conversion of the bridge notes pursuant to the terms thereof at
a conversion price of $3.00 per share. Aggregate proceeds from this offering,
exclusive of the conversion of the bridge notes, totaled
$26,136,309, net of offering commissions and certain other advisory fees paid
in connection with the consummation of this equity placement. In connection
with this private placement, the Company also issued i) to each of Spectra 3
and Enron warrants to purchase 5,000,000 shares of newly created Series B
common stock, and ii) to the Noteholders warrants to purchase an aggregate of
135,164 shares of such Series B common stock (Note 10).
On January 31, 1997, in connection with a private placement offering, the
Company issued 2,600,000 shares of Series C preferred stock, consisting of
1,044,700 shares issued for cash proceeds totaling $4,518,862, net of
placement agent commissions and related fees, and 1,555,300 shares issued
through the retirement of convertible bridge notes at $5.00 per share. In
connection with this offering, the holders of Series C shares also received
warrants for the purchase of 520,000 shares of common stock (Note 10).
During fiscal 1996, in connection with various private placement offerings,
the Company issued 1,142,304 shares of Series B preferred stock for proceeds
totaling $2,355,226.
F-19
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
DELAWARE REINCORPORATION
Effective June 26, 1998, the Company changed its state of incorporation from
California to Delaware. In connection therewith, a par value equal to $.0001
per share was assigned to each series of common and preferred stock. As a
result, the Consolidated Statement of Stockholders' Equity for fiscal 1998
reflects a reclassification to additional paid-in capital for the amounts in
excess of par value.
NOTE 10 - WARRANTS
During fiscal 1998, 1997 and 1996, the Company's non-employee warrant
activity was as follows:
In connection with the High Yield Debt Offering which was consummated on
April 13, 1998, the Company issued to the initial purchasers of the Notes
warrants to purchase 3,713,094 shares of Series B common stock at an exercise
price of $0.01 per share. Such warrants are exercisable at any time on or
after the earlier to occur of May 1, 1999, an initial public offering of the
Company's common stock or in the event of a change in control, as defined in
the warrant agreement, and expire on April 15, 2008. Such warrants contain
customary adjustments to protect against dilution, as well as certain
additional anti-dilutive adjustments as defined in the warrant agreement. As
of September 30, 1998, all of these warrants remain outstanding.
In connection with the December 1997 private placement of Series A common
stock, the Company issued warrants for the purchase of 10,135,164 shares of
Series B common stock to the investors therein. Such warrants were issued
with an exercise price of $3.00 per share, contain customary adjustments to
protect against dilution, and may be exercised at any time prior to the first
to occur of (i) December 30, 2004; (ii) the merger of the Company with or
into another entity in which the shareholders of the Company immediately
prior to the merger own less than 50% of the voting securities of the
surviving entity immediately following the merger; and (iii) the sale by the
Company of all or substantially all of its assets. As of September 30, 1998,
all of these warrants remain outstanding.
In connection with the private placement of Series A common stock referred to
above, the Company also issued to certain financial advisors warrants to
purchase 17,500 and 30,000 shares of Series B common stock at exercise prices
of $6.00 and $5.00, respectively, all of which have terms of five years and
contain customary adjustments to protect against dilution. As of September
30, 1998, all of these warrants remain outstanding.
During fiscal 1997, in connection with the attainment of a revolving credit
facility, the Company issued to the lender warrants to purchase 800,000
shares of common stock. Such warrants were issued with an exercise price of
$6.00 per share, a term of five years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreement. As a result of the capital
transaction and the equity recapitalization which occurred on December 30,
1997, these warrants are currently exercisable into 800,000 shares of Series
B common stock at an exercise price of $3.00 per share. As of September 30,
1998, all of these warrants remain outstanding.
In connection with the consummation of the credit facility described above,
the Company also issued to certain financial advisors warrants to purchase
83,400 shares of common stock, which warrants have an exercise price of $6.00
and a term of five years. As a result of the equity recapitalization which
occurred on December 30, 1997, these warrants are currently exercisable into
shares of Series B common stock. As of September 30, 1998, all of these
warrants remain outstanding.
During fiscal 1997, in connection with the attainment of short-term bridge
financing, the Company issued to the lender warrants to purchase 300,000
shares of common stock. Such warrants were issued with an exercise price of
$6.00 per share, a term of seven years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreements. As a result of the capital
transaction and the equity recapitalization which occurred on December 30,
1997 and the capital transaction occurring on April 13, 1998, such warrants
are currently exercisable into 470,092 shares of Series B common stock
F-20
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
at an exercise price of $3.83 per share. As of September 30, 1998, all of
these warrants remain outstanding.
During fiscal 1997, in connection with the issuance of convertible bridge
notes, warrants for the purchase of 33,789 shares of common stock were issued
to the note holders. Such warrants, which expire in July 2002, have an
exercise price of $6.00 per share and contain customary adjustments to
protect against dilution. As a result of the equity recapitalization which
occurred on December 30, 1997, these warrants are currently exercisable into
shares of Series B common stock. As of September 30, 1998, all of these
warrants remain outstanding.
During fiscal 1997, the Company issued to certain legal service providers
warrants to purchase 19,000 and 5,000 shares of common stock at exercise
prices of $.50 and $5.00, respectively. Such warrants have terms of five
years and contain customary adjustments to protect against dilution. As a
result of the equity recapitalization which occurred on December 30, 1997,
these warrants are currently exercisable into shares of Series B common
stock. As of September 30, 1998, all of these warrants remain outstanding.
During fiscal 1997, the Company issued a warrant for the purchase of 800,000
shares of common stock to a single investor for cash proceeds totaling
$200,000, which warrant has a term of five years. As issued, the original
warrant agreement contained a complex anti-dilution provision pursuant to
which the number of underlying common shares and exercise price per common
share would have been adjusted based upon the occurrence of certain future
events, as defined in the warrant agreement. On December 30, 1997, the
warrant agreement was amended whereby the number of shares purchasable under
the warrant was set at 2,110,140 shares of Series B common stock with an
exercise price of $1.80 per share. This warrant, as amended, remains subject
to certain customary adjustments to protect against dilution. As of September
30, 1998, no shares have been issued pursuant to this warrant.
In connection with a fiscal 1997 private placement of Series C preferred
stock, the Company issued warrants for the purchase of 520,000 shares of
common stock to the investors. Such warrants were issued with an exercise
price of $5.00 per share, a term of five years, and contain customary
adjustments to protect against dilution, as well as certain additional
anti-dilutive adjustments as defined in the warrant agreements. As a result
of the capital transactions which occurred on December 30, 1997 and April 13,
1998, such warrants are currently exercisable into 736,564 shares of Series B
common stock at an exercise price of $3.53 per share. As of September 30,
1998, all of these warrants remain outstanding.
In connection with the private placement of Series C preferred stock referred
to above, the Company also issued to certain financial advisors warrants to
purchase 218,118 and 15,000 shares of common stock at exercise prices of
$5.00 and $.50, respectively, all of which have terms of five years and
contain customary adjustments to protect against dilution. During fiscal
1997, 5,000 of the $.50 warrants were exercised for proceeds totaling $2,500.
As a result of the equity recapitalization which occurred on December 30,
1997, the remaining outstanding warrants are currently exercisable into
shares of Series B common stock. As of September 30, 1998, all of the
remaining warrants remain outstanding.
As a result of the equity recapitalization which occurred on December 30,
1997, outstanding warrants to purchase 139,494 shares of Series B preferred
stock, as previously issued in fiscal 1994, are currently exercisable into
shares of Series B common stock. Such warrants expire in April 1999 and
contain customary adjustments to protect against dilution. As of September
30, 1998, all of these warrants remain outstanding.
The fair value of the above-referenced warrants was determined at their time
of grant via application of the Black-Scholes option pricing model or, with
respect to those warrants issued in connection with the High Yield Debt
Offering, based on an independent valuation.
F-21
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following table summarizes information about warrants outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
$.01 3,713,094 9.6 $.01 - -
$.50 29,000 4.3 $.50 29,000 $.50
$1.50-1.80 2,249,634 3.1 $1.78 2,249,634 $1.78
$3.00-3.83 12,141,820 5.9 $3.06 12,141,820 $3.26
$5.00-6.00 387,807 4.2 $5.35 387,807 $4.50
----------------- ----------------
18,521,355 14,808,261
----------------- ----------------
----------------- ----------------
</TABLE>
NOTE 11 - STOCK OPTIONS AND PURCHASE RIGHTS
The Company has a 1995 Incentive Stock Option Plan (the 1995 Plan) and a 1997
Stock Plan (the 1997 Plan) (collectively, the Plans) under which stock options
or stock purchase rights to acquire an aggregate of 1,500,000 shares and
1,500,000 shares, respectively, of Series B common stock may be granted to
employees and directors of the Company, as well as to non-employee consultants
of the Company under the 1997 Plan. Both plans provide for the granting of
incentive stock options (within the meaning of Section 422A of the Internal
Revenue Code) while the 1997 Plan also provides for the granting of
non-statutory stock options. Additionally, stock purchase rights may also be
granted under the 1997 Plan.
The terms of stock options granted under the Plans are determined by the Board
of Directors. Stock options may be granted for periods of up to ten years at a
price per share not less than the fair market value of the Company's Series B
common stock at the date of grant for incentive stock options and not less than
85% of the fair market value of the Company's Series B common stock at the date
of grant for non-statutory stock options. In the case of incentive and
non-statutory stock options granted under Plans to employees, directors or
consultants who, at the time of grant of such options, own stock representing
more than 10% of the voting power of all classes of stock of the Company, the
exercise price shall be no less than 110% of the fair market value of the
Company's Series B common stock at the date of grant. Additionally, the term of
incentive stock option grants under the Plans is limited to five years if the
grantee owns in excess of 10% of the voting power of all classes of stock of the
Company at the time of grant. Options granted under the Plans generally vest to
the option holder ratably over a period of four to five years beginning on the
grant date. The terms of stock purchase rights granted under the 1997 Plan are
determined by the Board of Directors. Such purchase rights may be issued either
alone, in addition to, or in tandem with other awards granted under the 1997
Plan and/or cash awards made outside of the 1997 Plan.
The Company has a 1998 Stock Purchase Plan (the 1998 Plan) pursuant to which it
may grant to key employees and directors stock purchase rights to acquire an
aggregate of 500,000 shares of Series B common stock. The terms of stock
purchase rights granted under the 1998 Plan are determined by the Board of
Directors. Under the 1998 Plan, up to 50% of the aggregate purchase price for
shares subject to stock purchase rights may be paid by the offeree in the form
of a promissory note to the Company.
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had been applied in
measuring compensation expense. Had compensation cost for the Company's
stock-based compensation plans been determined based on the minimum value method
at the grant dates for awards under this plan consistent with the method
prescribed by Statement of Financial Accounting Standards No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
F-22
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998 1997 1996
<S> <C> <C> <C>
NET LOSS:
As reported $33,355,793 $9,552,838 $3,856,192
Pro forma $33,434,078 $9,564,128 $3,859,992
</TABLE>
The minimum value of each option and stock purchase right grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during fiscal 1998, 1997
and 1996: dividend yield of 0.0% for all periods; volatility of 0.0% for all
periods; risk-free interest rates of 5.88%, 6.07% and 5.79%; and an expected
life of 5.0 years for all periods, except with respect to stock purchase rights
granted during fiscal 1998, which rights have a term of .17 years. The weighted
average fair value of options and stock purchase rights granted during fiscal
1998, 1997 and 1996 was approximately $.57, $.09 and $.06, respectively.
Stock option and stock purchase right transactions during the three fiscal years
ended September 30, 1998, all of which relate to employee transactions, are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE STOCK AVERAGE
EXERCISE PURCHASE EXERCISE
OPTIONS PRICE RIGHTS PRICE
<S> <C> <C> <C> <C>
Outstanding at September 30, 1995 763,333 $ .15 - -
Granted 788,667 $ .25 - -
Exercised (330,000) $ .22 - -
Canceled (432,000) $ .21 - -
--------------- ----------------
Outstanding at September 30, 1996 790,000 $ .18 - -
Granted 489,400 $ .82 - -
Exercised (101,900) $ .22 - -
Canceled (138,700) $ .48 - -
--------------- ----------------
Outstanding at September 30, 1997 1,038,800 $ .44 - -
Granted 1,420,766 $3.71 300,000 $4.50
Exercised (350,517) $ .35 - -
Canceled (75,854) $2.44 - -
--------------- ----------------
Outstanding at September 30, 1998 2,033,195 $2.66 300,000 $4.50
--------------- ----------------
--------------- ----------------
</TABLE>
F-23
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following table summarizes information about stock options and stock
purchase rights outstanding at September 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
STOCK OPTIONS
$ .15 -.25 301,000 7.2 $ .22 253,600 $ .22
$ .50 341,400 8.2 $ .50 153,840 $ .50
$ 3.00 721,960 9.2 $3.00 453,753 $3.00
$ 4.50 668,835 9.8 $4.50 181,196 $4.50
----------------- ----------------
2,033,195 1,042,389
----------------- ----------------
----------------- ----------------
STOCK PURCHASE RIGHTS
$ 4.50 300,000 .13 $4.50 300,000 $4.50
----------------- ----------------
----------------- ----------------
</TABLE>
The Company's Board of Directors approved a repricing of stock options in
December 1997, pursuant to which the exercise price of certain stock options
designated at $3.20 per share was reduced to $3.00 per share.
NOTE 12 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
Net operating loss carryforwards $ 11,523,433 $ 4,733,931
High yield debt interest deductible when paid 4,945,868 -
Accrued employee costs 70,009 39,834
Depreciation and amortization (1,537,964) (78,845)
---------------- ----------------
15,001,346 4,694,920
Valuation allowance (15,001,346) (4,694,920)
---------------- ----------------
Deferred tax assets (liabilities), net $ - $ -
---------------- ----------------
---------------- ----------------
</TABLE>
As of September 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $37,436,000 and $23,997,000 respectively, which
amounts expire beginning in fiscal 2009 and fiscal 2000, respectively. As a
result of the private equity placement which occurred on December 30, 1997 (Note
9), which resulted in a change of ownership as defined by Section 382 of the
Internal Revenue Code, the Company's utilization of net operating loss
carryforwards generated through December 30, 1997 will be subject to an annual
limitation of approximately $878,000 for both federal and state tax purposes,
the effect of which has been reflected in the summary of deferred tax assets
above. Additionally, if the Company is able to recognize certain built-in gains
F-24
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
in the future, the annual utilization rate of the net operating losses would be
increased. If the Company were to recognize certain built-in losses, they will
be subject to the annual utilization limitation when recognized.
Based upon the Company's lack of prior earnings history and other available
evidence, management has recorded a full valuation allowance for the benefit
of deferred tax assets. A reconciliation of the income tax benefit computed
using the U.S. federal statutory rate (34%) and the Company's effective tax
rate follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998 1997 1996
<S> <C> <C> <C>
Computed expected federal tax benefit $ (11,340,970) $ (3,247,965) $ (1,311,105)
Non-deductible high yield debt interest 684,111 - -
State income taxes, net of federal benefit (1,069,310) 161,439 (356,087)
Change in valuation allowance 10,306,426 2,426,858 1,689,863
Section 382 net operating loss limitations 1,457,713 557,451 -
Other (37,970) 102,217 (22,671)
--------------- ---------------- ----------------
$ - $ - $ -
--------------- ---------------- ----------------
--------------- ---------------- ----------------
</TABLE>
NOTE 13 - LEGAL PROCEEDINGS
On October 16, 1998, the Company filed a declaratory relief action in San Diego
Superior Court, asking the Court to find that the Company is not obligated to
offer stock to Dina Partners L.P. (Dina) with respect to the December 30, 1997
equity investment by Spectra 3 and Enron (Note 9). Dina had previously indicated
in conversations with FirstWorld officers and counsel and in writing that it
believed the Company had breached a certain Amended and Restated Investor Rights
Agreement to which the Company and Dina were parties by refusing to allow Dina
to purchase additional stock in the Company. On December 3, 1998, in answer to
the Company's complaint, Dina filed a general denial with the court. Although
the ultimate resolution of this dispute is subject to the uncertainties inherent
in litigation, the Company does not believe that the resolution of the
declaratory relief action will have a material adverse effect on the Company's
results of operations, liquidity or financial position.
NOTE 14 - SUBSEQUENT EVENTS
On October 8, 1998, the Company commenced an offer to exchange (the Exchange
Offer) its outstanding 13% Senior Discount Notes due 2008 (the Original Notes)
for a new issue of 13% Senior Discount Notes due 2008, which were registered
with the Securities and Exchange Commission pursuant to a Registration Statement
on Form S-4 (the Exchange Notes). The Exchange Offer expired on November 9,
1998. Under the terms of the Exchange Offer, the Company accepted for exchange
all $470,000,000 in aggregate principal amount at maturity of Original Notes
and caused the cancellation of the Original Notes and
the issuance of the Exchange Notes.
On October 16, 1998, the Board of Directors of the Company elected to change the
Company's fiscal year end from September 30 to December 31, commencing with the
short fiscal year ending on December 31, 1998. The Company intends to file a
transition report on Form 10-Q with the Securities and Exchange Commission for
the period from October 1, 1998 through December 31, 1998.
On November 1, 1998, the Company adopted a 401(k) retirement plan (the Plan)
pursuant to which eligible employees may elect to defer up to 20% of their
compensation into the Plan up to a maximum of $10,000 per annum. The Plan also
stipulates that the Company may provide discretionary matching contributions to
the
F-25
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
participants of the Plan, which matching contributions would be allocated to
the participants on December 31 of each Plan year and would vest to the
participants at the rate of 25% per annum. All administrative expenses of the
Plan will be borne by the Company.
On November 24, 1998, pursuant to a Stock Purchase Agreement between the Company
and Enron Communications, Inc. (ECI), the Company purchased for cash all of the
outstanding capital stock of Optec, Inc. (Optec) from ECI. ECI is the parent
company of Enron Capital & Trade Resources Corp., a principal stockholder of the
Company. Optec is a telecommunications systems integrator with operations in
Oregon and Washington. Simultaneous to such transaction, the Company also
purchased from ECI an indefeasible right of use to fiber optic cable in a
metropolitan area network serving Portland with routes connecting Beaverton and
Hillsboro, Oregon. In addition, the Company obtained rights to OC-3 level
capacity on a wide area network being developed by ECI that will connect up to
15 cities nationwide. The Company paid an aggregate of $18,000,000 for the Optec
capital stock, the indefeasible rights of use and the wide area network rights.
The Company also repaid at closing approximately $4,000,000 of Optec's
indebtedness to ECI. The Company has deposited $1,000,000 of the total purchase
price into an escrow account to be held for a three year period for the purpose
of satisfying any claim made by the Company for breach of any representations,
warranties or covenants made by ECI in the agreement relating to the Company's
purchase of the Optec capital stock.
During the period October 1998 to December 1998, the Company entered into
certain employment agreements with key executive officials. Future minimum
salaries prescribed by such agreements, inclusive of equalization payments (as
defined in such agreements), total $688,000, $805,000, $421,000 and $31,000
during each of fiscal 1999, 2000, 2001 and 2002, respectively. Pursuant to such
agreements, the Company has also granted or committed to grant to the executives
a total of 950,000 options to purchase Series B common stock at exercise prices
that range from $4.50 to $7.50 per share.
F-26
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
beginning of end of
period Additions Deductions period
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
DEFERRED TAX ASSET VALUATION ALLOWANCE:
Year ended September 30, 1996 .. 578,199 1,689,863 -- 2,268,062
Year ended September 30, 1997 .. 2,268,062 2,426,858 -- 4,694,920
Year ended September 30, 1998 .. 4,694,920 10,306,426 -- 15,001,346
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended September 30, 1996 .. -- -- -- --
Year ended September 30, 1997 .. -- -- -- --
Year ended September 30, 1998 .. -- 9,765 -- 9,765
</TABLE>
F-27
<PAGE>
Exhibit 10.25
FIRSTWORLD COMMUNICATIONS, INC.
STOCK OPTION AGREEMENT
Capitalized terms used herein but not otherwise defined herein, shall have
the meanings assigned to such terms in that certain Employment Agreement, dated
as of October 1, 1998, by and between the Company (as defined below) and Sheldon
S. Ohringer (the "EMPLOYMENT AGREEMENT").
1. NOTICE OF STOCK OPTION GRANT
(a) NOTICE:
Sheldon S. Ohringer
c/o FirstWorld Communications
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
The undersigned optionee ("OPTIONEE") has been granted an option to
purchase (the "STOCK OPTION") Series B Common Stock, par value $.0001 per share
(the "COMMON STOCK"), of FirstWorld Communications, Inc. (the "COMPANY"),
subject to the terms and conditions of this Stock Option Agreement, as follows.
Date of Grant: 10/1/98
Vesting Commencement Date: 10/1/98
Exercise Price per Share: $6.00 (as adjusted pursuant to Section
2(c) below)
Total Number of Shares Granted: 2,805,000 (as adjusted pursuant to
Section 2(c) below)
Total Exercise Price: $16,830,000 (as adjusted pursuant to
Section 2(c) below)
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: 9/30/05
(b) VESTING SCHEDULE:
This Stock Option shall be exercisable, in whole or in part, according to
the following vesting schedule:
(i) with respect to one-third (1/3) of the Shares purchasable
thereunder, on the Commencement Date (as defined in the Employment
Agreement);
<PAGE>
(ii) with respect to one-third (1/3) of the Shares purchasable
thereunder, on the first anniversary of the Commencement Date; and
(iii) with respect to the remaining one-third (1/3) of the Shares
purchasable thereunder, on the second anniversary of the Commencement Date;
PROVIDED, HOWEVER, that immediately prior to the effectiveness of a Change of
Control (as defined below) of the Company, all of the Shares subject to the
Stock Option shall immediately vest; and FURTHER PROVIDED, HOWEVER, if the
Company has a market capitalization of at least $1.2 billion (as adjusted as
described below) for a period of twenty (20) consecutive trading days at any
time during a three year period beginning on October 1, 1998 and ending on
September 30, 2001, then all of the Shares subject to the Stock Option shall
immediately vest.
For the purposes hereof, a "Change in Control" of the Company means the
occurrence of one of the following events:
(1) the sale, lease, transfer, conveyance or other disposition, in
one or a series of related transactions, of all or substantially all of the
assets of the Company and its subsidiaries, taken as a whole, to any person
(as such term is defined in Section 3(a)(9) of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT")) or group (as such term is defined
in Section 13(d)(3) of the Exchange Act and Section 14(d)(2) of the
Exchange Act);
(2) the adoption of a plan relating to the liquidation or dissolution
of the Company; or
(3) any person (as defined above) or group (as defined above) other
than the Permitted Holders (as defined below) is or becomes the Beneficial
Owner (as defined below), directly or indirectly, of 50% or more of the
total voting stock or total common equity of the Company, including by way
of merger, consolidation or otherwise.
For the purposes hereof, the term "Permitted Holders" means (a) Donald L.
Sturm, Colorado Spectra 1, LLC, a Colorado limited liability company ("SPECTRA
1"), Colorado Spectra 2, LLC, a Colorado limited liability company ("SPECTRA
2"), Colorado Spectra 3, LLC, a Colorado limited liability company ("SPECTRA
3"), Enron Capital & Trade Resources Corp., a Delaware corporation ("ENRON"),
and any other person which any of the foregoing entities directly or indirectly
controls, or is under common control with, or is controlled by (other than the
Company and its subsidiaries) and (b) any child, stepchild, spouse, sibling,
son-in-law, daughter-in-law, brother-in-law or sister-in-law (including adoptive
relationships) of Donald L. Sturm (or any entity all of the beneficial ownership
interests of which are owned by such a relative) to whom membership interests in
Spectra 1, Spectra 2 or Spectra 3 are distributed to upon the death of Donald L.
Sturm. The term "Beneficial Owner" means a beneficial owner as defined in Rules
13d-3 and 13d-5 under the Exchange Act (or any successor rules), including (but
not limited to) the provisions of such rules that a person shall be deemed to
have beneficial ownership of all securities that such person has a right to
acquire within 60 days; PROVIDED that a person will not be deemed a beneficial
owner of, or to own beneficially, any securities if such beneficial ownership
(1) arises solely as a result of a revocable proxy delivered in response to a
proxy or consent
2
<PAGE>
solicitation made pursuant to, and in accordance with, the Exchange Act and
(2) is not also then reportable on Schedule 13D or Schedule 13G (or any
successor schedule) under the Exchange Act. The term "controls," as used
with respect to any person, means the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such person, whether through the ownership of voting securities or voting
interests or otherwise.
For the purposes hereof, market capitalization of $1.2 billion assumes
60,000,000 fully diluted shares of Common Stock (regardless of whether
60,000,000 shares of Common Stock are actually trading as of any period of
determination) and a market price of $20.00 per share (subject to adjustment as
described in the following sentence). If the number of fully diluted shares of
Common Stock is greater than or less than 60,000,000 shares of Common Stock, the
target market capitalization shall be proportionately adjusted; PROVIDED THAT
the $20.00 per share market price would not be so adjusted, except to the extent
required to appropriately reflect any subdivision (by any stock split, stock
dividend, recapitalization or otherwise), combination (by reverse stock split or
otherwise) or other adjustment in the number of outstanding shares of the
Company as determined on a fully diluted basis made without the receipt of
consideration to the Company after October 1, 1998.
(c) TERMINATION PERIOD:
Optionee acknowledges that he (or his estate) will have ninety (90) days
from the Date of Termination (as defined in the Employment Agreement) to
exercise all Shares of Common Stock vested under the Stock Option as of the Date
of Termination. In no event may Optionee exercise this Option after the
"Term/Expiration Date" set forth in Section 1(a) above.
2. AGREEMENT
(a) GRANT OF OPTION. The Board of Directors of the Company (the
"BOARD") hereby grants to the Optionee the Stock Option to purchase the
number of Shares set forth in the Notice of Grant, at the exercise price
per share set forth in the Notice of Grant (the "EXERCISE PRICE"), and
subject to the terms and conditions hereof.
This Stock Option is not intended to qualify as an Incentive Stock
Option as defined in Section 422 of the Code; therefore, this Stock Option
shall be treated as a Nonstatutory Stock Option ("NSO").
(b) EXERCISE OF OPTION.
(1) RIGHT TO EXERCISE. This Stock Option is exercisable during
its term in accordance with the vesting schedule set out in the Notice
of Grant and the applicable provisions of this Stock Option Agreement.
(2) METHOD OF EXERCISE. This Stock Option is exercisable by
delivery of an exercise notice, in the form attached as EXHIBIT A (the
"EXERCISE NOTICE"), which shall state the election to exercise the
Stock Option, the number of Shares with respect to which the Stock
Option is being exercised, and such other representations and
agreements as may be required by the Company. The Exercise
3
<PAGE>
Notice shall be accompanied by payment of the aggregate Exercise Price
as to all Shares being exercised thereby. This Stock Option shall be
deemed to be exercised upon receipt by the Company of such fully
executed Exercise Notice accompanied by the aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of a Stock
Option unless such issuance and such exercise complies with applicable
laws. Assuming such compliance, for income tax purposes the Shares
shall be considered transferred to the Optionee on the date on which
the Stock Option is exercised with respect to such Shares.
(c) ADJUSTMENT TO EXERCISE PRICE AND NUMBER OF SHARES. In order to
prevent dilution of the rights granted to Optionee under the Stock Option,
the number of shares of Common Stock subject to the Stock Option and the
Exercise Price of such Common Stock shall be subject to adjustment from
time to time as provided in this Section 2(c).
(1) SUBDIVISION OR COMBINATION OF STOCK.
(A) If at any time or from time to time after the
Commencement Date the Company shall subdivide (by stock split,
stock dividend or otherwise) its outstanding shares of common
stock, the Exercise Price in effect immediately prior to such
subdivision shall, concurrently with the effectiveness of such
subdivision, be proportionately decreased. In the event the
outstanding shares of common stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser
number of shares of common stock, the Exercise Price then in
effect shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.
(B) Upon each adjustment of the Exercise Price as provided
in Section 2(c)(1)(A), Optionee thereafter shall be entitled to
purchase, at the Exercise Price resulting from such adjustment,
the number of shares of Common Stock (calculated to the nearest
whole share) obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting
from such adjustment.
(2) OTHER DISTRIBUTIONS.
(A) In case the Company shall after the Commencement Date
distribute to the holders of its common stock evidences of its
indebtedness or assets (excluding regular cash dividends or
distributions and dividends or distributions referred to in
Section 2(c)(1) above) in connection with a split-up, spin-off or
otherwise, then in each such case the Exercise Price in effect
thereafter shall be determined by multiplying the Exercise Price
in
4
<PAGE>
effect immediately prior thereto by a fraction, the numerator
of which shall be the total number of shares of common stock
outstanding multiplied by the Fair Market Value (as defined in
Section 2(c)(5) below) per share of common stock prior to such
distribution, less the fair market value (as determined by the
Board) of said assets or evidences of indebtedness so
distributed, and the denominator of which shall be the total
number of shares of common stock outstanding multiplied by the
Fair Market Value per share of common stock prior to the
distribution. Such adjustment shall be made successively
whenever such a record date is fixed. Such adjustment shall be
made whenever any such distribution is made and shall become
effective immediately after the record date for the determination
of stockholders entitled to receive such distribution.
(B) Upon each adjustment of the Exercise Price as provided
in Section 2(c)(2)(A), Optionee thereafter shall be entitled to
purchase, at the Exercise Price resulting from such adjustment,
the number of shares of Common Stock (calculated to the nearest
whole share) obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting
from such adjustment.
(3) No adjustment in the Exercise Price and/or the number of
shares subject to the Stock Option shall be made if such adjustment
would result in a change in (i) the Exercise Price of less than one
cent ($0.01) per share or (ii) the number of shares represented by the
Stock Option of less than one share (the "ADJUSTMENT THRESHOLD
AMOUNT"). Any adjustment not made because the Adjustment Threshold
Amount is not satisfied shall be carried forward and made, together
with any subsequent adjustments, at the earlier of such time as (a)
the aggregate amount of all such adjustments is at least equal to the
Adjustment Threshold Amount or (b) the shares of Common Stock subject
to the Stock Option are acquired.
(4) Upon the occurrence of each adjustment or readjustment of
the Exercise Price pursuant to this Section 2(c), the Company promptly
shall compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to Optionee a certificate setting
forth such adjustment or readjustment, showing in detail the facts
upon which such adjustment or readjustment is based.
(5) "Fair Market Value" of a share of common stock as of a given
date shall be: (i) the average closing sale price of a share of common
stock on the principal exchange on which the common stock is then
trading, if any, over the last ten trading days prior to such date,
or, if shares were not traded during such period, over the next
preceding ten trading day period during which a sale occurred; (ii) if
the common stock is not traded on an exchange but is quoted on Nasdaq
or a successor quotation system, (1) the average closing sale price
over the last ten trading days (if the common stock is then quoted on
the Nasdaq National Market or the Nasdaq SmallCap
5
<PAGE>
Market) or (2) the mean between the closing representative bid and
asked prices (in all other cases) for a share of the common stock over
the last ten trading days prior to such date, or, if shares were not
traded during such period, then over the next preceding ten trading
day period during which a sale occurred, as reported by Nasdaq or such
successor quotation system; (iii) if the common stock is not publicly
traded on an exchange and not quoted on Nasdaq or a successor
quotation system, the mean between the closing bid and asked prices
for a share of common stock over the last ten trading days prior to
such date, or, if shares were not traded during such period, then over
the next preceding ten trading day period during which a sale
occurred, as determined in good faith by the Board; or (iv) if the
common stock is not publicly traded, the fair market value of a share
of common stock established by the Board acting in good faith.
(6) Prior to the consummation of any recapitalization,
reorganization, reclassification, consolidation, merger or other
transaction which is effected in such a way that holders of common
stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in
exchange for such securities (each an "ORGANIC CHANGE"), the Company
shall make appropriate provision to ensure that Optionee shall have
the right to acquire and receive upon Optionee's acquisition of the
shares of Common Stock subject to the Stock Option subsequent to such
consummation, in lieu of or in addition to (as the case may be) the
shares of Common Stock subject to the Stock Option, such shares of
stock, securities or assets as Optionee would be entitled to receive
if the shares of Common Stock subject to the Stock Option had been
acquired immediately prior to such Organic Change. In any such case,
the Company shall make appropriate provision with respect to
Optionee's rights and interests to insure that the provisions of this
Section 2(c) shall thereafter be applicable to the Stock Option. The
Company shall not effect any such Organic Change unless, prior to the
consummation thereof, the successor entity (if other than the Company)
resulting from such Organic Change (including a purchaser of all or
substantially all of the Company's assets) assumes by written
instrument the obligation to deliver to Optionee such shares of stock,
securities or assets as, in accordance with the foregoing provisions,
Optionee may be entitled to acquire upon acquisition of the shares of
Common Stock subject to the Stock Option.
(d) LOCK-UP PERIOD. Optionee hereby agrees that, if so requested by
the Company or any representative of the underwriters (the "MANAGING
UNDERWRITER") in connection with any registration of the offering of any
securities of the Company under the Securities Act, Optionee shall not sell
or otherwise transfer any Shares or other securities of the Company during
the 180-day period (or such other period as may be requested in writing by
the Managing Underwriter and agreed to in writing by the Company) (the
"MARKET STANDOFF PERIOD") following the effective date of the registration
statement of the Company filed under the Securities Act. Such restriction
shall apply only to the first registration statement of the Company to
become effective under the Securities Act that includes securities to be
sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
6
<PAGE>
(e) METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall
be by any of the following, or a combination thereof, at the election of
the Optionee:
(1) cash or check;
(2) consideration received by the Company under a formal
cashless exercise program adopted by the Company; or
(3) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee
for more than six (6) months on the date of surrender and (ii) have a
Fair Market Value (as defined in Section 2(c)(5) above) on the date of
surrender equal to the aggregate Exercise Price of the Shares being
exercised thereby.
(f) RESTRICTIONS ON EXERCISE.
(1) This Stock Option may not be exercised if the issuance of
such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any
Applicable Law (as defined below).
For the purposes hereof, "Applicable Laws" means the requirements
relating to the administration of stock option plans under U.S. state
corporate laws, U.S. federal and state securities laws, the Internal
Revenue Code of 1986, as amended, and any stock exchange or quotation
system on which the Common Stock is listed or quoted.
(2) Upon any exercise of the Stock Option, Optionee agrees that
he will hold at least 40% of the shares acquired pursuant to such
Stock Option exercise for at least one year from the date of such
Stock Option exercise; PROVIDED, HOWEVER, that the foregoing
requirement will not apply from and after (i) a Change in Control (as
defined above) of the Company or (ii) a merger, consolidation or other
transaction in which the Company is not the surviving entity and in
which all of the Company's stockholders receive cash or other
consideration for their shares as a result of such merger,
consolidation or other transaction. In addition, in connection with a
merger, consolidation or other transaction in which the Company is not
the surviving entity and in which all of the Company's stockholders
receive stock for their shares as a result of such merger,
consolidation or other transaction, the period during which Optionee
held the restricted shares of the Company will be added to the time
Optionee holds the shares acquired in connection with such merger,
consolidation or other transaction for purposes of determining the one
year holding period for the restricted shares.
In connection with all Stock Option exercises, certificates
representing an aggregate of 40% of the shares acquired pursuant to
such exercise shall be endorsed conspicuously as follows:
7
<PAGE>
"BY THE TERMS OF AN EMPLOYMENT AGREEMENT, CERTAIN RESTRICTIONS
HAVE BEEN PLACED ON THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE. THE CORPORATION WILL FURNISH A COPY OF SUCH AGREEMENT TO
THE HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON REQUEST TO THE
CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE."
In addition, the Company will be entitled to issue "stop-
transfer" orders to its transfer agent (the "TRANSFER AGENT") with
respect to the Common Stock that bears the endorsement set forth
above. At the conclusion of each applicable one-year period, the
Company will cause the Transfer Agent to remove the above legend from
the shares bearing such legend and which were restricted from transfer
during the prior one-year period pursuant to this Section 2(f)(2).
(g) NON-TRANSFERABILITY OF OPTION. This Stock Option may not be
transferred in any manner otherwise than by will or by the laws of descent
or distribution and may be exercised during the lifetime of Optionee only
by Optionee. The terms of this Stock Option Agreement shall be binding
upon the executors, administrators, heirs, successors and assigns of the
Optionee.
(h) TERM OF OPTION. This Stock Option may be exercised only within
the term set out in the Notice of Grant, and may be exercised during such
term only in accordance with the terms of this Stock Option.
(i) TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Stock Option of some of the federal tax consequences of
exercise of this Stock Option and disposition of the Shares. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS
STOCK OPTION OR DISPOSING OF THE SHARES.
(1) EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a
regular federal income tax liability upon the exercise of a
Nonstatutory Stock Option. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the Fair Market Value of the Shares on
the date of exercise over the Exercise Price. If Optionee is an
employee or a former employee, the Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay
to the applicable taxing authorities an amount in cash equal to a
percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(2) DISPOSITION OF SHARES. In the case of an NSO, if Shares are
held for at least one year, any gain realized on disposition of the
Shares will be treated as long-term capital gain for federal income
tax purposes.
8
<PAGE>
(j) ENTIRE AGREEMENT; GOVERNING LAW. The Employment Agreement and
this Stock Option Agreement constitute the entire agreement of the parties
with respect to the subject matter hereof and supersede in their entirety
all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to
the Optionee's interest except by means of a writing signed by the Company
and Optionee. This agreement is governed by the internal substantive laws,
but not the choice of law rules, of California.
(k) NO GUARANTEE OF CONTINUED EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND
AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF
IS NOT EARNED THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS STOCK
OPTION OR ACQUIRING SHARES HEREUNDER. OPTIONEE FURTHER ACKNOWLEDGES AND
AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OF THE COMPANY.
Optionee has reviewed this Stock Option in its entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Stock Option
Agreement and fully understands all provisions of the Stock Option. Optionee
hereby agrees to accept as binding, conclusive and
final all decisions or interpretations of the Board upon any questions arising
under this Stock Option. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
/s/ Sheldon S. Ohringer /s/ David Gandini
- ---------------------------------- -----------------------------------
SHELDON S. OHRINGER Name: David Gandini
Title: Executive Vice President
- ----------------------------------
- ----------------------------------
- ----------------------------------
Residence Address
Date: October 1, 1998
9
<PAGE>
EXHIBIT A
EXERCISE NOTICE
FirstWorld Communications
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Attention: Chief Financial Officer
1) EXERCISE OF OPTION. Effective as of today, ____________ ___, _____, the
undersigned ("OPTIONEE") hereby elects to exercise Optionee's option to
purchase (the "OPTION") ___________ shares of the Series B Common Stock,
par value $.0001 per share (the "SHARES"), of FirstWorld Communications,
Inc., a Delaware corporation (the "COMPANY"), under and pursuant to the
Stock Option Agreement dated October 1, 1998 (the "OPTION AGREEMENT").
2) DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the full
purchase price of the Shares, as set forth in the Option Agreement.
3) REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has
received, read and understood the Option Agreement and agrees to abide by
and be bound by its terms and conditions.
4) RIGHTS AS STOCKHOLDER. Until the issuance of the Shares (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Shares
acquired hereby, notwithstanding the exercise of the Option. The Shares
shall be issued to the Optionee as soon as practicable after the Option is
exercised.
5) COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee or
any transferee (either being sometimes referred to herein as the "HOLDER")
may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of
first refusal to purchase the Shares on the terms and conditions set forth
in this Section (the "RIGHT OF FIRST REFUSAL").
a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver
to the Company a written notice (the "NOTICE") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such
Shares; (ii) the name of each proposed purchaser or other transferee
("PROPOSED TRANSFEREE"); (iii) the number of Shares to be transferred
to each Proposed Transferee; and (iv) the bona fide cash price or
other consideration for which the Holder proposes to transfer the
Shares (the "OFFERED PRICE"), and the Holder shall offer the Shares at
the Offered Price to the Company or its assignee(s).
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b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30)
days after receipt of the Notice, the Company and/or its assignee(s)
may, by giving written notice to the Holder, elect to purchase all,
but not less than all, of the Shares proposed to be transferred to any
one or more of the Proposed Transferees, at the purchase price
determined in accordance with subsection (c) below.
c) PURCHASE PRICE. The purchase price ("PURCHASE PRICE") for the Shares
purchased by the Company or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration
other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the
Company (the "BOARD") in good faith.
d) PAYMENT. Payment of the Purchase Price shall be made, at the option
of the Company or its assignee(s), in cash (by check), by cancellation
of all or a portion of any outstanding indebtedness of the Holder to
the Company (or, in the case of repurchase by an assignee, to the
assignee), or by any combination thereof within 30 days after receipt
of the Notice or in the manner and at the times set forth in the
Notice.
e) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the
Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this
Section, then the Holder may sell or otherwise transfer such Shares to
that Proposed Transferee at the Offered Price or at a higher price,
PROVIDED that such sale or other transfer is consummated within 60
days after the date of the Notice, that any such sale or other
transfer is effected in accordance with any applicable securities laws
and that the Proposed Transferee agrees in writing that the provisions
of this Section shall continue to apply to the Shares in the hands of
such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new
Notice shall be given to the Company, and the Company and/or its
assignees shall again be offered the Right of First Refusal before any
Shares held by the Holder may be sold or otherwise transferred.
f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary
contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's
death by will or intestacy to the Optionee's immediate family or a
trust for the benefit of the Optionee's immediate family shall be
exempt from the provisions of this Section. "Immediate Family" as
used herein shall mean spouse, lineal descendant or antecedent,
father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred
subject to the provisions of this Section, and there shall be no
further transfer of such Shares except in accordance with the terms of
this Section.
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g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Company's Right of First
Refusal shall terminate immediately as to all Shares upon the
occurrence of the first to occur of the following events:
i) The acquisition of the Company by another entity by means of the
merger or consolidation of the Company with or into another
corporation in which the stockholders of the Company own less
than 50% of the voting securities of the surviving entity;
ii) The sale of all or substantially all of the assets of the
Company; or
iii) The date of the first sale of Common Stock of the Company to the
general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended.
6) TAX CONSULTATION. Optionee understands that Optionee may suffer adverse
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company
for any tax advice.
7) RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
a) LEGENDS. Optionee understands and agrees that the Company shall cause
the legends set forth below or legends substantially equivalent
thereto, to be placed upon any certificate(s) evidencing ownership of
the Shares together with any other legends that may be required by the
Company or by state or federal securities laws:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A
COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL
ARE BINDING ON TRANSFEREES OF THESE SHARES.
b) REFUSAL TO TRANSFER. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or
(ii) to treat as owner of such Shares or to accord the right to vote
or pay dividends to any purchaser or other transferee to whom such
Shares shall have been so transferred.
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8) SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject
to the restrictions on transfer herein set forth, this Agreement shall be
binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
9) INTERPRETATION. Any dispute regarding the interpretation of this Agreement
shall be submitted by Optionee or by the Company forthwith to the Board (or
a committee thereof) which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Board (or a committee
thereof) shall be final and binding on all parties.
10) GOVERNING LAW. This Agreement is governed by the internal substantive
laws, but not the choice of law rules, of California.
11) ENTIRE AGREEMENT. The Employment Agreement and the Option Agreement are
incorporated herein by reference. This Agreement, the Employment Agreement
and the Option Agreement constitute the entire agreement of the parties
with respect to the subject matter hereof and supersede in their entirety
all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to
the Optionee's interest except by means of a writing signed by the Company
and Optionee.
Submitted by: Accepted by:
OPTIONEE: FIRSTWORLD COMMUNICATIONS, INC.
a Delaware corporation
SHELDON S. OHRINGER
-----------------------------------
- ---------------------------------- Name:
Signature ------------------------------
Title:
-----------------------------
Address:
Address:
9333 Genesee Avenue, Suite 200
- ---------------------------------- San Diego, California 92121
- ----------------------------------
-----------------------------------
Date Received
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of October 1, 1998,
is by and between FirstWorld Communications, Inc., a Delaware corporation (the
"COMPANY") and Scott M. Chase ("EXECUTIVE").
RECITAL
The Company desires to employ Executive, effective as of October 1, 1998
(the "COMMENCEMENT DATE"), on the terms and conditions set forth in this
Agreement, and Executive desires to be so employed.
AGREEMENT
IN CONSIDERATION of the premises and the mutual covenants set forth below,
the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Executive as the
Senior Vice President, Corporate Communications and External Affairs of the
Company, and Executive hereby accepts such employment, on the terms and
conditions hereinafter set forth.
2. TERM. The period of employment of Executive by the Company hereunder
(the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall
continue through September 30, 2000. The Employment Period may be sooner
terminated by either party in accordance with Section 5 of this Agreement.
3. POSITION AND DUTIES. During the Employment Period, Executive shall
serve as Senior Vice President, Corporate Communications and External Affairs of
the Company. Executive shall devote such time, attention and energies to
Company affairs as are necessary to fully perform his duties (other than
absences due to illness or vacation) for the Company. During the Employment
Period, Executive shall not, directly or indirectly, render services to any
other organization, entity or person, as an employee, independent contractor,
consultant or otherwise, with or without compensation, without the prior written
consent of the Board of Directors of the Company (the "BOARD")
4. COMPENSATION AND RELATED MATTERS.
(a) EQUALIZATION PAYMENT. To compensate Executive for certain
benefits that he may lose or forfeit as a result of his termination of
employment with his former employer, ICG Communications, Inc., and commencement
of employment with the Company, the Company shall pay Executive in cash a
$20,000 payment (the "EQUALIZATION PAYMENT") payable on the Commencement Date or
as soon as reasonably practicable thereafter.
<PAGE>
(b) SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $125,000 per year ("BASE SALARY").
Executive's Base Salary shall be paid in approximately equal installments in
accordance with the Company's customary payroll schedule and practices.
Executive's Base Salary shall be subject to annual reviews commencing October
1999 and each year thereafter. If Executive's Base Salary is increased by the
Company, such increased Base Salary shall then constitute the Base Salary for
all purposes of this Agreement. All compensation paid to Executive shall be
subject to withholding and other employment taxes imposed by applicable law.
(c) ANNUAL BONUS. The Board's compensation committee (the "COMPENSATION
COMMITTEE") shall review Executive's performance at least once annually during
each year of the Employment Period and, based on Executive's performance,
recommend whether the Company should award Executive a cash bonus ("BONUS") in
order to reward Executive for services rendered to the Company and/or as an
incentive for continued service to the Company. The amount of Executive's
Bonus, if any, shall be determined in the reasonable discretion of the
Compensation Committee and shall be dependent upon, among other things, the
achievement of certain performance levels by the Company, including, without
limitation, (i) the nature, magnitude and quality of the services performed by
Executive for the Company, (ii) the condition (financial and other) and results
of operations of the Company and (iii) the compensation paid for positions of
comparable responsibility and authority within the telecommunications industry.
(d) STOCK OPTIONS. Effective as of the Commencement Date, Executive
shall be awarded a stock option (the "STOCK OPTION") to purchase 100,000 shares
of the Company's Series B Common Stock, par value $.0001 per share (the "Common
Stock"). Each share of Common Stock subject to the Stock Option shall have an
exercise price of $4.50 per share. The Stock Option will be granted under one
of the Company's stock option plans and the terms and conditions of the Stock
Option will be determined in accordance with the applicable stock option plan.
(e) EXPENSES. The Company shall promptly reimburse Executive for all
reasonable business expenses upon the presentation of reasonably itemized
statements of such expenses in accordance with the Company's policies and
procedures now in force or as such policies and procedures may be modified with
respect to all senior executive officers of the Company.
(f) WELFARE AND PENSION PLANS. In addition to Executive's Base
Salary and any incentive compensation and bonuses awarded to Executive
hereunder, he (and his family) shall be entitled to participate, to the extent
that he is (and they are) eligible under the terms and conditions thereof, in
any pension, retirement, hospitalization, insurance, disability or medical
service plan generally available to the executive officers of the Company that
may be in effect from time to time during the Employment Period. The Company
shall be under no obligation to institute or continue the existence of any such
employee benefit plan.
5. TERMINATION. Executive's employment hereunder may be terminated
during the Employment Period under the following circumstances:
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<PAGE>
(a) DEATH. Executive's employment hereunder shall terminate upon his
death.
(b) DISABILITY. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been substantially unable to
perform his duties hereunder for an entire period of thirty (30) consecutive
days, and within thirty (30) days after written Notice of Termination (as
defined in Section 6(a)) is given after such thirty (30) day period,
Executive shall not have returned to the substantial performance of his
duties on a full-time basis, the Company shall have the right to terminate
Executive's employment hereunder for "Disability," and such termination in
and of itself shall not be, nor shall it be deemed to be, a breach of this
Agreement.
(c) CAUSE. The Company shall have the right to terminate Executive's
employment for Cause (as defined), and such termination in and of itself shall
not be, nor shall it be deemed to be, a breach of this Agreement. For purposes
of this Agreement, the Company shall have "Cause" to terminate Executive's
employment upon Executive's:
(i) conviction of, or plea of guilty or nolo contendere to,
any crime constituting a felony;
(ii) commission of a material act of dishonesty, fraud,
misrepresentation or other act of moral turpitude that would, in the
Board's reasonable judgment, prevent the effective performance of his
duties hereunder;
(iii) continued failure to substantially perform his duties
hereunder to the reasonable satisfaction of the Board (other than such
failure resulting from Executive's incapacity due to physical or mental
illness or subsequent to the issuance of a Notice of Termination by
Executive for Good Reason (as defined in Section 5(d)) after demand for
substantial performance is delivered by the Board in writing that
specifically identifies the manner in which the Board believes Executive
has not used reasonable best efforts to substantially perform his duties;
or
(iv) willful misconduct (including, but not limited to, a
willful breach of the provisions of Section 8) that is, in the Board's
reasonable judgment, injurious to the Company or to any entity in control
of, controlled by or under common control with the Company ("AFFILIATE").
For purposes of this Section 5(c), no act, or failure to act, by Executive
shall be considered "willful" unless committed in bad faith and without a
reasonable belief that the act or omission was in the best interests of the
Company or any Affiliates thereof; PROVIDED, HOWEVER, that the requirements
outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if
Executive's action or non-action continues for more than ten (10) days after
Executive has received written notice of the inappropriate action or non-action.
This Section 5(c) shall not prevent Executive from challenging the Board's
determination that Cause exists or that Executive has failed to cure any act (or
failure to act) that purportedly formed the basis for the Board's determination,
under the arbitration procedures set forth in Section 10 below.
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<PAGE>
(d) GOOD REASON. Executive may terminate his employment for "Good
Reason" within thirty (30) days after Executive has actual knowledge of the
occurrence, without the written consent of Executive, of one of the following
events that has not been cured within thirty (30) days after written notice
thereof has been given by Executive to the Company (PROVIDED, that with respect
to this Section 5(d), the Company shall have the right to challenge Executive's
determination that he has the right to terminate his employment for "Good
Reason" under the arbitration procedures set forth in Section 10 below):
(i) a reduction by the Company in Executive's Base Salary or a
failure by the Company to pay any such amounts when due;
(ii) any purported termination of Executive's employment for
Cause which is not effected pursuant to the procedures of Section 5(c) (and
for purposes of this Agreement, no such purported termination shall be
effective);
(iii) the Company's failure to provide the Stock Option or the
Company's material breach of one or more of the stock option agreements
pursuant to which the Stock Option was issued to Executive;
(iv) the Company's failure to substantially provide any
material employee benefits due to be provided to Executive; or
(v) the Company's failure to provide in all material respects
the indemnification set forth in Section 9 of this Agreement.
Executive's continued employment during the thirty (30) day period referred
to above in this paragraph (d) shall not constitute Executive's consent to, or a
waiver of rights with respect to, any act or failure to act constituting Good
Reason hereunder.
(e) WITHOUT GOOD REASON. Executive shall have the right to terminate
his employment hereunder without Good Reason by providing the Company with a
Notice of Termination, and such termination shall not in and of itself be, nor
shall it be deemed to be, a breach of this Agreement.
6. TERMINATION PROCEDURE.
(a) NOTICE OF TERMINATION. Any termination of Executive's employment
by the Company or by Executive during the Employment Period (other than
termination pursuant to Section 5(a)) shall be communicated by written Notice of
Termination (as defined below) to the other party hereto in accordance with
Section 12 below. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
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<PAGE>
(b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
Executive's employment is terminated by his death, the date of his death, (ii)
if Executive's employment is terminated pursuant to Section 5(b), thirty (30)
days after Notice of Termination (provided that Executive shall not have
returned to the substantial performance of his duties on a full-time basis
during such thirty (30) day period) and (iii) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given or any later date (within thirty (30) days after the giving of such
notice) set forth in such Notice of Termination.
7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event
Executive is disabled or his employment terminates during the Employment Period,
the Company shall provide Executive with the payments and benefits set forth
below. Executive acknowledges and agrees that the payments set forth in this
Section 7 constitute liquidated damages for termination of his employment during
the Employment Period.
(a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD
REASON. If Executive's employment is terminated by the Company without Cause or
by Executive for Good Reason:
(i) the Company shall pay to Executive a severance payment
equal to the amount of Base Salary Executive would have received under the
Agreement if Executive had remained employed throughout the Employment
Period less any Base Salary paid to Executive prior to the Date of
Termination plus accrued vacation for the 12 month period ending on the
last day of the month preceding the month Executive's employment is
terminated by the Company without Cause or by Executive for Good Reason,
within thirty (30) days following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD
REASON. If Executive's employment is terminated by the Company for Cause or by
Executive (other than for Good Reason):
(i) the Company shall pay Executive his Base Salary and, to
the extent required by law or the Company's vacation policy, his accrued
vacation pay through the Date of Termination, as soon as practicable
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
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<PAGE>
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(c) DISABILITY. During any period that Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental
illness, Executive shall continue to receive his full Base Salary set forth in
Section 4(b) until his employment is terminated pursuant to Section 5(b). In
the event Executive's employment is terminated for Disability pursuant to
Section 5(b):
(i) the Company shall pay to Executive his Base Salary and
accrued vacation pay through the Date of Termination, within 30 days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(d) DEATH. If Executive's employment is terminated by his death:
(i) the Company shall pay in a lump sum to Executive's
beneficiary, legal representatives or estate, as the case may be,
Executive's Base Salary through the Date of Termination;
(ii) the Company shall reimburse Executive's beneficiary, legal
representatives, or estate, as the case may be, pursuant to Section 4(e)
for reasonable expenses incurred, but not paid prior to such termination of
employment; and
(iii) Executive's beneficiary, legal representatives or estate,
as the case may be, shall be entitled to any other rights, compensation and
benefits as may be due to any such persons or estate in accordance with the
terms and provisions of any agreements, plans or programs of the Company.
8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION.
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary
capacity for the benefit of the Company all Confidential Information (as defined
below) relating to the Company and its businesses and investments, which shall
have been obtained by Executive during Executive's employment by the Company and
which is not generally available public knowledge (other than by acts of
Executive in violation of this Agreement). Except as may be required or
appropriate in connection with his carrying out his duties under this Agreement,
Executive shall not, without the prior written consent of the Company or as may
otherwise be required by law or
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any legal process, or as is necessary in connection with any adversarial
proceeding against the Company (in which case Executive shall use his
reasonable best efforts in cooperating with the Company in obtaining a
protective order against disclosure by a court of competent jurisdiction),
communicate or divulge any such Confidential Information relating to the
Company to anyone other than the Company and those designated by the Company
or on behalf of the Company in the furtherance of its business or to perform
duties hereunder.
For the purposes hereof, the term "Confidential Information" means, with respect
to any person, any information concerning such person or its business, products,
financial condition, prospects and affairs that is not generally available to
the public. The term Confidential Information shall not include information
that: (i) is already known to the recipient and was properly obtained by the
recipient prior to the date of this Agreement; (ii) is in the public domain
other than through a negligent act or omission or willful misconduct of the
recipient; (iii) is acquired in good faith from a third party and, at the time
of the acquisition, the recipient had no knowledge or reason to believe that
such information was wrongfully obtained or disclosed by the third party; (iv)
is independently developed by the recipient from information not defined as
"Confidential Information" in this Agreement, as evidenced by the recipient's
written records; (v) is disclosed to third parties by the disclosing party
without restriction; (vi) is required to be disclosed under applicable law or by
a valid subpoena or other court or governmental order, decree, regulation or
rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the
recipient shall advise the disclosing party of the requirement to disclose the
Confidential Information prior to such disclosure and as soon as reasonably
practicable after the recipient becomes aware of such required disclosure; and
FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient
agrees to cooperate in good faith with any reasonable and lawful actions which
the disclosing party takes to resist such disclosure, limit the information to
be disclosed or limit the extent to which the information so disclosed may be
used or made available to third parties, at the cost of the disclosing party.
(b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files,
drawings, documents, models, equipment, and the like relating to the Company's
business, which Executive has control over shall not be removed from the
Company's premises by Executive without the Board's written consent, unless such
removal is in the furtherance of the Company's business or is in connection with
Executive's carrying out his duties under this Agreement and, if so removed by
Executive, shall be returned to the Company promptly after termination of
Executive's employment hereunder, or otherwise promptly after removal if such
removal occurs following termination of employment. Executive shall assign to
the Company all rights to trade secrets and other products relating to the
Company's business developed by him alone or in conjunction with others at any
time while employed by the Company.
(c) CONTINUING OPERATION. Except as specifically provided in this
Section 8, the termination of Executive's employment or of this Agreement shall
have no effect on the continuing operation of this Section 8.
9. INDEMNIFICATION. Upon the Commencement Date, Executive will enter
into the Company's standard directors and officers indemnification agreement.
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10. ARBITRATION. Any controversy between Executive and the Company
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, including, without limitation, the determination
of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d)
hereof and claims involving specific performance, shall on the written request
of either party served on the other in accordance with Section 12 below be
submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT,
VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY
OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO
A JURY TRIAL. Arbitration shall comply with and be governed in accordance with
the Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). The arbitration will be conducted only in Denver, Colorado, before a
single arbitrator selected by the parties or, if they are unable to agree on an
arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have
full authority to order specific performance and award damages and other relief
available under this Agreement or applicable law, but shall have no authority to
add to, detract from, change or amend the terms of this Agreement or existing
law. All arbitration proceedings, including settlements and awards, shall be
confidential. The decision of the arbitrator will be final and binding, and
judgment on the award by the arbitrator may be entered in any court of competent
jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY
ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary
damages, to ignore or vary the terms of this Agreement and any other agreement
between Executive and the Company and will be bound to apply controlling law.
The prevailing party in any such arbitration shall be entitled to receive the
costs of arbitration, including reasonable attorneys' fees and costs, from the
losing party.
11. SUCCESSORS; BINDING AGREEMENT.
(a) COMPANY'S SUCCESSORS. No rights or obligations of the Company
under this Agreement may be assigned or transferred, except that the Company
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as herein before defined and any successor to
its business and/or assets (by merger, purchase or otherwise) which executes and
delivers the agreement provided for in this Section 11 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
(b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive
under this Agreement may be assigned or transferred by Executive other than his
rights to payments or benefits hereunder, which may be transferred only by will
or the laws of descent and distribution. Upon Executive's death, this Agreement
and all rights of Executive hereunder shall inure to the benefit of and be
enforceable by Executive's beneficiary or beneficiaries, personal or legal
representatives or estate, to the extent any such person succeeds to Executive's
interests under
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this Agreement. Executive shall be entitled to select and change a
beneficiary or beneficiaries to receive any benefit or compensation payable
hereunder following Executive's death by giving the Company written notice
thereof. In the event of Executive's death or a judicial determination of
his incompetence, reference in this Agreement to Executive shall be deemed,
where appropriate, to refer to his beneficiary(ies), estate or other legal
representative(s). If Executive should die following his Date of Termination
while any amounts would still be payable to him hereunder if he had continued
to live, all such amounts unless otherwise provided herein shall be paid in
accordance with the terms of this Agreement to such person or persons so
appointed in writing by Executive, or otherwise to his legal representatives
or estate.
12. NOTICE. For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered either personally or by
United States certified or registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to Executive:
Scott M. Chase
c/o FirstWorld Communications, Inc.
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
Telecopy: (619) 552-8010
If to the Company:
FirstWorld Communications, Inc.
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
Attn: Secretary
Telecopy: (619) 552-8010
With a copy to:
David A. Hahn, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Telecopy: (619) 696-7419
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
13. WAIVER. No provisions of this Agreement may be amended, modified, or
waived unless such amendment or modification is agreed to in a writing signed by
Executive and by a duly authorized officer of the Company, and such waiver is
set forth in writing and signed by the
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party to be charged. No waiver by either party hereto at any time of any
breach by the other party hereto of any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time
14. SURVIVAL. Except as otherwise expressly set forth herein, the
respective rights and obligations of the parties under this Agreement shall
survive Executive's termination of employment and the termination of this
Agreement to the extent necessary for the intended preservation of such rights
and obligations.
15. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado without regard to its conflicts of law principles.
16. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument. Facsimile signatures will
be deemed to be effective originals hereunder.
18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto in respect of such
subject matter. Any prior agreement of the parties hereto in respect of the
subject matter contained herein is hereby terminated and canceled.
19. WITHHOLDING. All payments hereunder shall be subject to any required
withholding of Federal, state and local taxes pursuant to any applicable law or
regulation.
20. SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only, and they form no part of this Agreement and shall
not affect its interpretation.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Sheldon S. Ohringer
-----------------------------------------
Name: Sheldon S. Ohringer
Title: President and Chief Executive Officer
/s/ Scott M. Chase
--------------------------------------------
SCOTT M. CHASE
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of November 9,
1998, is by and between FirstWorld Communications, Inc., a Delaware
corporation (the "COMPANY") and Marion K. Jenkins ("EXECUTIVE").
RECITAL
The Company desires to employ Executive, effective as of November 9,
1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this
Agreement, and Executive desires to be so employed.
AGREEMENT
IN CONSIDERATION of the premises and the mutual covenants set forth
below, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Executive as
Senior Vice President and Chief Information Officer of the Company, and
Executive hereby accepts such employment, on the terms and conditions
hereinafter set forth.
2. TERM. The period of employment of Executive by the Company
hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date
and shall continue through October 31, 2000. The Employment Period may be
sooner terminated by either party in accordance with Section 5 of this
Agreement.
3. POSITION AND DUTIES. During the Employment Period, Executive shall
serve as Senior Vice President and Chief Information Officer of the Company.
Executive shall devote such time, attention and energies to Company affairs
as are necessary to fully perform his duties (other than absences due to
illness or vacation) for the Company. During the Employment Period,
Executive shall not, directly or indirectly, render services to any other
organization, entity or person, as an employee, independent contractor,
consultant or otherwise, with or without compensation, without the prior
written consent of the Board of Directors of the Company (the "BOARD")
4. COMPENSATION AND RELATED MATTERS.
(a) SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $160,000 per year ("BASE SALARY").
Executive's Base Salary shall be paid in approximately equal installments in
accordance with the Company's customary payroll schedule and practices.
Executive's Base Salary shall be subject to annual reviews commencing
November 1999 and each year thereafter. If Executive's Base Salary is
increased by the Company, such increased Base Salary shall then constitute
the Base Salary for all purposes of this Agreement. All compensation paid to
Executive shall be subject to withholding and other employment taxes imposed
by applicable law.
<PAGE>
(b) ANNUAL BONUS. The Board's compensation committee (the
"COMPENSATION COMMITTEE") shall review Executive's performance at least once
annually during each year of the Employment Period and, based on Executive's
performance, recommend whether the Company should award Executive a cash
bonus ("BONUS") in order to reward Executive for services rendered to the
Company and/or as an incentive for continued service to the Company. The
amount of Executive's Bonus, if any, shall be determined in the reasonable
discretion of the Compensation Committee and shall be dependent upon, among
other things, the achievement of certain performance levels by the Company,
including, without limitation, (i) the nature, magnitude and quality of the
services performed by Executive for the Company, (ii) the condition
(financial and other) and results of operations of the Company and (iii) the
compensation paid for positions of comparable responsibility and authority
within the telecommunications industry. The targeted amount of Executive's
Bonus shall be an amount equal to 50% of Base Salary at 100% completion of
applicable performance levels, to be set forth in the Company's Annual Bonus
Plan.
(c) STOCK OPTIONS. Effective as of the Commencement Date,
Executive shall be awarded a stock option (the "STOCK OPTION") to purchase
250,000 shares of the Company's Series B Common Stock, par value $.0001 per
share (the "Common Stock"). The shares of Common Stock subject to the Stock
Option shall vest in increments of 62,500 shares on each of the first,
second, third and fourth anniversaries of the Commencement Date, with the
shares in the first such increment having an exercise price of $6.00, shares
in the second such increment having an exercise price of $6.50, shares in the
third such increment having an exercise price of $7.00 and shares in the
fourth such increment having an exercise price of $7.50. The Stock Option
will be granted under one of the Company's stock option plans and the terms
and conditions of the Stock Option will be determined in accordance with the
applicable stock option plan.
(d) EXPENSES. The Company shall promptly reimburse Executive for
all reasonable business expenses upon the presentation of reasonably itemized
statements of such expenses in accordance with the Company's policies and
procedures now in force or as such policies and procedures may be modified
with respect to all senior executive officers of the Company.
(e) WELFARE AND PENSION PLANS. In addition to Executive's Base
Salary and any incentive compensation and bonuses awarded to Executive
hereunder, he (and his family) shall be entitled to participate, to the
extent that he is (and they are) eligible under the terms and conditions
thereof, in any pension, retirement, hospitalization, insurance, disability
or medical service plan generally available to the executive officers of the
Company that may be in effect from time to time during the Employment Period.
The Company shall be under no obligation to institute or continue the
existence of any such employee benefit plan.
5. TERMINATION. Executive's employment hereunder may be terminated
during the Employment Period under the following circumstances:
(a) DEATH. Executive's employment hereunder shall terminate upon
his death.
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(b) DISABILITY. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been substantially unable to
perform his duties hereunder for an entire period of sixty (60) consecutive
days, and within thirty (30) days after written Notice of Termination (as
defined in Section 6(a)) is given after such sixty (60) day period, Executive
shall not have returned to the substantial performance of his duties on a
full-time basis, the Company shall have the right to terminate Executive's
employment hereunder for "Disability," and such termination in and of itself
shall not be, nor shall it be deemed to be, a breach of this Agreement.
(c) CAUSE. The Company shall have the right to terminate
Executive's employment for Cause (as defined), and such termination in and of
itself shall not be, nor shall it be deemed to be, a breach of this
Agreement. For purposes of this Agreement, the Company shall have "Cause" to
terminate Executive's employment upon Executive's:
(i) conviction of, or plea of guilty or nolo contendere to,
any crime constituting a felony;
(ii) commission of a material act of dishonesty, fraud,
misrepresentation or other act of moral turpitude that would, in the
Board's reasonable judgment, prevent the effective performance of his
duties hereunder;
(iii) continued failure to substantially perform his duties
hereunder to the reasonable satisfaction of the Board (other than such
failure resulting from Executive's incapacity due to physical or mental
illness or subsequent to the issuance of a Notice of Termination by
Executive for Good Reason (as defined in Section 5(d)) after demand for
substantial performance is delivered by the Board in writing that
specifically identifies the manner in which the Board believes Executive
has not used reasonable best efforts to substantially perform his duties;
or
(iv) willful misconduct (including, but not limited to, a
willful breach of the provisions of Section 8) that is, in the Board's
reasonable judgment, injurious to the Company or to any entity in control
of, controlled by or under common control with the Company ("AFFILIATE").
For purposes of this Section 5(c), no act, or failure to act, by
Executive shall be considered "willful" unless committed in bad faith and
without a reasonable belief that the act or omission was in the best
interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that
the requirements outlined in paragraphs (iii) or (iv) above shall be deemed
to have occurred if Executive's action or non-action continues for more than
ten (10) days after Executive has received written notice of the
inappropriate action or non-action. This Section 5(c) shall not prevent
Executive from challenging the Board's determination that Cause exists or
that Executive has failed to cure any act (or failure to act) that
purportedly formed the basis for the Board's determination, under the
arbitration procedures set forth in Section 10 below.
(d) GOOD REASON. Executive may terminate his employment for "Good
Reason" within thirty (30) days after Executive has actual knowledge of the
occurrence, without
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the written consent of Executive, of one of the following events that has not
been cured within thirty (30) days after written notice thereof has been
given by Executive to the Company (PROVIDED, that with respect to this
Section 5(d), the Company shall have the right to challenge Executive's
determination that he has the right to terminate his employment for "Good
Reason" under the arbitration procedures set forth in Section 10 below):
(i) a reduction by the Company in Executive's Base Salary or a
failure by the Company to pay any such amounts when due;
(ii) any purported termination of Executive's employment for
Cause which is not effected pursuant to the procedures of Section 5(c) (and
for purposes of this Agreement, no such purported termination shall be
effective);
(iii) the Company's failure to provide the Stock Option or the
Company's material breach of one or more of the stock option agreements
pursuant to which the Stock Option was issued to Executive;
(iv) the Company's failure to substantially provide any
material employee benefits due to be provided to Executive;
(v) the Company's failure to provide in all material respects
the indemnification set forth in the agreement referenced in Section 9 of
this Agreement;
(vi) the relocation of the Company's corporate headquarters
(which are currently located in San Diego but which are being relocated to
the Denver metropolitan area) more than 100 miles from the Denver
metropolitan area; or
(vii) in connection with a Change in Control (as defined below)
of the Company, Executive's responsibilities are reduced such that he is no
longer serving as Senior Vice President and Chief Information Officer of
the Company or in a reasonably similar capacity.
For purposes of this Agreement, a "Change in Control" of the Company means
the occurrence of one of the following events:
(1) the sale, lease, transfer conveyance or other disposition,
in one or a series of related transactions, of all or substantially all of
the assets of the Company and its subsidiaries, taken as a whole, to any
person (as such term is defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT")) or group (as such
term is defined in Section 13(d)(3) of the Exchange Act and Section
14(d)(2) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or
dissolution of the Company; or
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(3) any person (as defined above) or group (as defined above)
other than the Permitted Holders (as defined below) is or becomes the
Beneficial Owner (as defined below), directly or indirectly, of 50% or more
of the total voting stock or total common equity of the Company, including
by way of merger, consolidation or otherwise.
Executive's continued employment during the thirty (30) day period
referred to above in this paragraph (d) shall not constitute Executive's
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right
to terminate his employment hereunder without Good Reason and the Company
shall have the right to terminate Executive's employment hereunder without
Cause by providing the other with a Notice of Termination, and such
termination shall not in and of itself be, nor shall it be deemed to be, a
breach of this Agreement.
6. TERMINATION PROCEDURE.
(a) NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive during the Employment Period (other
than termination pursuant to Section 5(a)) shall be communicated by written
Notice of Termination (as defined below) to the other party hereto in
accordance with Section 12 below. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
Executive's employment is terminated by his death, the date of his death,
(ii) if Executive's employment is terminated pursuant to Section 5(b), thirty
(30) days after Notice of Termination (provided that Executive shall not have
returned to the substantial performance of his duties on a full-time basis
during such thirty (30) day period) and (iii) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given or any later date (within thirty (30) days after the giving of such
notice) set forth in such Notice of Termination.
7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event
Executive is disabled or his employment terminates during the Employment
Period, the Company shall provide Executive with the payments and benefits
set forth below. Executive acknowledges and agrees that the payments set
forth in this Section 7 constitute liquidated damages for termination of his
employment during the Employment Period.
(a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD
REASON. If Executive's employment is terminated by the Company without Cause
or by Executive for Good Reason:
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(i) the Company shall pay to Executive a severance payment
equal to the amount of Base Salary Executive would have received under the
Agreement if Executive had remained employed throughout the Employment
Period stated in Section 2, plus accrued vacation, within thirty (30) days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(d) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD
REASON. If Executive's employment is terminated by the Company for Cause or
by Executive (other than for Good Reason):
(i) the Company shall pay Executive his Base Salary and, to
the extent required by law or the Company's vacation policy, his accrued
vacation pay through the Date of Termination, as soon as practicable
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(d) for reasonable expenses incurred, but not paid prior to such
termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(c) DISABILITY. During any period that Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental
illness, Executive shall continue to receive his full Base Salary set forth
in Section 4(a) until his employment is terminated pursuant to Section 5(b).
In the event Executive's employment is terminated for Disability pursuant to
Section 5(b):
(i) the Company shall pay to Executive his Base Salary and
accrued vacation pay through the Date of Termination, within 30 days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(d) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
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(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(d) DEATH. If Executive's employment is terminated by his death:
(i) the Company shall pay in a lump sum to Executive's
beneficiary, legal representatives or estate, as the case may be,
Executive's Base Salary through the Date of Termination;
(ii) the Company shall reimburse Executive's beneficiary, legal
representatives, or estate, as the case may be, pursuant to Section 4(d)
for reasonable expenses incurred, but not paid prior to such termination of
employment; and
(iii) Executive's beneficiary, legal representatives or estate,
as the case may be, shall be entitled to any other rights, compensation and
benefits as may be due to any such persons or estate in accordance with the
terms and provisions of any agreements, plans or programs of the Company.
8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION.
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary
capacity for the benefit of the Company all Confidential Information (as
defined below) relating to the Company and its businesses and investments,
which shall have been obtained by Executive during Executive's employment by
the Company and which is not generally available public knowledge (other than
by acts of Executive in violation of this Agreement). Except as may be
required or appropriate in connection with his carrying out his duties under
this Agreement, Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or any legal process, or as is
necessary in connection with any adversarial proceeding against the Company
(in which case Executive shall use his reasonable best efforts in cooperating
with the Company in obtaining a protective order against disclosure by a
court of competent jurisdiction), communicate or divulge any such
Confidential Information relating to the Company to anyone other than the
Company and those designated by the Company or on behalf of the Company in
the furtherance of its business or to perform duties hereunder.
For the purposes hereof, the term "Confidential Information" means, with
respect to any person, any information concerning such person or its
business, products, financial condition, prospects and affairs that is not
generally available to the public. The term Confidential Information shall
not include information that: (i) is already known to the recipient and was
properly obtained by the recipient prior to the date of this Agreement; (ii)
is in the public domain other than through a negligent act or omission or
willful misconduct of the recipient; (iii) is acquired in good faith from a
third party and, at the time of the acquisition, the recipient had no
knowledge or reason to believe that such information was wrongfully obtained
or disclosed by the third party; (iv) is independently developed by the
recipient from information not defined as "Confidential Information" in this
Agreement, as evidenced by the recipient's written records; (v) is disclosed
to
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<PAGE>
third parties by the disclosing party without restriction; (vi) is required
to be disclosed under applicable law or by a valid subpoena or other court or
governmental order, decree, regulation or rule; PROVIDED, HOWEVER, that if
disclosure is required under this provision the recipient shall advise the
disclosing party of the requirement to disclose the Confidential Information
prior to such disclosure and as soon as reasonably practicable after the
recipient becomes aware of such required disclosure; and FURTHER PROVIDED
THAT upon the request of the disclosing party, the recipient agrees to
cooperate in good faith with any reasonable and lawful actions which the
disclosing party takes to resist such disclosure, limit the information to be
disclosed or limit the extent to which the information so disclosed may be
used or made available to third parties, at the cost of the disclosing party.
(b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files,
drawings, documents, models, equipment, and the like relating to the
Company's business, which Executive has control over shall not be removed
from the Company's premises by Executive without the Board's written consent,
unless such removal is in the furtherance of the Company's business or is in
connection with Executive's carrying out his duties under this Agreement and,
if so removed by Executive, shall be returned to the Company promptly after
termination of Executive's employment hereunder, or otherwise promptly after
removal if such removal occurs following termination of employment.
Executive shall assign to the Company all rights to trade secrets and other
products relating to the Company's business developed by him alone or in
conjunction with others at any time while employed by the Company.
(c) CONTINUING OPERATION. Except as specifically provided in this
Section 8, the termination of Executive's employment or of this Agreement
shall have no effect on the continuing operation of this Section 8.
9. INDEMNIFICATION. Upon the Commencement Date, Executive will enter
into the Company's standard directors and officers indemnification agreement.
10. ARBITRATION. Any controversy between Executive and the Company
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, including, without limitation, the
determination of whether "Cause" or "Good Reason" exists under Section 5(c)
or Section 5(d) hereof and claims involving specific performance, shall on
the written request of either party served on the other in accordance with
Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING
THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS
SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS,
INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be
governed in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"). The arbitration will be conducted only
in Denver, Colorado, before a single arbitrator selected by the parties or,
if they are unable to agree on an arbitrator, before an arbitrator selected
by the AAA. The arbitrator shall have full authority to order specific
performance and award damages and other relief available under this Agreement
or applicable law, but shall have no authority to add to, detract from,
change or amend the terms of this Agreement or existing law. All arbitration
proceedings, including settlements and awards, shall be
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confidential. The decision of the arbitrator will be final and binding, and
judgment on the award by the arbitrator may be entered in any court of
competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE
SPECIFICALLY ENFORCEABLE. The arbitrator will have no power to award
punitive or exemplary damages, to ignore or vary the terms of this Agreement
and any other agreement between Executive and the Company and will be bound
to apply controlling law. The prevailing party in any such arbitration shall
be entitled to receive the costs of arbitration, including reasonable
attorneys' fees and costs, from the losing party.
11. SUCCESSORS; BINDING AGREEMENT.
(a) COMPANY'S SUCCESSORS. No rights or obligations of the Company
under this Agreement may be assigned or transferred, except that the Company
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean the Company as herein before defined and
any successor to its business and/or assets (by merger, purchase or
otherwise) which executes and delivers the agreement provided for in this
Section 11 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive
under this Agreement may be assigned or transferred by Executive other than
his rights to payments or benefits hereunder, which may be transferred only
by will or the laws of descent and distribution. Upon Executive's death, this
Agreement and all rights of Executive hereunder shall inure to the benefit of
and be enforceable by Executive's beneficiary or beneficiaries, personal or
legal representatives or estate, to the extent any such person succeeds to
Executive's interests under this Agreement. Executive shall be entitled to
select and change a beneficiary or beneficiaries to receive any benefit or
compensation payable hereunder following Executive's death by giving the
Company written notice thereof. In the event of Executive's death or a
judicial determination of his incompetence, reference in this Agreement to
Executive shall be deemed, where appropriate, to refer to his
beneficiary(ies), estate or other legal representative(s). If Executive
should die following his Date of Termination while any amounts would still be
payable to him hereunder if he had continued to live, all such amounts unless
otherwise provided herein shall be paid in accordance with the terms of this
Agreement to such person or persons so appointed in writing by Executive, or
otherwise to his legal representatives or estate.
12. NOTICE. For the purposes of this Agreement, notices, demands and
all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered either personally
or by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
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If to Executive:
Marion K. Jenkins
5454 E. Nichols Place
Littleton, CO 80122
Telecopy: (303) 770-5443
If to the Company:
FirstWorld Communications, Inc.
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
Attn: Secretary
Telecopy: (619) 552-8010
With a copy to:
David A. Hahn, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Telecopy: (619) 696-7419
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
13. WAIVER. No provisions of this Agreement may be amended, modified,
or waived unless such amendment or modification is agreed to in a writing
signed by Executive and by a duly authorized officer of the Company, and such
waiver is set forth in writing and signed by the party to be charged. No
waiver by either party hereto at any time of any breach by the other party
hereto of any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time
14. SURVIVAL. Except as otherwise expressly set forth herein, the
respective rights and obligations of the parties under this Agreement shall
survive Executive's termination of employment and the termination of this
Agreement to the extent necessary for the intended preservation of such
rights and obligations.
15. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado without regard to its conflicts of law principles.
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16. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument. Facsimile
signatures will be deemed to be effective originals hereunder.
18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by
any officer, employee or representative of any party hereto in respect of
such subject matter. Any prior agreement of the parties hereto in respect of
the subject matter contained herein is hereby terminated and canceled.
19. WITHHOLDING. All payments hereunder shall be subject to any
required withholding of Federal, state and local taxes pursuant to any
applicable law or regulation.
20. SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only, and they form no part of this Agreement and
shall not affect its interpretation.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Sheldon S. Ohringer
-------------------------------------------
Name: Sheldon S. Ohringer
Title: President and Chief Executive Officer
/s/ Marion K. Jenkins
----------------------------------------------
MARION K. JENKINS
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of November 30,
1998, is by and between FirstWorld Communications, Inc., a Delaware
corporation (the "COMPANY") and David Gandini ("EXECUTIVE").
RECITAL
The Company desires to employ Executive, effective as of November 30,
1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this
Agreement, and Executive desires to be so employed.
AGREEMENT
IN CONSIDERATION of the premises and the mutual covenants set forth
below, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Executive as the
Executive Vice President of Sales of the Company, and Executive hereby
accepts such employment, on the terms and conditions hereinafter set forth.
2. TERM. The period of employment of Executive by the Company
hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date
and shall continue through November 30, 2001. The Employment Period may be
sooner terminated by either party in accordance with Section 5 of this
Agreement.
3. POSITION AND DUTIES. During the Employment Period, Executive shall
serve as Executive Vice President of Sales of the Company. Executive shall
devote such time, attention and energies to Company affairs as are necessary
to fully perform his duties (other than absences due to illness or vacation)
for the Company. During the Employment Period, Executive shall not, directly
or indirectly, render services to any other organization, entity or person,
as an employee, independent contractor, consultant or otherwise, with or
without compensation, without the prior written consent of the Board of
Directors of the Company (the "Board"), unless such services are unrelated to
any telecommunications or internet business and do not interfere with his
duties to the Company.
4. COMPENSATION AND RELATED MATTERS.
(a) EQUALIZATION PAYMENT. To compensate Executive for certain
benefits that he may lose or forfeit as a result of his termination of
employment with his former employer, ICG Communications, Inc., and
commencement of employment with the Company, the Company shall pay Executive
in cash a $500,000 payment (the "EQUALIZATION PAYMENT") payable in three
installments. The first installment in the amount of $100,000 is due and
payable on January 1, 1999, the second installment in the amount of $200,000
is due and payable on January 1, 2000, and the third installment in the
amount of $200,000 is due and payable on January 1, 2001;
<PAGE>
PROVIDED, HOWEVER, that Executive shall have no right to receive any
installment of the Equalization Payment if he is not employed by the Company
(or one of its Affiliates (as defined in Section 5(c)(iv) below)), whether or
not employed as the Executive Vice President of Sales, on the dates such
payments become due and payable as a result of Executive's (i) death, (ii)
Disability (as defined below) , (iii) termination for Cause (as defined
below) or (iv) voluntary termination of employment without Good Reason (as
defined below).
(b) SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $185,000 per year ("BASE SALARY").
Executive's Base Salary shall be paid in approximately equal installments in
accordance with the Company's customary payroll schedule and practices.
Executive's Base Salary shall be subject to annual reviews commencing
December 1999 and each year thereafter. If Executive's Base Salary is
increased by the Company, such increased Base Salary shall then constitute
the Base Salary for all purposes of this Agreement. All compensation paid to
Executive shall be subject to withholding and other employment taxes imposed
by applicable law.
(c) ANNUAL BONUS. The Board's compensation committee (the
"COMPENSATION COMMITTEE") shall review Executive's performance at least once
annually during each year of the Employment Period and, based on Executive's
performance, recommend whether the Company should award Executive a cash
bonus ("BONUS") in order to reward Executive for services rendered to the
Company and/or as an incentive for continued service to the Company. The
amount of Executive's Bonus, if any, shall be determined in the reasonable
discretion of the Compensation Committee and shall be dependent upon, among
other things, the achievement of certain performance levels by the Company,
including, without limitation, (i) the nature, magnitude and quality of the
services performed by Executive for the Company, (ii) the condition
(financial and other) and results of operations of the Company and (iii) the
compensation paid for positions of comparable responsibility and authority
within the telecommunications industry. The targeted amount of Executive's
Bonus shall be an amount equal to 40% of Base Salary at 100% completion of
applicable performance levels, to be set forth in the Company's Annual Bonus
Plan.
(d) STOCK OPTIONS. Effective as of the Commencement Date, Executive
shall be awarded a stock option (the "STOCK OPTION") to purchase 500,000 shares
of the Company's Series B Common Stock, par value $.0001 per share (the "Common
Stock"). The shares of Common Stock subject to the Stock Option shall vest in
increments of 125,000 shares on each of the first, second, third and fourth
anniversaries of the Commencement Date, with the shares in the first such
increment having an exercise price of $6.00, shares in the second such increment
having an exercise price of $6.50, shares in the third such increment having an
exercise price of $7.00 and shares in the fourth such increment having an
exercise price of $7.50. The Stock Option will be granted under one of the
Company's stock option plans and the terms and conditions of the Stock Option
will be determined in accordance with the applicable stock option plan.
Notwithstanding any such terms, however, all shares subject to the Stock Option
shall become immediately vested and exercisable in the event of the sale of all
or substantially all of the Company's assets or a merger or consolidation in
which the Company is not the surviving entity or the Company's shareholders
prior to the transaction own less than 50% of the voting power of the Company's
outstanding securities immediately following the transaction.
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(e) EXPENSES. The Company shall promptly reimburse Executive for
all reasonable business expenses upon the presentation of reasonably itemized
statements of such expenses in accordance with the Company's policies and
procedures now in force or as such policies and procedures may be modified
with respect to all senior executive officers of the Company.
(f) WELFARE AND PENSION PLANS. In addition to Executive's Base
Salary and any incentive compensation and bonuses awarded to Executive
hereunder, he (and his family) shall be entitled to participate, to the
extent that he is (and they are) eligible under the terms and conditions
thereof, in any pension, retirement, hospitalization, insurance, disability
or medical service plan generally available to the executive officers of the
Company that may be in effect from time to time during the Employment Period.
The Company shall be under no obligation to institute or continue the
existence of any such employee benefit plan.
5. TERMINATION. Executive's employment hereunder may be terminated
during the Employment Period under the following circumstances:
(a) DEATH. Executive's employment hereunder shall terminate upon
his death.
(b) DISABILITY. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been substantially unable to
perform his duties hereunder for an entire period of thirty (30) consecutive
days, and within thirty (30) days after written Notice of Termination (as
defined in Section 6(a)) is given after such thirty (30) day period,
Executive shall not have returned to the substantial performance of his
duties on a full-time basis, the Company shall have the right to terminate
Executive's employment hereunder for "Disability," and such termination in
and of itself shall not be, nor shall it be deemed to be, a breach of this
Agreement.
(c) CAUSE. The Company shall have the right to terminate
Executive's employment for Cause (as defined), and such termination in and of
itself shall not be, nor shall it be deemed to be, a breach of this
Agreement. For purposes of this Agreement, the Company shall have "Cause" to
terminate Executive's employment upon Executive's:
(i) conviction of, or plea of guilty or nolo contendere to,
any crime constituting a felony;
(ii) commission of a material act of dishonesty, fraud,
misrepresentation or other act of moral turpitude that would, in the
Board's reasonable judgment, prevent the effective performance of his
duties hereunder;
(iii) continued failure to substantially perform his duties
hereunder to the reasonable satisfaction of the Board (other than such
failure resulting from Executive's incapacity due to physical or mental
illness or subsequent to the issuance of a Notice of Termination by
Executive for Good Reason (as defined in Section 5(d)) after demand for
substantial performance is delivered by the Board in writing that
specifically identifies the
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manner in which the Board believes Executive has not used reasonable best
efforts to substantially perform his duties; or
(iv) willful misconduct (including, but not limited to, a
willful breach of the provisions of Section 8) that is, in the Board's
reasonable judgment, injurious to the Company or to any entity in control
of, controlled by or under common control with the Company ("Affiliate").
For purposes of this Section 5(c), no act, or failure to act, by
Executive shall be considered "WILLFUL" unless committed in bad faith and
without a reasonable belief that the act or omission was in the best
interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that
the requirements outlined in paragraphs (iii) or (iv) above shall be deemed
to have occurred if Executive's action or non-action continues for more than
ten (10) days after Executive has received written notice of the
inappropriate action or non-action. This Section 5(c) shall not prevent
Executive from challenging the Board's determination that Cause exists or
that Executive has failed to cure any act (or failure to act) that
purportedly formed the basis for the Board's determination, under the
arbitration procedures set forth in Section 10 below.
(d) GOOD REASON. Executive may terminate his employment for "Good
Reason" within thirty (30) days after Executive has actual knowledge of the
occurrence, without the written consent of Executive, of one of the following
events that has not been cured within thirty (30) days after written notice
thereof has been given by Executive to the Company (PROVIDED, that with
respect to this Section 5(d), the Company shall have the right to challenge
Executive's determination that he has the right to terminate his employment
for "Good Reason" under the arbitration procedures set forth in Section 10
below):
(i) a reduction by the Company in Executive's Base Salary or a
failure by the Company to pay any such amounts when due;
(ii) any purported termination of Executive's employment for
Cause which is not effected pursuant to the procedures of Section 5(c) (and
for purposes of this Agreement, no such purported termination shall be
effective);
(iii) the Company's failure to provide the Stock Option or the
Company's material breach of one or more of the stock option agreements
pursuant to which the Stock Option was issued to Executive;
(iv) the Company's failure to substantially provide any
material employee benefits due to be provided to Executive; or
(v) the Company's failure to provide in all material respects
the indemnification set forth in the agreement referenced in Section 9 of
this Agreement.
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Executive's continued employment during the thirty (30) day period
referred to above in this paragraph (d) shall not constitute Executive's
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right
to terminate his employment hereunder without Good Reason and the Company
shall have the right to terminate Executive's employment hereunder without
Cause by providing the other with a Notice of Termination, and such
termination shall not in and of itself be, nor shall it be deemed to be, a
breach of this Agreement.
6. TERMINATION PROCEDURE.
(a) NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive during the Employment Period (other
than termination pursuant to Section 5(a)) shall be communicated by written
Notice of Termination (as defined below) to the other party hereto in
accordance with Section 12 below. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
Executive's employment is terminated by his death, the date of his death,
(ii) if Executive's employment is terminated pursuant to Section 5(b), thirty
(30) days after Notice of Termination (provided that Executive shall not have
returned to the substantial performance of his duties on a full-time basis
during such thirty (30) day period) and (iii) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given or any later date (within thirty (30) days after the giving of such
notice) set forth in such Notice of Termination.
7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event
Executive is disabled or his employment terminates during the Employment
Period, the Company shall provide Executive with the payments and benefits
set forth below. Executive acknowledges and agrees that the payments set
forth in this Section 7 constitute liquidated damages for termination of his
employment during the Employment Period.
(a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD
REASON. If Executive's employment is terminated by the Company without Cause
or by Executive for Good Reason:
(i) the Company shall pay to Executive a severance payment
equal to the amount of Base Salary Executive would have received under the
Agreement if Executive had remained employed throughout the Employment
Period stated in Section 2, plus accrued vacation, within thirty (30) days
following the Date of Termination;
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(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation, stock options (as described herein) and/or benefits as may be
due to Executive in accordance with the terms and provisions of any
agreements, plans or programs of the Company.
(b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD
REASON. If Executive's employment is terminated by the Company for Cause or
by Executive (other than for Good Reason):
(i) the Company shall pay Executive his Base Salary and, to
the extent required by law or the Company's vacation policy, his accrued
vacation pay through the Date of Termination, as soon as practicable
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(c) DISABILITY. During any period that Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental
illness, Executive shall continue to receive his full Base Salary set forth
in Section 4(b) until his employment is terminated pursuant to Section 5(b).
In the event Executive's employment is terminated for Disability pursuant to
Section 5(b):
(i) the Company shall pay to Executive his Base Salary and
accrued vacation pay through the Date of Termination, within 30 days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(d) DEATH. If Executive's employment is terminated by his death:
(i) the Company shall pay in a lump sum to Executive's
beneficiary, legal representatives or estate, as the case may be,
Executive's Base Salary through the Date of Termination;
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(ii) the Company shall reimburse Executive's beneficiary, legal
representatives, or estate, as the case may be, pursuant to Section 4(e)
for reasonable expenses incurred, but not paid prior to such termination of
employment; and
(iii) Executive's beneficiary, legal representatives or estate,
as the case may be, shall be entitled to any other rights, compensation and
benefits as may be due to any such persons or estate in accordance with the
terms and provisions of any agreements, plans or programs of the Company.
8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION.
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary
capacity for the benefit of the Company all Confidential Information (as
defined below) relating to the Company and its businesses and investments,
which shall have been obtained by Executive during Executive's employment by
the Company and which is not generally available public knowledge (other than
by acts of Executive in violation of this Agreement). Except as may be
required or appropriate in connection with his carrying out his duties under
this Agreement, Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or any legal process, or as is
necessary in connection with any adversarial proceeding against the Company
(in which case Executive shall use his reasonable best efforts in cooperating
with the Company in obtaining a protective order against disclosure by a
court of competent jurisdiction), communicate or divulge any such
Confidential Information relating to the Company to anyone other than the
Company and those designated by the Company or on behalf of the Company in
the furtherance of its business or to perform duties hereunder.
For the purposes hereof, the term "Confidential Information" means, with
respect to any person, any information concerning such person or its
business, products, financial condition, prospects and affairs that is not
generally available to the public. The term Confidential Information shall
not include information that: (i) is already known to the recipient and was
properly obtained by the recipient prior to the date of this Agreement; (ii)
is in the public domain other than through a negligent act or omission or
willful misconduct of the recipient; (iii) is acquired in good faith from a
third party and, at the time of the acquisition, the recipient had no
knowledge or reason to believe that such information was wrongfully obtained
or disclosed by the third party; (iv) is independently developed by the
recipient from information not defined as "Confidential Information" in this
Agreement, as evidenced by the recipient's written records; (v) is disclosed
to third parties by the disclosing party without restriction; (vi) is
required to be disclosed under applicable law or by a valid subpoena or other
court or governmental order, decree, regulation or rule; PROVIDED, HOWEVER,
that if disclosure is required under this provision the recipient shall
advise the disclosing party of the requirement to disclose the Confidential
Information prior to such disclosure and as soon as reasonably practicable
after the recipient becomes aware of such required disclosure; and FURTHER
PROVIDED THAT upon the request of the disclosing party, the recipient agrees
to cooperate in good faith with any reasonable and lawful actions which the
disclosing party takes to resist such disclosure, limit the
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<PAGE>
information to be disclosed or limit the extent to which the information so
disclosed may be used or made available to third parties, at the cost of the
disclosing party.
(b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files,
drawings, documents, models, equipment, and the like relating to the
Company's business, which Executive has control over shall not be removed
from the Company's premises by Executive without the Board's written consent,
unless such removal is in the furtherance of the Company's business or is in
connection with Executive's carrying out his duties under this Agreement and,
if so removed by Executive, shall be returned to the Company promptly after
termination of Executive's employment hereunder, or otherwise promptly after
removal if such removal occurs following termination of employment.
Executive shall assign to the Company all rights to trade secrets and other
products relating to the Company's business developed by him alone or in
conjunction with others at any time while employed by the Company.
(c) CONTINUING OPERATION. Except as specifically provided in this
Section 8, the termination of Executive's employment or of this Agreement
shall have no effect on the continuing operation of this Section 8.
9. INDEMNIFICATION.
(a) Upon the Commencement Date, Executive will enter into the
Company's standard directors and officers indemnification agreement.
(b) Upon the Commencement Date, Company will ensure that Executive
is added as an insured on its directors and officers liability insurance
policy. In the event that Executive's employment relationship with Company is
severed, for any reason, the Company will provide that Executive shall
continue to be an insured under the Company's directors and officers
liability insurance policy for as long as the Company retains such coverage,
and if the Company discontinues such coverage, Executive and/or his heirs or
personal or legal representative shall be given the opportunity to purchase
continuation coverage in accordance with the terms of the applicable policy.
10. ARBITRATION. Any controversy between Executive and the Company
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, including, without limitation, the
determination of whether "Cause" or "Good Reason" exists under Section 5(c)
or Section 5(d) hereof and claims involving specific performance, shall on
the written request of either party served on the other in accordance with
Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING
THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS
SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS,
INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be
governed in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"). The arbitration will be conducted only
in Denver, Colorado, before a single arbitrator selected by the parties or,
if they are unable to agree on an arbitrator, before an arbitrator selected
by the AAA. The arbitrator shall have full authority to order specific
performance and award damages and other relief available under this Agreement
or applicable
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law, but shall have no authority to add to, detract from, change or amend the
terms of this Agreement or existing law. All arbitration proceedings,
including settlements and awards, shall be confidential. The decision of the
arbitrator will be final and binding, and judgment on the award by the
arbitrator may be entered in any court of competent jurisdiction. THIS
SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The
arbitrator will have no power to award punitive or exemplary damages, to
ignore or vary the terms of this Agreement and any other agreement between
Executive and the Company and will be bound to apply controlling law. The
prevailing party in any such arbitration shall be entitled to receive the
costs of arbitration, including reasonable attorneys' fees and costs, from
the losing party.
11. SUCCESSORS; BINDING AGREEMENT.
(a) COMPANY'S SUCCESSORS. No rights or obligations of the Company
under this Agreement may be assigned or transferred, except that the Company
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean the Company as herein before defined and
any successor to its business and/or assets (by merger, purchase or
otherwise) which executes and delivers the agreement provided for in this
Section 11 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive
under this Agreement may be assigned or transferred by Executive other than
his rights to payments or benefits hereunder, which may be transferred only
by will or the laws of descent and distribution. Upon Executive's death, this
Agreement and all rights of Executive hereunder shall inure to the benefit of
and be enforceable by Executive's beneficiary or beneficiaries, personal or
legal representatives or estate, to the extent any such person succeeds to
Executive's interests under this Agreement. Executive shall be entitled to
select and change a beneficiary or beneficiaries to receive any benefit or
compensation payable hereunder following Executive's death by giving the
Company written notice thereof. In the event of Executive's death or a
judicial determination of his incompetence, reference in this Agreement to
Executive shall be deemed, where appropriate, to refer to his
beneficiary(ies), estate or other legal representative(s). If Executive
should die following his Date of Termination while any amounts would still be
payable to him hereunder if he had continued to live, all such amounts unless
otherwise provided herein shall be paid in accordance with the terms of this
Agreement to such person or persons so appointed in writing by Executive, or
otherwise to his legal representatives or estate.
12. NOTICE. For the purposes of this Agreement, notices, demands and
all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered either personally
or by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
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If to Executive:
David Gandini
3351 Meadow Creek Place
Highland Ranch, CO 80126
If to the Company:
FirstWorld Communications, Inc.
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
Attn: Secretary
Telecopy: (619) 552-8010
With a copy to:
David A. Hahn, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Telecopy: (619) 696-7419
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
13. WAIVER. No provisions of this Agreement may be amended, modified,
or waived unless such amendment or modification is agreed to in a writing
signed by Executive and by a duly authorized officer of the Company, and such
waiver is set forth in writing and signed by the party to be charged. No
waiver by either party hereto at any time of any breach by the other party
hereto of any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time
14. SURVIVAL. Except as otherwise expressly set forth herein, the
respective rights and obligations of the parties under this Agreement shall
survive Executive's termination of employment and the termination of this
Agreement to the extent necessary for the intended preservation of such
rights and obligations.
15. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado without regard to its conflicts of law principles.
16. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
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17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument. Facsimile
signatures will be deemed to be effective originals hereunder.
18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by
any officer, employee or representative of any party hereto in respect of
such subject matter. Any prior agreement of the parties hereto in respect of
the subject matter contained herein is hereby terminated and canceled.
19. WITHHOLDING. All payments hereunder shall be subject to any
required withholding of Federal, state and local taxes pursuant to any
applicable law or regulation.
20. SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only, and they form no part of this Agreement and
shall not affect its interpretation.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Sheldon S. Ohringer
-------------------------------------------
Name: Sheldon S. Ohringer
Title: President and Chief Executive Officer
/s/ David Gandini
----------------------------------------------
DAVID GANDINI
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of November 30,
1998, is by and between FirstWorld Communications, Inc., a Delaware
corporation (the "COMPANY") and David Gandini ("EXECUTIVE").
RECITAL
The Company desires to employ Executive, effective as of November 30,
1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this
Agreement, and Executive desires to be so employed.
AGREEMENT
IN CONSIDERATION of the premises and the mutual covenants set forth
below, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Executive as the
Executive Vice President of Sales of the Company, and Executive hereby
accepts such employment, on the terms and conditions hereinafter set forth.
2. TERM. The period of employment of Executive by the Company
hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date
and shall continue through November 30, 2001. The Employment Period may be
sooner terminated by either party in accordance with Section 5 of this
Agreement.
3. POSITION AND DUTIES. During the Employment Period, Executive shall
serve as Executive Vice President of Sales of the Company. Executive shall
devote such time, attention and energies to Company affairs as are necessary
to fully perform his duties (other than absences due to illness or vacation)
for the Company. During the Employment Period, Executive shall not, directly
or indirectly, render services to any other organization, entity or person,
as an employee, independent contractor, consultant or otherwise, with or
without compensation, without the prior written consent of the Board of
Directors of the Company (the "Board"), unless such services are unrelated to
any telecommunications or internet business and do not interfere with his
duties to the Company.
4. COMPENSATION AND RELATED MATTERS.
(a) EQUALIZATION PAYMENT. To compensate Executive for certain
benefits that he may lose or forfeit as a result of his termination of
employment with his former employer, ICG Communications, Inc., and
commencement of employment with the Company, the Company shall pay Executive
in cash a $500,000 payment (the "EQUALIZATION PAYMENT") payable in three
installments. The first installment in the amount of $100,000 is due and
payable on January 1, 1999, the second installment in the amount of $200,000
is due and payable on January 1, 2000, and the third installment in the
amount of $200,000 is due and payable on January 1, 2001;
<PAGE>
PROVIDED, HOWEVER, that Executive shall have no right to receive any
installment of the Equalization Payment if he is not employed by the Company
(or one of its Affiliates (as defined in Section 5(c)(iv) below)), whether or
not employed as the Executive Vice President of Sales, on the dates such
payments become due and payable as a result of Executive's (i) death, (ii)
Disability (as defined below) , (iii) termination for Cause (as defined
below) or (iv) voluntary termination of employment without Good Reason (as
defined below).
(b) SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $185,000 per year ("BASE SALARY").
Executive's Base Salary shall be paid in approximately equal installments in
accordance with the Company's customary payroll schedule and practices.
Executive's Base Salary shall be subject to annual reviews commencing
December 1999 and each year thereafter. If Executive's Base Salary is
increased by the Company, such increased Base Salary shall then constitute
the Base Salary for all purposes of this Agreement. All compensation paid to
Executive shall be subject to withholding and other employment taxes imposed
by applicable law.
(c) ANNUAL BONUS. The Board's compensation committee (the
"COMPENSATION COMMITTEE") shall review Executive's performance at least once
annually during each year of the Employment Period and, based on Executive's
performance, recommend whether the Company should award Executive a cash
bonus ("BONUS") in order to reward Executive for services rendered to the
Company and/or as an incentive for continued service to the Company. The
amount of Executive's Bonus, if any, shall be determined in the reasonable
discretion of the Compensation Committee and shall be dependent upon, among
other things, the achievement of certain performance levels by the Company,
including, without limitation, (i) the nature, magnitude and quality of the
services performed by Executive for the Company, (ii) the condition
(financial and other) and results of operations of the Company and (iii) the
compensation paid for positions of comparable responsibility and authority
within the telecommunications industry. The targeted amount of Executive's
Bonus shall be an amount equal to 40% of Base Salary at 100% completion of
applicable performance levels, to be set forth in the Company's Annual Bonus
Plan.
(d) STOCK OPTIONS. Effective as of the Commencement Date, Executive
shall be awarded a stock option (the "STOCK OPTION") to purchase 500,000 shares
of the Company's Series B Common Stock, par value $.0001 per share (the "Common
Stock"). The shares of Common Stock subject to the Stock Option shall vest in
increments of 125,000 shares on each of the first, second, third and fourth
anniversaries of the Commencement Date, with the shares in the first such
increment having an exercise price of $6.00, shares in the second such increment
having an exercise price of $6.50, shares in the third such increment having an
exercise price of $7.00 and shares in the fourth such increment having an
exercise price of $7.50. The Stock Option will be granted under one of the
Company's stock option plans and the terms and conditions of the Stock Option
will be determined in accordance with the applicable stock option plan.
Notwithstanding any such terms, however, all shares subject to the Stock Option
shall become immediately vested and exercisable in the event of the sale of all
or substantially all of the Company's assets or a merger or consolidation in
which the Company is not the surviving entity or the Company's shareholders
prior to the transaction own less than 50% of the voting power of the Company's
outstanding securities immediately following the transaction.
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(e) EXPENSES. The Company shall promptly reimburse Executive for
all reasonable business expenses upon the presentation of reasonably itemized
statements of such expenses in accordance with the Company's policies and
procedures now in force or as such policies and procedures may be modified
with respect to all senior executive officers of the Company.
(f) WELFARE AND PENSION PLANS. In addition to Executive's Base
Salary and any incentive compensation and bonuses awarded to Executive
hereunder, he (and his family) shall be entitled to participate, to the
extent that he is (and they are) eligible under the terms and conditions
thereof, in any pension, retirement, hospitalization, insurance, disability
or medical service plan generally available to the executive officers of the
Company that may be in effect from time to time during the Employment Period.
The Company shall be under no obligation to institute or continue the
existence of any such employee benefit plan.
5. TERMINATION. Executive's employment hereunder may be terminated
during the Employment Period under the following circumstances:
(a) DEATH. Executive's employment hereunder shall terminate upon
his death.
(b) DISABILITY. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been substantially unable to
perform his duties hereunder for an entire period of thirty (30) consecutive
days, and within thirty (30) days after written Notice of Termination (as
defined in Section 6(a)) is given after such thirty (30) day period,
Executive shall not have returned to the substantial performance of his
duties on a full-time basis, the Company shall have the right to terminate
Executive's employment hereunder for "Disability," and such termination in
and of itself shall not be, nor shall it be deemed to be, a breach of this
Agreement.
(c) CAUSE. The Company shall have the right to terminate
Executive's employment for Cause (as defined), and such termination in and of
itself shall not be, nor shall it be deemed to be, a breach of this
Agreement. For purposes of this Agreement, the Company shall have "Cause" to
terminate Executive's employment upon Executive's:
(i) conviction of, or plea of guilty or nolo contendere to,
any crime constituting a felony;
(ii) commission of a material act of dishonesty, fraud,
misrepresentation or other act of moral turpitude that would, in the
Board's reasonable judgment, prevent the effective performance of his
duties hereunder;
(iii) continued failure to substantially perform his duties
hereunder to the reasonable satisfaction of the Board (other than such
failure resulting from Executive's incapacity due to physical or mental
illness or subsequent to the issuance of a Notice of Termination by
Executive for Good Reason (as defined in Section 5(d)) after demand for
substantial performance is delivered by the Board in writing that
specifically identifies the
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manner in which the Board believes Executive has not used reasonable best
efforts to substantially perform his duties; or
(iv) willful misconduct (including, but not limited to, a
willful breach of the provisions of Section 8) that is, in the Board's
reasonable judgment, injurious to the Company or to any entity in control
of, controlled by or under common control with the Company ("Affiliate").
For purposes of this Section 5(c), no act, or failure to act, by
Executive shall be considered "WILLFUL" unless committed in bad faith and
without a reasonable belief that the act or omission was in the best
interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that
the requirements outlined in paragraphs (iii) or (iv) above shall be deemed
to have occurred if Executive's action or non-action continues for more than
ten (10) days after Executive has received written notice of the
inappropriate action or non-action. This Section 5(c) shall not prevent
Executive from challenging the Board's determination that Cause exists or
that Executive has failed to cure any act (or failure to act) that
purportedly formed the basis for the Board's determination, under the
arbitration procedures set forth in Section 10 below.
(d) GOOD REASON. Executive may terminate his employment for "Good
Reason" within thirty (30) days after Executive has actual knowledge of the
occurrence, without the written consent of Executive, of one of the following
events that has not been cured within thirty (30) days after written notice
thereof has been given by Executive to the Company (PROVIDED, that with
respect to this Section 5(d), the Company shall have the right to challenge
Executive's determination that he has the right to terminate his employment
for "Good Reason" under the arbitration procedures set forth in Section 10
below):
(i) a reduction by the Company in Executive's Base Salary or a
failure by the Company to pay any such amounts when due;
(ii) any purported termination of Executive's employment for
Cause which is not effected pursuant to the procedures of Section 5(c) (and
for purposes of this Agreement, no such purported termination shall be
effective);
(iii) the Company's failure to provide the Stock Option or the
Company's material breach of one or more of the stock option agreements
pursuant to which the Stock Option was issued to Executive;
(iv) the Company's failure to substantially provide any
material employee benefits due to be provided to Executive; or
(v) the Company's failure to provide in all material respects
the indemnification set forth in the agreement referenced in Section 9 of
this Agreement.
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Executive's continued employment during the thirty (30) day period
referred to above in this paragraph (d) shall not constitute Executive's
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right
to terminate his employment hereunder without Good Reason and the Company
shall have the right to terminate Executive's employment hereunder without
Cause by providing the other with a Notice of Termination, and such
termination shall not in and of itself be, nor shall it be deemed to be, a
breach of this Agreement.
6. TERMINATION PROCEDURE.
(a) NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive during the Employment Period (other
than termination pursuant to Section 5(a)) shall be communicated by written
Notice of Termination (as defined below) to the other party hereto in
accordance with Section 12 below. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
Executive's employment is terminated by his death, the date of his death,
(ii) if Executive's employment is terminated pursuant to Section 5(b), thirty
(30) days after Notice of Termination (provided that Executive shall not have
returned to the substantial performance of his duties on a full-time basis
during such thirty (30) day period) and (iii) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given or any later date (within thirty (30) days after the giving of such
notice) set forth in such Notice of Termination.
7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event
Executive is disabled or his employment terminates during the Employment
Period, the Company shall provide Executive with the payments and benefits
set forth below. Executive acknowledges and agrees that the payments set
forth in this Section 7 constitute liquidated damages for termination of his
employment during the Employment Period.
(a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD
REASON. If Executive's employment is terminated by the Company without Cause
or by Executive for Good Reason:
(i) the Company shall pay to Executive a severance payment
equal to the amount of Base Salary Executive would have received under the
Agreement if Executive had remained employed throughout the Employment
Period stated in Section 2, plus accrued vacation, within thirty (30) days
following the Date of Termination;
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(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation, stock options (as described herein) and/or benefits as may be
due to Executive in accordance with the terms and provisions of any
agreements, plans or programs of the Company.
(b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD
REASON. If Executive's employment is terminated by the Company for Cause or
by Executive (other than for Good Reason):
(i) the Company shall pay Executive his Base Salary and, to
the extent required by law or the Company's vacation policy, his accrued
vacation pay through the Date of Termination, as soon as practicable
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(c) DISABILITY. During any period that Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental
illness, Executive shall continue to receive his full Base Salary set forth
in Section 4(b) until his employment is terminated pursuant to Section 5(b).
In the event Executive's employment is terminated for Disability pursuant to
Section 5(b):
(i) the Company shall pay to Executive his Base Salary and
accrued vacation pay through the Date of Termination, within 30 days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(d) DEATH. If Executive's employment is terminated by his death:
(i) the Company shall pay in a lump sum to Executive's
beneficiary, legal representatives or estate, as the case may be,
Executive's Base Salary through the Date of Termination;
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(ii) the Company shall reimburse Executive's beneficiary, legal
representatives, or estate, as the case may be, pursuant to Section 4(e)
for reasonable expenses incurred, but not paid prior to such termination of
employment; and
(iii) Executive's beneficiary, legal representatives or estate,
as the case may be, shall be entitled to any other rights, compensation and
benefits as may be due to any such persons or estate in accordance with the
terms and provisions of any agreements, plans or programs of the Company.
8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION.
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary
capacity for the benefit of the Company all Confidential Information (as
defined below) relating to the Company and its businesses and investments,
which shall have been obtained by Executive during Executive's employment by
the Company and which is not generally available public knowledge (other than
by acts of Executive in violation of this Agreement). Except as may be
required or appropriate in connection with his carrying out his duties under
this Agreement, Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or any legal process, or as is
necessary in connection with any adversarial proceeding against the Company
(in which case Executive shall use his reasonable best efforts in cooperating
with the Company in obtaining a protective order against disclosure by a
court of competent jurisdiction), communicate or divulge any such
Confidential Information relating to the Company to anyone other than the
Company and those designated by the Company or on behalf of the Company in
the furtherance of its business or to perform duties hereunder.
For the purposes hereof, the term "Confidential Information" means, with
respect to any person, any information concerning such person or its
business, products, financial condition, prospects and affairs that is not
generally available to the public. The term Confidential Information shall
not include information that: (i) is already known to the recipient and was
properly obtained by the recipient prior to the date of this Agreement; (ii)
is in the public domain other than through a negligent act or omission or
willful misconduct of the recipient; (iii) is acquired in good faith from a
third party and, at the time of the acquisition, the recipient had no
knowledge or reason to believe that such information was wrongfully obtained
or disclosed by the third party; (iv) is independently developed by the
recipient from information not defined as "Confidential Information" in this
Agreement, as evidenced by the recipient's written records; (v) is disclosed
to third parties by the disclosing party without restriction; (vi) is
required to be disclosed under applicable law or by a valid subpoena or other
court or governmental order, decree, regulation or rule; PROVIDED, HOWEVER,
that if disclosure is required under this provision the recipient shall
advise the disclosing party of the requirement to disclose the Confidential
Information prior to such disclosure and as soon as reasonably practicable
after the recipient becomes aware of such required disclosure; and FURTHER
PROVIDED THAT upon the request of the disclosing party, the recipient agrees
to cooperate in good faith with any reasonable and lawful actions which the
disclosing party takes to resist such disclosure, limit the
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information to be disclosed or limit the extent to which the information so
disclosed may be used or made available to third parties, at the cost of the
disclosing party.
(b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files,
drawings, documents, models, equipment, and the like relating to the
Company's business, which Executive has control over shall not be removed
from the Company's premises by Executive without the Board's written consent,
unless such removal is in the furtherance of the Company's business or is in
connection with Executive's carrying out his duties under this Agreement and,
if so removed by Executive, shall be returned to the Company promptly after
termination of Executive's employment hereunder, or otherwise promptly after
removal if such removal occurs following termination of employment.
Executive shall assign to the Company all rights to trade secrets and other
products relating to the Company's business developed by him alone or in
conjunction with others at any time while employed by the Company.
(c) CONTINUING OPERATION. Except as specifically provided in this
Section 8, the termination of Executive's employment or of this Agreement
shall have no effect on the continuing operation of this Section 8.
9. INDEMNIFICATION.
(a) Upon the Commencement Date, Executive will enter into the
Company's standard directors and officers indemnification agreement.
(b) Upon the Commencement Date, Company will ensure that Executive
is added as an insured on its directors and officers liability insurance
policy. In the event that Executive's employment relationship with Company is
severed, for any reason, the Company will provide that Executive shall
continue to be an insured under the Company's directors and officers
liability insurance policy for as long as the Company retains such coverage,
and if the Company discontinues such coverage, Executive and/or his heirs or
personal or legal representative shall be given the opportunity to purchase
continuation coverage in accordance with the terms of the applicable policy.
10. ARBITRATION. Any controversy between Executive and the Company
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, including, without limitation, the
determination of whether "Cause" or "Good Reason" exists under Section 5(c)
or Section 5(d) hereof and claims involving specific performance, shall on
the written request of either party served on the other in accordance with
Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING
THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS
SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS,
INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be
governed in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"). The arbitration will be conducted only
in Denver, Colorado, before a single arbitrator selected by the parties or,
if they are unable to agree on an arbitrator, before an arbitrator selected
by the AAA. The arbitrator shall have full authority to order specific
performance and award damages and other relief available under this Agreement
or applicable
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law, but shall have no authority to add to, detract from, change or amend the
terms of this Agreement or existing law. All arbitration proceedings,
including settlements and awards, shall be confidential. The decision of the
arbitrator will be final and binding, and judgment on the award by the
arbitrator may be entered in any court of competent jurisdiction. THIS
SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The
arbitrator will have no power to award punitive or exemplary damages, to
ignore or vary the terms of this Agreement and any other agreement between
Executive and the Company and will be bound to apply controlling law. The
prevailing party in any such arbitration shall be entitled to receive the
costs of arbitration, including reasonable attorneys' fees and costs, from
the losing party.
11. SUCCESSORS; BINDING AGREEMENT.
(a) COMPANY'S SUCCESSORS. No rights or obligations of the Company
under this Agreement may be assigned or transferred, except that the Company
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean the Company as herein before defined and
any successor to its business and/or assets (by merger, purchase or
otherwise) which executes and delivers the agreement provided for in this
Section 11 or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law.
(b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive
under this Agreement may be assigned or transferred by Executive other than
his rights to payments or benefits hereunder, which may be transferred only
by will or the laws of descent and distribution. Upon Executive's death, this
Agreement and all rights of Executive hereunder shall inure to the benefit of
and be enforceable by Executive's beneficiary or beneficiaries, personal or
legal representatives or estate, to the extent any such person succeeds to
Executive's interests under this Agreement. Executive shall be entitled to
select and change a beneficiary or beneficiaries to receive any benefit or
compensation payable hereunder following Executive's death by giving the
Company written notice thereof. In the event of Executive's death or a
judicial determination of his incompetence, reference in this Agreement to
Executive shall be deemed, where appropriate, to refer to his
beneficiary(ies), estate or other legal representative(s). If Executive
should die following his Date of Termination while any amounts would still be
payable to him hereunder if he had continued to live, all such amounts unless
otherwise provided herein shall be paid in accordance with the terms of this
Agreement to such person or persons so appointed in writing by Executive, or
otherwise to his legal representatives or estate.
12. NOTICE. For the purposes of this Agreement, notices, demands and
all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered either personally
or by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:
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If to Executive:
David Gandini
3351 Meadow Creek Place
Highland Ranch, CO 80126
If to the Company:
FirstWorld Communications, Inc.
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
Attn: Secretary
Telecopy: (619) 552-8010
With a copy to:
David A. Hahn, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Telecopy: (619) 696-7419
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
13. WAIVER. No provisions of this Agreement may be amended, modified,
or waived unless such amendment or modification is agreed to in a writing
signed by Executive and by a duly authorized officer of the Company, and such
waiver is set forth in writing and signed by the party to be charged. No
waiver by either party hereto at any time of any breach by the other party
hereto of any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time
14. SURVIVAL. Except as otherwise expressly set forth herein, the
respective rights and obligations of the parties under this Agreement shall
survive Executive's termination of employment and the termination of this
Agreement to the extent necessary for the intended preservation of such
rights and obligations.
15. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado without regard to its conflicts of law principles.
16. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
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17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument. Facsimile
signatures will be deemed to be effective originals hereunder.
18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by
any officer, employee or representative of any party hereto in respect of
such subject matter. Any prior agreement of the parties hereto in respect of
the subject matter contained herein is hereby terminated and canceled.
19. WITHHOLDING. All payments hereunder shall be subject to any
required withholding of Federal, state and local taxes pursuant to any
applicable law or regulation.
20. SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only, and they form no part of this Agreement and
shall not affect its interpretation.
[REMINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
By:
-------------------------------------------
Name: Sheldon S. Ohringer
Title: President and Chief Executive Officer
----------------------------------------------
DAVID GANDINI
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of December 7, 1998,
is by and between FirstWorld Communications, Inc., a Delaware corporation (the
"COMPANY") and Doug Kramer ("EXECUTIVE").
RECITAL
The Company desires to employ Executive, effective as of December 7, 1998
(the "COMMENCEMENT DATE"), on the terms and conditions set forth in this
Agreement, and Executive desires to be so employed.
AGREEMENT
IN CONSIDERATION of the premises and the mutual covenants set forth below,
the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Executive as a Senior
Vice President and Chief Technical Officer of the Company, and Executive hereby
accepts such employment, on the terms and conditions hereinafter set forth.
2. TERM. The period of employment of Executive by the Company hereunder
(the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall
continue through December 13, 2000. The Employment Period may be sooner
terminated by either party in accordance with Section 5 of this Agreement.
3. POSITION AND DUTIES. During the Employment Period, Executive shall
serve as a Senior Vice President and Chief Technical Officer of the Company.
Executive shall devote such time, attention and energies to Company affairs as
are necessary to fully perform his duties (other than absences due to illness or
vacation) for the Company. During the Employment Period, Executive shall not,
directly or indirectly, render services to any other organization, entity or
person, as an employee, independent contractor, consultant or otherwise, with or
without compensation, without the prior written consent of the Board of
Directors of the Company (the "BOARD").
4. COMPENSATION AND RELATED MATTERS.
(a) EQUALIZATION PAYMENT. To compensate Executive for certain
benefits that he may lose or forfeit as a result of his termination of
employment with his former employer, ICG Communications, Inc., and commencement
of employment with the Company, the Company shall pay Executive in cash a
$30,000 payment (the "EQUALIZATION PAYMENT") payable with Executive's first
regularly scheduled paycheck in January, 1999.
(b) SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $135,000 per year ("BASE SALARY").
Executive's Base Salary shall be paid
<PAGE>
in approximately equal installments in accordance with the Company's customary
payroll schedule and practices. Executive's Base Salary shall be subject to
annual reviews commencing December 1999 and each year thereafter. If
Executive's Base Salary is increased by the Company, such increased Base Salary
shall then constitute the Base Salary for all purposes of this Agreement. All
compensation paid to Executive shall be subject to withholding and other
employment taxes imposed by applicable law.
(c) ANNUAL BONUS. The Board's compensation committee (the
"COMPENSATION COMMITTEE") shall review Executive's performance at least once
annually during each year of the Employment Period and, based on Executive's
performance, recommend whether the Company should award Executive a cash bonus
("BONUS") in order to reward Executive for services rendered to the Company
and/or as an incentive for continued service to the Company. The amount of
Executive's Bonus, if any, shall be determined in the reasonable discretion of
the Compensation Committee and shall be dependent upon, among other things, the
achievement of certain performance levels by the Company, including, without
limitation, (i) the nature, magnitude and quality of the services performed by
Executive for the Company, (ii) the condition (financial and other) and results
of operations of the Company and (iii) the compensation paid for positions of
comparable responsibility and authority within the telecommunications industry.
The targeted amount of Executive's Bonus shall be an amount equal to 35% of Base
Salary at 100% completion of applicable performance levels, to be set forth in
the Company's Annual Bonus Plan.
(d) STOCK OPTIONS. Effective as of the Commencement Date, Executive
shall be awarded a stock option (the "STOCK OPTION") to purchase 100,000 shares
of the Company's Series B Common Stock, par value $.0001 per share (the "COMMON
STOCK"). The shares of Common Stock subject to the Stock Option shall vest in
increments of 25,000 shares on each of the first, second, third and fourth
anniversaries of the Commencement Date, with the shares in the first such
increment having an exercise price of $6.00, shares in the second such increment
having an exercise price of $6.50, shares in the third such increment having an
exercise price of $7.00 and shares in the fourth such increment having an
exercise price of $7.50. The Stock Option will be granted under one of the
Company's stock option plans and the terms and conditions of the Stock Option
will be determined in accordance with the applicable stock option plan.
Notwithstanding any such terms, however, all shares subject to the Stock Option
shall become immediately vested and exercisable in the event of the sale of all
or substantially all of the Company's assets or a merger or consolidation in
which the Company is not the surviving entity or the Company's stockholders
prior to the transaction own less than 50% of the voting power of the Company's
outstanding securities immediately following the transaction.
(e) EXPENSES. The Company shall promptly reimburse Executive for all
reasonable business expenses upon the presentation of reasonably itemized
statements of such expenses in accordance with the Company's policies and
procedures now in force or as such policies and procedures may be modified with
respect to all senior executive officers of the Company.
(f) WELFARE AND PENSION PLANS. In addition to Executive's Base
Salary and any incentive compensation and bonuses awarded to Executive
hereunder, he (and his family)
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shall be entitled to participate, to the extent that he is (and they are)
eligible under the terms and conditions thereof, in any pension, retirement,
hospitalization, insurance, disability or medical service plan generally
available to the executive officers of the Company that may be in effect from
time to time during the Employment Period. The Company shall be under no
obligation to institute or continue the existence of any such employee benefit
plan.
5. TERMINATION. Executive's employment hereunder may be terminated
during the Employment Period under the following circumstances:
(a) DEATH. Executive's employment hereunder shall terminate upon his
death.
(b) DISABILITY. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been substantially unable to
perform his duties hereunder for an entire period of thirty (30) consecutive
days, and within thirty (30) days after written Notice of Termination (as
defined in Section 6(a)) is given after such thirty (30) day period, Executive
shall not have returned to the substantial performance of his duties on a
full-time basis, the Company shall have the right to terminate Executive's
employment hereunder for "Disability," and such termination in and of itself
shall not be, nor shall it be deemed to be, a breach of this Agreement.
(c) CAUSE. The Company shall have the right to terminate Executive's
employment for Cause (as defined), and such termination in and of itself shall
not be, nor shall it be deemed to be, a breach of this Agreement. For purposes
of this Agreement, the Company shall have "Cause" to terminate Executive's
employment upon Executive's:
(i) conviction of, or plea of guilty or nolo contendere to,
any crime constituting a felony;
(ii) commission of a material act of dishonesty, fraud,
misrepresentation or other act of moral turpitude that would, in the
Board's reasonable judgment, prevent the effective performance of his
duties hereunder;
(iii) continued failure to substantially perform his duties
hereunder to the reasonable satisfaction of the Board (other than such
failure resulting from Executive's incapacity due to physical or mental
illness or subsequent to the issuance of a Notice of Termination by
Executive for Good Reason (as defined in Section 5(d)) after demand for
substantial performance is delivered by the Board in writing that
specifically identifies the manner in which the Board believes Executive
has not used reasonable best efforts to substantially perform his duties;
or
(iv) willful misconduct (including, but not limited to, a
willful breach of the provisions of Section 8) that is, in the Board's
reasonable judgment, injurious to the Company or to any entity in control
of, controlled by or under common control with the Company ("AFFILIATE").
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For purposes of this Section 5(c), no act, or failure to act, by Executive
shall be considered "willful" unless committed in bad faith and without a
reasonable belief that the act or omission was in the best interests of the
Company or any Affiliates thereof; PROVIDED, HOWEVER, that the requirements
outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if
Executive's action or non-action continues for more than ten (10) days after
Executive has received written notice of the inappropriate action or non-action.
This Section 5(c) shall not prevent Executive from challenging the Board's
determination that Cause exists or that Executive has failed to cure any act (or
failure to act) that purportedly formed the basis for the Board's determination,
under the arbitration procedures set forth in Section 10 below.
(d) GOOD REASON. Executive may terminate his employment for "Good
Reason" within thirty (30) days after Executive has actual knowledge of the
occurrence, without the written consent of Executive, of one of the following
events that has not been cured within thirty (30) days after written notice
thereof has been given by Executive to the Company (PROVIDED, that with respect
to this Section 5(d), the Company shall have the right to challenge Executive's
determination that he has the right to terminate his employment for "Good
Reason" under the arbitration procedures set forth in Section 10 below):
(i) a reduction by the Company in Executive's Base Salary or
a failure by the Company to pay any such amounts when due;
(ii) any purported termination of Executive's employment for
Cause which is not effected pursuant to the procedures of Section 5(c) (and
for purposes of this Agreement, no such purported termination shall be
effective);
(iii) the Company's failure to provide the Stock Option or the
Company's material breach of one or more of the stock option agreements
pursuant to which the Stock Option was issued to Executive;
(iv) the Company's failure to substantially provide any
material employee benefits due to be provided to Executive; or
(v) the Company's failure to provide in all material respects
the indemnification set forth in the agreement referenced in Section 9 of
this Agreement.
Executive's continued employment during the thirty (30) day period referred
to above in this paragraph (d) shall not constitute Executive's consent to, or a
waiver of rights with respect to, any act or failure to act constituting Good
Reason hereunder.
(e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right to
terminate his employment hereunder without Good Reason and the Company shall
have the right to terminate Executive's employment hereunder without Cause by
providing the other with a Notice of Termination, and such termination shall not
in and of itself be, nor shall it be deemed to be, a breach of this Agreement.
4
<PAGE>
6. TERMINATION PROCEDURE.
(a) NOTICE OF TERMINATION. Any termination of Executive's employment
by the Company or by Executive during the Employment Period (other than
termination pursuant to Section 5(a)) shall be communicated by written Notice of
Termination (as defined below) to the other party hereto in accordance with
Section 12 below. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
Executive's employment is terminated by his death, the date of his death, (ii)
if Executive's employment is terminated pursuant to Section 5(b), thirty (30)
days after Notice of Termination (provided that Executive shall not have
returned to the substantial performance of his duties on a full-time basis
during such thirty (30) day period) and (iii) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given or any later date (within thirty (30) days after the giving of such
notice) set forth in such Notice of Termination.
7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event
Executive is disabled or his employment terminates during the Employment Period,
the Company shall provide Executive with the payments and benefits set forth
below. Executive acknowledges and agrees that the payments set forth in this
Section 7 constitute liquidated damages for termination of his employment during
the Employment Period.
(a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD
REASON. If Executive's employment is terminated by the Company without Cause or
by Executive for Good Reason:
(i) the Company shall pay to Executive a severance payment
equal to the amount of Base Salary Executive would have received under the
Agreement if Executive had remained employed throughout the Employment
Period stated in Section 2, plus accrued vacation, within thirty (30) days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation, stock options (as described herein) and/or benefits as may be
due to Executive in accordance with the terms and provisions of any
agreements, plans or programs of the Company.
(b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD
REASON. If Executive's employment is terminated by the Company for Cause or by
Executive (other than for Good Reason):
5
<PAGE>
(i) the Company shall pay Executive his Base Salary and, to
the extent required by law or the Company's vacation policy, his accrued
vacation pay through the Date of Termination, as soon as practicable
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(c) DISABILITY. During any period that Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental
illness, Executive shall continue to receive his full Base Salary set forth in
Section 4(b) until his employment is terminated pursuant to Section 5(b). In
the event Executive's employment is terminated for Disability pursuant to
Section 5(b):
(i) the Company shall pay to Executive his Base Salary and
accrued vacation pay through the Date of Termination, within 30 days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(d) DEATH. If Executive's employment is terminated by his death:
(i) the Company shall pay in a lump sum to Executive's
beneficiary, legal representatives or estate, as the case may be,
Executive's Base Salary through the Date of Termination;
(ii) the Company shall reimburse Executive's beneficiary,
legal representatives, or estate, as the case may be, pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive's beneficiary, legal representatives or estate,
as the case may be, shall be entitled to any other rights, compensation and
benefits as may be due to any such persons or estate in accordance with the
terms and provisions of any agreements, plans or programs of the Company.
6
<PAGE>
8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION.
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary
capacity for the benefit of the Company all Confidential Information (as defined
below) relating to the Company and its businesses and investments, which shall
have been obtained by Executive during Executive's employment by the Company and
which is not generally available public knowledge (other than by acts of
Executive in violation of this Agreement). Except as may be required or
appropriate in connection with his carrying out his duties under this Agreement,
Executive shall not, without the prior written consent of the Company or as may
otherwise be required by law or any legal process, or as is necessary in
connection with any adversarial proceeding against the Company (in which case
Executive shall use his reasonable best efforts in cooperating with the Company
in obtaining a protective order against disclosure by a court of competent
jurisdiction), communicate or divulge any such Confidential Information relating
to the Company to anyone other than the Company and those designated by the
Company or on behalf of the Company in the furtherance of its business or to
perform duties hereunder.
For the purposes hereof, the term "Confidential Information" means, with respect
to any person, any information concerning such person or its business, products,
financial condition, prospects and affairs that is not generally available to
the public. The term Confidential Information shall not include information
that: (i) is already known to the recipient and was properly obtained by the
recipient prior to the date of this Agreement; (ii) is in the public domain
other than through a negligent act or omission or willful misconduct of the
recipient; (iii) is acquired in good faith from a third party and, at the time
of the acquisition, the recipient had no knowledge or reason to believe that
such information was wrongfully obtained or disclosed by the third party; (iv)
is independently developed by the recipient from information not defined as
"Confidential Information" in this Agreement, as evidenced by the recipient's
written records; (v) is disclosed to third parties by the disclosing party
without restriction; (vi) is required to be disclosed under applicable law or by
a valid subpoena or other court or governmental order, decree, regulation or
rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the
recipient shall advise the disclosing party of the requirement to disclose the
Confidential Information prior to such disclosure and as soon as reasonably
practicable after the recipient becomes aware of such required disclosure; and
FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient
agrees to cooperate in good faith with any reasonable and lawful actions which
the disclosing party takes to resist such disclosure, limit the information to
be disclosed or limit the extent to which the information so disclosed may be
used or made available to third parties, at the cost of the disclosing party.
(b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files,
drawings, documents, models, equipment, and the like relating to the Company's
business, which Executive has control over shall not be removed from the
Company's premises by Executive without the Board's written consent, unless such
removal is in the furtherance of the Company's business or is in connection with
Executive's carrying out his duties under this Agreement and, if so removed by
Executive, shall be returned to the Company promptly after termination of
Executive's employment hereunder, or otherwise promptly after removal if such
removal occurs following termination of employment. Executive shall assign to
the Company all rights to trade secrets and
7
<PAGE>
other products relating to the Company's business developed by him alone or in
conjunction with others at any time while employed by the Company.
(c) CONTINUING OPERATION. Except as specifically provided in this
Section 8, the termination of Executive's employment or of this Agreement shall
have no effect on the continuing operation of this Section 8.
9. INDEMNIFICATION.
(a) Upon the Commencement Date, Executive will enter into the
Company's standard directors and officers indemnification agreement.
(b) Upon the Commencement Date, the Company will ensure that
Executive is added as an insured on its directors and officers liability
insurance policy. In the event that Executive's employment relationship with
the Company is severed, for any reason, the Company will provide that Executive
shall continue to be an insured under the Company's directors and officers
liability insurance policy for as long as the Company retains such coverage, and
if the Company discontinues such coverage, Executive and/or his heirs or
personal or legal representative shall be given the opportunity to purchase
continuation coverage in accordance with the terms of the applicable policy.
10. ARBITRATION. Any controversy between Executive and the Company
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, including, without limitation, the determination
of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d)
hereof and claims involving specific performance, shall on the written request
of either party served on the other in accordance with Section 12 below be
submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT,
VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY
OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO
A JURY TRIAL. Arbitration shall comply with and be governed in accordance with
the Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). The arbitration will be conducted only in Denver, Colorado, before a
single arbitrator selected by the parties or, if they are unable to agree on an
arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have
full authority to order specific performance and award damages and other relief
available under this Agreement or applicable law, but shall have no authority to
add to, detract from, change or amend the terms of this Agreement or existing
law. All arbitration proceedings, including settlements and awards, shall be
confidential. The decision of the arbitrator will be final and binding, and
judgment on the award by the arbitrator may be entered in any court of competent
jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY
ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary
damages, to ignore or vary the terms of this Agreement and any other agreement
between Executive and the Company and will be bound to apply controlling law.
The prevailing party in any such arbitration shall be entitled to receive the
costs of arbitration, including reasonable attorneys' fees and costs, from the
losing party.
8
<PAGE>
11. SUCCESSORS; BINDING AGREEMENT.
(a) COMPANY'S SUCCESSORS. No rights or obligations of the Company
under this Agreement may be assigned or transferred, except that the Company
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as herein before defined and any successor to
its business and/or assets (by merger, purchase or otherwise) which executes and
delivers the agreement provided for in this Section 11 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
(b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive
under this Agreement may be assigned or transferred by Executive other than his
rights to payments or benefits hereunder, which may be transferred only by will
or the laws of descent and distribution. Upon Executive's death, this Agreement
and all rights of Executive hereunder shall inure to the benefit of and be
enforceable by Executive's beneficiary or beneficiaries, personal or legal
representatives or estate, to the extent any such person succeeds to Executive's
interests under this Agreement. Executive shall be entitled to select and
change a beneficiary or beneficiaries to receive any benefit or compensation
payable hereunder following Executive's death by giving the Company written
notice thereof. In the event of Executive's death or a judicial determination
of his incompetence, reference in this Agreement to Executive shall be deemed,
where appropriate, to refer to his beneficiary(ies), estate or other legal
representative(s). If Executive should die following his Date of Termination
while any amounts would still be payable to him hereunder if he had continued to
live, all such amounts unless otherwise provided herein shall be paid in
accordance with the terms of this Agreement to such person or persons so
appointed in writing by Executive, or otherwise to his legal representatives or
estate.
12. NOTICE. For the purposes of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered either personally or by
United States certified or registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to Executive:
Doug Kramer
11965 Templin Lane
Parker, Colorado 80138
9
<PAGE>
If to the Company:
FirstWorld Communications, Inc.
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
Attn.: Secretary
Telecopy: (619) 552-8010
With a copy to:
David A. Hahn, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Telecopy: (619) 696-7419
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
13. WAIVER. No provisions of this Agreement may be amended, modified, or
waived unless such amendment or modification is agreed to in a writing signed by
Executive and by a duly authorized officer of the Company, and such waiver is
set forth in writing and signed by the party to be charged. No waiver by either
party hereto at any time of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
14. SURVIVAL. Except as otherwise expressly set forth herein, the
respective rights and obligations of the parties under this Agreement shall
survive Executive's termination of employment and the termination of this
Agreement to the extent necessary for the intended preservation of such rights
and obligations.
15. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado without regard to its conflicts of law principles.
16. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument. Facsimile signatures will
be deemed to be effective originals hereunder.
10
<PAGE>
18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto in respect of such
subject matter. Any prior agreement of the parties hereto in respect of the
subject matter contained herein is hereby terminated and canceled.
19. WITHHOLDING. All payments hereunder shall be subject to any required
withholding of Federal, state and local taxes pursuant to any applicable law or
regulation.
20. SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only, and they form no part of this Agreement and shall
not affect its interpretation.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Sheldon S. Ohringer
-----------------------------------------
Name: Sheldon S. Ohringer
Title: President and Chief Executive Officer
/s/ Doug Kramer
--------------------------------------------
DOUG KRAMER
12
<PAGE>
LEASE
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
A NEW JERSEY CORPORATION
(AS LANDLORD)
AND
FIRSTWORLD COMMUNICATIONS, INC.,
A DELAWARE CORPORATION
(AS TENANT)
<PAGE>
LEASE
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey Corporation
(as Landlord)
and
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware Corporation
(as Tenant)
<TABLE>
<S> <C>
1. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
3. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
4. COMPLETION OR REMODELING OF THE PREMISES . . . . . . . . . . . . .2
5. OPERATING EXPENSES AND TAXES . . . . . . . . . . . . . . . . . . .2
6. SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
7. QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . 11
8. DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9. CHARACTER OF OCCUPANCY . . . . . . . . . . . . . . . . . . . . . 11
10. MAINTENANCE, ALTERATIONS AND REENTRY BY LANDLORD . . . . . . . . 12
11. ALTERATIONS AND REPAIRS BY TENANT . . . . . . . . . . . . . . . 12
12. MECHANICS' LIENS . . . . . . . . . . . . . . . . . . . . . . . . 14
13. SUBLETTING AND ASSIGNMENT . . . . . . . . . . . . . . . . . . . 14
14. DAMAGE TO PROPERTY . . . . . . . . . . . . . . . . . . . . . . . 17
15. INDEMNITY TO LANDLORD . . . . . . . . . . . . . . . . . . . . . 17
16. SURRENDER AND NOTICE . . . . . . . . . . . . . . . . . . . . . . 18
17. INSURANCE, CASUALTY, AND RESTORATION OF PREMISES . . . . . . . . 18
18. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . 19
19. DEFAULT BY TENANT . . . . . . . . . . . . . . . . . . . . . . . 20
20. DEFAULT BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
<PAGE>
<TABLE>
<S> <C>
21. SUBORDINATION AND ATTORNMENT . . . . . . . . . . . . . . . . . . 24
22. REMOVAL OF TENANT'S PROPERTY . . . . . . . . . . . . . . . . . . 25
23. HOLDING OVER: TENANCY MONTH-TO-MONTH . . . . . . . . . . . . . . 25
24. PAYMENTS AFTER TERMINATION . . . . . . . . . . . . . . . . . . . 25
25. STATEMENT OF PERFORMANCE . . . . . . . . . . . . . . . . . . . . 26
26. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 26
27. AUTHORITIES FOR ACTION AND NOTICE . . . . . . . . . . . . . . . 29
28. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . 30
29. PARKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
30. SUBSTITUTE PREMISES . . . . . . . . . . . . . . . . . . . . . . 30
31. BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
32. TIME OF ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . 30
33. OPTION TO EXTEND . . . . . . . . . . . . . . . . . . . . . . . . 30
34. SIGNAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
35. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . . . . . 31
EXHIBIT A FLOOR PLAN . . . . . . . . . . . . . . . . . . . . . . . . . 34
EXHIBIT B LEGAL DESCRIPTION . . . . . . . . . . . . . . . . . . . . . 35
EXHIBIT C COMMENCEMENT CERTIFICATE . . . . . . . . . . . . . . . . . . 36
EXHIBIT D RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . 37
</TABLE>
-ii-
<PAGE>
OFFICE BUILDING LEASE
THIS LEASE is made this 1st day of December, 1998 by and between THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation
("Landlord") and FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation
("Tenant").
W I T N E S S E T H:
1. PREMISES. In consideration of the payment of rent and the keeping and
performance of the covenants and agreements by Tenant, as hereinafter set forth,
Landlord hereby leases and demises unto Tenant the premises located on the
second floor of the Building known as Suite 208, comprised of approximately
7,108 rentable square feet (hereinafter referred to as the "Premises"), as
depicted on the plat hereto attached as Exhibit A, and being a part of the
building known as Paragon Building, located at 7100 East Belleview Avenue,
Englewood, Colorado (the "Building"), together with a non-exclusive right,
subject to the provisions hereof, to use all appurtenances thereto, including,
but not limited to, any plazas, common areas, or other areas on the real
property (described more particularly on Exhibit B "Real Property") designated
by Landlord for the exclusive or non-exclusive use of the tenants of the
Building. The Building, Real Property, plazas, common areas, other areas, and
appurtenances are hereinafter collectively sometimes called the "Building
Complex."
2. TERM. The term of the Lease shall commence at 12:01 a.m. on the
earlier of (i) the 1st day of December, 1998 or (ii) such date as Landlord
delivers possession of the Premises to Tenant and shall terminate at 12:00
midnight on the 30th day of November, 1999 (said term is referred to herein as
the "Primary Lease Term"). The term of the Lease may be extended pursuant to
Paragraph 33 hereof and, if so extended, any references in this Lease to the
"Term" shall include the Extension Term.
3. RENT. Tenant shall pay the annual rental (the "Base Rent") for the
Primary Lease Term, payable in monthly installments due on the first day of each
month during the term hereof, as follows:
<TABLE>
<CAPTION>
TERM MONTHLY ANNUAL
---- RENTAL RENTAL
------ ------
<S> <C> <C>
December 1, 1998 - $11,254.33 $135,051.96
November 30, 1999
</TABLE>
The Base Rent for the Extension Term shall be as set forth in Paragraph 33
hereof. If the initial or final month of the term of this Lease is less than a
calendar month, Base Rent for such partial month shall be prorated at the rate
of one-thirtieth of the monthly Base Rent for each day. All rents shall be paid
in advance, without notice, set off, abatement, or diminution, at the office
<PAGE>
of Landlord in Englewood, Colorado, or at such place as Landlord from time to
time designates in writing.
4. COMPLETION OR REMODELING OF THE PREMISES.
A. Landlord shall have no obligation for the completion or remodeling
of the Premises, and Tenant shall accept the Premises in their "as is" condition
on the date the Primary Lease Term commences. If Landlord is delayed in
delivering the Premises to Tenant due to the failure of a prior occupant to
vacate the same, then the obligation for the payment of rent and the
commencement of the Primary Lease Term hereof shall be postponed until Landlord
delivers the Premises to Tenant whereupon all of the covenants, conditions, and
agreements contained herein shall be in full force and effect. The postponement
of Tenant's obligation to pay rent and other sums hereunder shall be in full
settlement of all claims which Tenant may otherwise have by reason of such delay
of delivery.
B. If the commencement of the Primary Lease Term is delayed pursuant
to subparagraph A above, and such commencement date would otherwise occur on
other than the first day of the month, the commencement date of the Primary
Lease Term shall be further delayed until the first day of the following month
and Tenant shall pay proportionate rent at the same monthly rate set forth
herein (also in advance) for such partial month. In the event said commencement
date is so delayed, the expiration of the term hereof shall be extended so that
the Primary Lease Term will continue for the full period set forth in Paragraph
2 hereof. As soon as the Primary Lease Term commences, Landlord and Tenant shall
execute a commencement certificate in the form attached hereto as EXHIBIT C,
which may be requested by either party, setting forth the exact date on which
the Primary Lease Term commenced and the expiration date of the Primary Lease
Term.
C. Taking possession of the Premises by Tenant shall be conclusive
evidence as against Tenant that the Premises were in the condition agreed upon
between Landlord and Tenant and acknowledgment of satisfactory completion of any
fix-up or remodeling, as the case may be, which Landlord has agreed in writing
to perform.
5. OPERATING EXPENSES AND TAXES.
In addition to Base Rent, Tenant shall reimburse Landlord for certain
of the Taxes and Operating Expenses of the Building Complex, such reimbursement
to be in the manner, at the times, and in the amounts set forth in this Section
5.
A. TAXES. If the amount of Taxes billed for any calendar year
beginning with the calendar year 2000 and falling partly or wholly within the
Term of this Lease shall be in excess of the Taxes for the calendar year 1999
(the "Tax Base Amount"), then the Rent payable by Tenant for such year shall be
increased by Tenant's pro rata share ("Pro Rata Share") of such difference, such
Pro Rata Share being 4.2 percent and such share calculated on the basis that the
rentable area of floor space in the Premises (approximately 7,108 rentable
square feet) bears to the total rentable area of floor space in the Building as
of the date hereof (approximately 169,757
-2-
<PAGE>
square feet). If there is a change in the total Building rentable area as a
result of an addition to the Building, partial destruction, modification or
similar cause, which event causes a reduction or increase on a permanent basis,
Landlord shall cause adjustments in the computations as shall be necessary to
provide for any such changes. Landlord's system for measurement applied to all
tenants shall be used to determine rentable area. In determining the amount of
Taxes for any calendar year, the amount of special assessments to be included
shall be limited to the amount of the installment (plus any interest payable
thereon) of such special assessment which would have been required to have been
paid during such calendar year if Landlord had elected to have such special
assessment paid over the maximum period of time permitted by law, if such
election is available to Landlord. Except as provided in the second sentence of
Subsection 5.C.(1) hereof, all reference to Taxes "for" and "billed for" a
particular calendar year shall be deemed to refer to Taxes levied, assessed,
billed or otherwise imposed for such calendar year, without regard to the dates
when any such Taxes are due and payable.
As used in this Lease, the term "Taxes" means any and all general
and special taxes and impositions of every kind and nature whatsoever levied,
assessed, or imposed upon, or with respect to, the Building Complex, any
leasehold improvements, fixtures, installations, additions, and equipment
whether owed by Landlord or Tenant, or either because of or in connection with
the Landlord's ownership, leasing, and operation of the Building and the
Property, including, without limitation, real estate taxes, personal property
taxes, sewer rents, water rents, general or special assessments, and duties or
levies charged or levied upon or assessed against the Building and the Property
and personal property, transit taxes, all costs and expenses (including legal
fees and court costs) charged for the protest or reduction of property taxes or
assessments in connection with the Property and the Building, or any tax or
excise on rent or any other tax (however described) on account of rental
received for use and occupancy of any or all of the Building, and the Property,
whether any such taxes are imposed by the United States, the State of Colorado,
the County of Denver, or any local governmental municipality, authority, or
agency or any political subdivision of any thereof. Taxes shall not include any
net income, capital stock, succession, transfer, franchise, gift, estate, and
inheritance taxes; provided, however, if at any time during the Term hereof, a
tax or excise on rents or income or other tax, however described (herein called
"Rent Tax"), is levied or assessed by the State of Colorado or any political
subdivision thereof, on account of the Rent hereunder or the interest of
Landlord under this Lease, such Rent Tax shall constitute Taxes; provided,
further, in no event shall Tenant be obligated (i) to pay for any calendar year
any greater amount by way of such Rent Tax than would have been payable by
Tenant had the rentals paid to Landlord under all Building leases (being the
rentals upon which such Rent Tax is imposed) had been the sole taxable income of
Landlord for the calendar year in question, or (ii) to pay or to reimburse
Landlord for any tax of any kind assessed against Landlord on account of any
such Rent Tax having been reimbursed to Landlord.
B. OPERATING EXPENSES. If, in any calendar year falling partly or
wholly within the Term of this Lease, the Operating Expenses paid or accrued by
Landlord shall be higher than Landlord's Operating Expenses for the calendar
year 1999 (the "Operating Expense Base Amount"), then the Rent payable by Tenant
for such calendar year shall be increased by an
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amount equal to Tenant's Pro Rata Share of such difference calculated on the
basis of the percentage set forth in Subsection 5.A. above.
As used in this Lease, the term "Operating Expenses" means any
and all expenses, costs, and disbursements (other than Taxes) of every kind and
nature whatsoever, which are paid or accrued by Landlord in connection with the
leasing, management, maintenance, operation, or repair of the Building Complex
(including, without limitation):
(a) Costs of supplies, including, but not limited to, the cost of
relamping all lighting installed as a part of the Building Standard work or
located in common areas of the Building Complex. "Building Standard" means the
level of tenant finish improvements or the level of Building services, as the
context may require, customarily offered from time to time by Landlord to all
tenants of the Building;
(b) Costs incurred in connection with obtaining and providing
energy for the Building Complex, including, but not limited to, costs of
propane, butane, natural gas, steam, electricity, solar energy, fuel oils, coal
or any other energy sources;
(c) Costs of water and sanitary and storm drainage services;
(d) Costs of janitorial and security services;
(e) Costs of general maintenance and repairs, including costs
under climate control and other mechanical maintenance contracts and repairs and
replacements of equipment used in connection with such maintenance and repair
work;
(f) Costs of maintenance and replacement of landscaping;
(g) Insurance premiums, including fire and all-risk coverage,
together with loss of rent endorsement, the part of any claim required to be
paid under the deductible portion of any insurance policies carried by Landlord
in connection with the Building Complex (where Landlord is unable to obtain
insurance without such deductible from a major insurance carrier at reasonable
rates), public liability insurance and any other insurance carried by Landlord
on the Building Complex or any component parts thereof (all such insurance shall
be in such amounts as may be required by any Mortgagee, as defined in Section 20
hereof, or as Landlord may reasonably determine);
(h) Labor costs associated with operation and maintenance of the
Building Complex, including wages and other payments, costs to Landlord of
workmen's compensation and disability insurance, payroll taxes, welfare fringe
benefits, and all legal fees and other costs or expenses incurred in resolving
any labor dispute associated with the operation and maintenance of the Building
Complex;
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(i) Professional building management fees including rental for
the Manager's office space and costs of supplying the Manager with necessary
office equipment and storage space in the Building;
(j) Legal, accounting, inspection, and other consultation fees
(including, without limitation, fees charged by consultants retained by Landlord
for services that are intended to produce a reduction in Operating Expenses,
reduce the rate of increase in Operating Expenses or to reasonably improve the
operation, maintenance or state of repair of the Building Complex) incurred in
the ordinary course of operating the Building Complex;
(k) The costs of capital improvements and structural repairs and
replacements made in or to the Building Complex in order to conform to any
applicable laws, ordinances, rules, regulations or orders of any governmental or
quasi-governmental authority having jurisdiction over the Building Complex
(herein "Required Capital Improvements") and the costs of any capital
improvements and structural repairs and replacements designed primarily to
reduce Operating Expenses or to reduce the rate of increase in Operating
Expenses (herein "Cost Savings Improvements"). The expenditures for Required
Capital Improvements and Cost Savings Improvements shall be reimbursed to
Landlord in equal installments over the useful life of such capital improvement
or structural repair or replacement (as determined by Landlord) together with
interest on the balance of the reimbursed expenditure at the Prime Rate in
effect on the date the expenditure was incurred by Landlord, plus three percent
(3%); provided, however, that the amount to be reimbursed by Tenant for any Cost
Savings Improvement shall be limited in any year to the reduction or estimated
savings in Operating Expenses as a result thereof;
(l) Costs incurred by Landlord or its agents in engaging experts
or other consultants to assist them in making the computations required
hereunder; and
(m) Rental payments or acquisition costs, allocated over the
useful life, for machinery or equipment, including vehicles, necessary to timely
and economically perform the cleaning and maintenance functions imposed on
Landlord together with the interest on such acquisition costs at the Prime Rate
in effect as of the acquisition date on the balance of the unrecovered
acquisition costs over the useful life of such machinery or equipment.
"OPERATING EXPENSES" shall NOT include:
(1) Costs of work, including painting and decorating and tenant
change work, which Landlord performs for any tenant or in any tenant's space in
the Building other than work of a kind a scope which Landlord would be obligated
to furnish to all tenants whose leases contain a rental adjustment provision
similar to this one;
(2) Costs of repairs or other work occasioned by fire, windstorm
or other insured casualty to the extent of insurance proceeds received;
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(3) Leasing commissions, advertising expenses, and other costs
incurred in leasing space in the Building;
(4) Costs of repairs or rebuilding necessitated by condemnation;
(5) Any interest on borrowed money or debt amortization, except
as specifically set forth above;
(6) Depreciation on the Building Complex;
(7) Any settlement, payment or judgment incurred by Landlord or
the Building manager due to their willful misconduct or gross negligence, as
established by a court of law, which is not covered by insurance proceeds; or
(8) Cost of any damage to the Building Complex caused directly by
Landlord's willful misconduct or gross negligence, as established by a court of
law, which is not covered by insurance proceeds.
Notwithstanding anything contained herein to the contrary, if any
lease entered into by Landlord with any tenant in the Building is on a so-called
"net" basis, or provides for a separate basis of computation for any Operating
Expenses with respect to its leased premises, then, to the extent that Landlord,
in its sole judgment, determines that an adjustment should be made in making the
computations herein provided for to appropriately allocate the Operating
Expenses among the tenants, Landlord shall be permitted to modify the
computation of Taxes, Operating Expense Base Amount, rentable area, and/or
Operating Expenses for a particular calendar year in order to eliminate or
otherwise compensate for any such expenses which are paid for in whole or in
part by such tenant. Furthermore, in making any computations contemplated
hereby, Landlord shall also be permitted to make such adjustments and
modifications to the provisions of this Section 5 as shall be reasonably
necessary to achieve the intention of the parties hereto.
C. The adjustments provided for in Subsections 5.A. to Taxes shall
be made as follows:
(1) In the case of calculations made pursuant to Subsection 5.A.
above, such calculation shall be made promptly following receipt by Landlord of
the bills (meaning in the case of annual general real estate taxes, the
statement for same) for Taxes for each calendar year in question. In the event
of a subsequent adjustment of Taxes for a previous calendar year by the taxing
authority which adjustment has resulted in a corresponding adjustment payment by
or to Landlord, the same shall constitute an adjustment to Taxes paid during the
calendar year when such adjustment payment is made. If, pursuant to such
calculations, the Tenant's Pro Rata Share of Taxes due as adjusted by the taxing
authority are more than the Tenant's Pro Rata Share of the Taxes paid by Tenant,
Tenant shall pay to Landlord, within fifteen (15) days following the furnishing
(the "upward adjustment date") of each such calculation to Tenant, Tenant's Pro
Rata Share of such difference.
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(2) Commencing with the first calendar month next succeeding each
upward adjustment date, Tenant shall pay to Landlord on the first day of each
calendar month until the next upward adjustment date (which period between
adjustment dates is herein called a "Tax Deposit Year") one-twelfth of the
amount of Tenant's Pro Rata Share of the excess (the "Tax Excess") of: (i) Taxes
most recently billed (as reported in the calculation furnished pursuant to
foregoing clause A(1) above over (ii) the Tax Base Amount, and shall also pay
with each such first monthly payment for a Tax Deposit Year an amount equal to
one-twelfth of Tenant's Pro Rata Share of such Tax Excess multiplied by the
number of calendar months between (y) the month preceding the month in which
Landlord received the bills for Taxes and (z) the first such monthly payment
date. Amounts paid under this Subsection (2) in any Tax Deposit Year shall be
credited against any amounts payable by Tenant under the foregoing Subsection
(1) on account of Taxes billed to Landlord for the same Tax Deposit Year, and
provided there is any surplus remaining after the credit to Tenant and provided
Tenant shall not then be in default under any of the provisions of this Lease,
Landlord shall, at Landlord's option, either refund the amount of such surplus
to Tenant within thirty (30) days following the end of such Tax Deposit Year or
apply such surplus amount against any other amounts then due from Tenant to
Landlord to the extent such surplus was actually received by Landlord from
Tenant.
D. The adjustments provided for in Subsections 5.B. to Operating
Expenses shall be made as follows:
(1) In the case of calculations made pursuant to Subsection 5.B.
such calculation shall be made as promptly as practicable following each
calendar year in question, and bills therefor shall be furnished to Tenant. Any
subsequent adjustment of Operating Expenses for such calendar year which results
in a corresponding adjustment payment by or to Landlord, shall constitute an
adjustment to Operating Expenses during the calendar year when such adjustment
is made. If, pursuant to such calculations, the Operating Expenses so paid
exceed the Operating Expense Base Amount, Tenant shall pay Landlord within
thirty (30) days of furnishing (the "upward adjustment date") of such
calculation to Tenant, Tenant's Pro Rata Share of such difference, calculated on
the basis of the percentage determined in Subsection 5.A.
(2) As soon as practicable after the close of the calendar year
in which the Commencement Date occurs, Landlord shall supply Tenant with written
notice of Landlord's estimate of the Operating Expenses that will be incurred or
accrued during such calendar year immediately following the calendar year of the
Commencement Date (the "Initial Deposit Year") in excess of the Operating Base
Cost Amount. On or before the first day of each month during such Initial
Deposit Year, Tenant shall pay to Landlord one-twelfth of Tenant's Pro Rata
Share of such estimated excess amount. If the monthly deposit amount is not
determined in time for Tenant to make the first payment on January 1 of the
Initial Deposit Year, then the first monthly payment shall be due on the first
day of the month immediately following the date Landlord supplies Tenant with
notice of the excess amount and the first monthly payment(s) shall also include
a payment equal to one-twelfth of such additional sum multiplied by the number
of calendar months which have elapsed during the Initial Deposit Year prior to
the date Tenant makes its first payment. If the total of the estimated payments
made by Tenant during the Initial
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Deposit Year are less than Tenant's obligation under this Lease for Operating
Expenses for such Initial Deposit Year, then Tenant, within thirty (30) days
of the billing therefor, shall pay such deficiency to Landlord. In the event
the total of the Tenant's estimated payments for the Initial Deposit Year
exceed Tenant's obligation for excess Operating Expenses for such year, then
the surplus shall be handled in the manner provided in the last sentence of
Subsection 5.D.(3).
(3) Commencing with the calendar year following the Initial
Deposit Year and during each calendar year of the Term of this Lease, Tenant
shall pay to Landlord on the first day of each month of each calendar year
(hereinafter sometimes called an "Expense Deposit Year") one-twelfth of the
amount, if any, of Tenant's Pro Rata Share of the excess of Operating
Expenses paid during the preceding calendar year over the Operating Expense
Base Amount. In the event the monthly amount so payable by Tenant during any
calendar year is not determined until after January 1 of such calendar year,
then until such monthly amount is determined, Tenant shall continue to pay a
monthly amount equal to the monthly payments required of Tenant with respect
to adjusted (estimated in the case of the Initial Deposit Year) Operating
Expenses for the preceding calendar year, and when such current calendar
year's monthly amount is so determined, Tenant shall, upon being advised
thereof, pay any deficiency between the monthly payments theretofore made
during such period and the current monthly payment; provided that in the
first calendar year in which Tenant is required to pay additional sums for
Operating Expenses under this subsection (3), the first monthly payment shall
also include a payment equal to one-twelfth of such additional sum multiplied
by the number of calendar months which have elapsed during such calendar year
prior to the first monthly payment due date(s) for such additional sum. If
the advice shows a surplusage rather than a deficiency between the amount
paid and the amount due, and provided Tenant is not then in default under any
of the provisions of this Lease, Landlord shall, at Landlord's option, either
refund the amount of such surplusage to the Tenant within thirty (30) days
following such advice, or apply such amount against any other amounts then
due from Tenant to Landlord to the extent actually received by Landlord from
Tenant.
E. AUDIT AND ADJUSTMENT PROCEDURES.
(1) The annual determination and statement of Taxes and
Operating Expenses shall be prepared in accordance with generally accepted
accounting principles. In the event of any dispute as to any Rent due
hereunder, Tenant shall have the right to inspect Landlord's accounting
records relative to Taxes and Operating Expenses at the office in which
Landlord maintains its records during normal business hours at any time
within fifteen (15) days following the furnishing by Landlord to Tenant of
such statement. Unless Tenant shall take written exception of any item in any
such statement within such fifteen (15) day period, such statement shall be
considered as accepted by Tenant. If Tenant makes such timely written
exception, a certification as to the proper amount of Rent shall be made by a
Certified Public Accountant designated by Landlord (which certification shall
be final and conclusive). Tenant agrees to pay the cost of such certification
unless it is determined that Landlord's original determination of both Taxes
and Operating Expenses was in error by more than three percent (3%) over
Tenant's actual obligation.
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(2) In the event of the termination of this Lease by
expiration of the stated Term or for any other cause or reason prior to the
determination of an adjustment to Rent permitted by this Lease, Tenant's
agreement to pay its Pro Rata Share of increases in Taxes and Operating
Expenses up to the time of termination shall survive termination of this
Lease, and Tenant shall pay all amounts due to Landlord within fifteen (15)
days after being billed therefor. In the event of termination of this Lease
by expiration of the stated Term or for any other cause or reason whatsoever,
except default by Tenant of any of the terms or provisions of this Lease,
prior to the determination of adjustments as hereinabove set forth in Section
5, Landlord's agreement to refund any excess Rent paid by Tenant up to the
time of termination shall survive termination of the Lease, and Landlord
shall pay the amount due, adjusted by the amounts of any applicable offsets,
to Tenant within fifteen (15) days of Landlord's determination of such
amount. This covenant shall survive the expiration or termination of this
Lease.
(3) All calculations to be made under this Section 5 shall be
made, furnished, handled, and (where applicable) billed separately.
(4) Subject to the rights of Landlord hereunder, any refund to
which Tenant may be entitled under the provisions of any of subsections
5.C.(1), 5.C.(2), 5.D.(1), 5.D.(2) and 5.D.(3) may not be used by Tenant to
offset any payments of Base Rent or other payments then due or that become
due Landlord under this Lease.
(5) If the Term of this Lease commences on any day other than
the first day of January, or if the Term of this Lease ends on any day other
than the last day of December, any payment due to Landlord by reason of an
increase in Taxes or Operating Expenses shall be prorated on the basis by
which the number of days in such partial year bears to 365.
(6) All sums which Tenant is required to pay or discharge
pursuant to this Section 5 of this Lease in addition to Base Rent, together
with any interest or other sums which may be added for late payment thereof,
shall constitute "Rent" hereunder.
6. SERVICES.
A. Subject to the provisions of subparagraph D below, Landlord,
without charge, except as provided herein, and in accordance with standards
from time to time prevailing for the Building, agrees: (1) to furnish running
water at those points of supply for general use of tenants of the Building;
(2) to furnish to public areas of the Building Complex heated or cooled air
(as applicable), electrical current, janitorial services, and maintenance to
the extent Landlord deems necessary; (3) to furnish, during Ordinary Business
Hours, as hereinafter defined, such heated or cooled air to the Premises as
may, in the judgment of Landlord, be reasonably required for the comfortable
use and occupancy of the Premises, provided that the recommendations of
Landlord's engineer regarding occupancy and use of the Premises are complied
with by Tenant and, with respect to cooled air, provided the same is used
only for standard office use; (4) to furnish, subject to availability and
capacity of building systems, unfiltered treated cooling tower water for use
in Tenants' packaged HVAC systems, provided that such systems are equipped
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with Landlord-approved strainers, pumping systems and controls, and that
such systems are connected only after approval of Landlord's engineer; (5) to
provide, during Ordinary Business Hours, the general use of passenger
elevators for ingress and egress to and from the Premises (at least one such
elevator shall be available at all times, except in the case of emergencies
or repair); (6) to provide janitorial services for the Premises to the extent
of the Building Standard tenant finish work items contained therein
(including such window washing of the outside of exterior windows as may, in
the judgment of Landlord, be reasonably required), but unless and until the
Building Standard changes, such janitorial services shall be provided after
Ordinary Business Hours on Monday through Thursday and Sunday only, except
for Legal Holidays; and (7) to cause electric current to be supplied to the
Premises for all of Tenant's Standard Electrical Usage, as hereinafter
defined. "Tenant's Standard Electrical Usage", as used herein, shall mean and
refer to weekly electrical consumption in an amount equal to multiplying
three and one-half (3.5) watts/square foot by fifty-nine (59) hours and by
then multiplying the product thereof by the number of rentable square feet in
the Premises. "Ordinary Business Hours" as used herein shall mean and refer
to 7:00 a.m. to 6:00 p.m. Monday through Friday and 9:00 a.m. to 12:00 p.m.
on Saturdays, Legal Holidays excepted. "Legal Holidays," as used herein,
shall mean New Year's Day, Martin Luther King Day, Presidents' Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and such
other national holidays as may be hereafter established by the United States
Government.
B. "Excess Usage" shall be defined as any usage of electricity (1)
during other than Ordinary Business Hours; or (2) in an amount in excess of
Tenant's Standard Electrical Usage; or (3) for "Special Equipment"; or (4)
for any requirement for standard HVAC services during other than Ordinary
Business Hours. "Special Equipment," as used herein, shall mean (a) any
equipment consuming more than 0.5 kilowatts at rated capacity, (b) any
equipment requiring a voltage other than 120 volts, single phase, or (c)
equipment that requires the use of self-contained HVAC units. Tenant shall
reimburse Landlord for reasonable costs incurred by Landlord in providing
services for Excess Usage, which costs are subject to change from time to
time. Such reasonable costs will include Landlord's costs for materials,
additional wear and tear on equipment, utilities, and labor (including fringe
and overhead costs). Computation of Landlord's cost for providing such
services will be made by Landlord's engineer, based on his engineering survey
of Tenant's Excess Usage. Tenant shall also reimburse Landlord for all costs
of supplementing the Building HVAC System and/or extending or supplementing
any electrical service, as Landlord may determine is necessary, as a result
of Tenant's Excess Usage. Prior to installation or use by Tenant of any
equipment which will result in Excess Usage or operation of the Premises for
extended hours on an ongoing basis, Tenant shall notify Landlord of such
intended installation or use and obtain Landlord's consent therefor. In
addition to the foregoing, Tenant, at Tenant's option, upon such notice or at
any time thereafter, may request Landlord, at Tenant's sole cost and expense,
to install a check meter and/or flow meter to assist in determining the cost
to Landlord of Tenant's Excess Usage. If Tenant desires electric current
and/or heated or cooled air to the Premises during periods other than
Ordinary Business Hours, Landlord will use reasonable efforts to supply the
same, but at the expense of Tenant, at Landlord's standard rate as
established by it, from time to time, for such services. Not less than
forty-eight (48) hours' prior notice shall be given by Tenant to Landlord of
Tenant's desire for such services. It is also
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understood and agreed that Tenant shall pay the cost of replacing light bulbs
and/or tubes and ballast used in all lighting in the Premises other than
Building Standard lighting.
C. If Tenant requires janitorial services other than those required
to be provided to other tenants of the Building Complex generally, Tenant
shall separately pay for such services monthly upon billings by Landlord, or
Tenant shall, at Landlord's option, separately contract for such services
with the same company furnishing janitorial services to Landlord.
Notwithstanding the foregoing, Tenant shall have the right, subject to
Landlord's prior written consent and such rules, regulations and requirements
as Landlord may impose (including but not limited to the requirement that
such janitors belong to a trade union), to employ janitors, other than those
employed by Landlord, to perform such additional services.
D. Tenant agrees that Landlord shall not be liable for failure to
supply any such heating, air conditioning, elevator, electrical, janitorial,
lighting or other services, or during any period Landlord is required to
reduce or curtail such services pursuant to any applicable laws, rules, or
regulations, including regulations of any utility now or hereafter in force
or effect, it being understood that Landlord may discontinue, reduce, or
curtail such services, or any of them (either temporarily or permanently), at
such times as it may be necessary by reason of accident, repairs,
alterations, improvements, strikes, lockouts, riots, acts of God, application
of applicable laws, statutes, or rules and regulations or due to any other
happening beyond the control of Landlord. In the event of any interruption,
reduction, or discontinuance of Landlord's services (either temporary or
permanent), Landlord shall not be liable for damages to person or property as
a result thereof nor shall the occurrence of any such event in any way be
construed as an eviction of Tenant; or cause or permit an abatement,
reduction or setoff of rent; or operate to release Tenant from any of
Tenant's obligations hereunder.
E. Tenant agrees to notify promptly the Landlord or its
representative of any accidents or defects in the Building of which Tenant
becomes aware including defects in pipes, electrical wiring, and HVAC
equipment. In addition, Tenant shall provide Landlord with prompt
notification of any matter or condition which may cause injury or damage to
the Building or any person or property therein.
7. QUIET ENJOYMENT. So long as Tenant is not in default under this
Lease, Tenant shall be entitled to the quiet enjoyment and peaceful
possession of the Premises, subject to the terms and provisions of the Lease.
8. DEPOSIT. Waived.
9. CHARACTER OF OCCUPANCY. Tenant covenants and agrees to occupy the
Premises as general offices (the "Permitted Use") and for no other purpose,
and to use them in a careful, safe, and proper manner; to pay on demand for
any damage to the Premises caused by misuse or abuse thereof by Tenant,
Tenant's agents or employees, or of any other person entering upon the
Premises under express or implied invitation of Tenant. Tenant, at Tenant's
expense, shall comply with all laws, codes, rules, and regulations of the
United States, the State of Colorado, and of the County of Arapahoe
("APPLICABLE LAWS"), now in effect, or which may
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hereafter be in effect, which shall impose any duty upon Landlord or Tenant
with respect to the occupation or alteration of the Premises. Tenant shall
not commit waste or suffer or permit waste to be committed or permit any
nuisance on or in the Premises. Tenant agrees that it will not store, keep,
use, sell, dispose of or offer for sale in, upon or from the Premises any
article or substance which may be prohibited by any insurance policy in force
from time to time covering the Building nor shall Tenant keep, store, produce
or dispose of on, in or from the Premises or the Building any substance which
may be deemed a hazardous substance or infectious waste under any state,
local or federal rule, statute, law, regulation or ordinance as may be
promulgated or amended from time to time.
10. MAINTENANCE, ALTERATIONS AND REENTRY BY LANDLORD.
A. Unless otherwise expressly provided herein, Landlord shall not
be required to make any improvements or repairs of any kind or character to
the Premises during the Primary Lease Term, or any extension thereof, except:
(i) such repairs to HVAC, mechanical, life safety and electrical systems in
the Premises (to the extent such systems are Building Standard) as may be
deemed necessary by Landlord for normal maintenance operations of the
Building Complex; and (ii) upkeep, maintenance, and repairs to all Common
Areas in the Building Complex so long as the need for any such repair is not
the result of Tenant's negligence.
B. Tenant covenants and agrees to permit Landlord at any time to
enter the Premises to examine and inspect the same or, if Landlord so elects,
to perform any obligations of Tenant hereunder which Tenant shall fail to
perform or to perform such cleaning, maintenance, janitorial services,
repairs, additions, or alterations as Landlord may deem necessary or proper
for the safety, improvement, or preservation of the Premises or of other
portions of the Building Complex or as may be required by governmental
authorities through any code, rule, regulation, ordinance, and/or law. Any
such reentry shall not constitute an eviction or entitle Tenant to abatement
of rent. Furthermore, Landlord shall at all times have the right at
Landlord's election to make such alterations or changes in other portions of
the Building Complex as Landlord may from time to time deem necessary and
desirable as long as such alterations and changes do not unreasonably
interfere with Tenant's use and occupancy of the Premises. Landlord may use
one or more of the street entrances to the Building Complex and such public
areas thereof as may be necessary, in Landlord's determination to complete
such alterations or changes.
11. ALTERATIONS AND REPAIRS BY TENANT.
A. Tenant covenants and agrees not to make any Alterations in or
additions to the Premises, including installation of any equipment or
machinery therein which requires modification of or additions to any existing
electrical outlet or which would increase Tenant's usage of electricity
beyond the Tenant's Standard Electrical Usage (all such alterations are
referred to herein collectively as "Alterations") without in each such
instance first obtaining the written consent of Landlord. Landlord's consent
to any Alterations by Tenant or Landlord's approval of the plans,
specifications and working drawings for Tenant's Alterations shall create no
responsibility or liability on the part of Landlord for their completeness,
design sufficiency, or compliance with all laws, rules and regulations of
governmental agencies or authorities now in
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effect or which may hereafter be in effect. Tenant, at its expense, shall pay
all engineering and design costs incurred by Landlord attributable to the
Alterations and obtain all necessary governmental permits and certificates
required for any Alterations to which Landlord has consented and shall cause
such alterations to be completed in compliance therewith and with all
applicable laws and requirements of public authorities and all applicable
requirements of Landlord's insurance carriers. All Alterations which Tenant
is permitted to make shall be performed in a good and workmanlike manner,
using new materials and equipment at least equal in quality to the original
installations in the Premises. All repair and maintenance work required to be
performed by Tenant pursuant to the provisions of subparagraph B below and
any Alterations permitted by Landlord pursuant to the provisions hereof,
including, but not limited to, any installations desired by Tenant for
Tenant's telegraphic, telephonic or electrical connections, shall be done at
Tenant's expense by Landlord's employees or, with Landlord's consent, by
persons requested by Tenant and authorized in writing by Landlord; provided,
however if such work is performed by persons who are not employees of
Landlord, Tenant shall pay to Landlord, upon receipt of billing therefor, the
costs for supervision and control of such persons as Landlord may determine
to be necessary. If Landlord authorizes persons requested by Tenant to
perform such work, prior to the commencement of any such work, on request,
Tenant shall deliver to Landlord certificates issued by insurance companies
qualified to do business in the State of Colorado, evidencing that workmen's
compensation, public liability insurance, and property damage insurance, all
in the amounts, with companies and on forms satisfactory to Landlord, are in
force and effect and maintained by all contractors and subcontractors engaged
by Tenant to perform such work. All such policies shall name Landlord and any
Mortgagee (as defined in Paragraph 20) as an additional insured. Each such
certificate shall provide that the same may not be canceled or modified
without ten (10) days' prior written notice to Landlord and such Mortgagee.
Further, Landlord and such Mortgagee shall have the right to post notices in
the Premises in locations which will be visible by parties performing any
work on the Premises stating that Landlord is not responsible for the payment
for such work and setting forth such other information as Landlord may deem
necessary. Alterations, repair, and maintenance work shall be performed in a
manner which will not unreasonably interfere with, delay, or impose any
additional expense upon Landlord in the maintenance or operation of the
Building or upon other tenants' use of their premises.
B. Tenant shall keep the Premises in as good order, condition, and
repair and in an orderly state, as when they were entered upon, loss by fire
or other casualty or ordinary wear excepted. Subject to Landlord's obligation
to make repairs in the event of certain casualties, as set forth in Paragraph
18 below, Landlord shall have no obligation for the repair or replacement of
any portion of the interior of the Premises which is damaged or wears out
during the term hereof regardless of the cause therefor, including but not
limited to carpeting, draperies, window coverings, wall coverings, painting
or any of Tenant's property or betterments in the Premises.
C. All Alterations and permanent fixtures installed in the
Premises, including, by way of illustration and not by limitation, all
partitions, paneling, carpeting, drapes or other window coverings, and light
fixtures (but not including movable office furniture not attached to the
Building), shall be deemed a part of the real estate and the property of
Landlord and shall
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remain upon and be surrendered with the Premises as a part thereof without
molestation, disturbance, or injury at the end of the Primary Lease Term, or
any extension thereof, whether by lapse of time or otherwise, unless Landlord
by notice given to Tenant no later than fifteen (15) days prior to the end of
the term shall elect to have Tenant remove all or any of the Alterations, and
in such event, Tenant shall promptly remove at Tenant's expense the
Alterations specified by Landlord and restore the Premises to their condition
prior to the making of the same, reasonable wear and tear excepted.
12. MECHANICS' LIENS. Tenant shall pay or cause to be paid all costs for
work done by Tenant or caused to be done by Tenant on the Premises (including
work performed by Landlord or its contractor at Tenant's request following
the commencement of the Primary Lease Term) of a character which will or may
result in liens on Landlord's interest therein and Tenant will keep the
Premises free and clear of all mechanics' liens, and other liens on account
of work done for Tenant or persons claiming under it. Tenant hereby agrees to
indemnify, defend, and save Landlord harmless of and from all liability,
loss, damage, costs, or expenses, including attorneys' fees, on account of
any claims of any nature whatsoever including claims or liens of laborers or
materialmen or others for work performed for or materials or supplies
furnished to Tenant or persons claiming under Tenant. Should any liens be
filed or recorded against the Premises or any action affecting the title
thereto be commenced as a result of such work (which term includes the
supplying of materials), Tenant shall cause such liens to be removed of
record within five (5) days after notice from Landlord. If Tenant desires to
contest any claim of lien, Tenant shall furnish to Landlord adequate security
of at least one hundred fifty percent (150%) of the amount of the claim, plus
estimated costs and interest and, if a final judgment establishing the
validity or existence of any lien for any amount is entered, Tenant shall pay
and satisfy the same at once. If Tenant shall be in default in paying any
charge for which a mechanic's lien or suit to foreclose the lien has been
recorded or filed and shall not have given Landlord security as aforesaid,
Landlord may (but without being required to do so) pay such lien or claim and
any costs, and the amount so paid, together with reasonable attorney's fees
incurred in connection therewith, shall be immediately due from Tenant to
Landlord.
13. SUBLETTING AND ASSIGNMENT.
A. Tenant shall neither sublet any part of the Premises nor assign
this Lease or any interest herein without the written consent of Landlord
first being obtained, which consent, as to any subletting of less than
twenty-five percent (25%) of the Premises, will not be unreasonably withheld
provided that: (1) Tenant has complied with the provision of subparagraph D
below and Landlord has declined to exercise its rights thereunder; (2) the
proposed subtenant or assignee is engaged in a business and the Premises will
be used in a manner which is in keeping with the then standards of the
Building and does not conflict with any exclusive use rights granted to any
other tenant; (3) the proposed subtenant or assignee has a reputation and
standing in the business community consistent with the image of tenants in a
first-class office building and has reasonable financial worth in light of
the responsibilities involved and Tenant shall have provided Landlord with
reasonable proof thereof; (4) Tenant is not in default hereunder at the time
it makes its request for such consent; (5) the proposed subtenant or assignee
is not a governmental or quasi-governmental agency; (6) the proposed
subtenant or
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assignee is not a tenant under, or is not currently negotiating, a lease
with Landlord in any Building owned by Landlord in the southeast Denver
metropolitan area (including the Building); or (7) the rent under such
sublease or assignment is not less than the rent to be paid by Tenant for
such space under the Lease and is not less than 85% of the rental rate then
being offered by Landlord for similar space in the Building. Notwithstanding
anything contained herein to the contrary, Tenant acknowledges that if the
use of the Premises by any proposed subtenant or assignee would require
compliance by Landlord and the Building with any current or future laws to a
greater extent than that required prior to the proposed occupancy by such
subtenant or assignee, Landlord, at its sole option, may refuse to grant such
consent, unless, as an express condition thereof, Tenant and/or such assignee
or subtenant bears the entire cost of such greater compliance.
B. If this Lease is assigned, or if the Premises or any part
thereof is sublet or occupied by anybody other than Tenant, Landlord may,
after default by Tenant, collect the rent from the assignee, subtenant, or
occupant and apply the net amount collected to the rent herein reserved, but
no such assignment, subletting, occupancy, or collection shall be deemed an
acceptance of the assignee, subtenant, or occupant as the Tenant hereof or a
release of Tenant from further performance by Tenant of covenants on the part
of Tenant herein contained. A sale by Tenant of all or substantially all of
its assets or all or substantially all of its stock if Tenant is a publicly
traded corporation, a merger of Tenant with another corporation, the transfer
of twenty-five percent (25%) or more of the stock in a corporate tenant whose
stock is not publicly traded, or transfer of twenty-five percent (25%) or
more of the beneficial ownership interests in a partnership tenant shall
constitute a prohibited assignment hereunder. Consent by Landlord to any one
Assignment or sublease shall not in any way be construed as relieving Tenant
from obtaining the Landlord's express written consent to any further
Assignment or sublease. Notwithstanding the consent of Landlord to any
sublease or Assignment, Tenant shall not be relieved from its primary
obligations hereunder to Landlord, including, but not limited to the payment
of all Base Rent and Tenant's Pro Rata Share of increases in Operating
Expenses. Landlord's consent to any requested sublease or Assignment shall
not waive Landlord's right to refuse to consent to any other such request or
to terminate this Lease if such request is made, all as provided herein. If
Tenant collects any rental or other amounts from a subtenant or assignee in
excess of the Base Rent and Tenant's Pro Rata Share of increases in Operating
Expenses for any monthly period, Tenant shall pay to Landlord on a monthly
basis, as and when Tenant receives the same, all such excess amounts received
by Tenant.
C. Notwithstanding anything contained in this Paragraph 13 to the
contrary, in the event Tenant requests Landlord's consent to sublet
twenty-five percent (25%) or more of the Premises or to assign twenty-five
percent (25%) or more of its interest in this Lease, Landlord shall have the
right to: (1) consent to such sublease or Assignment in its sole discretion;
(2) refuse to grant such consent in Landlord's sole discretion; or (3) refuse
to grant such consent and terminate this Lease as to the portion of the
Premises with respect to which such consent was requested; provided, however,
if Landlord refuses to grant such consent and elects to terminate the Lease
as to such portion of the Premises, Tenant shall have the right within
fifteen (15) days after notice of Landlord's exercise of its right to
terminate to withdraw Tenant's request for such consent and remain in
possession of the Premises under the terms and conditions hereof. In the
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event the Lease is terminated as set forth herein, such termination shall be
effective as of the date set forth in a written notice from Landlord to
Tenant, which date shall in no event be more than thirty (30) days following
such notice.
D. Tenant hereby agrees that in the event it desires to sublease
all or any portion of the Premises or assign this Lease to any party, in
whole or in part, (herein "Assignment"), Tenant shall notify Landlord not
less than ninety (90) days prior to the date Tenant desires to sublease such
portion of the Premises or assign this Lease ("Tenant's Notice"). Tenant's
Notice shall set forth the description of the portion of the Premises to be
so sublet or assigned and the terms and conditions on which Tenant desires to
sublet the Premises or assign this Lease. Landlord shall have sixty (60) days
following receipt of Tenant's Notice within which to attempt to sublet the
Premises or assign this Lease on Tenant's behalf (or to exercise Landlord's
rights pursuant to subparagraph C above if Tenant's Notice discloses that
twenty-five percent (25%) or more of the Premises is involved). In the event
that the space covered by Tenant's Notice is leased by Landlord, rent and
other sums due from the subtenant in accordance with the sublease shall be
paid to Tenant for Tenant's account and Landlord shall have no responsibility
whatsoever for the observance and performance by such subtenant of its
obligations under its sublease with Tenant. Landlord shall be under no
obligation to find a prospective subtenant or assignee. If Landlord is
unwilling or unable to locate a subtenant or assignee (and, if applicable,
declines to exercise its rights pursuant to subparagraph C above), Landlord
will notify Tenant not later than sixty (60) days after the date Landlord
receives Tenant's Notice and Tenant shall be free to sublet the portion of
the Premises in question or assign the applicable portion of its interest in
this Lease to any third party on terms substantially identical to those
described in Tenant's Notice, subject to Landlord's consent as set forth in
subparagraph A above. If Tenant is unable to sublet said portion of the
Premises or assign the applicable portion of its interest in this Lease on
said terms and conditions within one hundred twenty (120) days following its
original notice to Landlord, Tenant agrees to reoffer the Premises to
Landlord in accordance with the provisions hereof prior to leasing or
assigning the same to any third party.
E. All documents utilized by Tenant to evidence any subletting or
assignment to which Landlord has consented shall be subject to prior approval
by Landlord or its counsel. Tenant shall pay on demand all of Landlord's
costs and expenses, including reasonable attorneys' fees, incurred in
determining whether or not to consent to any requested sublease or Assignment
and in reviewing and approving such documentation.
F. Landlord and Tenant understand that notwithstanding certain
provisions to the contrary contained herein, a trustee or debtor in
possession under the Bankruptcy Code of the United States may have certain
rights to assume or assign this Lease. If a trustee in bankruptcy is entitled
to assume control over Tenant's rights under this Lease and assigns such
rights to any third party, the Base Rent to be paid hereunder by such party
shall be increased to the then current Base Rent (if greater than then being
paid for the Premises) which Landlord would charge for comparable space in
the Building as of the date of such third party's occupancy of the Premises.
Landlord and Tenant further understand that in any event Landlord is entitled
under the Bankruptcy Code to Adequate Assurance of future performance of the
terms and provisions
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of this Lease. For purposes of any such assumption or assignment, the parties
hereto agree that the term "ADEQUATE ASSURANCE" shall include at least the
following:
i. In order to assure Landlord that the proposed assignee will
have the resources with which to pay the rent called for herein, any proposed
assignee must have demonstrated to Landlord's satisfaction a net worth (as
defined in accordance with generally accepted accounting principles
consistently applied) at least as great as the net worth of Tenant on the
date this Lease became effective increased by seven percent (7%), compounded
annually, for each year from the Lease Commencement Date through the date of
the proposed assignment. The financial condition and resources of Tenant were
a material inducement to Landlord in entering into this Lease.
ii. Any proposed assignee of this Lease must assume and agree
to be bound by the terms, provisions, and covenants of this Lease.
14. DAMAGE TO PROPERTY. Tenant shall neither hold nor attempt to hold
Landlord liable for any injury or damage, either proximate or remote,
occurring through or caused by fire, water, steam, or any repairs,
alterations, injury, accident, or any other cause to the Premises, to any
furniture, fixtures, Tenant improvements, or other personal property of
Tenant kept or stored in the Premises, or in other parts of the Building
Complex not herein demised, whether by reason of the negligence or default of
the owners or occupants thereof or any other person or otherwise and the
keeping or storing of all property of Tenant in the Building Complex and/or
Premises shall be at the sole risk of Tenant. Tenant shall obtain and
maintain throughout the term of this Lease "all risk" or "multi-peril"
insurance on and for the full cost of replacement of all of Tenant's property
and betterments in the Premises, including, without limitation all furniture,
fixtures, personal property and all tenant finish in excess of Building
Standard items.
15. INDEMNITY TO LANDLORD.
A. Tenant hereby agrees to indemnify, defend, and save Landlord
harmless of and from all liability, loss, damages, costs, or expenses,
including attorneys' fees, on account of injuries to the person or property
of Landlord or of any other tenant in the Building Complex or to any other
person rightfully in said Building Complex for any purpose whatsoever, where
the injuries are caused by the negligence, misconduct or breach of this Lease
by the Tenant, Tenant's agents, servants, or employees or of any other person
entering upon the Premises under express or implied invitation of Tenant or
where such injuries are the result of the violation of the provisions of this
Lease by any of such persons. This indemnity shall survive termination or
earlier expiration of this Lease.
B. In addition to the above, Tenant shall obtain and maintain
throughout the term of this Lease a commercial general liability policy,
including protection against death, personal injury and property damage,
issued by an insurance company qualified to do business in the State of
Colorado, with a single limit of not less than One Million Dollars
($1,000,000.00). All such policies shall name Landlord as an additional
insured. Each such policy shall provide that the same may not be canceled or
modified without at least twenty (20) days' prior written
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notice to Landlord and any Mortgagee (as defined in Paragraph 20). Prior to
occupancy of the Premises, and thereafter from time to time, Tenant shall
deliver certificates evidencing that such insurance, as required under
Paragraph 14 above and this Paragraph 15, is in force and effect. The limits
of said insurance shall not, under any circumstances, limit the liability of
Tenant hereunder.
16. SURRENDER AND NOTICE. Upon the expiration or other termination of
the term of this Lease, Tenant shall promptly quit and surrender to Landlord
the Premises broom clean, in good order and condition, ordinary wear and tear
and loss by fire or other casualty excepted unless due to the negligence of
Tenant, and Tenant shall remove all of its movable furniture and other
effects and such Alterations as Landlord shall require Tenant to remove
pursuant to Paragraph 11 hereof. In the event Tenant fails to vacate the
Premises on a timely basis as required, Tenant shall be responsible to
Landlord for all costs incurred by Landlord as a result of such failure,
including, but not limited to, any amounts required to be paid to third
parties who were to have occupied the Premises.
17. INSURANCE, CASUALTY, AND RESTORATION OF PREMISES.
A. Landlord shall maintain casualty insurance on the shell and core
of the Building, on the Premises to the extent of the base tenant finish per
the then-current standard allowance provided by Landlord to tenants in the
Building therein and in the Building Complex, in such amounts, from such
companies, and on such terms and conditions, including loss of rental
insurance for such period of time as Landlord deems appropriate, from time to
time.
B. If the Premises or the Building shall be so damaged by fire or
other casualty as to render the Premises wholly untenantable and if such
damage shall be so great that a competent architect, in good standing,
selected by Landlord shall certify in writing to Landlord and Tenant within
sixty (60) days of said casualty that the Premises, with the exercise of
reasonable diligence, cannot be made fit for occupancy within one hundred
eighty (180) working days from the happening thereof, then this Lease shall
cease and terminate from the date of the occurrence of such damage and Tenant
shall thereupon surrender to Landlord the Premises and all interest therein
hereunder and Landlord may reenter and take possession of the Premises and
remove Tenant therefrom. Tenant shall pay rent, duly apportioned, up to the
time of such termination of this Lease. If, however, the damage shall be such
that said architect shall certify within said sixty (60) day period that the
Premises can be made tenantable within said one hundred eighty (180) day
period, then, except as hereinafter provided, Landlord shall repair the
damage so done (to the extent of the base tenant finish per the then-current
standard allowance provided by Landlord to tenants in the Building) with all
reasonable speed.
C. If the Premises shall be slightly damaged by fire or other
casualty, but not so as to render the same wholly untenantable or to require
a repair period in excess of one hundred eighty (180) days, then, Landlord,
after receiving notice in writing of the occurrence of the casualty, except
as hereafter provided, shall cause the same to be repaired to the extent of
the base tenant finish per the then-current standard allowance provided by
Landlord to tenants in the Building with reasonable promptness. If the
estimated repair period as established in accordance
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with the provisions of subparagraph B above exceeds one hundred eighty (180)
days, then the provisions of subparagraph B shall control notwithstanding the
fact that the Premises are not wholly untenantable.
D. In case the Building throughout shall be so injured or damaged,
whether by fire or otherwise (though said Premises may not be affected, or if
affected, can be repaired within said one hundred eighty (180) days), that,
within sixty (60) days after the happening of such injury, Landlord shall
decide not to reconstruct or rebuild said Building, then, notwithstanding
anything contained herein to the contrary, upon notice in writing to that
effect given by Landlord to Tenant within said sixty (60) days, Tenant shall
pay the rent, properly apportioned up to such date, this Lease shall
terminate from the date of delivery of said written notice, and both parties
hereto shall be freed and discharged of all further obligations hereunder.
E. Landlord and Tenant hereby waive any and all rights of recovery
against the other, their officers, agents, and employees occurring out of the
use and occupancy of the Premises for loss or damage to their respective real
and/or personal property arising as a result of a casualty or condemnation
contemplated by this Paragraph 17. Each of the parties shall, upon obtaining
the policies of insurance required by this Lease, notify the insurance
carrier that the foregoing waiver is contained in this Lease and shall
require such carrier to include an appropriate waiver of subrogation
provision in the policies.
F. Provided that the casualty is not the fault of Tenant, Tenant's
agents, servants, or employees, Tenant's rent shall abate during any such
period of repair and restoration, but only to the extent of any recovery by
Landlord under its rental insurance related to the Premises in the same
proportion that the part of the Premises rendered untenantable bears to the
whole.
18. CONDEMNATION. If the entire Premises or substantially all of the
Premises or any portion of the Building Complex which shall render the
Premises untenantable shall be taken by right of eminent domain or by
condemnation or shall be conveyed in lieu of any such taking, then this
Lease, at the option of either Landlord or Tenant exercised by either party
giving notice to the other of such termination within thirty (30) days after
such taking or conveyance, shall forthwith cease and terminate and the rent
shall be duly apportioned as of the date of such taking or conveyance. Tenant
thereupon shall surrender the Premises and all interest therein under this
Lease to Landlord and Landlord may reenter and take possession of the
Premises or remove Tenant therefrom. In the event less than all of the
Premises shall be taken by such proceeding, Landlord shall promptly repair
the Premises as nearly as possible to its condition immediately prior to said
taking, unless Landlord elects not to reconstruct or rebuild as described in
subparagraph D of Paragraph 17 above. In the event of any such taking or
conveyance, Landlord shall receive the entire award or consideration for the
portion of the Building so taken.
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19. DEFAULT BY TENANT.
A. Each one of the following events is herein referred to as an
"Event of Default":
(1) Any failure by Tenant to pay the rent or any other
monetary sums required to be paid hereunder on the date such sums are due
shall be deemed a default. Notwithstanding the foregoing, Tenant may cure a
default under this provision at any time prior to five (5) business days
after written notice of such default is given by Landlord exercising its
remedies as to such default under this Lease; provided, however, Tenant shall
not be entitled to more than two (2) notices of a delinquency in payment
during any calendar year and, if thereafter during such calendar year any
rent or other amounts owing hereunder are not paid when due, an Event of
Default shall be deemed to have occurred immediately even though no notice
thereof is given;
(2) Tenant shall vacate or abandon the Premises;
(3) This Lease or the estate of Tenant hereunder shall be
transferred to or shall pass to or devolve upon any other person or party
except in the manner set forth in Paragraph 13;
(4) This Lease or the Premises or any part thereof shall be
taken upon execution or by other process of law directed against Tenant or
shall be taken upon or subject to any attachment at the instance of any
creditor of or claimant against Tenant and said attachment shall not be
discharged or disposed of within fifteen (15) days after the levy thereof;
(5) The filing of any petition or the commencement of any case
or proceeding by the Tenant under any provision or chapter of the Federal
Bankruptcy Act, the Federal Bankruptcy Code, or any other federal or state
law relating to insolvency, bankruptcy, or reorganization or the adjudication
that the Tenant is insolvent or bankrupt or the entry of an order for relief
under the Federal Bankruptcy Code with respect to Tenant;
(6) The filing of any petition or the commencement of any case
or proceeding described in subparagraph (5) above against the Tenant, unless
such petition and all proceedings initiated thereby are dismissed within
sixty (60) days from the date of such filing; the filing of an answer by
Tenant admitting the allegations of any such petition; the appointment of or
taking possession by a custodian, trustee or receiver for all or any assets
of the Tenant, unless such appointment is vacated or dismissed within sixty
(60) days from the date of such appointment;
(7) The insolvency of the Tenant or the execution by the
Tenant of an assignment for the benefit of creditors; the convening by Tenant
of a meeting of its creditors, or any class thereof, for purposes of
effecting a moratorium upon or extension or composition of its debts; or the
failure of the Tenant generally to pay its debts as they mature;
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(8) The admission in writing by Tenant, or any partner of
Tenant if Tenant is a partnership, that he is unable to pay his debts as they
mature or he is generally not paying his debts as they mature;
(9) Tenant shall fail to take possession of the Premises on the
date the Primary Lease Term commences;
(10) Tenant shall fail to perform any of the other agreements,
terms, covenants, or conditions hereof on Tenant's part to be performed and
such non-performance shall continue for a period of thirty (30) days after
written notice thereof by Landlord to Tenant or, if such performance cannot
be reasonably had within such thirty (30) day period, Tenant shall not in
good faith have commenced such performance within such thirty (30) day period
and shall not diligently proceed therewith to completion; provided, however,
if Tenant fails to perform any of the other agreements, covenants or
conditions hereof repeatedly during the term of this Lease, Tenant shall no
longer have the opportunity to cure any subsequent failure and an Event of
Default shall be deemed to have occurred immediately upon such failure.
B. REMEDIES OF LANDLORD. If any one or more Event of Default
shall happen, then Landlord shall have the right at Landlord's election, then
or at any time thereafter, either:
(1) (a) Without demand or notice, to reenter and take
possession of the Premises or any part thereof and repossess the same as of
Landlord's former estate and expel Tenant and those claiming through or under
Tenant and remove the effects of both or either, without being deemed guilty
of any manner of trespass and without prejudice to any remedies for arrears
of rent or preceding breach of covenants or conditions. Should Landlord elect
to reenter, as provided in this subparagraph (1), or should Landlord take
possession pursuant to legal proceedings or pursuant to any notice provided
for by law, Landlord may, from time to time, without terminating this Lease,
relet the Premises or any part thereof, either alone or in conjunction with
other portions of the Building of which the Premises are a part, in
Landlord's or Tenant's name but for the account of Tenant, for such term or
terms (which may be greater or less than the period which would otherwise
have constituted the balance of the term of this Lease) and on such
conditions and upon such other terms (which may include concessions of free
rent and alteration and repair of the Premises) as Landlord in its
uncontrolled discretion, may determine and Landlord may collect and receive
the rents therefor. Landlord shall in no way be responsible or liable for any
failure to relet the Premises, or any part thereof, or for any failure to
collect any rent due upon such reletting. No such reentry or taking
possession of the Premises by Landlord shall be construed as an election on
Landlord's part to terminate this Lease unless a written notice of such
intention be given to Tenant. No notice from Landlord hereunder or under a
forcible entry and detainer statute or similar law shall constitute an
election by Landlord to terminate this Lease unless such notice specifically
so states. Landlord reserves the right following any such reentry and/or
reletting to exercise its right to terminate this Lease by giving Tenant such
written notice, in which event the Lease will terminate as specified in said
notice.
(b) If Landlord elects to take possession of the Premises
as provided in this subparagraph (1) without terminating the Lease, Tenant shall
pay to Landlord (i)
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the rent and other sums as herein provided, which would be payable hereunder
if such repossession had not occurred, less (ii) the net proceeds, if any, of
any reletting of the Premises after deducting all of Landlord's expenses
incurred in connection with such reletting, including, but without
limitation, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees, expenses of employees, alteration, remodeling, and repair
costs and expenses of preparation for such reletting. If, in connection with
any reletting, the new lease term extends beyond the existing term or the
premises covered thereby include other premises not part of the Premises, a
fair apportionment of the rent received from such reletting and the expenses
incurred in connection therewith, as provided aforesaid, will be made in
determining the net proceeds received from such reletting. In addition, in
determining the net proceeds from such reletting, any rent concessions will
be apportioned over the term of the new lease. Tenant shall pay such amounts
to Landlord monthly on the days on which the rent and all other amounts owing
hereunder would have been payable if possession had not been retaken and
Landlord shall be entitled to receive the same from Tenant on each such day;
or
(2) To give Tenant written notice of intention to terminate
this Lease on the date of such given notice or on any later date specified
therein and, on the date specified in such notice, Tenant's right to
possession of the Premises shall cease and the Lease shall thereupon be
terminated, except as to Tenant's liability hereunder as hereinafter
provided, as if the expiration of the term fixed in such notice were the end
of the term herein originally demised. In the event this Lease is terminated
pursuant to the provisions of this subparagraph (2), Tenant shall remain
liable to Landlord for damages in an amount equal to the rent and other sums
which would have been owing by Tenant hereunder for the balance of the term
had this Lease not been terminated less the net proceeds, if any, of any
reletting of the Premises by Landlord subsequent to such termination, after
deducting all Landlord's expenses in connection with such reletting,
including, but without limitation, the expenses enumerated above. Landlord
shall be entitled to collect such damages from Tenant monthly on the days on
which the rent and other amounts would have been payable hereunder if this
Lease had not been terminated and Landlord shall be entitled to receive the
same from Tenant on each such day. Alternatively, at the option of Landlord,
in the event this Lease is terminated, Landlord shall be entitled to recover
forthwith against Tenant as damages for loss of the bargain and not as a
penalty an amount equal to the worth at the time of termination of the
excess, if any, of the amount of rent reserved in this Lease for the balance
of the term hereof over the then Reasonable Rental Value of the Premises for
the same period plus all amounts incurred by Landlord in order to obtain
possession of the Premises and relet the same, including attorneys' fees,
reletting expenses, alterations and repair costs, brokerage commissions and
all other like amounts. It is agreed that the "Reasonable Rental Value" shall
be the amount of rental which Landlord can obtain as rent for the remaining
balance of the term.
C. CUMULATIVE REMEDIES. Suit or suits for the recovery of the
rents and other amounts and damages set forth hereinabove may be brought by
Landlord, from time to time, at Landlord's election, and nothing herein
shall be deemed to require Landlord to await the date whereon this Lease or
the term hereof would have expired had there been no such default by Tenant
or no such termination, as the case may be. Each right and remedy provided
for in this Lease shall be cumulative and shall be in addition to every other
right or remedy provided for in
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this Lease or now or hereafter existing at law or in equity or by statute or
otherwise, including, but not limited to, suits for injunctive relief and
specific performance. The exercise or beginning of the exercise by Landlord
of any one or more of the rights or remedies provided for in this Lease or
now or hereafter existing at law or in equity or by statute or otherwise
shall not preclude the simultaneous or later exercise by Landlord of any or
all other rights or remedies provided for in this Lease or now or hereafter
existing at law or in equity or by statute or otherwise. All such rights and
remedies shall be considered cumulative and non-exclusive. All costs incurred
by Landlord in connection with collecting any rent or other amount and
damages owing by Tenant pursuant to the provisions of this Lease, or to
enforce any provision of this Lease, shall also be recoverable by Landlord
from Tenant. Further, if an action is brought pursuant to the terms and
provisions of the Lease, the prevailing party in such action shall be
entitled to recover from the other party any and all reasonable attorneys'
fees incurred by such prevailing party in connection with such action.
D. NO WAIVER. No failure by Landlord to insist upon the strict
performance of any agreement, term, covenant or condition hereof or to
exercise any right or remedy consequent upon a breach thereof and no
acceptance of full or partial rent during the continuance of any such breach
shall constitute a waiver of any such breach or of such agreement, term,
covenant, or condition. No agreement, term, covenant, or condition hereof to
be performed or complied with by Tenant and no breach thereof shall be
waived, altered, or modified, except by written instrument executed by
Landlord. No waiver of any breach shall affect or alter this Lease but each
and every agreement, term, covenant, and condition hereof shall continue in
full force and effect with respect to any other then existing or subsequent
breach thereof. Notwithstanding any termination of this Lease, the same shall
continue in force and effect as to any provisions which require observance or
performance by Landlord or Tenant subsequent to such termination.
E. BANKRUPTCY. Nothing contained in this Paragraph 19 shall limit
or prejudice the right of Landlord to prove and obtain as liquidated damages
in any bankruptcy, insolvency, receivership, reorganization, or dissolution
proceeding an amount equal to the maximum allowed by any statute or rule of
law governing such a proceeding and in effect at the time when such damages
are to be proved, whether or not such amount be greater, equal to, or less
than the amounts recoverable, either as damages or rent, referred to in any
of the preceding provisions of this Paragraph. Notwithstanding anything
contained in this Paragraph to the contrary, any such proceeding or action
involving bankruptcy, insolvency, reorganization, arrangement, assignment for
the benefit of creditors, or appointment of a receiver or trustee, as set
forth above, shall be considered to be an Event of Default only when such
proceeding, action, or remedy shall be taken or brought by or against the
then holder of the leasehold estate under this Lease.
F. LATE PAYMENT CHARGE. Any rents or other amounts owing hereunder
which are not paid within five (5) days after the date they are due shall
thereafter bear interest at the rate of three percentage points over the
Prime Rate then being charged by Wells Fargo Bank, N.A. or its successor, to
its most credit-worthy customers on an unsecured basis for short term loans
(the "Prime Rate") or the highest rate permitted by applicable usury law,
whichever is lower, until paid. Further, in the event any rents or other
amounts owing hereunder are not paid within five
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(5) days after written notice, Landlord and Tenant agree that Landlord will
incur additional administrative expenses, the amount of which will be
difficult if not impossible to determine. Accordingly, Tenant shall pay to
Landlord an additional, one-time late charge for any such late payment in the
amount of five percent (5%) of such payment. Any amounts paid by Landlord to
cure any defaults of Tenant hereunder, which Landlord shall have the right
but not the obligation to do, shall, if not repaid by Tenant within five (5)
days of demand by Landlord, thereafter bear interest at the rate of three
percentage points over the Prime Rate or the highest rate permitted by
applicable usury law, whichever is lower, until paid.
G. WAIVER OF JURY TRIAL. TENANT AND LANDLORD HEREBY WAIVE (TO THE
EXTENT ALLOWED BY LAW) ANY AND ALL RIGHTS TO A TRIAL BY JURY IN SUIT OR SUITS
BROUGHT TO ENFORCE ANY PROVISION OF THIS LEASE OR ARISING OUT OF OR
CONCERNING THE PROVISIONS OF THIS LEASE.
20. DEFAULT BY LANDLORD. In the event of any alleged default on the
part of Landlord hereunder, Tenant shall give written notice to Landlord in
the manner herein set forth and shall afford Landlord a reasonable
opportunity to cure any such default. Notice to Landlord of any such alleged
default shall be ineffective unless notice is simultaneously delivered to any
holder of a Mortgage and/or Trust Deed affecting all or any portion of the
Building Complex ("Mortgagees"), as hereafter provided. Tenant agrees to give
all Mortgagees, by certified mail, return receipt requested, a copy of any
notice of default served upon Landlord, provided that prior to such notice
Tenant has been notified, in writing (by way of notice of Assignment of Rents
and Leases, or otherwise), of the address of such Mortgagees. Tenant further
agrees that if Landlord shall have failed to cure such default within the
time provided for in this Lease, then the Mortgagees shall have an additional
thirty (30) days within which to cure such default or, if such default cannot
be cured within that time, then such additional time as may be necessary, if,
within such thirty (30) days, any Mortgagee has commenced and is diligently
pursuing the remedies necessary to cure such default (including, but not
limited to, commencement of foreclosure proceedings, if necessary to effect
such cure), in which event this Lease shall not be terminated while such
remedies are being so diligently pursued. In no event will Landlord or any
Mortgagee be responsible for any consequential damages incurred by Tenant as
a result of any default, including, but not limited to, lost profits or
interruption of business as a result of any alleged default by Landlord
hereunder.
21. SUBORDINATION AND ATTORNMENT.
A. This Lease, at Landlord's option, shall be subordinate to any
mortgage or deed of trust (now or hereafter placed upon the Building Complex,
or any portion thereof), including any amendment, modification, or
restatement of any of such documents, and to any and all advances made under
any mortgage or deed of trust and to all renewals, modifications,
consolidations, replacements, and extensions thereof. Tenant agrees that with
respect to any of the foregoing documents, no documentation, other than this
Lease, shall be required to evidence such subordination.
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B. If any holder of a mortgage or deed of trust shall elect to have
this Lease superior to the lien of the holder's mortgage or deed of trust and
shall give written notice thereof to Tenant, this Lease shall be deemed prior
to such mortgage or deed of trust, whether this Lease is dated prior or
subsequent to the date of said mortgage or deed of trust or the date of
recording thereof.
C. In confirmation of such subordination or superior position, as
the case may be, Tenant agrees to execute such documents as may be required
by Landlord or its Mortgagee to evidence the subordination of its interest
herein to any of the documents described above, or to evidence that this
Lease is prior to the lien of any mortgage or deed of trust, as the case may
be, and failing to do so within ten (10) days after written demand, Tenant
does hereby make, constitute, and irrevocably appoint Landlord as Tenant's
attorney-in-fact and in Tenant's name, place and stead, to do so.
D. Tenant hereby agrees to attorn to all successor owners of the
Building Complex, whether or not such ownership is acquired as a result of a
sale, through foreclosure of a deed of trust or mortgage, or otherwise.
22. REMOVAL OF TENANT'S PROPERTY. All movable furniture and personal
effects of Tenant not removed from the Premises upon the vacation or
abandonment thereof or upon the termination of this Lease for any cause
whatsoever shall conclusively be deemed to have been abandoned and may be
appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord
without notice to Tenant or any other person and without obligation to
account therefor and Tenant shall pay Landlord all expenses incurred in
connection with the disposition of such property.
23. HOLDING OVER: TENANCY MONTH-TO-MONTH. If, after the expiration of
this Lease, Tenant shall remain in possession of the Premises and continue to
pay rent, and Landlord shall accept such rent, without any express written
agreement as to such holding over, then such holding over shall be deemed and
taken to be a holding upon a tenancy from month-to-month, subject to all the
terms and conditions hereof on the part of Tenant to be observed and
performed and at a monthly rent equivalent to two hundred percent (200%) of
the monthly installments paid by Tenant immediately prior to such expiration
or the current market rental rate for the Premises, whichever is greater. All
such rent shall be payable in advance on the same day of each calendar month.
Such month-to-month tenancy may be terminated by either party upon ten (10)
days' notice prior to the end of any such monthly period. Nothing contained
herein shall be construed as obligating Landlord to accept any rental
tendered by Tenant after the expiration of the term hereof or as relieving
Tenant of its liability pursuant to Paragraph 16 and any holdover without
Landlord's consent shall be deemed a default hereunder entitling Landlord to
all of its rights and remedies set forth in Paragraph 19 above, including,
without limitation, its right to recover consequential damages resulting from
said holdover.
24. PAYMENTS AFTER TERMINATION. No payments of money by Tenant to
Landlord after the termination of this Lease, in any manner, or after giving
of any notice (other
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than a demand for payment of money) by Landlord to Tenant shall reinstate,
continue, or extend the term of this Lease or affect any notice given to
Tenant prior to the payment of such money, it being agreed that after the
service of notice or the commencement of a suit or other final judgment
granting Landlord possession of the Premises, Landlord may receive and
collect any sums of rent due or any other sums of money due under the terms
of this Lease or otherwise exercise Landlord's rights and remedies hereunder
and the payment of such sums of money, whether as rent or otherwise, shall
not waive said notice or in any manner affect any pending suit or judgment
theretofore obtained.
25. STATEMENT OF PERFORMANCE. Tenant agrees at any time and from time
to time, upon not less than ten (10) days' prior written request by Landlord,
to execute, acknowledge, and deliver to Landlord a statement in writing
certifying that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), that there have been no defaults
thereunder by Landlord or Tenant (or, if there have been defaults, setting
forth the nature thereof), the date to which the rent and other charges have
been paid in advance, if any, and such other information as Landlord may
request. It is intended that any such statement delivered pursuant to this
Paragraph may be relied upon by any prospective purchaser of all or any
portion of Landlord's interest herein or a holder of any mortgage or deed of
trust encumbering the Building Complex. Tenant's failure to deliver such
statement within such time shall be conclusive upon Tenant that: (i) this
Lease is in full force and effect, without modification except as may be
represented by Landlord; (ii) there are no uncured defaults in Landlord's
performance; and (iii) not more than one (1) month's rent has been paid in
advance. Further, upon request, Tenant will supply to Landlord a corporate or
partnership resolution, as the case may be, certifying that the party signing
said statement of Tenant is properly authorized to do so.
26. MISCELLANEOUS.
A. The term "Landlord" as used in this Lease, so far as covenants
or obligations on the part of Landlord are concerned, shall be limited to
mean and include only the owner or owners of the Building Complex at the time
in question and, in the event of any transfer or transfers of the title
thereto, Landlord herein named (and in the case of any subsequent transfers
or conveyances, the then grantor) shall be automatically released, from and
after the date of such transfer or conveyance, of all liability as respects
the performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed, provided that any funds
in the hands of Landlord or the then grantor at the time of such transfer in
which Tenant has an interest shall be turned over to the grantee and any
amount then due and payable to Tenant by Landlord or the then grantor under
any provisions of this Lease shall be paid to Tenant.
B. The termination or mutual cancellation of this Lease shall not
work a merger, and such termination or mutual cancellation shall, at the
option of Landlord, either terminate all subleases and subtenancies or
operate as an assignment to Landlord of any or all such subleases or
subtenancies.
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C. The Tenant agrees that, for the purposes of completing or making
repairs or alterations in any portion of the Building, Landlord may use one
or more of the street entrances, the halls, passageways, and elevators of the
Building.
D. This Lease shall be construed as though the covenants herein
between Landlord and Tenant are independent and not dependent and Tenant
shall not be entitled to any setoff of the rent or other amounts owing
hereunder against Landlord if Landlord fails to perform its obligations set
forth herein; provided, however, the foregoing shall in no way impair the
right of Tenant to commence a separate action against Landlord for any
violation by Landlord of the provisions hereof so long as notice is first
given to Landlord and any holder of a mortgage or deed of trust covering the
Building Complex or any portion thereof and an opportunity granted to
Landlord and such holder to correct such violation as provided in Paragraph
20 above.
E. If any clause or provision of this Lease is illegal, invalid, or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby and it is also the
intention of the parties to this Lease that in lieu of each clause or
provision of this Lease that is illegal, invalid, or unenforceable there be
added as a part of this Lease a clause or provision as similar in terms to
such illegal, invalid, or unenforceable clause or provision as may be
possible and be legal, valid, and enforceable.
F. The caption of each paragraph is added as a matter of
convenience only and shall be considered of no effect in the construction of
any provision or provisions of this Lease.
G. Except as herein specifically set forth, all terms, conditions,
and covenants to be observed and performed by the parties hereto shall be
applicable to and binding upon their respective heirs, administrators,
executors, and assigns. The terms, conditions, and covenants hereof shall
also be considered to be covenants running with the land to the fullest
extent permitted by law.
H. Tenant and the party executing this Lease on behalf of Tenant
represent to Landlord that such party is authorized to do so by requisite
action of the board of directors or partners, as the case may be, and agree,
upon request, to deliver to Landlord a resolution or similar document or
opinion of counsel to that effect.
I. If there are more than one entity or person which or who are the
Tenant under this Lease, the obligations imposed upon Tenant under this Lease
shall be joint and several.
J. No act or thing done by Landlord or Landlord's agents during the
term hereof, including, but not limited to, any agreement to accept surrender
of the Premises or to amend or modify this Lease, shall be deemed to be
binding on Landlord, unless such act or thing shall be by a partner or
officer of Landlord, as the case may be, or a party designated in writing by
Landlord as so authorized to act. The delivery of keys to Landlord, or
Landlord's agents,
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employees, or officers shall not operate as a termination of this Lease or a
surrender of the Premises. No payment by Tenant or receipt by Landlord of a
lesser amount than the monthly rent and all other amounts owing, as herein
stipulated, shall be deemed to be other than on account of the earliest
stipulated rent or other amounts nor shall any endorsement or statement on
any check or any letter accompanying any check or payment as rent be deemed
an accord and satisfaction and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such rent or
pursue any other remedy available to Landlord.
K. Landlord shall have the right at any time to change the name
of the Building, to increase the size of the Building Complex by adding
additional real property thereto, to construct other buildings or
improvements on any portion of the Building Complex or to change the location
and/or character of or to make alterations of or additions to the Building
Complex. In the event any such additional buildings are constructed or
Landlord increases the size of the Building Complex, Landlord and Tenant
shall execute an Amendment to Lease which incorporates such modifications,
additions, and adjustments to Tenant's Pro Rata Share, if necessary. Tenant
shall not use the Building's name for any purpose other than as a part of its
business address. Any use of such name in the designation of Tenant's
business shall constitute a default under this Lease.
L. Tenant covenants and agrees that no diminution of light, air,
or view of or from the Building or any other building (whether or not
constructed or owned by Landlord) shall entitle Tenant to any reduction of
rent or other charges under this Lease, result in any liability of Landlord
to Tenant, or in any way affect this Lease or Tenant's obligations hereunder.
M. Notwithstanding anything to the contrary contained herein,
Landlord's liability under this Lease shall be limited to Landlord's interest
in the Building Complex.
N. Tenant acknowledges and agrees that it has not relied upon any
statements, representations, agreements, or warranties by Landlord, its agents
or employees, except such as are expressed herein and that no amendment or
modification of this Lease shall be valid or binding unless expressed in
writing and executed by the parties hereto in the same manner as the
execution of this Lease.
O. Tenant agrees to make such modifications and amendments of
this Lease as may hereafter be required to conform to any lender's
requirements, so long as such modifications or amendments will not increase
Tenant's obligations hereunder or materially alter its rights as set forth
herein.
P. Submission of this instrument for examination or signature by
Tenant does not constitute a reservation of or an option for lease, and it is
not effective as a lease or otherwise until execution and delivery by both
Landlord and Tenant.
Q. Tenant represents as follows:
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(1) Neither Tenant nor any of its affiliates (within the
meaning of Part V(c) of Prohibited Transaction Exemption 84-14, 49 Fed.Reg.
9494 (1984), as amended ("PTE 84-14") has, or during the immediately
preceding year, has exercised authority to:
(a) appoint or terminate the Prudential Insurance
Company of America or Prudential Real Estate Investors ("Prudential") as
investment manager over assets of any employee benefit plan invested in
Landlord; or
(b) negotiate the terms of a management agreement with
Prudential on behalf of any such plan;
(2) Tenant is not a "related party" of Prudential (as defined
in Part V(h) of PTE 84-14);
(3) Tenant has negotiated and determined the terms of this
Lease at arm's length, as such terms would be negotiated and determined by
Tenant with unrelated parties; and
(4) Tenant is not an "employee benefit plan" as defined in
Section 3(3) of the Employees Retirement Income Security Act of 1974, as
amended ("ERISA"), a "plan" as defined in Section 4965(e)(1) of the Internal
Revenue Code of 1986, as amended (the "Code"), or any entity deemed to hold
"plan assets" within the meaning of 29 C.F.R. Section 2510.3-101 of any such
employee benefit plan or plans.
27. AUTHORITIES FOR ACTION AND NOTICE.
A. Except as herein otherwise provided, Landlord may act in any
manner provided for herein by and through Landlord's Building Manager or any
other person who shall from time to time be designated in writing.
B. All notices, demands, statements or communications required or
permitted to be given to Landlord hereunder shall be in writing and shall be
deemed duly served when delivered personally to any officer of Landlord (or a
partner of Landlord if Landlord is a partnership or to Landlord individually
if Landlord is a sole proprietor) or manager of Landlord whose principal
office is in the Building, or when deposited in the United States mail,
postage prepaid, certified or registered, return receipt requested, addressed
to Landlord at Landlord's principal office in the Building or at the most
recent address of which Landlord has notified Tenant in writing. All notices,
demands, statements or communications required to be given to Tenant
hereunder shall be in writing and shall be deemed duly served when delivered
personally to any officer of Tenant (or a partner of Tenant if Tenant is a
partnership or to Tenant individually if Tenant is a sole proprietor) or
manager of Tenant whose office is in the Building, when deposited in the
United States mail, postage prepaid, certified or registered, return receipt
requested, addressed to Tenant at the Premises, or, prior to Tenant's taking
possession of the Premises, to the address known to Landlord as Tenant's
principal office address. Either party shall have the right to designate in
writing, served as above provided, a different address to
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which notice is to be mailed. The foregoing shall in no event prohibit notice
from being given as provided in Rule 4 of Colorado Rules of Civil Procedure, as
the same may be amended from time to time.
28. RULES AND REGULATIONS. It is further agreed that the rules and
regulations set forth on EXHIBIT D attached hereto shall be and are hereby
made a part of this Lease and Tenant agrees that Tenant's employees and
agents or any others permitted by Tenant to occupy or enter the Premises will
at all times abide by said rules and regulations. A breach of any of such
rules or regulations shall be deemed an Event of Default under this Lease and
Landlord shall have all remedies as set forth in Paragraph 19 hereof.
29. PARKING. Tenant shall be provided non-assigned surface parking in
the Building parking lots at a ratio of one (1) space per three hundred (300)
rentable square feet of office space leased. Based upon leasing 7,108
rentable square feet, this ratio equates to twenty-four (24) spaces, all of
which will be provided at no expense to Tenant during the Primary Lease Term.
30. SUBSTITUTE PREMISES. At any time during the Extension Term,
Landlord shall have the right upon thirty (30) days' prior written notice to
Tenant to substitute other substantially comparable space within the
Building, including substantially comparable tenant finish, for the Premises
(the "Substitute Premises"). Tenant shall relocate to the Substitute Premises
on the date set forth in Landlord's notice (to occur no sooner than thirty
(30) days after receipt by Tenant of said notice). Landlord agrees to pay all
reasonable expenses incurred by Tenant to move its furniture, fixtures, and
equipment to the Substitute Premises. The suite number designation and
Exhibit A shall be deemed revised to reflect the description of the
Substitute Premises. Except for such revisions, the terms and provisions of
the Lease shall be applicable to the Substitute Premises and the Substitute
Premises shall be deemed to be the Premises under the Lease.
31. BROKERAGE. Tenant hereby represents and warrants that Tenant has
not employed any broker other than Frederick Ross Company in regard to this
Lease and that Tenant has no knowledge of any other broker being instrumental
in bringing about this Lease transaction except Cushman and
Wakefield/Premisys Colorado, Inc., a Delaware corporation ("Cushman and
Wakefield") which has acted as Landlord's leasing agent. Tenant shall
indemnify Landlord against any expense incurred by Landlord as a result of
any claim for brokerage or other commissions made by any other broker,
finder, or agent, whether or not meritorious, employed by Tenant or claiming
by, through, or under Tenant. Tenant acknowledges that Landlord shall not be
liable for any representations by Cushman and Wakefield regarding the
Premises, the Building, or this lease transaction.
32. TIME OF ESSENCE. Time is of the essence herein.
33. OPTION TO EXTEND. Provided that this Lease is in full force and
effect and no Event of Default, or event which but for the passage of time or
the giving of notice, or both, would constitute an Event of Default has
occurred and is continuing, Tenant shall have one
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option to extend the Lease for a period of one (1) year (the "Extension
Term") beginning immediately after the Primary Lease Term upon the same terms
and conditions provided in this Lease except that (i) Base Rent will be equal
to the then-current market rental rate for the Premises as determined by the
Landlord; and (ii) the option to extend stated in this Paragraph shall be
deleted. Tenant may exercise this option by giving Landlord at least one
hundred twenty (120) days written notice prior to the expiration of the
Primary Lease Term.
34. SIGNAGE. In the event that, and at such time as, Tenant leases more
than 10,000 square feet in the Building, for a term of at least three years,
at Tenant's request and sole expense, Landlord will put a Building-standard
sign with Tenant's name on it on one or both of the two exterior monument
signs located outside the Building. Further, prior to the installation of any
sign, Tenant shall pay to Landlord a fee in an amount to be agreed upon
between Landlord and Tenant, which fee shall be in addition to the costs of
design and installation of any such sign.
35. RIGHT OF FIRST REFUSAL. If, prior to the expiration or sooner
termination of the Term of this Lease, (a) Landlord receives an offer to
lease the 26,802 rentable square foot premises located on the third floor of
the Building and shown on Exhibit A-2 hereto or (b) Landlord receives an
offer to lease the 1,773 rentable square foot area adjacent to the Premises
which is known as Suite 206 (either space shall be referred to as the
"Refusal Space"), which Landlord desires to accept, and provided that Tenant
is not in default, Landlord shall give Tenant written notice of such offer,
setting forth the rental rate and all other terms and conditions of such
offer, and Tenant shall have the exclusive first right and option to lease
the Refusal Space by giving written notice to Landlord of its intention to
lease the Refusal Space within three (3) business days after such notice, at
the same price and on the same terms of any such offer, it being understood
that in the event Tenant does not give notice of its intention to exercise
said right and option to lease within said three (3) business day period,
Landlord shall be free to lease the Refusal Space upon the same terms and
conditions given to Tenant, and in the event the Refusal Space is not leased
for any reason, Tenant shall have, upon the same conditions and notice, the
continuing right and option to lease the same upon the terms of any
subsequent offer or offers to lease. The termination of Tenant's right of
first refusal for the Refusal Space for nonexercise, is automatic and
self-executing, however, Tenant shall upon request, execute and deliver to
Landlord a release of such right and option. Notwithstanding the foregoing,
the right of first refusal with respect to Suite 206 shall be subordinate and
subject to, the rights of any existing tenant of Suite 206, and an offer to
lease by such tenant shall not activate a right of first refusal in favor of
Tenant.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed the day and year first-above written.
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FIRSTWORLD COMMUNICATIONS, INC., THE PRUDENTIAL INSURANCE
a Delaware corporation COMPANY OF AMERICA, a New Jersey
corporation
By: /s/ Scott Chase By: CUSHMAN AND WAKEFIELD/
-------------------------------- PREMISYS COLORADO, INC., a
Its: Senior Vice President, Delaware corporation, as agent for The
Corporate & Government Affairs Prudential Insurance Company of America
-------------------------------
By: /s/ Stephen M. Schwab
-------------------------------
Stephen M. Schwab
Its: Director
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FIRST AMENDMENT TO LEASE
(GENESEE EXECUTIVE PLAZA)
THIS FIRST AMENDMENT TO LEASE ("FIRST AMENDMENT") is made and entered
into as of the 31st day of July, 1998, by and between ARDEN REALTY LIMITED
PARTNERSHIP, a Maryland limited partnership ("LANDLORD") and FIRSTWORLD
COMMUNICATIONS, INC., a Delaware corporation (formerly known as SPECTRANET
INTERNATIONAL, INC.) ("Tenant").
RECITALS:
A. Talcott Realty I Limited Partnership, a Connecticut limited
partnership ("ORIGINAL LANDLORD") and Tenant entered into that certain Office
Lease, dated as of September 4, 1996 (the "Lease"), whereby Original Landlord
leased to Tenant and Tenant leased from Original Landlord certain office
space located in that certain building located and addressed at 9333/9339
Genesee Avenue, San Diego, California (the "Building"). Landlord is the
successor-in-interest to Original Landlord.
B. By this First Amendment, Landlord and Tenant desire to expand the
Premises, extend the Term and to otherwise modify the Lease as provided
herein.
C. Unless otherwise defined herein, capitalized terms as used herein
shall have the same meanings as given thereto in the Lease.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
AGREEMENT:
1. THE EXISTING PREMISES. Landlord and Tenant hereby agree that
pursuant to the Lease, Landlord currently leases to Tenant and Tenant
currently leases from Landlord that certain office space in the Building
containing 11,627 rentable (10,128 usable) square feet located on the second
(2nd) floor of the Building located and addressed at 9333 Genesee Avenue and
known as Suite 200 (the "EXISTING PREMISES"), as outlined on Attachment 2 to
the Lease.
2. EXPANSION OF THE PREMISES. That certain space located on the first
(1st) floor of the building located and addressed at 9333 Genesee Avenue
consisting of 8,375 (7,295 usable) rentable square feet and known as Suite
100 and that certain space located on the first (1st) floor of the building
located and addressed at 9339 Genesee Avenue consisting of 15,344 rentable
(13,366 usable) square feet and known as Suite 100, as outlined on the floor
plan attached hereto as Exhibit "A" and made a part hereof, may be referred
to herein as the "EXPANSION SPACE." Effective as of September 1, 1998
("EXPANSION COMMENCEMENT DATE"), Tenant shall lease from Landlord and
Landlord shall lease to Tenant the Expansion Space. Accordingly, effective
upon the Expansion Commencement Date, the Existing Premises shall be
increased to include the Expansion Space. Landlord and Tenant hereby agree
that such addition of the Expansion Space to the Existing Premises shall,
effective as of the Expansion Commencement Date, increase the number of
rentable square feet leased by Tenant in the Building to a total of 35,346
rentable square feet. Effective as of the Expansion Commencement Date, all
references to the "Premises" shall mean and refer to the Existing Premises as
expanded by the Expansion Space. Notwithstanding anything to the contrary
contained herein, Tenant shall have the right to commence business from the
Expansion Space during the period prior to the Expansion Commencement Date
(the "EARLY OCCUPANCY PERIOD"), provided that (i) Tenant shall give Landlord
at least ten (10) days prior notice of any such occupancy of the Expansion
Space and (ii) all of the terms and conditions of the Lease, as amended by
this First Amendment shall apply, including Tenant's obligations to pay
Monthly Base Rent for the portion of the Expansion Space
<PAGE>
so utilized by Tenant (which rent shall be prorated based upon the number of
rentable square feet of such space at Two Dollars ($2.00) per rentable square
foot per month).
3. EXTENDED LEASE TERM. The Termination Date shall be extended such
that the Lease shall terminate on August 31, 2002 ("NEW TERMINATION DATE").
The period from the Expansion Commencement Date through the New Termination
Date specified above, shall be referred to herein as the "Extended Term."
4. MONTHLY BASE RENT. During the Extended Term, Tenant shall pay in
accordance with the provisions of this Section 4, Monthly Base Rent for the
entire Premises as follows:
<TABLE>
<CAPTION>
MONTH MONTHLY BASE RENT
----- -----------------
<S> <C>
1 $66,041.20
2-12 $66,622.55
13 $68,282.88
14-24 $73,166.22
25-36 $75,727.04
37-48 $78,377.48
</TABLE>
5. TENANT'S PROPORTIONATE SHARE AND BASE YEAR FOR THE EXPANSION SPACE.
Effective as of the Expansion Commencement Date and continuing throughout the
Extended Term (i) Tenant's Proportionate Share of any increase in Operating
Expenses for the Expansion Space only shall be fifteen point one eight
percent (15.18%) and (ii) the Base Year shall be the calendar year 1998.
6. BASE YEAR FOR THE EXISTING PREMISES. Section II.M. of the Lease is
hereby amended to insert a Base Year for the Existing Premises of 1999, which
Base Year shall be effective as of October 1, 1999. Notwithstanding the
foregoing, Tenant's Proportionate Share of Excess Expenses for the Existing
Premises for the period prior to October 1, 1999 shall be calculated based on
a 1996 Base Year as indicated in the Lease.
7. TENANT IMPROVEMENTS. Tenant Improvements in the Expansion Space
shall be installed and constructed in accordance with the terms of the Tenant
Work Letter attached hereto as Exhibit "B" and made a part hereof. The
construction of the Tenant Improvements will be governed by the Tenant Work
Letter and not the terms of Section 8 of the Lease.
8. PARKING. Effective as of the Expansion Commencement Date and
continuing throughout the Extended Term, Section II.T. of the Lease shall be
amended to provide that Tenant shall rent from Landlord a total of one
hundred twenty-seven (127) parking passes for use in the Building's parking
facility of which one hundred nineteen (119) such passes shall be unreserved
parking passes and the eight (8) remaining passes shall be reserved parking
spaces. The reserved spaces shall be contiguous to Tenant's existing reserved
spaces in the Building parking facility, but in no event shall the total
number of reserved spaces exceed eight (8) spaces. Tenant's rental and use of
such additional parking passes shall be in accordance with, and subject to,
all provisions of Section 28 of the Lease; provided, however that the monthly
parking rates for such passes shall be amended as stated herein. The parking
passes shall be provided to Tenant free of charge from the Expansion
Commencement Date through February 29, 2000. Commencing on March 1, 2000, all
unreserved parking passes rented by Tenant shall be at the rate of
Twenty-five Dollars ($25.00) per unreserved pass per month and the reserved
parking spaces shall be at the rate of Fifty Dollars ($50.00) per pass per
month.
9. SECURITY DEPOSIT. Tenant has previously deposited with Landlord
Eighteen Thousand Twenty-One and 85/100 Dollars ($18,021.85) as a Security
Deposit under the Lease. Concurrently with Tenant's execution of this First
Amendment, Tenant shall deposit with Landlord an additional Forty-Eight
Thousand Six Hundred and 70/100 Dollars ($48,600.70), for a total Security
Deposit under the Lease, as amended herein, of Sixty-Six Thousand Six Hundred
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<PAGE>
Twenty-Two and 55/100 Dollars ($66,622.55). Landlord shall continue to hold
the Security Deposit as increased herein in accordance with the terms and
conditions of Attachment 1, Section 24 of the Lease.
10. SIGNAGE/DIRECTORY.
10.1 LOBBY/SUITE SIGNAGE. Provided Tenant is not in default under
the Lease (as amended by this First Amendment), Tenant, at Tenant's sole cost
and expense, shall have the right to two (2) lines in the lobby directory of
the Building during the Extended Term. In addition, provided Tenant is not in
default under the Lease (as amended by this First Amendment), Tenant shall
have the right, at Tenant's sole cost and expense (or as a charge to the
Improvement Allowance pursuant to the Tenant Work Letter attached hereto as
Exhibit "B"), to install Building standard suite signage designated by
Landlord ("TENANT'S SIGNAGE"). Tenant's Signage shall be subject to
Landlord's approval as to size, design, location, graphics, materials, colors
and similar specifications and shall be consistent with the exterior design,
materials and appearance of the Building and the Building's signage program
and shall be further subject to all applicable local governmental laws,
rules, regulations, codes and other governmental approvals and any applicable
covenants, conditions and restrictions. Tenant's Signage shall be personal to
the Original Tenant (as defined in Section II below) and may not be assigned
to any assignee or sublessee, or any other person or entity. Landlord has the
right, but not the obligation, to oversee the installation of Tenant's
Signage. Upon the expiration of the Extended Term, or other earlier
termination of the Lease, as amended by this First Amendment, Tenant shall be
responsible for any and all costs associated with the removal of Tenant's
Signage, including, but not limited to, the cost to repair and restore the
Building to its original condition, normal wear and tear excepted.
10.2 BUILDING TOP SIGNAGE. Subject to this Section 10.2, Tenant
shall be entitled to install, at its sole cost and expense, one (1) sign on
the exterior of the Building identifying Tenant, at the highest point
possible on the building ("SIGNAGE"). The graphics, materials, size, color,
design, lettering, lighting (if any), specifications and exact location of
the Signage (collectively, the "SIGNAGE SPECIFICATIONS") shall be subject to
the prior written approval of Landlord, which approval should not be
unreasonably withheld. In addition, the Signage and all Signage
Specifications therefore shall be subject to (i) Tenant's receipt of all
required governmental permits and approvals, (ii) all applicable governmental
laws and ordinances, (iii) any existing sign rights of other tenants of the
Building and (iv) all covenants, conditions and restrictions affecting the
Building. Tenant hereby acknowledges that, notwithstanding Landlord's
approval of the Signage and/or the Signage Specifications therefor, Landlord
has made no representations or warranty to Tenant with respect to the
probability of obtaining such approvals and permits. In the event Tenant does
not receive the necessary permits and approvals for the Signage, Tenant's and
Landlord's rights and obligations under the remaining provisions of the
Lease, as amended by this First Amendment, shall not be affected. The cost of
installation of the Signage, as well as all costs of design and construction
of such Signage and all other costs associated with such Signage, including,
without limitation, permits, maintenance and repair, shall be the sole
responsibility of Tenant. Notwithstanding anything to the contrary contained
herein, in the event that at any time during the Extended Term (or any Option
Term, if applicable), Tenant fails to occupy at least 35,346 rentable square
feet in the building, Tenant's right to the Signage shall thereupon terminate
and Tenant shall remove such Signage as provided in this Section 10.2 below.
The rights to the Signage shall be personal to the Original Tenant and may
not be transferred. Should the Signage require maintenance or repairs as
determined in Landlord's reasonable judgment, Landlord shall have the right
to provide written notice thereof to Tenant and Tenant shall cause such
repairs and/or maintenance to be performed within thirty (30) days after
receipt of such notice from Landlord at Tenant's sole cost and expense.
Should Tenant fail to perform such maintenance and repairs within the period
described in the immediately preceding sentence, Landlord shall have the
right to cause such work to be performed and to charge Tenant, as Additional
Rent, for the cost of such work. Upon the expiration or earlier termination
of the Lease, as amended by this First Amendment and any applicable Option
Term (or the termination of Tenant's Signage right as described above),
Tenant shall, at Tenant's sole cost and expense, cause the Signage to be
removed from the exterior of the Building and shall cause the exterior of the
Building to be restored to the condition existing prior to the placement of
such Signage. If Tenant fails to remove such Signage and to restore the
exterior of the Building as provided in the
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<PAGE>
immediately preceding sentence within thirty (30) days following the
expiration or early termination of the Lease, as amended by this First
Amendment, then Landlord may perform such work, and all costs and expenses
incurred by Landlord in so performing such work shall be reimbursed by Tenant
to Landlord within ten (10) days after Tenant's receipt of invoice therefor.
The immediately preceding sentence shall survive the expiration or earlier
termination of the Lease, as amended by this First Amendment. Any signs,
notices, logos, pictures, names or advertisements which are installed and
that have not been individually approved by Landlord may be removed without
notice by Landlord at the sole expense of Tenant. Except as provided in this
Section 10 above, Tenant may not install any signs on the exterior or roof of
the Building or the common areas of the Building or the Land.
11. OPTION TO EXTEND. Section II.G. of the Lease is hereby deleted in
its entirety and in lieu thereof Landlord hereby grants to the Tenant named
herein (the "ORIGINAL TENANT") one (1) option ("OPTION") to extend the
Extended Term for a period of four (4) years ("OPTION TERM"), which option
shall be exercisable only by written notice delivered by Tenant to Landlord
set forth below. The rights contained in this Section 11 shall be personal to
the Original Tenant and may only be exercised by the Original Tenant (and not
any assignee, sublessee or other transferee of the Original Tenant's interest
in the Lease, as amended herein) if the Original Tenant occupies the entire
Existing Premises and Expansion Space as of the date of Tenant's Acceptance
(as defined in Section 11(b) below).
(a) OPTION RENT. The rent payable by Tenant during the Option Term
("OPTION RENT") shall be equal to the "Market Rent" (defined below). "MARKET
RENT" shall mean the applicable Monthly Base Rent, including all escalations,
operating expenses, additional rent and other charges at which tenants, as of
the commencement of the Option Term, are leasing non-sublease,
non-encumbered, space comparable in size, location and quality to the
Premises in renewal transactions for a term comparable to the Option Term
which comparable space is located in office buildings comparable to the
Building in the University Towne Center area, taking into consideration the
value of the existing improvements in the Premises to Tenant, as compared to
the value of the existing improvements in such comparable space, with such
value to be based upon the age, quality and layout of the improvements and
the extent to which the same could be utilized by Tenant with consideration
given to the fact that the improvements existing in the Premises are
specifically suitable to Tenant.
(b) EXERCISE OF OPTION. The Option shall be exercised by Tenant only
in the following manner: (i) Tenant shall not be in default, and shall not
have been in default under the Lease, as amended herein, more than once after
the expiration of any applicable cure periods, on the delivery date of the
Interest Notice and Tenant's Acceptance; (ii) Tenant shall deliver written
notice ("INTEREST NOTICE") to Landlord not more than twelve (12) months nor
less than nine (9) months prior to the New Termination Date stating that
Tenant is interested in exercising the Option; (iii) within fifteen (15)
business days of Landlord's receipt of Tenant's written notice, Landlord
shall deliver notice ("OPTION RENT NOTICE") to Tenant setting forth the
Option Rent; and (iv) if Tenant desires to exercise such Option, Tenant shall
provide Landlord written notice within fifteen (15) days after receipt of the
Option Rent Notice ("TENANT'S ACCEPTANCE") and upon and concurrent with such
exercise, Tenant may, at its option, object to the Option Rent contained in
the Option Rent Notice. Tenant's failure to deliver the Interest Notice or
Tenant's Acceptance on or before the dates specified above shall be deemed to
constitute Tenant's election not to exercise the Option. If Tenant timely and
properly exercises its Option, the Extended Term shall be extended for the
Option Term upon all of the terms and conditions set forth in the Lease, as
amended herein, except that the rent for the Option Term shall be as
indicated in the Option Rent Notice unless Tenant, concurrently with Tenant's
Acceptance, objects to the Option Rent contained in the Option Rent Notice,
in which case the parties shall follow the procedure and the Option Rent
shall be determined, as set forth in Section 11(c) below.
(c) DETERMINATION OF MARKET RENT. If Tenant timely and appropriately
objects to the Market Rent in Tenant's Acceptance, Landlord and Tenant shall
attempt to agree upon the Market Rent using their best good-faith efforts. If
Landlord and Tenant fail to reach agreement within twenty-one (21) days
following Tenant's Acceptance ("OUTSIDE AGREEMENT DATE"), then each party
shall make a separate determination of the Market Rent which shall be
submitted to each other and to arbitration in accordance with the following
items (i) through (vii):
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<PAGE>
(i) Landlord and Tenant shall each appoint, within ten (10) days
of the Outside Agreement Date, one arbitrator who shall by profession be a
current real estate broker or appraiser of commercial high-rise properties in
the immediate vicinity of the Project, and who has been active in such field
over the last five (5) years. The determination of the arbitrators shall be
limited solely to the issue of choosing either Landlord's or Tenant's
submitted Market Rent as the deemed Market Rent, taking into account the
requirements of item (b), above.
(ii) The two arbitrators so appointed shall within five (5)
business days of the date of the appointment of the last appointed arbitrator
agree upon and appoint a third arbitrator who shall be qualified under the
same criteria set forth hereinabove for qualification of the initial two
arbitrators.
(iii) The three arbitrators shall within fifteen (15) days of the
appointment of the third arbitrator reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted Market Rent, and shall
notify Landlord and Tenant thereof.
(iv) The decision of the majority of the three arbitrators shall
be binding upon Landlord and Tenant.
(v) If either Landlord or Tenant fails to appoint an arbitrator
within ten (10) days after the applicable Outside Agreement Date, the
arbitrator appointed by one of them shall reach a decision, notify Landlord
and Tenant thereof, and such arbitrator's decision shall be binding upon
Landlord and Tenant.
(vi) If the two arbitrators fail to agree upon and appoint a
third arbitrator, or both parties fail to appoint an arbitrator, then the
appointment of the third arbitrator or any arbitrator shall be dismissed and
the matter to be decided shall be forthwith submitted to arbitration under
the provisions of the American Arbitration Association, but subject to the
instruction set forth in this item (c).
(vii) The cost of arbitration shall be paid by Landlord and Tenant
equally.
12. ASSIGNMENT AND SUBLETTING. Section 16(c) of Attachment I to the
Lease is hereby amended to provide that, in the event of an assignment or
sublease, Tenant shall pay to Landlord fifty percent (50%) of all sums
referred to in Sections 16(c)(1) and 16(c)(2) of the Lease.
13. BROKERS. Each party represents and warrants to the other that no
broker, agent or finder negotiated or was instrumental in negotiating or
consummating this First Amendment other than CB Richard Ellis, Inc. Each
party further agrees to defend, indemnify and hold harmless the other party
from and against any claim for commission or finder's fee by any entity who
claims or alleges that they were retained or engaged by the first party or at
the request of such party in connection with this First Amendment.
14. SIGNING AUTHORITY. Concurrently with Tenant's execution of this
First Amendment, Tenant shall provide to Landlord a copy of a resolution of
the Board of Directors authorizing the execution of this First Amendment on
behalf of Tenant, which copy of resolution shall be duly certified by the
secretary or an assistant secretary of the corporation to be a true copy of a
resolution duly adopted by the Board of Directors of said corporation and
shall be in the form of Exhibit "C" or in some other form reasonably
acceptable to Landlord. In the event Tenant fails to comply with the
requirements set forth in this Section 14, then each individual executing
this First Amendment shall be personally liable for all of Tenant's
obligations in the Lease (as amended by this First Amendment).
15. DEFAULT. Tenant hereby represents and warrants to Landlord that, as
of the date of this First Amendment, Tenant is in full compliance with all
terms, covenants and conditions of the Lease and that there are no breaches
or defaults under the Lease by Landlord or Tenant, and that Tenant knows of
no events or circumstances which, given the passage of time, would constitute
a default under the Lease by either Landlord or Tenant.
16. WAIVER OF JURY TRIAL. EACH PARTY HEREBY WAIVES ANY RIGHT TO TRIAL
BY JURY IN ANY ACTION SEEKING SPECIFIC PERFORMANCE OF ANY PROVISION OF THE
LEASE (AS AMENDED BY THIS FIRST
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<PAGE>
AMENDMENT), FOR DAMAGES FOR ANY BREACH UNDER THE LEASE (AS AMENDED BY THIS
FIRST AMENDMENT), OR OTHERWISE FOR ENFORCEMENT OF ANY RIGHT OR REMEDY UNDER
THE LEASE (AS AMENDED BY THIS FIRST AMENDMENT).
17. NO FURTHER MODIFICATION. Except as set forth in this First
Amendment, all of the terms and provisions of the Lease shall apply with
respect to the Expansion Space and shall remain unmodified and in full force
and effect. Effective as of the Expansion Commencement Date, all references
to the "Lease" shall refer to the Lease as amended by this First Amendment.
IN WITNESS WHEREOF, this First Amendment has been executed as of the day
and year first above written.
"LANDLORD"
ARDEN REALTY LIMITED PARTNERSHIP,
a Maryland limited partnership
By: ARDEN REALTY, INC.,
a Maryland corporation
Its: Sole General Partner
By: /s/ Victor J. Coleman
------------------------------
VICTOR J. COLEMAN
Its: President and COO
By: /s/ Andrew J. Sobel
------------------------------
ANDREW J. SOBEL
Its: Exec. V.P. and
Assistant Secretary
"TENANT"
FIRSTWORLD COMMUNICATIONS, INC.
a Delaware corporation
By: /s/ Bob Cerasoli
----------------------------------
Print Name: BOB CERASOLI
Title: Senior Vice President
By: /s/ G. Bradford Saunders
----------------------------------
Print Name: G. BRADFORD SAUNDERS
Title: Asst. Sec.
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<PAGE>
EXHIBIT "A"
OUTLINE OF EXPANSION SPACE
[MAP]
EXHIBIT "A"
1 OF 2
<PAGE>
EXHIBIT "A"
OUTLINE OF EXPANSION SPACE
[MAP]
EXHIBIT "A"
2 OF 2
<PAGE>
EXHIBIT "B"
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions
relating to the renovation of the tenant improvements in the Existing
Premises and the Expansion Space. This Tenant Work Letter is essentially
organized chronologically and addresses the issues of the construction of the
Existing Premises and the Expansion Space, in sequence, as such issues will
arise.
SECTION 1
LANDLORD'S INITIAL CONSTRUCTION IN THE EXPANSION SPACE
Landlord has constructed, at its sole cost and expense, the base, shell
and core (i) of the Expansion Space, and (ii) of the floor of the Building on
which the Expansion Space is located (collectively, the "BASE, SHELL AND
CORE"). Tenant has inspected and hereby approves the condition of the
Expansion Space and the Existing Premises and the Base, Shell and Core, and
agrees that the Expansion Space and the Existing Premises and the Base, Shell
and Core shall be delivered to Tenant in their current "as-is" condition. The
renovation to the improvements in the Expansion Space and the Existing
Premises shall be designed and constructed pursuant to this Tenant Work
Letter.
SECTION 2
IMPROVEMENTS
2.1 IMPROVEMENT ALLOWANCE, Tenant shall be entitled to a one-time
improvement allowance (the "IMPROVEMENT ALLOWANCE") in the amount of
$335,761.80 (based on $13.80 per usable square foot of the Expansion Space
and $5.00 per usable square foot of the Existing Premises) for the costs
relating to the initial design and construction of Tenant's improvements
which are permanently affixed to the Expansion Space and Existing Premises
(the "IMPROVEMENTS"). In no event shall Landlord be obligated to make
disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Improvement Allowance and in no event shall Tenant be entitled to
any credit for any unused portion of the Improvement Allowance not used by
Tenant by February 1, 1999. Allocation of the Improvement Allowance between
the Expansion Space and the Existing Premises shall be determined in Tenant's
reasonable discretion.
2.2 DISBURSEMENT OF THE IMPROVEMENT ALLOWANCE. Except as otherwise set
forth in this Tenant Work Letter, the Improvement Allowance shall be
disbursed by Landlord (each of which disbursements shall be made pursuant to
Landlord's disbursement process provided below) for costs related to the
construction of the Improvements and for the following items and costs
(collectively, the "IMPROVEMENT ALLOWANCE ITEMS"): (i) payment of the fees of
the "Architect" and the "Engineers," as those terms are defined in Section
3.1 of this Tenant Work Letter, and payment of the fees incurred by, and the
cost of documents and materials supplied by, Landlord and Landlord's
consultants in connection with the preparation and review of the
"Construction Drawings," as that term is defined in Section 3.1 of this
Tenant Work Letter, (ii) the cost of permits and construction supervision
fees; (iii) the cost of any changes in the Base, Shell and Core required by
the Construction Drawings; (iv) the cost of any changes to the Construction
Drawings or Improvements required by applicable building codes (the "CODE");
and (v) the "Landlord Coordination Fee," as that term is defined in Section
4.3 of this Tenant Work Letter. However, in no event shall more than $3.00
per usable square foot for the Expansion Space and $1.50 per usable square
foot for the Existing Premises of the Improvement Allowance be used for the
items described in (i) and (ii) above; any additional amount incurred as a
result of (i) and (ii) above shall be deemed to constitute an Over-Allowance
Amount. During the construction of the Improvements, Landlord shall make
monthly disbursements of the Improvement Allowance for Improvement Allowance
Items for the benefit of Tenant and shall authorize the release of monies for
the benefit of Tenant as follows.
EXHIBIT "B"
<PAGE>
2.2.1 MONTHLY DISBURSEMENTS. On or before the first day of each
calendar month, during the construction of the Improvements (or such other
date as Landlord may designate), Tenant shall deliver to Landlord: (i) a
request for payment of the "Contractor," as that term is defined in Section
4.1 of this Tenant Work Letter, approved by Tenant, in a form to be provided
by Landlord, showing the schedule, by trade, of percentage of completion of
the Improvements in the Expansion Space and the Existing Premises, detailing
the portion of the work completed and the portion not completed; (ii)
invoices from all of "Tenant's Agents," as that term is defined in Section
4.2 of this Tenant Work Letter, for labor rendered and materials delivered to
the Expansion Space and the Existing Premises; (iii) executed mechanic's lien
releases from all of Tenant's Agents which shall comply with the appropriate
provisions, as reasonably determined by Landlord, of California Civil Code
Section 3262(d); and (iv) all other information reasonably requested by
Landlord. Tenant's request for payment shall be deemed Tenant's acceptance
and approval of the work furnished and/or the materials supplied as set forth
in Tenant's payment request. Thereafter, Landlord shall deliver a check to
Tenant in payment of the lesser of (A) the amounts so requested by Tenant, as
set forth in this Section 2.2.1, above, less a ten percent (10%) retention
(the aggregate amount of such retentions to be known as the "FINAL
RETENTION"), and (B) the balance of any remaining available portion of the
Improvement Allowance (not including the Final Retention), provided that
Landlord does not dispute any request for payment based on non-compliance of
any work with the "Approved Working Drawings," as that term is defined in
Section 3.4 below, or due to any substandard work, or for any other reason.
Landlord's payment of such amounts shall not be deemed Landlord's approval or
acceptance of the work furnished or materials supplied as set forth in
Tenant's payment request.
2.2.2. FINAL RETENTION. Subject to the provisions of this Tenant
Work Letter, a check for the Final Retention payable to Tenant shall be
delivered by Landlord to Tenant following the completion of construction of
the Expansion Space and the Existing Premises, provided that (i) Tenant
delivers to Landlord properly executed mechanics lien releases in compliance
with both California Civil Code Section 3262(d)(2) and either Section
3262(d)(3) or Section 3262(d)(4), (ii) Landlord has determined that no
substandard work exists which adversely affects the mechanical, electrical,
plumbing, heating, ventilating and air conditioning, life-safety or other
systems of the Building, the curtain wall of the Building, the structure or
exterior appearance of the Building, or any other tenant's use of such other
tenant's leased premises in the Building and (iii) Architect delivers to
Landlord a certificate, in a form reasonably acceptable to Landlord,
certifying that the construction of the Improvements in the Expansion Space
and the Existing Premises has been substantially completed.
2.2.3 OTHER TERMS. Landlord shall only be obligated to make
disbursements from the Improvement Allowance to the extent costs are incurred
by Tenant for Improvement Allowance Items. All Improvement Allowance Items
for which the Improvement Allowance has been made available shall be deemed
Landlord's property.
2.3 STANDARD TENANT IMPROVEMENT PACKAGE. Landlord has established
specifications (the "SPECIFICATIONS") for the Building-standard components to
be used in the construction of the Improvements in the Expansion Space and
the Existing Premises (collectively, the "STANDARD IMPROVEMENT PACKAGE"),
which SPECIFICATIONS are available upon request. The quality of Improvements
shall be equal to or of greater quality than the quality of the
Specifications, provided that Landlord may, at Landlord's option, require the
Improvements to comply with certain Specifications.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 SELECTION OF ARCHITECT/CONSTRUCTION DRAWINGS. Tenant shall retain
KMA Architects as its architect/space planner which architect/space planner
has been reasonably approved by Landlord (THE "ARCHITECT") to prepare the
"Construction Drawings," as that term is defined in this Section 3.1. Tenant
shall also retain the engineering consultants designated by Landlord (the
"ENGINEERS") to prepare all plans and engineering working drawings relating
to the structural, mechanical, electrical, plumbing, HVAC and lifesafety work
of the Improvements. The
EXHIBIT "B"
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<PAGE>
plans and drawings to be prepared by Architect and the Engineers hereunder
shall be known collectively as the "CONSTRUCTION DRAWINGS." All Construction
Drawings shall comply with the drawing format and specifications as
reasonably determined by Landlord, and shall be subject to Landlord's
reasonable approval. Tenant and Architect shall verify, in the field, the
dimensions and conditions as shown on the relevant portions of the base
building plans, and Tenant and Architect shall be solely responsible for the
same, and Landlord shall have no responsibility in connection therewith.
Landlord's review of the Construction Drawings as set forth in this Section
3, shall be for its sole purpose and shall not imply Landlord's review of the
same, or obligate Landlord to review the same, for quality, design, Code
compliance or other like matters. Accordingly, notwithstanding that any
Construction Drawings are reviewed by Landlord or its space planner,
architect, engineers and consultants, and notwithstanding any advice or
assistance which may be rendered to Tenant by Landlord or Landlord's space
planner, architect, engineers, and consultants, Landlord shall have no
liability whatsoever in connection therewith and shall not be responsible for
any omissions or errors contained in the Construction Drawings.
3.2 FINAL SPACE PLAN. Tenant and the Architect shall prepare the final
space plan for Improvements in the Expansion Space and the Existing Premises
(collectively, the "FINAL SPACE PLAN"), which Final Space Plan shall include
a layout and designation of all offices, rooms and other partitioning, their
intended use, and equipment to be contained therein, and shall deliver the
Final Space Plan to Landlord for Landlord's approval.
3.3 FINAL WORKING DRAWINGS. Architect and the Engineers shall complete
the architectural and engineering drawings for the Expansion Space and the
Existing Premises, and the final architectural working drawings in a form
which is complete to allow subcontractors to bid on the work and to obtain
all applicable permits (collectively, "FINAL WORKING DRAWINGS") and shall
submit the same to Landlord for Landlord's approval.
3.4 PERMITS. The Final Working Drawings shall be approved by Landlord
(the "APPROVED WORKING DRAWINGS") prior to the commencement of the
construction of the Improvements. Tenant shall cause the Architect to
immediately submit the Approved Working Drawings to the appropriate municipal
authorities for all applicable building permits necessary to allow
"Contractor," as that term is defined in Section 4.1, below, to commence and
fully complete the construction of the Improvements (the "PERMITS"). No
changes, modifications or alterations in the Approved Working Drawings may be
made without the prior written consent of Landlord, which consent shall not
be unreasonably withheld.
SECTION 4
CONSTRUCTION OF THE IMPROVEMENTS
4.1 CONTRACTOR. A general contractor shall be retained by the Tenant
to construct the Improvements. Such general contractor ("CONTRACTOR") shall
be Neilson Dillingham or, in the event Landlord does not approve the
qualifications of Neilson Dillingham (which are to be provided to Landlord
for review), another general contractor shall be selected by Tenant and
approved by Landlord.
4.2 TENANT'S AGENTS. All subcontractors, laborers, materialmen, and
suppliers used by the Tenant (such subcontractors, laborers, materialmen, and
suppliers, and the Contractor to be known collectively as "TENANT'S AGENTS")
must be approved in writing by Landlord, which approval shall not be
unreasonably withheld or delayed. If Landlord does not approve any of the
Tenant's proposed subcontractors, laborers, materialmen or suppliers, the
Tenant shall submit other proposed subcontractors, laborers, materialmen or
suppliers for Landlord's written approval. In addition, Landlord reserves the
right to require that any and all subcontractors be selected by a competitive
bidding process. Notwithstanding the foregoing, the Tenant shall be required
to utilize subcontractors designated by Landlord for any mechanical,
electrical, plumbing, life-safety, sprinkler, structural and air-balancing
work.
4.3 CONSTRUCTION OF IMPROVEMENTS BY CONTRACTOR. The Tenant shall
independently retain, in accordance with Section 4.1 above, Contractor to
construct the Improvements in
EXHIBIT "B"
-3-
<PAGE>
accordance with the Approved Working Drawings. The Tenant shall pay, or the
Improvement Allowance shall be charged, a logistical coordination fee (the
"LANDLORD COORDINATION FEE") to Landlord in an amount equal to five percent
(5%) of the total amount of the construction contract and general conditions
between the Tenant and the Contractor.
4.4 INDEMNIFICATION & INSURANCE.
4.4.1 INDEMNITY. Tenant's indemnity of Landlord as set forth in
Article 10 of the Lease shall also apply with respect to any and all costs,
losses, damages, injuries and liabilities related in any way to any act or
omission of Tenant or Tenant's Agents.
4.4.2 REQUIREMENTS OF TENANT'S AGENT. Each of Tenant's Agents
shall guarantee to Tenant and for the benefit of Landlord that the portion of
the Improvements for which it is responsible shall be free from any defects
in workmanship and materials for a period of not less than one (1) year from
the date of completion thereof. All such warranties or guarantees as to
materials or workmanship of or with respect to the Improvements shall be
contained in the contract or subcontract and shall be written such that such
guarantees or warranties shall inure to the benefit of both Landlord and
Tenant, as their respective interests may appear, and can be directly
enforced by either. Tenant covenants to give to Landlord any assignment or
other assurances which may be necessary to effect such right of direct
enforcement.
4.4.3 INSURANCE REQUIREMENTS.
4.4.3.1 GENERAL COVERAGES. All of Tenant's Agents shall
carry worker's compensation insurance covering all of their respective
employees, and shall also carry public liability insurance, including
property damage, all with limits, in form and with companies as are required
to be carried by Tenant as set forth in Section 9 of the Lease.
4.4.3.2 SPECIAL COVERAGES. Tenant shall carry "Builder's
All Risk" insurance in an amount approved by Landlord covering the
construction of the Improvements, and such other insurance as Landlord may
require. Such insurance shall be in amounts and shall include such extended
coverage endorsements as may be reasonably required by Landlord.
4.4.3.3 GENERAL TERMS. Certificates for all insurance
carried pursuant to this Section 4.4.3.3 shall be delivered to Landlord
before the commencement of construction of the Improvements and before the
Contractor's equipment is moved onto the site. In the event that the
Improvements are damaged by any cause during the course of the construction
thereof, Tenant shall immediately repair the same at Tenant's sole cost and
expense. Landlord may, in its discretion, require Tenant to obtain a lien and
completion bond or some alternate form of security satisfactory to Landlord
in an amount sufficient to ensure the lien-free completion of the
Improvements and naming Landlord as a co-obligee.
SECTION 5
MISCELLANEOUS
5.1 TENANT'S REPRESENTATIVE. The Tenant has designated Linda Armstrong
as its sole representative with respect to the matters set forth in this
Tenant Work Letter, who, until further notice to Landlord, shall have full
authority and responsibility to act on behalf of the Tenant as required in
this Tenant Work Letter.
5.2 LANDLORD'S REPRESENTATIVE. Prior to commencement of construction
of Improvements, Landlord shall designate a representative with respect to
the matters set forth in this Tenant Work Letter, who, until further notice
to the Tenant, shall have full authority and responsibility to act on behalf
of the Landlord as required in this Tenant Work Letter.
5.3 TIME OF THE-ESSENCE IN THIS TENANT WORK LETTER. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer
to calendar days.
EXHIBIT "B"
-4-
<PAGE>
5.4 FINAL DRAWINGS PROVIDED TO LANDLORD. Notwithstanding anything to
the contrary contained herein, upon completion of the Improvements pursuant
to this Tenant Work Letter, Tenant shall provide Landlord with complete
copies of all Construction Drawings, including, but not limited to, the
Approved Working Drawings, which drawings shall be in a form approved by
Landlord, but which shall be a reproducible form (i.e. C.A.D. discs) for
Landlord's records and use.
5.5 COMPLETION OF IMPROVEMENTS DURING THE EXTENDED TERM. Tenant
hereby agrees and acknowledges that the Improvements in the Expansion Space
and/or the Existing Premises shall be constructed during the Term of the
existing Lease and/or the Extended Term hereof and that the performance of
such work shall not be deemed a constructive eviction nor shall Tenant be
entitled to any abatement of Rent in connection therewith.
5.6 INDEPENDENT HVAC SYSTEM. Landlord and Tenant hereby acknowledge
that Tenant may, as part of the Improvements to be performed in accordance
with this Tenant Work Letter, install in the that part of the Expansion Space
known as Suite 100 of the building located and addressed at 9339 Genesee
Avenue ("HVAC SPACE"), an independent heating, ventilation and air
conditioning system ("HVAC SYSTEM"), the electricity for which shall be
separately metered at Tenant's sole cost and expense and for which Tenant
shall make payment directly to the entity providing such electricity. Tenant
shall, at Tenant's sole cost and expense, maintain a service and/or
maintenance contract for such HVAC System with a contractor reasonably
approved by Landlord, which contractor shall perform all maintenance and
repairs on the HVAC System. Tenant hereby acknowledges that the HVAC System
shall be part of the Improvements constructed in accordance with this Tenant
Work Letter and shall be deemed Landlord's property upon the expiration or
earlier termination of the Lease, as amended by this First Amendment, in
accordance with Section 2.2.3 above.
EXHIBIT "B"
-5-
<PAGE>
EXHIBIT "C"
CERTIFIED COPY OF
BOARD OF DIRECTORS RESOLUTIONS
OF
FIRSTWORLD COMMUNICATIONS, INC.
The undersigned, being the duly elected Corporate Secretary of
Firstworld Communications, Inc., a Delaware corporation ("CORPORATION"),
hereby certifies that the following is a true, full and correct copy of the
resolutions adopted by the Corporation by unanimous written consent in lieu
of a special meeting of its Board of Directors, and that said resolutions
have not been amended or revoked as of the date hereof.
RESOLVED, that the Corporation, is hereby authorized to execute, deliver
and fully perform that certain document entitled First Amendment to Lease
("AMENDMENT") by and between the Corporation and Arden Realty Limited
Partnership, a Maryland limited partnership, for the lease of space at 9333
and 9339 Genesee Avenue.
RESOLVED FURTHER, that the Corporation is hereby authorized and directed
to make, execute and deliver any and all, consents, certificates, documents,
instruments, amendments, confirmations, guarantees, papers or writings as may
be required in connection with or in furtherance of the Amendment
(collectively with the Amendment, the "DOCUMENTS") or any transactions
described therein, and to do any and all other acts necessary or desirable to
effectuate the foregoing resolution.
RESOLVED FURTHER, that the following officers acting together:
_____________ as ____________ and _______________ as ______________ are
authorized to execute and deliver the Documents on behalf of the Corporation,
together with any other documents and/or instruments evidencing or ancillary
to the Documents, and in such forms and on such terms as such officer(s)
shall approve, the execution thereof to be conclusive evidence of such
approval and to execute and deliver on behalf of the Corporation all other
documents necessary to effectuate said transaction in conformance with these
resolutions.
Date: , 199
---------------- -- -------------------------------------------
, Corporate Secretary
-----------
EXHIBIT "C"
<PAGE>
FIRST AMENDMENT
TO
AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
This First Amendment to Amended and Restated Investor Rights Agreement (the
"AMENDMENT") is entered into as of September 28, 1998, by and among FirstWorld
Communications, Inc., a Delaware corporation (the "COMPANY"), Colorado Spectra
1, LLC, a Colorado limited liability company ("SPECTRA 1"), Colorado Spectra 2,
LLC, a Colorado limited liability company ("SPECTRA 2"), Colorado Spectra 3,
LLC, a Colorado limited liability company ("SPECTRA 3") and Enron Capital &
Trade Resources Corp., a Delaware corporation ("ENRON").
WHEREAS, the Company, Spectra 1, Spectra 2, Spectra 3, Enron and the other
parties set forth on the Exhibits thereto entered into that certain Amended and
Restated Investor Rights Agreement, dated as of April 13, 1998 (the "INVESTOR
RIGHTS AGREEMENT"); and
WHEREAS, the parties hereto acknowledge pursuant to that certain Employment
Agreement, dated as of the date hereof, between the Company and Sheldon S.
Ohringer, Mr. Ohringer has been granted a right of first refusal to purchase his
pro rata share of certain Equity Securities (as defined in the Investor Rights
Agreement) on terms substantially similar to those set forth in the Investor
Rights Agreement;
WHEREAS, pursuant to the terms of Section 5.5(a) of the Investor Rights
Agreement, the Investor Rights Agreement may only be amended or modified upon
the written consent of the Company, Spectra 3, Enron and the holders of a
majority of the Registrable Securities (as defined in the Investor Rights
Agreement); and
WHEREAS, the parties hereto hold a majority of the Registrable Securities
under the Investor Rights Agreement; and
WHEREAS, the parties hereto desire to amend the Investor Rights Agreement
as set forth below.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. Section 4.1 of the Investor Rights Agreement is hereby deleted and
replaced in its entirety by the following:
"The Sturm Entities and Enron (each an "ELIGIBLE HOLDER") shall have a
right of first refusal to purchase its pro rata share of all Equity
Securities, as defined below, that the Company may from time to time
propose to sell and issue after the date of this Agreement, other than the
Equity Securities excluded by Section 4.6 hereof. Each such Eligible
Holder's pro rata share is equal to the ratio of (A) the number of Demand
Shares
<PAGE>
which such Holder holds (or could hold upon exercise of the Common
Warrants) immediately prior to the issuance of such Equity Securities to
(B) the total number of shares of the Company's outstanding Common Stock
(including all shares of Common Stock issued or issuable upon conversion or
exercise of any outstanding warrants, options or other convertible
securities) immediately prior to the issuance of the Equity Securities.
The term "Equity Securities" shall mean (i) any Common Stock or Preferred
Stock of the Company, (ii) any security convertible, with or without
consideration, into any Common Stock or Preferred Stock (including any
option to purchase such a convertible security), (iii) any security
carrying any warrant or right to subscribe to or purchase any Common Stock
or Preferred Stock or (iv) any such warrant or right. The Company, the
Sturm Entities and Enron acknowledge that, pursuant to the terms of an
Employment Agreement dated as of September 28, 1998 (the "EMPLOYMENT
AGREEMENT"), between the Company and Sheldon S. Ohringer, Mr. Ohringer was
granted a right of first refusal to purchase his pro rata share of certain
Equity Securities on terms substantially similar to those set forth herein.
The Company, the Sturm Entities and Enron acknowledge that Mr. Ohringer is
an "Eligible Holder" hereunder; however, Mr. Ohringer's right of first
refusal will at all times be governed by the terms of the Employment
Agreement."
2. Except as modified in this Amendment, the Investor Rights Agreement shall
continue in full force and effect in accordance with its terms.
3. The Sturm Entities and Enron hereby acknowledge and agree that (i) the
issuance of an option (the "STOCK OPTION") to purchase 2,805,000 shares of
Series B Common Stock to Mr. Ohringer under the Employment Agreement and (ii)
any subsequent issuance of the shares of Series B Common Stock underlying the
Stock Option are "Excluded Securities" under Section 4.6 of the Investor Rights
Agreement and, as such, the Sturm Entities and Enron do not have any "right of
first refusal" with respect to the securities described in clauses (i) and (ii)
of this Paragraph 3.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
The foregoing agreement is hereby executed in counterparts as of the date
first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Donald L. Sturm
----------------------------------------
Donald L. Sturm, Chief Executive Officer
ENRON CAPITAL & TRADE RESOURCES CORP.,
a Delaware corporation
By: /s/ C. Kevin Garland
----------------------------------------
C. Kevin Garland
COLORADO SPECTRA 1, LLC,
a Colorado limited liability company
By: /s/ Donald L. Sturm
----------------------------------------
Donald L. Sturm, Manager
COLORADO SPECTRA 2, LLC,
a Colorado limited liability company
By: /s/ Donald L. Sturm
----------------------------------------
Donald L. Sturm, Manager
COLORADO SPECTRA 3, LLC,
a Colorado limited liability company
By: /s/ Donald L. Sturm
----------------------------------------
Donald L. Sturm, Manager
3
<PAGE>
EXHIBIT 12.1
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pre-tax loss from continuing operations (418) (908) (3,856) (9,448) (28,625)
Interest capitalized during the period -- -- -- (52) (450)
---- ---- ------ ------ -------
(418) (908) (3,856) (9,500) (29,075)
---- ---- ------ ------ -------
Fixed charges:
Interest expense and amortization of debt discount
and premium on all indebtedness 53 38 27 1,424 17,348
Interest portion of rentals (33% of rent expense) 16 24 36 120 183
---- ---- ------ ------ -------
Total fixed charges 69 62 63 1,544 17,531
---- ---- ------ ------ -------
Loss before income taxes and fixed charges (349) (846) (3,793) (7,956) (11,544)
---- ---- ------ ------ -------
---- ---- ------ ------ -------
Ratio of earnings to fixed charges n/a n/a n/a n/a n/a
---- ---- ------ ------ -------
---- ---- ------ ------ -------
Insufficiency of earnings to cover fixed charges 418 908 3,856 9,500 29,075
---- ---- ------ ------ -------
---- ---- ------ ------ -------
</TABLE>
Page 1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-68195 and No. 333-65861) of FirstWorld
Communications, Inc. of our report dated December 11, 1998 appearing on page
F-2 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
December 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 72,039,498
<SECURITIES> 165,591,010
<RECEIVABLES> 503,158
<ALLOWANCES> 9,765
<INVENTORY> 0
<CURRENT-ASSETS> 241,456,811
<PP&E> 47,020,107
<DEPRECIATION> 2,999,689
<TOTAL-ASSETS> 294,105,357
<CURRENT-LIABILITIES> 8,891,923
<BONDS> 0
0
0
<COMMON> 2,605
<OTHER-SE> 29,370,782
<TOTAL-LIABILITY-AND-EQUITY> 294,105,357
<SALES> 0
<TOTAL-REVENUES> 1,090,661
<CGS> 0
<TOTAL-COSTS> 6,501,105
<OTHER-EXPENSES> 13,065,778
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,898,271
<INCOME-PRETAX> (28,625,126)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,625,126)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,730,667)
<CHANGES> 0
<NET-INCOME> (33,355,793)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
